KWR Shareholder opposition to the proposed merger with BTR

I’ve recently circulated the below email to KWR Shareholders whose email address I currently have.

If you have not received the below email, andwould like to be involved in opposing the proposed merger with BTR, please donot hesitate to reach out to me at [email protected]

If you could include your name, contactinformation and the name of the entity in which your shares are held, thatwould be greatly appreciated.

All the best

Nick

____________________________

Dear all

I have had the pleasure of speaking with many of you,however, due to the sheer number of shareholders (approximately 1700) and lackof contact details contained in the Shareholder Registry, I have not had theopportunity to speak with all of you.

What this is

I have reviewed the documents regarding the proposedmerger between Kingwest Resources (KWR) and Brightstar Resources (BTR). I do not consider that this deal is value accretive to KWRshareholders.

I have spoken with several brokers who are notinvolved in this transaction, and have not been involved in raising money forKWR. These brokers also do not see the value to KWR Shareholders.

I have spoken with multiple senior figures in the goldand mining industry across Australia. Again, these individuals do not seevalue to KWR Shareholders in the proposed merger with BTR.

As such, although I do not have a significant stake inthe company, I have taken it upon myself to pull together shareholders who alsodo not consider that the proposed merger with BTR is in the best interests of allKWR Shareholders.

The proposed merger documents can be located here:

1. Brightstar and Kingwest Resources Agree Strategic Merger dated 23 December 2022 (BTR & KWR Strategic Merger Announcement);
2. Strategic Merger Presentation dated 23 December 2022 (Merger Presentation);
3. Scheme Implementation Deed dated 23 December 2022 (Scheme Implementation Deed).

Who I am and why I am involved

I am Nick Cohen a solicitor based in Sydney whospecialises in Commercial Litigation and Insolvency.

I have a small investment in KWR (approximately300,000 shares). This is a relatively small holding compared to other KWRShareholders, and relative to my overall investment profile. However, Isee KWR as a company with fantastic prospects that are not being fully exploredand maximised.

KWR’s current position

There are approximately 1700 shareholders in KWR, withapproximately 280 millions shares on issue (SOI). At the recentAGM there were only approximately 60 million shares voted. KWR does notcurrently have an active shareholder base; I am seeking to change this.

We need 5% of shareholder votes, or 100 shareholdersto require the company to call a meeting and/or put certain resolutions to theKWR shareholders. We already have 5% of SOI.

At the end of the 30 September 2022 quarter, KWR hadapproximately $2.8m. At the end of the December quarter, KWR should haveapproximately $2.1m in cash.

KWR is in a (relatively) strong position with thecurrent JV with BML in relation to the Selkirk deposit.

KWR could receive somewhere in the vicinity of $3m -$5m from the JV with BML in relation to the Selkirk deposit alone. That is, KWR currently holds enough cash on hand for at least 4 – 6 quarters ifwe minimised costs. This is more than enough time to obtain the incomefrom the Selkirk deposit.

BML have indicated a willingness to extend therelationship with KWR in respect of another small deposit at Menzies. More importantly, BML have indicated a desire to engage further with KWR inrespect of the larger deposits, if the initial mining is successful. Thiscould be highly profitable for KWR.

Menzies

KWR currently has a deposit of approximately 500kounces, at 1.33 grams per tonne. This is nothing to be sneeze at. KWR is in the process of monetising the Menzies deposit. However, theoverall Menzies deposit is made up of multiple smaller deposits, all ofwhich are open at depth. Historically, Menzies has produced 800kounces at 19 grams per tonne, which is exceptional (see slide 10 of the MergerPresentation).

Further, most of the existing KWR Mineral ResourcesEstimate (MRE) is relatively shallow “predominantly defined withinthe top 200m from surface) and modest grade, despite the historically minedYunndaga deposit being mined to+600m depth” (see slide 10 of the MergerPresentation).

There is ample opportunity for KWR to conduct furtherdrilling across Menzies, and carry out deeper drilling across each of theexisting Menzies deposits.

Lake Goongarrie

Lake Goongarrie is highly prospective, however, it isdifficult to drill and from the results that we have seen to date, will mostlikely require a significant number of holes to locate any meaningful golddeposit. This is not something that KWR can afford to focus on,especially in the short term and in this financial climate. However, itremains a fantastic asset for KWR to pursue in the future when it has astronger balance sheet and can afford to take the time and resources to drillLake Goongarrie properly.

Other prospects

The financial climate is becoming more and more difficult. Inflation is soring and many small mining companies are going tostruggle. Access to cash for exploration activities through capitalraises and the like will become increasingly difficult. This is a greattime for KWR to build its existing cash position through its relationship withBML and to maximise the commercialisation of the existing Menziesdeposit. There are likely to be many companies, deposits and tenementsthat will be significantly undervalued in WA and across Australia more broadlyin the next few years. KWR should capitalise on these opportunities, notbecome one.

Proposed BTR Merger

The proposed merger results in approximately 1.5billion shares on issue and a market cap of $20m. This is before anyfunds are raised.

The ‘strategic’ benefit to KWR Shareholders isapparently:

1. BTR’s existing resource at Laverton (460k ounces at 1.6 grams per tonne, which is similar to KWR’s MRE); and
2. BTR’s Laverton mill.

There does not appear to be strong synergies betweenBTR and KWR.

The cost of fixing up BTR’s mill in Laverton is atleast $5.5m (see slides 6 and 9 of the MergerPresentation). I say at least because this was a cost identified inMay 2021, and construction associated costs have only increased since thattime. However, even if this mill at Laverton is restarted, it is arelatively small mill and the operational costs of milling will besignificantly higher than those at existing larger mills.

The trucking route from Menzies to the mill atLaverton is 260km, bypassing a number of larger mills significantly closer toMenzies (many of whom BML have a relationship with, and accessing to millingpotential).

KWR is apparently obtaining a resource similar to itsown, but under the merger with BTR KWR shareholders end up with 43% of thetotal and BTR shareholders with 57% of the total. The merged company hasto pay higher trucking costs to get to the Laverton mill and the merged companyhas to pay higher milling costs (at the small Laverton mill, if the companygets it operational) and then, KWR Shareholders only obtain 43% of theprofits.

When compared to a JV with BML, where BML pays all theupfront costs, KWR has lower trucking costs and cheaper milling costs at thelarger mills that BML has access to, and KWR and BML split the profits 50-50,the BTR strategy doesn’t make any sense at all to me.

I have heard that BTR’s new MD, Alex Rovira (Rovira),is a genuinely nice person. Which is great to hear, but he is in hisearly 30’s and has never run a company before, let alone a miningcompany. He has, to date, been a Perth based broker.

Excessive compensation

If the proposed merger goes ahead, Rovira will begifted 80 million performance shares (see Appendix 2 / page 7 of the BTR& KWR Strategic Merger Announcement). This is a large number ofshares for what I would consider to be standard operating procedure for aManaging Director or CEO of a mining company.

In addition to this, Bill Hobba (Hobba) is toreceive $1,140,000 in compensation if the BTR mill becomes operational andproduces 50,000 ounces of gold. Again, this appears to be excessive andunnecessary compensation.

Further, part of Rovira’s and all of Hobba’scompensation is directly tied to the BTR mill at Laverton becoming operational,even though this may not be in the best interest of the merged company as awhole. This presents a complex potential for a conflict ofinterests.

Does KWR need BTR?

As you can see from the above, KWR does notnecessarily need BTR to continue its activities. BTR on the other handhas a considerable number of SOI (approximately 700m) and is currently raising$1.6m in capital to continue with its current activities. Merging withKWR provides BTR with access to additional capital and an immediaterevenue stream (through KWR’s JV with BML in respect of the Menziesdeposit). As far as I am aware, BTR does not have any program in place toimmediately monetise its deposit at Laverton. Ultimately, it appears tome that BTR need KWR a lot more than KWR needs BTR.

Alternate course of action

In light of the above, we consider that the followingcourse of action is far more advantageous to KWR Shareholders, and should bepursued instead of the proposed merger with BTR.

1. Minimise costs and KWR’s expenses;
2. Immediately expand KWR’s JV with BML;
3. Consider further expansion of the JV with BML regarding some of the larger deposits at Menzies;
4. Develop exploration and drilling programs at depth at Menzies;
5. Develop exploration and drilling programs (including potentially a Moving Loop Electromagnetic (MLEM) Survey) across the Highway Ultramafic for potential Nickel and gold deposits;
6. Actively engage in seeking out undervalued deposits, companies and tenements; and
7. (further down the track) consider reengaging drilling at Lake Goongarrie.

In some ways, the proposed course of action for KWR isnot a ‘sexy’ or ‘exciting’ proposed course of action, but it is one that Igenuinely consider will maximise shareholder value in the medium to longrun.

Further action

The proposed merger with BTR requires a specialresolution to be passed, this means that it requires 75% of the shares voted tobe in favour of the merger. As such, I am seeking to obtain proxies for atleast 25% of the SOI to ensure that we can prevent the merger fromproceeding. From the support that I have already received, number is veryrealistic.

Once you have had the opportunity to consider theabove and the proposed merger documents (each of which I have linked above), itwould be greatly appreciated if you could please email me with whether:

1. you will support our action to block the merger with BTR;
2. whether you are undecided; or
3. whether you will support the merger with BTR.

The KWR Shareholder registry also did not containemails or phone numbers for a considerable number of KWR Shareholders. Assuch, it would be greatly appreciated if you could please circulate thisamongst other KWR Shareholders that may not have their contact details on theKWR Shareholder Register.

The above is in no way financial advice, it is myopinion as a shareholder of KWR. I want every KWR Shareholder to look atthe proposed merger with BTR on its merits, and consider whether it is the bestway forward for KWR. I do not consider that it is, and I have flagged severalof the reasons above that have caused me to reach this conclusion.

Finally, should you have any questions or commentsregarding the above, please do not hesitate to contact me via email ([email protected])