CONTINUING CONNECTED TRANSACTION
RELATING TO THE CONSTRUCTION OF
INFRASTRUCTURE AT THE MINING AREA
Independent Financial Adviser to the Independent Board Committee
and the Shareholders
A letter from the Board is set out on pages 5 to 10 of this circular. A letter of advice from
the Independent Financial Adviser (as defined herein) to the Independent Board Committee
(as defined herein) and the Shareholders (as defined herein) is set out on pages 13 to 22 of
this circular. A letter of the Independent Board Committee is set out on pages 11 to 12 of
this circular. Any person who is in doubt about his/her position is recommended to
consult his/her professional adviser.
If you are in any doubt as to any aspect of this circular or as to the action to be taken, you
should consult your licensed securities dealer or registered institution in securities, bank
manager, solicitor, professional accountant or other professional adviser.
If you have sold or transferred all your shares in CITIC Pacific Limited, you should at
once hand this circular to the purchaser or the transferee or to the licensed securities
dealer or registered institution in securities or other agent through whom the sale or
transfer was effected for transmission to the purchaser or the transferee.
The Stock Exchange of Hong Kong Limited takes no responsibility for the contents of this
circular, makes no representation as to its accuracy or completeness and expressly disclaims
any liability whatsoever for any loss howsoever arising from or in reliance upon the
whole or any part of the contents of this circular.
CONTENTS
Page
DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
LETTER FROM THE BOARD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
LETTER FROM THE INDEPENDENT BOARD COMMITTEE . . . . . . . . . . . . . . . . . . . 11
LETTER FROM THE INDEPENDENT FINANCIAL ADVISER . . . . . . . . . . . . . . . . . . 13
APPENDIX – GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
DEFINITIONS
– 1 –
In this circular, the following expressions have the following meanings unless the context
otherwise requires:
“associate” or has the meaning ascribed to it under the Listing Rules
“connected person”
“Balmoral” Balmoral Iron Pty Ltd., a company incorporated in
Australia
“Balmoral Acquisition” the acquisition by Balmoral Holdings of all the shares
in Balmoral pursuant to the takeover agreement dated
31 March 2006 entered into between Mineralogy Pty
Ltd., Balmoral Holdings, the Company, Mr. Clive
Frederick Palmer and Balmoral
“Balmoral Holdings” Balmoral Iron Holdings Pty Ltd., a company
incorporated in Australia and wholly owned by the
Company
“Balmoral Project” the mining and extraction of magnetite ore from the
Mining Area and the processing of that magnetite ore
into products through mine and processing facilities
or infrastructure to be constructed or installed by
Balmoral
“Board” the board of the Directors
“Business Day” a day, other than a Saturday, a Sunday, a public
holiday and a day on which a tropical cyclone warning
no. 8 or above or a “black rainstorm warning signal”
is hoisted in Hong Kong at any time between 9:00 a.m.
and 5:00 p.m., on which licensed banks are open for
general banking business in Hong Kong throughout
their normal business hours
“Catak” Catak Enterprises Corp., a company incorporated in
the British Virgin Islands and wholly owned by the
Company
“CITIC Pacific” or CITIC Pacific Limited, a company incorporated in
the “Company” Hong Kong whose shares are listed on the Main Board
of the Stock Exchange
“Completion” completion of the Disposal pursuant to the Sale and
Purchase Agreement
DEFINITIONS
– 2 –
“Contract Sum” the contract sum for the Works pursuant to the Original
General Construction Contract or the Supplemented
General Construction Contract (as applicable)
“Directors” the directors of the Company
“Disposal” the disposal by Catak of the Sale Interest, pursuant to
the terms of the Sale and Purchase Agreement
“Group” the Company and its subsidiaries
“HK$” Hong Kong dollars, the lawful currency of Hong Kong
“Hong Kong” the Hong Kong Special Administrative Region of the
People’s Republic of China
“Independent Board Committee” the independent committee of the Board comprising
all the independent non-executive Directors, namely
Hamilton Ho Hau Hay, Alexander Reid Hamilton,
Hansen Loh Chung Hon and Norman Ho Hau Chong
established for the purpose of advising the
Shareholders in relation to the Supplemented General
Construction Contract and the transactions
contemplated thereunder
“Independent Financial Adviser” Commerzbank AG, acting through its Hong Kong
or “Commerzbank” branch, a licensed bank under the Banking Ordinance
and an authorized financial institution under the SFO
to conduct type 1 (dealing in securities), type 4
(advising on securities) and type 6 (advising on
corporate finance) regulated activities as set out in
Schedule 5 to the SFO, and appointed as the
independent financial adviser to the Independent
Board Committee and the Shareholders in relation to
the Supplemented General Construction Contract and
the transactions contemplated thereunder
“Latest Practicable Date” 17 September 2007, being the latest practicable date
prior to the printing of this circular for ascertaining
certain information contained in this circular
“Listing Rules” the Rules Governing the Listing of Securities on the
Stock Exchange
“MCC” China Metallurgical Group Corp., a company
incorporated in the PRC
DEFINITIONS
– 3 –
“Mining Area” a specified area located under Mining Leases 08/123,
08/124 and 08/125 granted under the Mining Act of
Western Australia
“Original General Construction the general construction contract dated 24 January 2007
Contract” entered into between Sino-Iron and MCC in respect of
the engagement of MCC by Sino-Iron for, amongst
other things, the design, construction, installation and
testing of certain infrastructure at the Mining Area
“PRC” the People’s Republic of China, for the purpose of this
circular, excluding Hong Kong, the Macau Special
Administrative Region of the PRC and Taiwan
“Projects” the Sino-Iron Project and the Balmoral Project
“Sale and Purchase Agreement” the sale and purchase agreement dated 20 August 2007
entered into between Catak and MCC in respect of the
Disposal
“Sale Interest” 20% of the ordinary shares in the issued capital of
Sino-Iron Holdings and an interest bearing
shareholder’s loan at the date of Completion together
with interest thereon
“SFO” Securities and Futures Ordinance of Hong Kong
“Share(s)” share(s) of HK$0.40 each in the share capital of the
Company
“Shareholder(s)” holder(s) of the Share(s)
“Sino-Iron” Sino-Iron Pty Ltd., a company incorporated in
Australia and wholly owned by the Company
“Sino-Iron Holdings” Sino-Iron Holdings Pty Ltd, a company incorporated
in Australia and the immediate holding company of
Sino-Iron
“Sino-Iron Project” the mining and extraction of magnetite ore from the
Mining Area and the processing of that magnetite ore
into products through mine and processing facilities
or infrastructure to be constructed or installed by Sino-
Iron
“Stock Exchange” The Stock Exchange of Hong Kong Limited
DEFINITIONS
– 4 –
“Supplemental Agreements” the supplemental agreement and a side letter both
dated 20 August 2007 entered into between Sino-Iron
and MCC in respect of the supplemental terms to the
Original General Construction Contract and certain
construction specifications for the Projects respectively
“Supplemented General the Original General Construction Contract, as
Construction Contract” supplemented by the Supplemental Agreements
“US$” United States dollars, the lawful currency of the United
States
“Works” the works which MCC are responsible for carrying
out at the Mining Area under the Supplemented
General Construction Contract, including the
procurement of mining equipment, design,
construction and installation of primary crushing plant,
concentrator, pellet plant, material handling system,
camp and other auxiliary infrastructure facilities
“%” percentage
For illustration purpose, conversion of US$ to HK$ is based on the exchange rate of
US$1 = HK$7.8
LETTER FROM THE BOARD
– 5 –
(Incorporated in Hong Kong with limited liability)
(Stock Code: 267)
Directors: Registered Office:
Larry Yung Chi Kin (Chairman) 32nd Floor
Henry Fan Hung Ling (Managing Director) CITIC Tower
Peter Lee Chung Hing (Deputy Managing Director) 1 Tim Mei Avenue
Carl Yung Ming Jie (Deputy Managing Director) Central
Leslie Chang Li Hsien (Deputy Managing Director) Hong Kong
Vernon Francis Moore (Executive Director)
Li Shilin (Executive Director)
Liu Jifu (Executive Director)
Chau Chi Yin (Executive Director)
Milton Law Ming To (Executive Director)
Wang Ande (Executive Director)
Willie Chang*
Hamilton Ho Hau Hay**
Alexander Reid Hamilton**
Hansen Loh Chung Hon**
Norman Ho Hau Chong**
André Desmarais*
Chang Zhenming*
Peter Kruyt#
* Non-executive Director
** Independent Non-executive Director
# Alternate Director to André Desmarais
24 September 2007
To the Shareholders,
Dear Sir or Madam,
CONTINUING CONNECTED TRANSACTION
RELATING TO THE CONSTRUCTION OF INFRASTRUCTURE
AT THE MINING AREA
1. INTRODUCTION
References are made to the circular of the Company dated 8 May 2006, in relation to
the acquisition of certain mining rights in Western Australia, which constituted a major
transaction for the Company, and the announcement of the Company dated 24 January
LETTER FROM THE BOARD
– 6 –
2007 in relation to the entering into of the Original General Construction Contract with
MCC. The acquisition of mining rights was approved by a written shareholders’ approval
pursuant to Rule 14.44 of the Listing Rules.
Once an additional 1 billion tonnes of magnetite ore are identified by the Company,
the Company will be under an obligation to complete the Balmoral Acquisition subject to
obtaining the relevant consent from the Treasurer of Australia. Based on preliminary drilling
results, subject to final confirmation, the additional 1 billion tonnes of magnetite ore
would be available. Following completion of the Balmoral Acquisition, Balmoral will
commence mining operations at the Mining Area, which will be carried out concurrently
with, the mining operations of the Sino-Iron Project. The development of the Sino-Iron
Project and the Balmoral Project will require the construction and installation of similar
infrastructure and it would be more cost effective and expedient for the design, construction
and installation of such infrastructure to be considered as a whole.
The Company has also been looking for appropriate partners with expertise in mining
to participate in the Projects.
In view of the foregoing, the Directors announced on 20 August 2007 that Sino-Iron
entered into the Supplemental Agreements with MCC in relation to, amongst other things,
the adjustment to the scope of the Works as set out in the Original General Construction
Contract and the revision of the Contract Sum to US$1,750 million.
The Directors further announced on 20 August 2007 that Catak, a wholly-owned
subsidiary of the Company, and MCC entered into the Sale and Purchase Agreement for
the disposal of the Group’s 20% interest in Sino-Iron for a consideration equivalent to 20%
of all the funds provided to Sino-Iron Holdings by the Group for the development of the
Sino-Iron Project up to the date of Completion (including equity share capital and
shareholders’ loans) together with interest (subject to adjustment based on the completion
audit on Sino-Iron Holdings). The Group’s shareholding in Sino-Iron will be reduced to
80% as a result of the Disposal.
Upon Completion, MCC will become a substantial shareholder of a subsidiary of
the Company and will therefore become a connected person of the Company as defined
under Chapter 14A of the Listing Rules. As the Contract Sum is payable in accordance
with the progress of the Works and settled on a monthly basis over an estimated period of
five years, the Supplemented General Construction Contract and the transactions
contemplated thereunder therefore constitute a non-exempt continuing connected
transaction for the Company under Rule 14A.35 of the Listing Rules and, together with
the relevant annual caps, are subject to reporting, announcement and independent
shareholders’ approval requirements under Rules 14A.45 to 48 of the Listing Rules.
The purpose of this circular is to provide you with details on the Supplemented
General Construction Contract and the transactions contemplated thereunder, the
recommendation of the Independent Board Committee and the advice of Independent
Financial Adviser in respect of the Supplemented General Construction Contract and the
transactions contemplated thereunder.
LETTER FROM THE BOARD
– 7 –
2. SUPPLEMENTED GENERAL CONSTRUCTION CONTRACT
The Supplemental Agreements
Date: 20 August 2007
Parties: (1) Sino-Iron
(2) MCC
Subject matter:
The Supplemental Agreements set out the terms upon which the Original
General Construction Contract is revised and additional terms in relation to the
Works. Certain construction specifications for the Projects, including the installation
of self-grinder and ball grinder production lines and pellet produce production
lines, are also stipulated therein. Relevant details on the Original General
Construction Contract have been disclosed by the Company in its announcement
dated 24 January 2007.
Changes to the scope of the Works
Pursuant to the Supplemental Agreements, the terms of the Original General
Construction Contract are revised to reflect, amongst other things, changes to the
scope of the Works to be performed by MCC in order to satisfy the additional
requirements of the Balmoral Project. Accordingly, the Works shall cater for the
production capacity of 24,000,000 tonne iron ore concentrate per annum and 6,000,000
tonne pellet per annum, with the capability to expand production capacity to
36,000,000 tonne of products per annum. Such products would comprise of a mixture
of iron ore concentrate, pellets and/or other value added products such as hot
briquette iron. Ultimately, the products mix shall be determined by Sino-Iron (and,
following completion of the Balmoral Acquisition, by Balmoral, respectively)
depending on market demand.
Contract Sum
Pursuant to the Original General Construction Contract, the price for the Works
to be conducted by MCC under the Contract was estimated to be US$1,106 million,
which amount is capped and no increase to the Contract Sum can be made unless
otherwise agreed by both parties. Sino-Iron also agreed to pay 1% of the relevant
price as Management Fee(s) in consideration of MCC managing relevant third party
contractors. As at the date of the Original General Construction Contract, to the best
of the knowledge, information and belief of the Directors having made all reasonable
enquiries, MCC and its ultimate beneficial owner are third parties independent of
the Company and connected persons of the Company. Accordingly, the Original
General Construction Contract did not constitute continuing connected transaction
for the Company.
LETTER FROM THE BOARD
– 8 –
Pursuant to the Supplemental Agreements, the Contract Sum is revised to US$1,750
million. The revised Contract Sum has been arrived at after negotiations on an arm’s
length basis, taking into consideration the experience of MCC, the complexity and the
increased scope of the Works, the construction requirement of both the Sino-Iron Project
and the Balmoral Project and the terms of the Supplemented General Construction Contract.
The revised Contract Sum shall be payable in accordance with the progress of the Works
settled on a monthly basis.
The revised Contract Sum forms part of the aggregate estimated capital expenditure
of the Sino-Iron Project and the Balmoral Project (being US$1,370 million and US$1,100
million respectively), which has been disclosed in the Company’s circular dated 8 May
2006, and has been approved by shareholders of the Company as mentioned above.
3. ANNUAL CAP
The expected time required for the completion of all the Works to be conducted by
MCC is approximately five years from the execution of the Supplemented General
Construction Contract.
The payment of the Contract Sum depends on the progress of the Works to be
completed. As it is anticipated that initial production will commence in 2009, a substantial
part of the Works shall be performed in the first three years of the contract term. The
estimated annual caps on the Contract Sum payable for the five financial years ending 31
December 2011 are as follows:
Financial year ending Annual cap
Percentage of
Contract Sum US$ (million)
31 December 2007 30% 525
31 December 2008 40% 700
31 December 2009 40% 700
31 December 2010 25% 437.5
31 December 2011 20% 350
In the event that any of the annual caps set forth above are exceeded, the Company
will make a further announcement and will comply with the Listing Rules as and when
necessary.
4. REASONS AND BENEFITS FOR ENTERING INTO THE SUPPLEMENTAL
AGREEMENTS
Given the development potential of the Balmoral Project, it is essential that it shall
have all the geological exploration, mining, processing, transportation, and infrastructure
and auxiliary facilities as necessary for producing the products of required quantity and
quality. MCC’s participation in the Projects will better align the interests of MCC and the
Group, and will generate economies of scale and significant operational efficiency and
cost-savings.
LETTER FROM THE BOARD
– 9 –
The Directors are of the view that the Supplemental Agreements are on normal
commercial, fair and reasonable terms, and consider that the entering into of the
Supplemental Agreements as being in the best interests of the Company and its
Shareholders as a whole.
5. IMPLICATIONS UNDER THE LISTING RULES
Upon Completion, MCC will become a substantial shareholder of a subsidiary of
the Company and will therefore become a connected person of the Company as defined
under Chapter 14A of the Listing Rules. As the Contract Sum is payable in accordance
with the progress of the Works and settled on a monthly basis over an estimated period of
five years, the Supplemented General Construction Contract and the transactions
contemplated thereunder therefore constitute a non-exempt continuing connected
transaction for the Company under Rule 14A.35 of the Listing Rules and, together with
the relevant annual caps, are subject to reporting, announcement and independent
shareholders’ approval requirements under Rules 14A.45 to 48 of the Listing Rules.
MCC has confirmed to the Company that, as at the Latest Practicable Date, neither
it nor its associates have any interest in any shares of the Company giving the right to
attend and vote at general meetings of the Company. As such, none of the Shareholders of
the Company is required to abstain from voting on the Supplemented General Construction
Contract.
The Independent Board Committee has been appointed to advise the Shareholders
on the terms of the Supplemented General Construction Contract and the transactions
contemplated thereunder. Commerzbank has been appointed to advise the Independent
Board Committee and the Shareholders in this regard, and also to advise whether it is
normal practice for the Supplemented General Construction Contract to have a duration
of more than three years.
The following Shareholders gave their written approval of the Supplemented General
Construction Contract under Rule 14A.43. Such Shareholders together were beneficially
interested in 1,232,706,285 Shares representing approximately 55.79% of the issued share
capital of the Company as at 17 August 2007, being the date their written approval was
given. The Company made a submission to the Stock Exchange that such Shareholders
constitute a “closely allied group of shareholders” within the meaning of Rule 14.45 and
the Stock Exchange has granted a waiver to the Company from strict compliance with the
requirement to hold a shareholders’ meeting to approve the Supplemented General
Construction Contract.
LETTER FROM THE BOARD
– 10 –
Percentage of
total issued
No. of ordinary share capital of the
Shares beneficially Company as at
Name of beneficial shareholder interested 17 August 2007
CITIC Hong Kong (Holdings) Limited
(through its wholly-owned subsidiaries) 635,919,285 28.78%
The Chairman and the Managing Director
of the Company having an interest
in the shares of the Company 452,381,000 20.48%
Power Corporation of Canada
(a substantial shareholder of the
Company as defined under the SFO
and in which a non-executive director
of the Company acts as the President) 144,406,000 6.53%
TOTAL 1,232,706,285 55.79%
6. RECOMMENDATION
Your attention is drawn to the letter from the Independent Board Committee set out
in this circular which contains its recommendation to the Shareholders in relation to the
Supplemented General Construction Contract and the transactions contemplated therein.
Your attention is also drawn to the letter from the Independent Financial Adviser,
for incorporation into the circular, which contains its advice to the Independent Board
Committee and the Shareholders as regards the Supplemented General Construction
Contract and the transactions contemplated therein and the principal factors and reasons
considered by it in arriving thereat.
Having taken into account the advice of Commerzbank, the Independent Board
Committee considers the terms of the Supplemented General Construction Contract and
the transactions contemplated therein and the relevant annual cap for each of the five
financial years ending 31 December 2011 are fair and reasonable so far as the Shareholders
are concerned and in the interests of the Company and its Shareholders as a whole.
Yours faithfully,
By Order of the Board
CITIC Pacific Limited
Larry Yung Chi Kin
Chairman
LETTER FROM THE INDEPENDENT BOARD COMMITTEE
– 11 –
(Incorporated in Hong Kong with limited liability)
(Stock Code: 267)
24 September 2007
To the Shareholders
Dear Sir or Madam
CONTINUING CONNECTED TRANSACTION
We refer to the Letter from the Board set out in the circular dated 24 September 2007
(the “Circular”) of which this letter forms part. Capitalised terms defined in the Circular
shall have the same meaning when used herein unless the context otherwise requires.
We have been appointed as the Independent Board Committee to consider the
Supplemented General Construction Contract and the transactions contemplated thereunder
and to advise the Shareholders as to the fairness and reasonableness of the Supplemented
General Construction Contract and the transactions contemplated thereunder and to
recommend whether or not the Shareholders should approve the Supplemented General
Construction Contract and the transactions contemplated thereunder. Commerzbank has
been appointed to advise the Independent Board Committee and the Shareholders in
relation to the terms of the Supplemented General Construction Contract and the
transactions contemplated thereunder.
RECOMMENDATION
We wish to draw your attention to the Letter from the Board and the letter from
Commerzbank to the Independent Board Committee and the Shareholders which contains
its advice to us in relation to the Supplemented General Construction Contract and the
transactions contemplated thereunder as set out in the Circular.
LETTER FROM THE INDEPENDENT BOARD COMMITTEE
– 12 –
Having taken into account principal factors and reasons considered by and the
opinion of Commerzbank as stated in its letter of advice, we consider the terms of the
Supplemented General Construction Contract and the transactions contemplated thereunder
to be fair and reasonable so far as the interests of the Shareholders are concerned and to
be in the interests of the Company and the Shareholders as a whole. We therefore
recommend the Shareholders to support the entering into of the Supplemented General
Construction Contract and the transactions contemplated thereunder.
Yours faithfully
Independent Board Committee of
CITIC PACIFIC LIMITED
Hamilton Ho Hau Hay
Alexander Reid Hamilton
Hansen Loh Chung Hon
Norman Ho Hau Chong
Independent Non-executive Directors
LETTER FROM THE INDEPENDENT FINANCIAL ADVISER
– 13 –
24 September 2007
To: the Independent Board Committee and
the Shareholders of CITIC Pacific Limited
Dear Sirs,
CONTINUING CONNECTED TRANSACTION RELATING
TO THE CONSTRUCTION OF
INFRASTRUCTURE AT THE MINING AREA
INTRODUCTION
We refer to our appointment as the independent financial adviser to advise the
Independent Board Committee and the Shareholders in relation to the entering into of the
Supplemented General Construction Contract between Sino-Iron, a wholly-owned
subsidiary of the Company incorporated in Australia, with MCC. Details of the
Supplemented General Construction Contract, including the Supplemental Agreements,
are set out in the section headed “Letter from the Board” as contained in the circular
dated 24 September 2007 (the “Circular”), of which this letter forms a part. Unless otherwise
defined herein, capitalised terms used in this letter shall have the same meaning as those
defined in the Circular.
On 31 March 2006, the Company entered into agreements whereby the Company
has obtained the mining rights (the “Mining Rights”) of potentially 6 billion tonnes of
magnetite ore in the Mining Area through the (i) acquisition of the entire share capital of
Sino-Iron (the “Sino-Iron Acquisition”) and Balmoral (the “Balmoral Acquisition”), and
(ii) the obtaining of the options to acquire the right to extract up to 4 billion additional
tonnes of magnetite ore. The Mining Area is located in western region of Pilbara, Western
Australia, which is near the mouth of the Fortescue River. In order to carry out the design,
construction, installation and testing of the infrastructure at the Mining Area after
acquisition of the Mining Rights, the Group, on 24 January 2007, entered into the Original
General Construction Contract with MCC, pursuant to which, MCC will be responsible
for the procurement of mining equipment, design, construction and installation of primary
crushing plant, concentrator, pellet plant, material handling system, camp and other
auxiliary infrastructure facilities at an amount not exceeding approximately US$1,106
million (equivalent to approximately HK$8,630 million). As stated in the section headed
“Letter from the Board” in the Circular, as soon as an additional 1 billion tonnes of
magnetite ore are identified by the Company, the Company will be under an obligation to
complete the Balmoral Acquisition subject to obtaining the relevant consent from the
Treasurer of Australia. Based on preliminary drilling results, subject to final confirmation,
the additional 1 billion tonnes of magnetite ore would be available. Following completion
LETTER FROM THE INDEPENDENT FINANCIAL ADVISER
– 14 –
of the Balmoral Acquisition, Balmoral will commence the mining operations in the Mining
Area concurrently with the Sino-Iron Project. In view of the concurrent mining operations
of both the Sino-Iron Project and the Balmoral Project, on 20 August 2007, Sino-Iron entered
into the Supplemental Agreements with MCC to revise the scope of the Works for inclusion
of additional requirements for the Balmoral Project.
On 20 August 2007, Catak, a wholly-owned subsidiary of the Company, also entered
into the Sale and Purchase Agreement with MCC, pursuant to which, the Group has
agreed to sell and MCC has agreed to acquire the Group’s 20% equity interest in Sino-
Iron. As a result, MCC will become a substantial shareholder of Sino-Iron and become a
connected person of the Company under the definition of Chapter 14A of the Listing
Rules. The transactions contemplated under the Supplemented General Construction
Contract will constitute a non-exempt continuing connected transaction for the Company
under Chapter 14A of the Listing Rules and is subject to approval of the independent
Shareholders. MCC has confirmed to the Company that neither it nor its associates have
any interest in the Shares. Accordingly, no Shareholder is required to abstain from voting
on the Supplemented General Construction Contract and the transactions contemplated
therein.
The Board currently comprises 18 Directors, with Messrs. Larry Yung Chi Kin, Henry
Fan Hung Ling, Peter Lee Chung Hing, Carl Yung Ming Jie, Leslie Chang Li Hsien, Vernon
Francis Moore, Li Shilin, Liu Jifu, Chau Chi Yin, Milton Law Ming To and Wang Ande as
the executive Directors; Messrs. Willie Chang, André Desmarais, Chang Zhenming and
Peter Kruyt (an alternate Director to Mr. André Desmarais) as the non-executive Directors,
and Messrs. Hamilton Ho Hau Hay, Alexander Reid Hamilton, Hansen Loh Chung Hon
and Norman Ho Hau Chong as the independent non-executive Directors. Pursuant to
Rule 13.39(6) of the Listing Rules, an Independent Board Committee comprising all of the
non-executive Directors has been formed for the purpose of making recommendation to
the Shareholders as to (i) whether the terms of the Supplemented General Construction
Contract, including, among other things, the duration and the annual caps (the “Annual
Caps”) in relation to the Supplemented General Construction Contract are of normal
practice and on normal commercial terms and are fair and reasonable and (ii) whether the
entering into of the Supplemented General Construction Contract by the Company is in
the interest of the Company and the Shareholders as a whole. We, Commerzbank, have
been appointed as the independent financial adviser to advise the Independent Board
Committee and the Shareholders in such regard.
In formulating our advice, we have relied on the information and facts supplied to
us by the Company. We have assumed that all information, opinion and representations
contained or referred to in the Circular are true, complete and accurate and we have relied
on the same. We have also relied on the representations of the Company that having made
all due enquiries and careful considerations, and to the best of its knowledge and belief,
there are no other facts or representations, the omission of which would make any statement
contained in the Circular, including this letter, misleading. We have also assumed that all
information, statements and representations made or referred to in the Circular, which
have been provided to us by the Company, and for which they are wholly responsible, are
true, complete and accurate as at the Latest Practicable Date.
LETTER FROM THE INDEPENDENT FINANCIAL ADVISER
– 15 –
We consider that we have (i) taken reasonable steps as required under Rule 13.80 of
the Listing Rules in obtaining all necessary information from the Company and (ii) reviewed
sufficient information to enable us to reach an informed view regarding the Supplemented
General Construction Contract and the terms and the transactions contemplated thereunder
and to provide us with a reasonable basis for our advice. We have no reason to suspect
that any material facts have been omitted or withheld, nor are we aware of any facts or
circumstances which would render the information and representations made to us untrue,
inaccurate or misleading. We have not, however, carried out any independent verification
of the information provided by the Company, nor have we conducted any independent
in-depth investigation into the business and affairs of the Group.
PRINCIPAL FACTORS CONSIDERED
In formulating our opinion in relation to the transactions contemplated under the
Supplemented General Construction Contract and giving our independent financial advice
to the Independent Board Committee and the Shareholders, we have taken into account
the following principal factors and reasons:
1. Background of the Supplemented General Construction Contract
According to the Company’s circular dated 8 May 2006 (the “May Circular”),
the Company, in March 2006, entered into agreements, whereby the Company has
obtained the Mining Rights of potentially 6 billion tonnes of magnetite ore over the
Mining Area through (i) the Sino-Iron Acquisition and the Balmoral Acquisition,
and (ii) the obtaining of the option to acquire the right to extract up to 4 billion
additional tonnes of magnetite ore in the Mining Area. The Mining Area is located
in western Pilbara region, Western Australia, which is near the mouth of the Fortescue
River. Further details of the Mining Rights, the Sino-Iron Acquisition, the Balmoral
Acquisition and the said option are contained in the May Circular.
As disclosed in the announcement made by the Company on 24 January 2007
(the “Original General Construction Announcement”), following the acquisition of
the Mining Rights, the Company had been in the process of identifying appropriate
professional companies for contracting out the design, construction, installation and
testing of the infrastructure at the Mining Area for the Sino-Iron Project. On 24
January 2007, Sino-Iron entered into the Original General Construction Contract
with MCC, pursuant to which MCC shall be responsible for the procurement of
mining equipment, design, construction and installation of primary crushing plant,
concentrator, pellet plant, material handling system, camp and other auxiliary
infrastructure facilities (collectively the “Works”) at an amount not exceeding
approximately US$1,106 million. In addition, Sino-Iron also agreed to pay 1% of the
relevant price as management fee (the “Management Fee”) in consideration of MCC’s
management of relevant third party contractors for the works not to be conducted
by MCC.
LETTER FROM THE INDEPENDENT FINANCIAL ADVISER
– 16 –
Under the Balmoral Acquisition, the Company is obliged to complete the
Balmoral Acquisition (subject to the relevant consent from the Treasurer of Australia)
when 1 billion additional tonnes of magnetite ore are identified by the Group. As
stated in the section headed “Letter from the Board” in the Circular, based on the
preliminary drilling result, subject to final confirmation, the additional 1 billion
tonnes of magnetite ore would be available in the Mining Area. Following completion
of the Balmoral Acquisition, Balmoral will commence mining operations at the Mining
Area concurrently with the Sino-Iron Project. Given the fact that it is essential for
the Balmoral Project to have all the geological exploration, mining, processing,
transportation and infrastructure and auxiliary facilities as necessary for producing
the products of required quantity and quality, the Group entered into the
Supplemental Agreements to supplement the Original General Construction Contract
to include the additional work relating to the Balmoral Project and revise the Contract
Sum (the “Revised Contract Sum”) payable to MCC.
2. Terms of the Supplemental Agreements
As disclosed in the Circular, the purpose of the Supplemental Agreements is
to revise the Original General Construction Contract to include additional terms in
relation to the Works and to stipulate certain construction specifications for the
Projects, including the installation of self-grinder and ball grinder production lines
and pellet produce production lines. Set out below is a summary of the changes in
the terms contained in the Supplemented General Construction Contract as extracted
from the Circular:
(i) Scope of the Works
Pursuant to the Supplemental Agreements, the terms of the Original
General Construction Contract are revised to reflect, amongst other things,
changes to the scope of the Works in order to satisfy the additional requirements
of the Balmoral Project. Accordingly, the Work shall cater for the production
capacity of 24,000,000 tonne iron ore concentrate per annum and 6,000,000
tonne pellet annum, with the capability to expand production capacity to
36,000,000 tonne of products per annum, comprising a mixture of iron ore
concentrate, pellets and/or other value added products such as hot briquette
iron.
(ii) Contract Sum
Pursuant to the Supplemental Agreements, the consideration for the
Works was revised from an amount not exceeding approximately US$1,106
million (equivalent to approximately HK$8,630 million) to US$1,750 million
(equivalent to approximately HK$13,655 million). Under both the Original
General Construction Contract and the Supplemental Agreements, such
Contract Sum is capped and no increase to the Contract Sum can be made
unless otherwise agreed by both parties to the Original General Construction
Contract and the Supplemental Agreements. In addition, Sino-Iron also agreed
to pay the Management Fee(s).
LETTER FROM THE INDEPENDENT FINANCIAL ADVISER
– 17 –
3. Reasons and benefits for entering into the Supplemental Agreements
As stated in the Original General Construction Contract Announcement, MCC
is an international construction company which has undertaken similar construction
works for large scale iron ore projects in various countries including the PRC,
Federative Republic of Brazil, Islamic Republic Iran and Bolivarian Republic of
Venezuela. The Directors are of the view that MCC has the ability to (i) undertake,
complete and manage the Works up to world-class standards in terms of construction
and safety standards and (ii) comply with the relevant legal and technical
requirements in Australia and the applicable industry standards for similar types of
construction works in Australia. We are also advised by the Directors that the mining
operations of the Balmoral Project will be carried out concurrently with the Sino-
Iron Project at the Mining Area and the Sino-Iron Project and the Balmoral Project
have the same geological conditions and the development of the two projects will
require construction and installation of similar infrastructure, resulting in similar
mining methods, processing, transportation, infrastructure and auxiliary facilities to
be used in both projects. Given the above, together with the synergies to be achieved
from carrying out the relevant construction work for both the Sino-Iron Project and
the Balmoral Project as a whole, including, but not limited to, the reduction in time
and management cost, we are of the view that engaging MCC to extend the relevant
construction work under the Original General Construction Contract to the Works
will be likely to achieve significant economies of scale and operational efficiency for
the Works, which is in the interest of the Company and the Shareholders as a whole.
4. Revised Contract Sum
Pursuant to the Supplemental Agreements, the Revised Contract Sum of up to
US$1,750 million represented an increase of approximately 58% from the Contract
Sum of up to approximately US$1,160 million. The Directors have confirmed that
the Revised Contract Sum is determined with reference to, among other things, the
changes to the scope and the additional construction requirement as a result of the
inclusion of the Balmoral Project, including, among other things, the addition of the
equipment, engineering services and the related infrastructure facilities for purposes
of expanding the production capacity from 12,000,000 tonnes of products per annum
as specified under the Original General Construction Contract to 24,000,000 tonnes
of products per annum, with the capability expandable to a production capacity of
36,000,000 tonnes of products per annum. The Directors have confirmed that the
Revised Contract Sum and the Management Fee were arrived at after arm’s length
commercial negotiation with MCC and the difference between the Contract Sum
and the Revised Contract Sum is calculated with reference to the price agreed under
Original General Construction Contract for the Works in relation to the Sino-Iron
Project, the increase in production scale of the projects and the expanded scope of
the Works in relation to the Balmoral Project.
LETTER FROM THE INDEPENDENT FINANCIAL ADVISER
– 18 –
According to the Supplemented General Construction Contract, the Revised
Contract Sum is divided into six sections, namely mining section (including crushing
plant), concentrator section, pellet plant section, materials handling section, camp
section and infrastructure and services section. The Supplemental Agreements have
specified the contract sum for each section and the related designs, materials and
components to be used, the type of services and facilities to be supplied by MCC,
construction standards and specifications have also been clearly formulated for each
section pursuant to the specification of the Works. We have reviewed each section of
the Supplemental Agreements and discussed with the Directors about the
corresponding scope of work pertaining to each section. We noted that each section
of work (including the materials to be used for the construction, their corresponding
price quotation and other relevant quotations for services or facilities supplies etc.)
in the Supplemental Agreements were arrived at after due and careful negotiations
between the Directors and the management of MCC. We also evaluate the scope of
work to be performed by MCC and noted that the increase in Contract Sum is fully
due to the expansion of work to cover the mining equipment and related
infrastructure facilities for both of the Sino-Iron Project and the Balmoral Project
concurrently. We understand from the Company that the construction work and
services included in the Supplemented General Construction Contract are common
and normal construction works and services available to all construction and
engineering companies in the mining industry. We also understand that the price
breakdown and the related specifications and standards of the Works are arrived at
after due negotiations with the management of MCC and after careful evaluation by
the management of the Group on the experience of MCC, the complexity and the
increase scope of the Works. MCC, at present, has not entered into similar
construction contracts in Australia and the Supplemented General Construction
Contract is the first engineering project of MCC in Australia. With a view to
maintaining the long-term strategic relationship with the Company over the Mining
Rights in Australia, it is stipulated in the Supplemented General Construction
Contract that, in the event that MCC has undertaken any similar construction
assignments with other companies in Australia with more preferential terms, the
existing terms in the Supplemented General Construction Contracts will be adjusted
to align with such preferential terms offered to other parties. We consider such term
is beneficial to the Company and the Shareholders.
Based on the above analysis, we consider that the Revised Contract Sum is
fair and reasonable and is in the interest of the Company and the Shareholders as a
whole.
LETTER FROM THE INDEPENDENT FINANCIAL ADVISER
– 19 –
5. Duration of the Works
We note that it will take approximately five years for MCC to complete all the
Works, which would exceed the three-year term as set out in Rule 14A.35 of the
Listing Rules.
The duration for establishing the relevant infrastructure involved in mining
operations such as construction of the processing plant, transportation facilities and
other auxiliary facilities will largely depend on the geological complexity,
environmental conditions, the scale of the mining operations and the mining methods
adopted (such as open-pit and underground). The Directors have advised that for
the Mining Area with 6 billion tonnes of magnetite ore, it is necessary to have
infrastructure such as the crushing plant, concentrator, pellet plant and material
handling system as well as the relevant transportation system, caps and other
auxiliary infrastructure facilities to cater for such scale of mining operations. We
have also discussed with the management of MCC and understood that the duration
of their engineering projects normally depend on the type and size of the mineral
ores in the mining areas, the size of construction or facilities to be installed and any
specific requirements from the clients. We have been provided by MCC the
engineering contracts for other similar mining projects including an iron ore
construction project in the PRC with an annual production capacity of 4,500,000
tonnes of product and an copper mine project in Islamic Republic of Pakistan with
an annual production capacity of 17,000,000 tonnes of product and noted that the
time required to complete each of the said contracts is approximately 4 years even
though their respective underlying production capacities are much less than the size
of 24,000,000 tonnes of products per annum pursuant to the Supplemental
Agreements. Both these two projects were entered into between MCC and other
independent third parties not connected with MCC. Given the project capacity of
the Supplemental Agreements is of such large scale, the management of MCC
considers it necessary to have a term of five years in order to complete the
construction terms stipulated in the Supplemental Agreements. In addition, the
management of MCC have further confirmed that based on their experience and
market knowledge in the engineering industry for mining projects, it is common
and in normal business term for mining projects with designed production capacity
larger than those of the two above-mentioned projects conducted by MCC to have a
contract term of more than three years.
We have also reviewed the annual reports of a total of five companies listed in
Hong Kong and Australia which are engaged in mining business and examined
whether a term of five years for such large scale engineering project is common to
the said listed companies. We noted that although such companies may have
subcontracted the engineering projects to outside parties for their mining projects,
their respective types, terms and scales of services are significantly different from
one another. For instance, Yanzhou Coal Mining Company Limited, a company
listed on the Main Board of the Stock Exchange, subcontracted the provision of
utilities, supply of materials and equipment and motor vehicle transportation to its
parent company with a contract term of 10 years; BHP Billiton Limited, a global
LETTER FROM THE INDEPENDENT FINANCIAL ADVISER
– 20 –
resources company listed in Australia, has a number of development projects for
different mining operations and the estimated period of development for such projects
varies from 3 to 5 years. Based on our findings, we consider that the contract terms
for engineering projects are specific to individual companies and the length of such
projects depends largely on a number of factors including, but not limited to, the
types and scale of facilities to be installed, the types of minerals to be extracted and,
the geological and climatic conditions of these projects.
Based on the above and taking the following into consideration:
(i) the delivery schedule of the Works agreed between MCC and Sino-Iron
under the Supplemental Agreements;
(ii) time required for the commissioning after the installation of the
equipment and the warranty period of the Works;
(iii) the Supplemented General Construction Contract is an extension of the
Original General Construction Contracts to include the additional
requirements for the Balmoral Project;
(iv) the completion schedule of construction projects of this nature is subject
to a number of unpredictable factors such as weather and geological
conditions; and
(v) the construction period incurred by MCC for other similar mining
projects
we consider that the duration of the Supplemented General Construction Contract
of five years is reasonable and confirm that it is a normal business practice for
contracts of this type to be of such duration.
6. Annual Caps of the Revised Contract Sum payable
The Annual Caps represent the amount payable by Sino-Iron to MCC which
mainly comprises (i) the Revised Contract Sum to be payable in accordance with the
progress of the Works over a period of approximately five years (the expected time
required for the completion of all the Works) and will be settled on a monthly basis
and (ii) the Management Fee.
LETTER FROM THE INDEPENDENT FINANCIAL ADVISER
– 21 –
As set out in the “Letter from the Board”, the estimated Annual Caps for each
of the five years ending 31 December 2011 are as follows:
Financial year ending 31 December
2007 2008 2009 2010 2011
Expected percentage of 20% 30% 30% 15% 5%
completion of the Works
Annual Caps amount 525 700 700 437.5 350
(US$ million)
Percentage of Revised 30% 40% 40% 25% 20%
Contract Sum
In assessing the reasonableness of the Annual Caps, we have discussed with
the Directors the bases and assumptions underlying the projection of the Annual
Caps. The Company advises that the Annual Caps are set with reference to (i) the
expected percentage of completion of the Works; (ii) the nature of the infrastructure
to be constructed by MCC; and (iii) the potential changes in the level of the Works
completed by MCC.
It is anticipated by the Company that the initial production of the Mining
Area will commence in 2009 and a substantial part of the Works will be performed
in the first three years. We have noted that the payment of the Revised Contract
Sum is based on the percentage of the Works completed by MCC; therefore, we
consider that it is reasonable for the Company to determine the above respective
Annual Caps.
We noted that the aggregate amount of the Annual Caps is larger than the
Revised Contract Sum. The Directors have confirmed that such buffer is necessary
in order to accommodate any changes in the progress of the Works to be performed
by MCC during the construction period due to unforeseen circumstances. We concur
with the Directors’ view that the Annual Caps are reasonable and are in the interest
of the Company and the Shareholders as a whole.
CONCLUSION
Having considered the above principal factors and reasons, and given that:
(i) the engagement of a construction company to undertake the design,
construction of production/processing plant, equipment, the related
infrastructure and auxiliary facilities is a common and normal practice in the
mining industry;
(ii) MCC having the necessary expertise and efficiency to execute the Works for
both the Sino-Iron Project and the Balmoral Project in a cost effective manner
which is beneficial to the Group’s interests in these two projects;
LETTER FROM THE INDEPENDENT FINANCIAL ADVISER
– 22 –
(iii) the Supplemented General Construction Contract, the terms and the
transactions contemplated thereunder (including the Annual Caps) having been
entered into on terms no less favourable to the Company than those MCC
would offer to other independent third parties;
(iv) the Annual Caps having been arrived at after due and careful consideration
by the Directors; and
(v) the duration of the Supplemented General Construction Contract of over three
years being of normal practice for sizable engineering projects similar to the
Sino-Iron Project or Balmoral Project,
we are of the view that the terms of the Supplemented General Construction Contract,
including the Supplemental Agreements and the transactions contemplated thereunder
(including the revised Contract Sum, the Annual Caps and the duration) are fair and
reasonable and are in the interests of the Company and the Shareholders as a whole.
Yours faithfully,
For and on behalf of
Commerzbank AG Hong Kong Branch
Kenneth Chan Andrew Yu
Head of Corporate Finance – Asia Pacific Corporate Finance – Asia Pacific
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