DISPOSAL OF THE ENTIRE BUSINESS OF HERNIC … disposal of the entire business of hernic ferrochrome proprietary limited (in business rescue) request for expression of interest 6 november

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DISPOSAL OF THE ENTIRE BUSINESS OF

HERNIC FERROCHROME PROPRIETARY

LIMITED (IN BUSINESS RESCUE)

REQUEST FOR EXPRESSION OF INTEREST

6 November 2017

1 DISPOSAL OF THE ENTIRE BUSINESS OF HERNIC FERROCHROME PROPRIETARY LIMITED (IN BUSINESS RESCUE) | REQUEST FOR EXPRESSION OF INTEREST | 6 November 2017

DISCLAIMER

Questco Proprietary Limited (“Questco”) is the corporate advisor to Hernic Ferrochrome (Pty) Ltd (in

Business Rescue) (“Hernic” or “the Company”) with respect to the proposed disposal by Hernic of its

entire business (“Proposed Transaction”).

The sole purpose of this document (“the Request for Expression of Interest”) is to assist the selected

intended recipient hereof (“the Recipient”) in evaluating the Proposed Transaction, and if suitable,

submitting an Expression of Interest in accordance with paragraph 5.1 of this document and subject to

the procedures and terms established by the business rescue practitioners of Hernic (“the BRPs”).

This document does not purport to be exhaustive or to contain all the information that a Recipient may

require when investigating the Proposed Transaction.

This document has been issued upon the express understanding that it will be used only in respect of

the Proposed Transaction and for the purpose stated herein. No representation or warranty, express or

implied, is or will be made in relation to, and no responsibility or liability is or will be accepted by Hernic,

the BRPs, Questco or by any of their respective directors, officers, representatives, employees, advisers

or agents (“Representatives”) as to, or in relation to, the accuracy, reliability, completeness or

otherwise of this document, any information in it or any other written or oral information made available

to a prospective acquirer or its advisers in connection with the Proposed Transaction.

No information, representations or opinions set out or expressed in this document will form the basis of

any agreement relating to the Proposed Transaction. Any Recipient submitting an Expression of Interest

(“an Interested Party”) will be required to acknowledge in a relevant agreement that it has not relied

on, or been induced to enter into such agreement by, any representation or warranty, except as

expressly provided in such agreement.

Neither the issue of this document nor any part of its contents is to be taken as any form of commitment

on the part of Hernic or the BRPs to proceed with the Proposed Transaction, or any part of it, or with

any particular party.

The BRPs, in their sole and absolute discretion, may at any stage:

amend the timetable for this process;

amend the terms of this process;

reject any or all proposals;

engage with one or more Interested Parties;

vary the assets that are being disposed of;

vary any information provided during this process;

withdraw, amend or terminate all or part of this process, including any discussions that may

have commenced; and/or

declare any or all bids, as the case may be, null and void,

in each case without being obliged to give any accompanying justification or reason.

Neither Hernic, the BRPs or Questco, nor any of their respective Representatives, shall be liable for

any losses, costs or expenses suffered by any participant in the process associated with the Proposed

Transaction.

Recipients of this document should inform themselves about, and observe, any applicable legal and

regulatory requirements.


The document has been prepared by Questco on behalf of the BRPs (acting for Hernic), for distribution

to and use by Recipients for the sole purpose of evaluating the Proposed Transaction and assessing

whether to participate in the Proposed Transaction.

This document does not constitute a recommendation or the giving of investment advice by Hernic, the

BRPs, Questco or their respective Representatives and has been prepared and provided to the

Recipient on the basis that the Recipient is solely responsible for independently assessing the

information contained in this document, as well as any further information which may be provided to it

or any of its directors, officers, representatives, employees, advisers or agents.


TABLE OF CONTENTS

DISCLAIMER ........................................................................................................................................ 1

TABLE OF CONTENTS ...................................................................................................................... 3

1. INTRODUCTION .......................................................................................................................... 4

2. KEY INVESTMENT HIGHLIGHTS ............................................................................................ 4

3. INVITATION TO PARTICIPATE ................................................................................................ 5

4. DEPOSITS .................................................................................................................................... 6

5. THE BID PROCESS .................................................................................................................... 7

5.1. Expression of Interest .................................................................................................................. 7

5.2. Information Memorandum ........................................................................................................... 8

5.3. Indicative Bids ............................................................................................................................... 8

5.4. Due Diligence stage ..................................................................................................................... 9

5.5. Final Binding Bid ......................................................................................................................... 10

5.6. Definitive Agreements ............................................................................................................... 10

6. TIMETABLE ................................................................................................................................ 11


1. INTRODUCTION

Hernic Ferrochrome Proprietary Limited (in Business Rescue) ("Hernic") is currently operating at

full capacity, utilising all of its assets, save for one of its underground sections, on a “business as

usual” basis with sufficient available working capital to meet its day-to-day obligations for payment

as and when they fall due.

As Hernic is a non-core investment of Mitsubishi Corporation (“Mitsubishi”), the majority

shareholder of Hernic, Mitsubishi has chosen to exit this investment for strategic reasons.

Mitsubishi has historically provided significant funding to Hernic in the form of loans

("Mitsubishi Loan"), which will become due and payable on 1 April 2018. Hernic is unlikely to be

able to repay the Mitsubishi Loan when it becomes due and payable on 1 April 2018.

As a consequence, the board of directors of Hernic resolved to voluntarily place Hernic under

business rescue as per section 129(1) of the Companies Act 71 of 2008.

Therefore, Hernic did not commence business rescue proceedings due to immediate cash shortfalls

and inability to meet its debts in the ordinary course. However, the voluntary commencement of

business rescue proceedings was aimed at Hernic benefiting from the moratorium provided for in

the Companies Act (in respect of, inter alia, the repayment of the Mitsubishi Loan) and to allow it

time to develop and implement a business rescue plan, with the objective of ensuring the

sustainability of the business.

In furtherance of this objective, Hernic, represented by the Joint Business Rescue Practitioners

(“BRPs”), has embarked on a competitive tender disposal process to dispose of its entire business,

as a going concern, to a strategic purchaser (the “Disposal Process”).

Hernic's current operational cash flow, along with the funding previously advanced to Hernic in

terms of the Mitsubishi Loan, enables Hernic to continue paying its trade creditors in the ordinary

course, notwithstanding the business rescue proceedings.

In the circumstances, Hernic should be valued on a going concern basis for purposes of the

Disposal Process.

2. KEY INVESTMENT HIGHLIGHTS

Hernic is one of the world’s largest integrated ferrochrome producers.

Situated on the Western Limb of the Bushveld Igneous Complex in the North West Province, South Africa.

Long-life, vertically integrated mine-to-market operation:

o three long-life chrome ore mines, with life of mine of >100 years, 201.5 Mt of chromite resources and 67.6 Mt of chromite reserves (April 2016);

o four electric arc ferrochrome furnaces (one of which, the F4 furnace, is the largest in SA and second largest globally);

o ore beneficiation plant with capacity of 185 kt per month;

o PGM concentrator plant, recovering 4E PGM from tailings;

o ferrochrome from slag recovery plant; and

o on surface tailings with in excess of 3 Mt containing chrome and PGM (with a


minimum of 6 years of chrome reserves).

Record-breaking performance in FY16, profitable in FY17:

o during FY16, Hernic produced 357kt of ferrochrome, achieving a number of monthly production records; and

o Hernic made a record profit after tax of approximately R900 million in respect of FY16 and is expected to be profitable in FY17, following a focused capex program and implementation of a turn-around strategy.

Replacement value of all plant is in the order of R7 billion (excluding the additional value of ore reserves and resources).

Current net working capital as of 30-Sep-2017 of approximately R1 billion.

Favourable long-term supply and demand fundamentals.

3. INVITATION TO PARTICIPATE

Should you be interested in participating in the Disposal Process, you are invited to submit the following

documents to Questco at the address set out below by no later than 17h00 CAT on

Thursday, 16 November 2017:

1) an expression of interest covering letter, substantially in the form set out in Annexure 1,

enclosed herewith;

2) a completed credentials questionnaire, a copy of which is included in Annexure 2, enclosed

herewith;

3) a signed confidentiality and non-disclosure agreement, a copy of which is included in

Annexure 3, enclosed herewith; and

4) a signed escrow agreement (“the Escrow Agreement”) regulating the escrow arrangement in

respect of the Deposit(s) (as detailed in paragraph 4), a copy of which is included in

Annexure 4, enclosed herewith,

(where 1, 2, 3 and 4 above collectively constitute an “Expression of Interest”).

Each of the documents listed above must be submitted in order to ensure a valid Expression of Interest.

Failure to submit any of the documents may result in the Expression of Interest being disqualified.

Queries and submissions should be submitted to Questco at the contact details set out on the page

following:


If delivered by email: If delivered by hand:

Avikal Gangaram Questco Proprietary Limited

Hernic - Expression of interest

1st Floor

Yellowwood House

Ballywoods Office Park

33 Ballyclare Drive

Bryanston

2191

Email:

Tel:

Cell:

[email protected]

+27 (0)11 011 9219

+27 (0)74 673 1484

Claudia Adamson

Email:

Tel:

Cell:

[email protected]

+27 (0)11 011 9209

+27 (0)72 361 1010

David Austen

Email:

Tel:

Cell:

[email protected]

+27 (0)11 011 9203

+27 (0)83 310 8240

Direct, unauthorised contact with the BRPs, Hernic, or the directors, shareholders, management

or staff of Hernic, may result in automatic exclusion from the Disposal Process.

Where considered necessary or appropriate by the BRPs or Hernic, Questco may seek clarity regarding

the content of any Expressions of Interest received.

4. DEPOSITS

In recognition of the fact that, throughout the Disposal Process, participants will be provided access to

confidential and proprietary information in respect of Hernic, and the cost and management time

required to facilitate the Disposal Process, the BRPs require the payment of one or more deposits

(“the Deposit(s)”) into an escrow account, in accordance with the process set out below.

Tranche Timing Amount

The cumulative deposits shall be refundable in any of the following cases*:

First Tranche (“Deposit A”)

Within two business days of being notified by Questco that the Interested Party has been selected to receive the Information Memorandum (as set out in paragraph 5.2).

R1 million (i) If the Pre-Qualified Bidder (as defined in paragraph 5.1) does not submit an Indicative Bid (as defined in paragraph 5.3); or

(ii) If the Pre-Qualified Bidder is not invited by Questco, on behalf of the BRPs, to proceed to the Due Diligence stage of the Disposal Process in accordance with paragraph 5.3.

Second Tranche (“Deposit B”)

Within two business days of being notified by Questco that the Pre-Qualified Bidder has been selected to proceed to the Due Diligence stage of the

An additional R9 million

If the Finalist (as defined in paragraph 5.3) is not selected as a Preferred Finalist (as defined in paragraph 5.6).

mailto:[email protected]




Disposal Process (as set out in paragraph 5.4).

Third Tranche (“Deposit C”)

Within two business days of being notified by Questco that the Finalist has been selected to engage in exclusive negotiations with the BRPs in respect of the Disposal Process (as set out in paragraph 5.6).

An additional R15 million

If, through no fault and/or act and/or omission of the Preferred Finalist, the transaction as contemplated in the Definitive Agreement is not implemented.

Total Deposit R25 million

*All valid refunds shall be made by the escrow agent (on behalf of the BRPs), into the account

nominated by the Interested Party and notified to the escrow agent by the BRPs in writing, as

contemplated in the Escrow Agreement, within five business days of the BRPs informing the escrow

agent in writing (i) that the relevant circumstance referred to in the table above has occurred, and (ii) the

amount which is due to be refunded to the Interested Party, subject to the determination of any disputes.

The bank account details in respect of the Escrow Account are set out in the Escrow Agreement

attached as Annexure 4.

5. THE BID PROCESS

The BRPs have requested that a specific process be followed in making information available to

Interested Parties, and in inviting and considering bids which may be made by Recipients. This Process

is outlined below.

5.1. Expression of Interest

Interested Parties are invited to confirm their interest in participating in the Disposal Process

by following the process set out in paragraph 3 above, by no later than 17h00 (CAT) on

Thursday, 16 November 2017.

The BRPs, with the assistance of Questco, will evaluate each Expression of Interest received

and identify, in their sole and absolute discretion, the parties (“Pre-Qualified Bidders”) who

will be selected to receive the information memorandum (“the Information Memorandum”)

in respect of the Disposal Process. Interested Parties not identified as Pre-Qualified Bidders

will be notified accordingly in writing by Questco and their further participation in the Disposal

Process will terminate, with no liability to the BRPs, Hernic or any of their respective

Representatives.

Deposit A (as set out in paragraph 4) shall become due and payable by Pre-Qualified

Bidders within two business days of being notified by Questco, on behalf of the BRPs,

of their eligibility to receive the Information Memorandum.

Notwithstanding anything to the contrary contained in this document, the BRPs reserve the

right in their sole and absolute discretion not to furnish the Information Memorandum to any

person, irrespective of whether such person has submitted an Expression of Interest.


5.2. Information Memorandum

The Information Memorandum is being prepared solely for information purposes in connection

with the Proposed Transaction and will contain confidential information relating to Hernic and

more detail on the Disposal Process.

Following payment by Pre-Qualified Bidders of Deposit A (in accordance with paragraph 4),

Pre-Qualified Bidders will receive the Information Memorandum.

By providing the Information Memorandum to Pre-Qualified Bidders, neither the BRPs, Hernic

or Questco, nor any of their respective Representatives, undertake to provide any

Pre-Qualified Bidder with access to additional information, nor to update the Information

Memorandum or such additional information provided at any time to a Pre-Qualified Bidder or

any of its directors, officers, representatives, employees, advisers or agents.

It is expressly recorded that the Information Memorandum does not constitute an offer for sale

of the net assets or business of, or any interest in, Hernic, and the BRPs will have no obligation

to consider or to accept any bid submitted by any Pre-Qualified Bidder(s) on the basis thereof.

Neither the BRPs, Hernic nor Questco, or any their respective Representatives, will be liable

for any costs incurred by any Pre-Qualified Bidder arising from, relating to and/or in connection

with its consideration of the Information Memorandum.

Applicable laws may restrict the distribution of the Information Memorandum in certain

jurisdictions. Therefore, in executing and returning the Expression of Interest,

Recipients of this document represent that they are able to receive and respond to both

this document and the Information Memorandum without contravening any unfulfilled

registration or other legal restrictions or requirements in the jurisdiction(s) in which

they reside or conduct business.

5.3. Indicative Bids

Pre-Qualified Bidders will be invited to submit indicative bids in respect of the Disposal

Process (“Indicative Bids”) by Wednesday, 6 December 2017. Where considered

necessary or appropriate by the BRPs, Questco may seek clarity regarding the content of any

Indicative Bids received from Pre-Qualified Bidders.

In assessing the Indicative Bids, the BRPs and Questco will consider, inter alia, the following

(each of which must be addressed in the Indicative Bid):

the total purchase consideration;

the form of the consideration offered (preference will be given to Indicative Bids in

cash);

if the purchase price is not in cash, when and how the consideration will be converted

to cash;

the financial resources of the Pre-Qualified Bidder, with particular reference to (i)

Hernic’s working capital requirements in fluctuating market conditions; and (ii) its

ability to pay the consideration in cash;

in the event and to the extent that the Pre-Qualified Bidder requires external finance,

the strength of the commitments made to the Pre-Qualified Bidder from its financiers

(in this regard direct submissions from such financiers are required);

the Pre-Qualified Bidder's technical expertise, technical resources, previous

experience and track record in respect of similar businesses;

the Pre-Qualified Bidder's ability and intention to continue to conduct all or part of

Hernic's business after the implementation of the Proposed Transaction;


the internal and external approvals (including any statutory or regulatory approvals)

which the Pre-Qualified Bidder anticipates will be required in respect of the Proposed

Transaction, the estimated timing to obtain such approvals and any considerations

which may impact on the likelihood of such approvals being obtained (in particular,

the Pre-Qualified Bidder's assessment of any factors which may impact on any

approval required from any competition authority(ies), if any) and/or their timing;

the Pre-Qualified Bidder’s ability to conclude the Disposal Process in a timely manner;

the level of HDSA participation in the Pre-Qualified Bidder and, if a Pre-Qualified

Bidder does not have an existing HDSA shareholding, its future intentions in this

regard; and

the Pre-Qualified Bidder’s commitment to retain existing Hernic employees in

accordance with of section 197 of the Labour Relations Act 66 of 1995 (as amended).

Indicative Bids must be in respect of the entire business of Hernic, as a going concern.

The BRPs reserve the right to call for unconditional bank guarantees from Pre-Qualified

Bidders as part of their Indicative Bid submissions or at any other stage of the Disposal

Process.

The Indicative Bids should accordingly contain sufficient information to allow the BRPs, with

the assistance of Questco, to assess the Indicative Bids in terms of the above.

The BRPs, with the assistance of Questco, will evaluate each Indicative Bid received and

identify, in their sole and absolute discretion, those Pre-Qualified Bidders (“Finalists”) who

will be invited to commence with a confirmatory due diligence (“the Due Diligence”). Pre-

Qualified Bidders not identified as Finalists will be notified accordingly in writing by Questco

and their further participation in the Disposal Process will terminate, with no liability to the

BRPs, Hernic, Questco or any of their respective Representatives. In such instances, Deposit

A will be refunded to the Pre-Qualified Bidder in accordance with paragraph 4.

Deposit B (as set out in paragraph 4) shall become due and payable by Finalists within

two business days of being notified by Questco, on behalf of the BRPs, of their

eligibility to proceed to the Due Diligence stage of the Disposal Process.

5.4. Due Diligence stage

The date on which the Due Diligence will commence will be confirmed on distribution of the

Information Memorandum.

Following payment by Finalists of Deposit B (in accordance with paragraph 4), Finalists will

have access to a virtual data room containing detailed information supporting the Information

Memorandum.

During the Due Diligence stage, the Finalists who have been selected to advance to the Due

Diligence stage and/or their respective employees, advisers, agents and representatives will

be given an opportunity to visit the mining, processing and smelting operations of Hernic on

pre-arranged dates at pre-arranged times and under supervised conditions. The Finalists will

also have controlled access to management and/or senior technical personnel of Hernic.

A draft sale agreement (“the Sale Agreement”) will be distributed to Finalists as part of the

Due Diligence stage.

None of Hernic, the BRPs, Questco or their respective Representatives will be liable for any

costs incurred by any Finalists arising from, relating to and/or in connection with its Due

Diligence investigations.


5.5. Final Binding Bid

Each Finalist will have the opportunity after the Due Diligence stage to submit a final binding

bid (“the Final Binding Bid”), which is to be fully funded to the satisfaction of the BRPs,

including marked-up comments on the Sale Agreement.

Final Binding Bids must be in respect of the entire business of Hernic, as a going

concern.

The extent to which the Sale Agreement is marked-up by each Finalist will be taken into

consideration in assessing its Final Binding Bid.

The BRPs would, in the absence of any material misstatement or omission in connection with

the information disclosed and/or provided in the course of the Disposal Process, not expect

such Final Binding Bid by a Finalist to deviate materially from its Indicative Bid.

The BRPs and Questco would expect the Final Binding Bid, once submitted, to be expressed

in terms which are and will remain binding on the Finalist, and remain open for acceptance by

the BRPs on the terms set out therein, for a period of 4 months after the Final Binding Bid is

submitted or until superseded and replaced in its entirety on execution of the definitive

agreements by the parties thereto (“the Definitive Agreements”), whichever is the earliest.

In addition, the BRPs and Questco would expect Finalists to have obtained all internal

approvals (including any required board and/or investment committee approvals) which are

required in respect of the Proposed Transaction prior to the submission of any Final Binding

Bid (where necessary).

Final Binding Bids will be considered by the BRPs, with the assistance of Questco. The BRPs

will be entitled, in their sole and absolute discretion, to determine whether any Final Binding

Bid is acceptable to it. Neither the BRPs nor Questco will be obliged to furnish reasons to any

Finalist who is not selected to proceed to negotiations. Finalists whose Final Binding Bids are

not acceptable to the BRPs will be notified accordingly in writing by Questco and their further

participation in the Disposal Process will terminate, with no liability to the BRPs, Hernic,

Questco or any of their respective Representatives. In such instances, Deposits A and B will

be refunded to the Finalist in accordance with paragraph 4.

5.6. Definitive Agreements

Following consideration of each Final Binding Bid, the BRPs intend to enter into further

negotiations with the preferred Finalist(s) (“the Preferred Finalist”) who have submitted Final

Binding Bids which, in the BRP’s sole and absolute discretion, are in principle acceptable to

them, with a view to entering into Definitive Agreements in respect of the Proposed

Transaction.

Unless otherwise expressly agreed in writing between the parties prior to the commencement

of such negotiations, the BRPs will be entitled at any time to terminate negotiations with any

Preferred Finalist, or to enter into negotiations with any other person, who may not be a

Preferred Finalist, in respect of the Proposed Transaction.

Each Preferred Finalist, as the case may be, will be solely responsible for the appointment

and costs of its own professional advisers in regard to the negotiation, drafting, execution and

implementation of the Definitive Agreements, save as otherwise expressly set out in the

Definitive Agreements.

Deposit C (as set out in paragraph 4) shall become due and payable by each Preferred

Finalist within two business days of being notified by Questco, on behalf of the BRPs,

of their selection as a Preferred Finalist.


On implementation of the Proposed Transaction, Deposits A, B and C shall be applied

in part settlement by the Preferred Finalist of the purchase consideration payable by it.

Deposits A, B and C shall only be refunded to the Preferred Finalist if, through no fault

and/or act and/or omission of the Preferred Finalist, the Proposed Transaction as

contemplated in the Definitive Agreements is not implemented in respect of that

Preferred Finalist.

6. TIMETABLE

Whilst the BRPs recognise that Recipients and/or Interested Parties (as the case may be) may require

additional time to assimilate the information provided and if applicable to complete the Expression of

Interest, and to formulate their Indicative Bids, the BRPs are desirous to complete the Disposal Process

in as short a period as possible.

Recipients are therefore requested to note the preliminary timetable of proposed target dates set out

below. The BRPs and Questco reserve the right in their sole and absolute discretion to change the

target date(s) of all or each distinct stage in the Disposal Process specified in the timetable.

Interested Parties are requested to familiarise themselves with the timelines and key dates of critical

process elements as described in this document (including, inter alia, funding requirements, Deposit(s),

timing of bids and internal approvals). Failure by bidders to comply with these timelines may result in

the bidders' further involvement in the Disposal Process being terminated.

All times stated are in Central African Time.

Submission of Expression of Interest by Interested Parties 16 November 2017 17h00

Distribution of Information Memorandum to Pre-Qualified Bidders* 20 November 2017 17h00

Indicative Bids submitted by Pre-Qualified Bidders 6 December 2017 17h00

Notify Finalists and unsuccessful Pre-Qualified Bidders on or about

8 December 2017

Due Diligence stage, including site visits, to commence* on or about

11 December 2017

Final Binding Bids submitted by Finalists on or about

9 February 2018

Notify Preferred Finalists and unsuccessful Finalists on or about

16 February 2018

Definitive Agreements stage commences* on or about

16 February 2018

*Subject to receipt of the applicable Deposit.

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DISPOSAL OF THE ENTIRE BUSINESS OF HERNIC … disposal of the entire business of hernic ferrochrome proprietary limited (in business rescue) request for expression of interest 6 november