Polyus Gold – KazakhGold offered $10.13 per share; company on pre-sale in 2H08

Troika Dialog

June 16, 2009

Polyus Gold - KazakhGold offered $10.13 per share; company on pre-sale in 2H08 Polyus Gold finally announced its binding offer to acquire 50.1% of KazakhGold at $10.13 per share, mostly in cash. KazakhGold’s 2008 results were utterly weak, as production came to a halt in 2H08. While the company was in pre-sale preparation, SG&A surged 140%, $7 mln of funds was misappropriated and capex ballooned to $200 mln. We expect Polyus Gold to now finally take charge of matters and provide funding to the asset, looking to unlock its alluring potential and deliver on the aggressive growth expansion program.

Polyus Gold finally announced on Friday night its binding offer to acquire 50.1% of KazakhGold, ending the 10-month long difficult negotiation process. The structure of the transaction is quite complicated – the shareholders will receive 0.423 Polyus Gold local shares, in line with the previous non-binding offer, which translates into $19.50 per KazakhGold share. However, those shareholders subscribing to the offer and receiving the shares will need to sell 84.86% of them back (or 0.359 Polyus Gold local shares per KazakhGold share) to Polyus Gold at $20.00 per share. Thus, KazakhGold shareholders will be left with $7.18 in cash and 0.064 Polyus Gold local shares, which is equal to $10.13 per KazakhGold share (7.18 + 0.064*46 = 10.13), a 26% premium to the latest closing price on April 30. Shares are to be acquired pro-rata from the tendering shareholders, so that Polyus Gold buys a 50.1% stake in the company.

The offer is binding upon Polyus Gold now. Following the completion of the transaction, KazakhGold will also conduct a $100 mln rights issue, fully underwritten by Polyus Gold, but other shareholders will also be invited to participate. Overall, Polyus Gold is paying $265 mln for the 50.1% stake, including $190 mln in cash and $75 mln in own shares.

KazakhGold 2008 IFRS results were reported immediately after the offer, as auditors signed them off. The major factor underlying the weak performance lies on the operational side: it appears that production almost came to a halt in 2H08. The company reported that it had to scale down the underground mining operations at all three major sites – Aksu, Bestobe and Zholymbet to refurbish the essential subsurface infrastructure, while on the open-pit mining front it mined lower grade material during the period, before it could gain access to the layers of higher grade ore. Volumes of ore processed for the year fell from 3.5 mln tonnes to 1.6 mln tonnes, and while the milled grades stayed flat at 2.0 g/t, production suffered proportionately, declining to 104 koz from 232 koz.