/NOT FOR DISSEMINATION IN THE UNITED STATES OF AMERICA/ TRADING SYMBOL: TSX-V: FII
VANCOUVER, April 8 /CNW/ - Flagship Industries Inc. (TSXV: FII) ("Flagship" or the "Company") is pleased to announce that it has entered into an arm's length letter agreement dated April 7, 2009 with Charonga Financial Corp. ("Charonga") with a view to completing a business combination which will result in Flagship acquiring certain coal interests located in Kazakhstan (the "Business Combination").
Information Concerning the Business Combination
Flagship and Charonga have entered into a letter agreement dated April 7, 2009 setting out certain terms and conditions pursuant to which the proposed Business Combination will be completed whereby Flagship will acquire an interest in the Orlovskoe coal deposit in Kazakhstan (the "Orlovskoe Deposit"). The Business Combination is subject to the successful negotiation and entering into of a definitive agreement.
It is currently anticipated that the Business Combination will be completed pursuant to the acquisition by Flagship of all of the issued and outstanding shares of Charonga in consideration for which Flagship shall pay an aggregate of US$3,000,000 (the "Cash Consideration") and issue an aggregate of 40,000,000 common shares of Flagship (the "Consideration Shares"). Flagship will also reimburse the amount of approximately US$250,000 (the "Reimbursement Funds") for expenses relating to the acquisition by Charonga of an interest in the Orlovskoe Deposit (the "Property Acquisition").
While the completion of the Property Acquisition is a condition to the completion of the Business Combination, Flagship may agree to complete the Business Combination prior to Charonga completing the Property Acquisition. In such event, Flagship shall issue an aggregate of 40,000,000 subscription receipts of Flagship in lieu of the Consideration Shares. Each subscription receipt will be automatically exercised into one common share of Flagship upon completion of the Property Acquisition, provided that if Charonga does not complete the Property Acquisition within 120 days of the closing of the Business Combination, such subscription receipts will be cancelled and the transaction shall be terminated and unwound. Upon such event, the Cash Consideration and the Reimbursement Funds, which will be held in escrow pending completion of the Business Combination, will be repaid to Flagship. In connection with the completion of the Business Combination, options to acquire an aggregate of 8,600,000 common shares of the resulting issuer will be granted to certain of its directors, officers, employees and consultants. Such options will be exercisable for a period of ten years following the date of grant at an exercise price equal to the subscription price in respect of the Financing (as defined below).
The completion of the Business Combination is also conditional on Flagship completing a private placement financing for minimum gross proceeds of $5,000,000 (the "Financing") at a price to be determined in accordance with the policies of the TSX Venture Exchange (the "Exchange"). It is anticipated that pursuant to the Financing, Flagship will issue subscription receipts which shall be automatically exercised upon the completion of the Business Combination (or, if subscription receipts are issued as consideration for the Business Combination, upon the exercise of such subscription receipts). Each subscription receipt issued pursuant to the Financing will be exercisable for one common share of Flagship and, if applicable, one-half of one common share purchase warrant of Flagship. The proceeds from the Financing will be held in escrow pending the exercise of the subscription receipts. In the event that the Business Combination and Property Acquisition are completed concurrently, the Financing may be completed through the issuance of the securities underlying the subscription receipts without the need to escrow the proceeds. The proceeds from the Financing will be used to carry out confirmatory drilling on the Orlovskoe Deposit, a detailed market study, pre-feasibility and feasibility studies and for working capital purposes. The definitive terms of the Financing will be determined in the context of the market.
Each of Flagship and Charonga will pay for their respective costs incurred with respect to the Business Combination, including legal and accounting costs, whether or not the Business Combination is completed. In addition, and in accordance with an advisory agreement between Flagship and Endeavour Financial ("Endeavour"), Flagship shall, upon closing, issue to Endeavour 800,000 common shares of Flagship and pay a fee of US$60,000 together with an amount equal to 1% of the gross proceeds of the Financing, all in consideration for Endeavour's assistance with the Business Combination.
Upon completion of the Business Combination, it is proposed that Flagship will change its name to "Flagship Power Corp."
The completion of the Business Combination is subject to the approval of the Exchange and all other necessary regulatory approvals. It is also subject to additional conditions precedent, including shareholder approval of each of Flagship and Charonga, the completion of the Financing for minimum gross proceeds of $5,000,000, the satisfactory completion of due diligence reviews by each party, approvals of the board of directors of each of Flagship and Charonga and certain other conditions customary for transactions of this nature.
Information Concerning Charonga
Charonga is a private company existing under the laws of the British Virgin Islands. Charonga currently has 10,000 shares outstanding. Charonga has no other securities outstanding.
Charonga is currently in the process of acquiring an interest in the Orlovskoe Deposit in Kazakhstan, 80% of which is to be indirectly owned by Charonga, through a wholly-owned subsidiary, and the remaining 20% of which is to be indirectly owned by the Government of Kazakhstan. Charonga was only recently incorporated for the purpose of acquiring an interest in the Orlovskoe Deposit and does not currently have an interest in any resource properties. Further information concerning the Orlovskoe Deposit can be found in the National Instrument 43-101 technical report dated April 8, 2009 prepared by Vattenfall Europe Mining Consulting ("VEMC") and entitled "Technical Report for the Orlovskoe Lignite Deposit in Kazakhstan" (the "Technical Report"), which will be filed on SEDAR and be available at www.sedar.com.
In the 1950s and 1970s, extensive exploration activities were conducted for coal deposits in certain republics of the former Soviet Union, including in the Turgajskij basin of Kazakhstan, where the lignite fields therein, including the Orlovskoe Deposit, were considered for large scale lignite-based power generation. While the area was intensively explored at that time, including both a preliminary and detailed exploration program, no subsequent exploration of the Orlovskoe Deposit, or other deposits within a several hundred kilometre radius, has been carried out by any company.
The Orlovskoe Deposit was initially held as property of the Soviet state. Following the end of the Soviet Union, work on the project ceased and the Kazakh government decided instead to expand the existing hard coal projects in the Ekibastus and Pavlodar regions of Kazakhstan. Recently, a consortium of western investors represented by Charonga and certain local partners started to re-examine the potential of the Orlovskoe Deposit with the objective of creating an integrated mine to power plant complex and also to provide electrical power to the region as well as the southern Urals in Russia.
The property that covers the Orlovskoe Deposit is located in the northern part of Kazakhstan, 380 kilometres west of the capital of Astana and around 300 kilometres southeast of the city of Kostanai. The property is in the far west portion of the Akmola region of Kazakhstan near the boundary with the Kostanai region. The towns of Yesi and Derzhavinsk are about 70 kilometres and 40 kilometres northeast and east of the Orlovskoe Deposit, respectively.
The geological formations of the area under review are mainly Mesozoic and Cenozoic sediments within the Kysyltal-Savinkovsko basin. The Orlovskoe Deposit is located at the western boundary of one of the basin structures where the basement of the structure is comprised of magmatic and metamorphic rocks. Overlying the basement rocks are Jurassic sediments and consolidated sediments that host the coal seams of economic interest. There are a total of nine coal horizons (I to IX), each of which consists of up to 16 individual coal seams. Of the nine coal horizons, the youngest five horizons have been subjected to detailed exploration and sampling. The coal-bearing strata are overlain by Cretaceous, Tertiary and Quaternary sediments such as sand, clay, gravel and unconsolidated rubble.
The proportion of coal relative to non-coal partings within each of the coal-bearing horizons is approximately 27% for the younger horizons, while the older horizons yield an average of 13%. These percentage contents of coal refer only to the coal-bearing horizons and do not include interburden material between the horizons. The total thickness of humus coal is approximately 100 metres (referring to horizons I to VI) and has been explored to vertical depths of between 65 and 550 metres. A current inferred resource of 1,135 Mt of lignite has been estimated by VEMC for the upper horizons (I to V) of the deposit in compliance with CIM Definition Standards. The lower horizons (VI to IX) were excluded from the resource evaluation.
The available historical reports documenting the previous exploration efforts record all procedures and results in great detail. Due to this detailed documentation of the results and the thorough implementation of the exploration procedures, the degree of exploration has been adequate for the preparation and reporting of a resource estimate.
The historical resource for coal horizons I -V was reported to Former Soviet Union Standards and was primarily all in the A + B and C1 category. There is no precise correlation between the Russian classification standard GOST 2160-62 and National Instrument 43-101 resource classification. The resource estimate was submitted and approved by GKZ (State Committee of Reserves) in 1980. VEMC is not treating the historical resource as current mineral resources or reserves; and the historical estimate should not be relied upon. The table below highlights the historical resource (in millions of tonnes).
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No.
of
Rank Coal
of Hori- A + B +
Coal zons A B A + B C1 A + B + C1 C2 C1 + C2
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B(2) I 41.750 35.935 77.685 110.751 188.436 7.345 195.780
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B(2) II 67.547 125.237 192.784 64.296 257.080 12.838 269.918
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B(2) III 81.558 48.716 130.274 78.862 209.136 9.074 218.210
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B(2) IV 96.174 114.460 210.634 127.250 337.884 11.326 349.210
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B(2) V 8.815 10.547 19.362 70.677 90.039 11.996 102.035
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total 295.844 334.895 630.739 451.836 1,082.575 52.579 1,135.154
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The coal resource was reconciled by VEMC to the CIM Definitions in accordance with requirements of National Instrument 43-101 and has been reclassified as inferred resources. The resources were only estimated and reported for those parts of the deposit in which the ratio of waste-coal is up to a maximum of 6.4:1. In addition, a maximum depth of 460 m was considered as a limit for an opencast mine operation. Mineral resources that are not mineral reserves do not have demonstrated economic viability.
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No. of Coal Horizon Inferred (Mt)
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I 195.780
II 269.918
III 218.210
IV 349.210
V 102.035
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Total 1,135.154
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Summary of the total resources in the Orlovskoe deposit (March 2009)
All of the coal in the five coal horizons that comprise the resources are considered to be humus coal, lignite or brown coal. Extensive analytical studies of the coal quality parameters have confirmed relatively low ash and sulphur contents (19.3% and 1.2%, respectively). The heating value Qnet is on average 3,542 kilocalories, whereas the upper heating value Qdaf was determined to be approximately 6,688 kilocalories. The coal has a content of volatiles of approximately 45% and is therefore applicable for use in a power plant. In contrast, the coal is not applicable for refining (carbonization or briquetting).
VEMC used the resource as the basis for completing eight different mine and power scenarios. Preliminary scheduling and estimating of a Real Average Cost (RAC) was included for each of these scenarios. The RAC estimates for eight varying mine plans range between US$10 and US$15 per ton of coal and 3.5 to 4.9 ct per kWh can be reached if the opencast mine output exceeds 7 Mt/a. A summary of these options are listed below:
- Option 1 assumes mine coal production of 2.5 Mt/a and all of this is
fed to a 500 MW power plant.
- Option 2 assumes mine coal production of 10 Mt/a and all is fed to a
1950 MW power plant.
- Option 2a assumes mine coal production of 10 Mt/a and 2.5 Mt/a is fed
to a 500 MW power plant the same size as option 1.
- Option 2b is similar to 2a with the exception of slightly different
mobile equipment scenario.
- Option 3 assume mine coal production of 17.5 Mt/a and all is fed to a
3400 MW power plant.
- Option 4 assumes mine coal production of 15 Mt/a and 10 Mt/a is fed
to a 1950 MW power plant similar to option 2.
- Option 5a assumes mine coal production of 7.5 Mt/a.
- Option 5b is the same as 5a with an alternate mobile equipment fleet.
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Option 1 2 2a 2b 3 4 5a 5b
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Annual Lignite
Output Mt/a 2.5 10.0 10.0 10.0 17.5 15.0 7.5 7.5
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Total Lignite
Produced - LOM Mt 92 349 384 383 607 553 293 293
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Supply of On-
Site-TPP Mt/a 2.5 10.0 2.5 2.5 17.5 10.0 - -
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Lignite Sold Mt/a - - 7.5 7.5 - 5.0 7.5 7.5
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Initial Capital
Costs (TPP plus
mine) MUS$ 1,365 3,390 1,330 1,355 5,625 3,310 550 445
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Size of On-
Site-TPP MW 2x250 3x650 2x250 2x250 4x850 3x650 - -
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Total Mining
Costs MUS$ 1,233 2,814 3,026 3,021 4,684 3,980 2,812 3,570
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RAC of Lignite
(free off
mine) US$/t 22.30 11.29 11.20 11.25 9.86 9.56 13.78 14.76
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Total TPP Costs
(including
lignite costs) MUS$ 4,476 11,965 3,637 3,523 21,167 12,104 - -
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RAC of generated
Power (free
off TPP) ct/kWh 4.87 3.54 4.06 4.12 3.54 3.50 - -
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The assessment of RAC is based on a discount rate of 6%, and does not include financing costs, taxes and escalation rates. All price calculations for the expenses to build a thermal power plant as well as to purchase mining equipment have been made based on price levels in 2008/2009. The RAC estimate is preliminary in nature in that it includes inferred mineral resources that are considered too speculative geologically to have cost considerations applied to them that would enable them to be categorized as mineral reserves, and there is no certainty that the RAC estimates would be realized.
VEMC has recommended proceeding with the development of the independent mine and power plant project by undertaking a Phase 1 program consisting of a market study, geological 3D model, confirmatory drilling (10 holes with average depth of 400 m) and resource estimation and categorization. The budget for this Phase 1 program is C$4,224,000 ((euro)2,505,000) and its anticipated duration is seven months. A Phase 2 program contingent upon the results of the first phase of work will consist of an open cast mine pre-feasibility study and a thermal power plant pre-feasibility study has also been recommended and is contingent upon the results of the Phase 1 program. The budget for this Phase 2 program is C$1,009,000 ((euro)600,000) and its anticipated duration is eight months. Additional work and studies are recommended but the scope and budget for these activities are contingent upon the results of the initial two phases of work.
The mining license for the Orlovskoe Deposit should be applied for simultaneously with the preparation of the prefeasibility studies. The permit process will take several months and require intensive active participation of Flagship. It will also be necessary to establish an engineering department for coordination and control of the implementation of processes and measures for completing the recommended studies.
This press release has been reviewed by Stephan Peters, Dipl.-Geol., an independent qualified person, who has prepared the Technical Report.
Charonga has only recently been created for the sole purpose of acquiring an interest in the Orlovskoe Deposit. It has not transacted any material financial transactions since being incorporated and does not currently have any material financial information.
The only principal shareholders of Charonga which own more than 10% of Charonga's outstanding shares are Eiger Trust and Otan Trust, both trusts controlled by Pinnacle Trustees Limited, St. Helier, Jersey, and Askar Urankhayev, a resident of Kazakhstan. The principal shareholders of Charonga are all arm's length to Flagship.
Management and Board of Directors of Resulting Issuer
Upon completion of the Business Combination, it is anticipated that the management and Board of Directors of the resulting issuer will consist of the persons identified below:
Phillip Shirvington, President and CEO
Mr. Shirvington is a Non-Executive Director of Uranium One Inc. ("Uranium One"), a TSX listed company with producing assets in Kazakhstan. Prior to that, he was President and Chief Executive Officer of UrAsia Energy Ltd. from May 2005 until its merger with Uranium One in April 2007. Mr. Shirvington has over 40 years experience in the nuclear business, including six years as Managing Director of Energy Resources of Australia Ltd. ("ERA"), the third largest uranium producer in the world. Mr. Shirvington has been involved in the resource business in Kazakhstan since 1992, when he served as General Manager, Marketing for ERA. Prior to joining ERA in 1980 he was a nuclear scientist and First Secretary Atomic Energy at the Australian Embassy in Washington D.C.
Dr. Sergey V. Kurzin, Director
Dr. Kurzin is a research engineer who has played a key role in initiatives to acquire and develop former Soviet Union mining assets, including Julietta (a high grade gold deposit in Russia, with Bema Gold Corporation "Bema Gold"), Kupol (a high grade epithermal gold deposit in Russia, with Bema Gold) and Varvarinskoye (copper and gold skarn deposit, Kazakhstan, with European Minerals Corporation). He was founder of Oriel Resources Plc (acquired by Mechel OAO in 2008) and held the position of Executive Chairman. Dr. Kurzin played a key role in establishing UrAsia Energy Ltd., a uranium producer with mining operations in Kazakhstan until its subsequent merger with Uranium One.
Hon. John Reynolds, P.C., Director
Mr. Reynolds served as both a Member of the Legislative Assembly in British Columbia (from 1983 to 1991) and as a Member of Parliament in Ottawa (from 1972 to 1977 and again from 1997 to 2006). Prior to his recent retirement from Federal politics he was the Official Opposition House Leader for the Conservative Caucus. Previously he had been Leader of the Opposition in the House of Commons for the Canadian Alliance Caucus. Mr. Reynolds is currently a Member of the Queen's Privy Council for Canada and a Senior Strategic Advisor for the law firm Lang Michener LLP. He currently sits on boards of several publicly listed mineral exploration companies, and has been President of Gainey Consultants Inc. since January 2006.
Dr. Massimo Carello, Director
Dr. Carello has over 30 years of international senior management and director level experience. Dr. Carello was the Chairman and Chief Executive Officer of Fiat UK from 1990 to 2001 and of Diners Club UK from 2001 to 2004. Dr. Carello served as a member of the Confederation of British Industry ("CBI") Presidents Committee from 1998 to 2003 and was a member of the CBI European Committee. He was Vice President of the Italian Chamber of Commerce in the United Kingdom from 1998 to 2005. Currently Dr. Carello is a non-executive director and a member of the audit committee of Uranium One. Dr. Carello also sits on the boards of Canaccord Capital Inc. and Orsu Metals Corp.
Takhirzhan Baratov, Director
Mr. Baratov, a Kazakh citizen, is Executive Director for Central Asia and Kazakhstan and currently holds the position of Chairman of the Board of Varvarinskoye JV. Mr. Baratov graduated from Kazakh State University in 1986, specializing in applied mathematics. Since the early 1990s he has held mining directorships with various international natural resource companies such as European Minerals Corporation, Steppe Gold Resources Ltd., Zincox Resources plc and Ennex International plc. Mr. Baratov also holds the positions of Director General of Muzbel LLP and Deputy Director General of GRK Kazakhstan Nickel LLP and was a former director of Oriel Resources Plc.
Gordon Keep, Interim CFO and Secretary
Mr. Keep has wide business experience as an investment banker and has held several senior positions. From April 1987 until October 1997 he was the Vice President of Corporate Finance in the natural resource group of Yorkton Securities Inc. and from September 1997 until March 2004 he was Senior Vice President and Director of Lions Gate Entertainment Corp. Mr. Keep was Managing Director of Corporate Finance at Endeavour Financial, an investment banking firm that specializes in the mining and mineral industries, from January 2001 to July 2007. Mr. Keep is currently Executive Vice President of Fiore Financial Corporation.
Information Concerning Flagship
Flagship is a company existing under the laws of Ontario and is a reporting issuer in Ontario, British Columbia and Alberta. Flagship currently has 84,441,375 common shares (the "Flagship Shares") outstanding. In addition, Flagship has issued warrants to acquire an aggregate of 30,125,000 common shares at a price of $0.10 per share (the "Flagship Warrants"). Flagship has also granted stock options to its directors and officers to acquire an aggregate of up to 850,000 common shares at a price of $0.38 per share and up to 4,100,000 common shares at a price of $0.11 per share (collectively, the "Flagship Options"). Other than the Flagship Shares, the Flagship Warrants and the Flagship Options, no other securities of Flagship are outstanding.
Further information concerning Flagship can be found on Flagship's SEDAR profile at www.sedar.com.
Completion of the transaction is subject to a number of conditions, including Exchange acceptance and if applicable pursuant to Exchange requirements, disinterested shareholder approval. Where applicable, the transaction cannot close until the required shareholder approval is obtained. There can be no assurance that the transaction will be completed as proposed or at all.
Investors are cautioned that, except as disclosed in the filing statement of Flagship to be prepared in connection with the proposed transaction, any information released or received with respect to the proposed transaction may not be accurate or complete and should not be relied upon. Trading in the securities of Flagship should be considered to be highly speculative.
This press release contains projections and forward-looking information that involve various risks and uncertainties regarding future events. Such forward-looking information may include, without limitation, statements based on current expectations involving a number of risks and uncertainties and are not guarantees of the future performance of Flagship. These risks and uncertainties could cause actual results and Flagship's plans and objectives to differ materially from those expressed in the forward-looking information. Actual results and future events could differ materially from those anticipated in such information. These and all subsequent written and oral forward-looking information are based on estimates and opinions of management on the dates they are made and expressly qualified in their entirety by this notice. Except as required by applicable laws, Flagship assumes no obligation to update forward-looking information should circumstances or management's estimates or opinions change.
Neither TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release.