China interest in Kagara's $262m raising

Miner Kagara has finally lifted the veil on its capital raising plans, announcing it will raise up to $262 million with a Chinese company to subscribe for a 15 per cent stake.

Shares in Kagara have been in a trading halt over the past fortnight as the company finalised details of the capital raising. Kagara shares last traded at $1.185.

In a statement today, Kagara said it intends to raise between $150 million and $262 million in three parts including a share placement to sophisticated investors to raise $23 million,with shares priced at 60 cents each.

Institutional shareholders will be able to participate through a one-for-one rights issue to raise $85 million, while a one-for-one rights issue will be offered to retail shareholders to raise $92 million.

Macquarie Capital Advisers and Southern Cross Equities will underwrite the first $127 million of the rights issues.

In a separate deal, Chinese entity Guandong Foreign Trade Group has agreed to invest the lesser of $62.5 million or 15 per cent in Kagara by subscribing for any shortfall in the rights issues.

Guandong will also have the option, post raising, to subscribe for additional shares to increase its stake in the Kagara to 19.9 per cent, by subscribing for shares priced at 80 cents each to generate a further $34 million.

Guandong will be entitled to nominate one member to Kagara's board.

Guandong's investment will need to be cleared by relevant Australian and Chinese authorities.

"The Offer will enable Kagara to significantly reduce its existing debt, strengthen its financial position, and provide a solid foundation on which to take advantage of Kagara's unique assets," Kagara executive chairman Kim Robinson said.

"The creation of this strategic alliance with Guangdong is expected to deliver a range of mutually attractive opportunities and provide Kagara with strong potential to access development capital from offshore".

Funds from the raising will be used to pay Western Areas the initial $20 million fee to access the decline leading to the Flying Fox to develop Kagara's Lounge Lizard nickel project.

Kagara has also set aside between $15.6 million and $22.6 million for transaction costs which resulted from the miner pursuing a number of financing alternatives of where one resulted in a payment of $7.6 million.

Funds will also be used to reduce bank loans by between $90 million and $136 million.

Additionally, Kagara said it has received approval from Westpac and the National Bank of Australia to extend the maturity of the remaining $60 million of outstanding loans from October 2009 to July 2010, subject to the successful completion of the offer.

The announcement is below:

Kagara Limited (ASX: KZL) ("Kagara" or "Company") hereby announces its intention to raise a minimum of A$150 million and a maximum of A$262 million through the issue of fully-paid ordinary shares ("New Shares") to existing and new shareholders (together, the "Offer").

As part of the Offer, Macquarie Capital Advisers Limited ("Macquarie") and Southern Cross Equities Limited ("Southern Cross"), will underwrite the first A$127 million of an entitlement offer to existing shareholders, subject to standard conditions ("Entitlement Offer").

Additionally, Goldman Sachs JB Were has arranged and provided financial advice to Kagara in relation to a strategic alliance between Kagara and Guangdong Foreign Trade Group, under which its wholly owned subsidiary Goldsland Holdings Company Ltd ("Guangdong") has agreed to invest, subject to regulatory approvals, the lesser of A$62.5 million or 15% of the Company (post the Offer) through the subscription for any shortfall under the Offer and, if necessary, a placement after completion of the Offer. In addition, post completion of the Offer, Guangdong may at its option, subscribe for additional shares to increase its holding in Kagara up to 19.9%.

The proceeds of the Offer will be used, amongst other things, to strengthen Kagara's balance sheet by retiring bank debt and provisional pricing liabilities, funding Kagara's agreement with Western Areas NL for the development of its Lounge Lizard nickel project, and providing working capital.

Kagara's Executive Chairman, Kim Robinson commented, "We are very pleased to offer shareholders the opportunity to participate in this equity raising. The Offer will enable Kagara to significantly reduce its existing debt, strengthen its financial position, and provide a solid foundation on which to take advantage of Kagara's unique assets. We look forward to delivering value to all Kagara shareholders by further developing Kagara's existing assets and pursuing future opportunities."

"The creation of this strategic alliance with Guangdong is expected to deliver a range of mutually attractive opportunities and provide Kagara with strong potential to access development capital from offshore".

Details of the Offer

The Offer comprises:

- A completed placement of 38 million new Kagara shares to sophisticated investors at a price of A$0.60 per share raising approximately A$23 million;

- A non‐renounceable entitlement offer to institutional shareholders of approximately A$85 million ("Institutional Entitlement Offer"); and

- A non‐renounceable entitlement offer to retail shareholders ("Retail Entitlement Offer") to raise up to a maximum of approximately A$92 million

The Entitlement Offer is underwritten to the first A$127 million, subject to standard conditions, by Macquarie and Southern Cross who are acting as Underwriters and Joint Lead Managers of the Offer.

Shares acquired under Guangdong's commitment to invest in Kagara will be at A$0.60 per share. Under the strategic alliance, Guangdong has the ability to increase its stake in the Company to 19.9% at a price of A$0.80 per share, which may raise up to an additional A$34 million. Subject to the approval of Kagara's banks, Guangdong has agreed to provide the Company with a short term funding loan of A$10 million. Any investment by Guangdong is subject to the approval of the Australian Foreign Investment Review Board ("FIRB"), the Chinese National Development and Reform Commission ("NDRC") and in the event the placement to Guangdong exceeds the placement capacity of Kagara after completion of the Offer, the excess will require Kagara shareholder approval.

As part of the strategic alliance Guangdong will be entitled to nominate one member to the Kagara Board.

The Record Date for the Entitlement Offer will be 5.00pm (WST) on Monday, 15 June 2009. Under the Entitlement Offer, eligible shareholders will be able to subscribe for one New Share for each existing Kagara share that they own at a price of A$0.60 per share ("Entitlements"). The Entitlements are non‐renounceable and will not be tradeable on ASX or otherwise transferable.

The Institutional Entitlement Offer will be conducted on Wednesday, 10 June 2009. Kagara expects to announce the outcome of the Institutional Entitlement Offer to the market on Thursday, 11 June 2009, with trading expected to recommence at 8.00am (WST) on that day. The Retail Entitlement Offer will be open between Tuesday, 16 June 2009 and Friday, 3 July 2009.

Major shareholder Transaminvest SA has committed to take up its Entitlement. It is the current intention of all Directors who own shares in the Company to take up their Entitlements, either in whole or in part.

Financing Update

Kagara has received approval from Westpac and NAB to extend the maturity of the remaining A$60 million of outstanding loans from October 2009 to July 2010 subject to successful completion of the Offer, and the repayment of A$90 million of its bank loans, in addition to standard bank terms and final documentation. In the event funds raised under the Offer exceed A$170 million, 50% of these additional funds will also be used to retire bank debt.

Operations Update

The operations in North Queensland have now returned to steady state production. Widespread flooding had resulted in lack of access to the inland heavy haulage routes for seventy‐four out of the ninety days of the March quarter and restricted access continued throughout April. Although the two copper treatment plants at Mt Garnet and Thalanga continued production at a reduced level with copper production remaining on target for 38,000 tonnes for the financial year, the polymetallic plant at Mt Garnet was shut down on 19 April for a period of fifteen days due to lack of ore stockpiles at Mt Garnet which will result in approximately 2,000 tonnes of projected zinc production being deferred into the next financial year. Ore and concentrate haulage has now returned to normal and production for May has returned to an annualized production rate of 36,000 tonnes for copper and 54,000 tonnes for zinc.

No exploration has been carried out since the March quarter, although a major upgrade for the Red Dome gold resource to 1.446 million ounces was announced on 13 May 2009 and a Heads of Agreement was reached with Western Areas to mine the Lounge Lizard nickel deposit. Preparations for the Mungana Goldmines IPO continue and are expected for completion during the September 2009 quarter. It is anticipated that the ASX listing of Mungana Goldmines Ltd will result in a true realisation of value for these substantial gold assets and also result in further debt reduction within Kagara. Kagara shareholders will receive a priority allocation to subscribe for shares in Mungana Goldmines Ltd.

The equity raising will also enable the pre‐feasibility study on the world class Admiral Bay project to commence immediately. This will be carried out by RSV Australia, one of the world's foremost Project Management and Design engineering companies. RSV has designed, procured and managed the sinking of many deep, vertical mine shaft complexes similar to that which will be required at the Admiral Bay project. Metallurgical test work is now complete and has shown that Admiral Bay will produce premium lead and zinc concentrates at excellent recoveries.

Preliminary scoping studies have shown that Admiral Bay has the potential to be the largest producer of lead and zinc worldwide.