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Continental Coal grows South Africa coal production assets in milestone deal

Published: 13:23 04 Aug 2010 BST

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Continental Coal (ASX: CCC) has significantly enhanced its portfolio of South African production assets with its subsidiary Continental Coal Limited (CCL) entering into a binding heads of agreement to acquire 100% of the shares of unlisted South African thermal coal mining and export coal producing company Mashala Resources.

The acquisition provides Continental with immediate export coal production from the Ferreira open cast mine which exported approx. 600,000 tonnes in FY 2009. Also, the Richards Bay Coal Terminal (RBCT) allocation and Transnet rail contracts are in place, enhancing the company’s key logistics capabilities.

Continental’s global in situ resources have increase by approximately 290% to 631Mt and will commence immediate development of the acquired and fully permitted Penumbra underground project into a 500,000tpa export thermal coal operation.

The acquisition provides Continental with existing 300tph wash plant operation and rail siding only 3km from the existing open cast mine and Penumbra underground project.

Acquisition costs are to be partially funded through A$25m convertible note and other coal off-take related financings.

Continental has finalised a A$22m placement to sophisticated and institutional investors and will complete an A$11m underwritten share purchase plan to existing shareholders to fund future mine development and working capital costs.
 
Don Turvey, Continental’s CEO, said “the acquisition adds extensive mine infrastructure, immediate export sales and provides one existing and five future mining operations to Continental’s existing project portfolio.”

The company said it has identified a highly attractive and complementary acquisition and consolidation opportunity in South Africa’s world class coal mining sector.

Continental believes that the acquisition of Mashala and its significant portfolio of an operational coal mine, advanced development projects and numerous exploration opportunities in both South Africa and Botswana, is the first in a number of steps to establish Continental as one of South Africa’s leading mid-tier coal mining companies.

"The acquisition of Mashala will significantly increase the company's resources and substantially enhance its growth and eanings potential, bringing enhanced returns for shareholders," Turvey added.

Continental completed all necessary legal, financial and technical due diligence/reviews in June 2010, and after its offer to acquire Mashala was accepted a binding heads of agreement was signed by all parties in South Africa on 26 July 2010.

The acquisition now only remains subject to receipt of all necessary South African regulatory approvals and conclusion of final comprehensive agreements. The company expects this to occur by 31 August 2010.

Turvey, said “the combined portfolio of assets sets the company apart in the junior coal sector in South Africa, providing an outstanding platform to grow the company far beyond its current operations”.

“The acquisition of Mashala transforms Continental into a multi-mine operator, with existing export and domestic coal production at the Ferreira and domestic production from the Vlakvarkfontein mine."

"The company is now extremely well placed to take advantage of what is arguably one of the most attractive commodity sectors, with the current strength in export thermal coal prices and the outlook for global coal markets” said Turvey.

“The portfolio of existing operating coal mines and the exciting mine development and growth opportunities from the Mashala acquisition will, I believe, deliver significant long term and sustainable production growth potential to the company for the next 20 years” he said.

Turvey believes the speed at which the company has built and developed the portfolio of assets and negotiated this acquisition puts it in a strategically important position in South Africa’s world class coal mining sector.

“We have rapidly advanced our existing project portfolio; having taken our first project into production within 12 months of acquisition and in recent weeks have signed an off-take and funding agreement with EDF Trading, one of the leaders in the international wholesale energy markets."

"Despite these being major milestones for the company, we will continue to review a range of highly attractive and complementary acquisition and consolidation opportunities in South Africa’s world class coal mining sector to determine if they have the capacity to complement our existing portfolio and add value in the medium to long-term.”

“Following an extensive review of a range of acquisition opportunities it became clear the Mashala assets were not only complementary to those already held by Continental, but also would provide clear financial benefits to the Company,” Turvey added.

“This acquisition will take Continental into a new era in its emergence as a significant South African coal mining company. It builds on the hard work and progress that our team has achieved over the past 18 months, and is entirely consistent with our stated goal of developing a strong, profitable export coal focussed mining company” he said.

Turvey added that the acquisition established a combined entity with a significant project development pipeline over the next five years.

“The combination of these two companies will create a major new force in the junior coal mining sector in South Africa and a highly attractive investment option for global funds looking for thermal coal exposure,” he said.

“Furthermore, Mashala’s management brings to the team valuable complementary coal mining skills that will advance our mine development and growth strategy and provide enhanced management capability.” Turvey added.

Under the terms of the binding heads of agreement, the Company’s 74% subsidiary, CCL, willacquire 100% of the share capital of Mashala. The payment terms are:

- US$35m to acquire a majority 62% interest in Mashala payable on execution of the Sale and Purchase Agreement and receipt of all necessary regulatory approvals and South African government approvals
- The 38% balance of the shares in Mashala to be acquired within the next 12 months in either cash (at the existing agreed price of US$21m) or by the issuance of shares in CCC to an equivalent value following a joint inward listing of the Company on the Johannesburg Stock Exchange.

The acquisition has received the unanimous support of Mashala’s shareholders and executive management.

To enable the company to complete the acquisition of Mashala and commence immediate development of the Penumbra underground mine, whilst still progressing the development of its existing Vaalbank and Project X mines, the company has arranged the following financing package:

- A placement to institutional and sophisticated investors to raise A$22m
- A convertible note to Asian and European financial institutions to raise A$25m
- An underwritten share purchase plan to raise A$11m
- An additional US$20m Coal Loan Financing with corresponding off-take agreements

Together these funds will be used to:

- Fund the acquisition costs of Mashala;
- Fund deferred acquisition costs of the Company’s projects
- Repay A$13m of secured debt
- Meet mine development and working capital costs of the Penumbra underground mine.

The issue of securities pursuant to the placement, the convertible note facility and the share purchase plan are subject to shareholder approval.

In addition, Continental has successfully completed a placement of 400 million new shares to selected sophisticated, institutional and professional investors at an issue price of A$0.055 per share to raise A$22m (before issue costs).

The company received very strong support for the placement which was heavily oversubscribed. The placement shares will be issued in two tranches with the first tranche of 200 million shares to be issued on or about 10 August 2010 under the Company’s 15% capacity.

The balance of 200 million shares will be issued upon receipt of shareholder approval.

The company is also in the process of finalising a A$25m convertible note facility, which is being finalised with Asian and European based financial institutions.

The convertible note facility will have a 3 year term, a 10% coupon rate and be convertible into fully paid ordinary shares at A$0.08 per share.

Continental also intends to offer existing shareholders the opportunity to subscribe for additional shares at A$0.055 per share under a share purchase plan (SPP).

The SPP will be underwritten up to A$11m by Max Capital Pty Ltd. Under the SPP, shareholders on the company’s register as at the Record Date of 3 August 2010 (Eligible Shareholders) will be able to subscribe for up to 272,727 new shares at an issue price of $0.055 per share for a maximum investment of A$15,000 per shareholder.

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