Somercourt Investments Ltd Release in Relation to Sino Prosper State Gold Resources Holdings Limited (Stock Code: 766)

HONG KONG, Sept. 24, 2013 /PRNewswire/ -- Somercourt Investments Ltd ("Somercourt") is a long-term investor of Sino Prosper State Gold Resources Holdings Limited (the "Company" or "Sino Prosper") holding (directly and indirectly) approximately 7.04% of the issued share capital of the Company at the date of this announcement.

Sino Prosper has convened two EGMs to be held on Monday 30 September 2013 for the purposes of asking Shareholders:

• to approve the Micro Finance Transaction; and
• to approve an extension of the Long Stop Date of the Qing Jiao Transaction to 31December 2014.

Both these transactions are connected transactions with the Chairman as vendor, and Somercourt is extremely concerned that the transactions are not on arm's length terms and are not in the interests of the Company and the Shareholders as a whole.  Somercourt has noted, in particular:

• the highly unusual warnings and risk factors highlighted and described in the Micro Finance Circulars; and
• the recommendations of the Independent Financial Adviser and Independent Board Committee in the Qing Jiao Circular that the proposed extension of the Long Stop Date to 31 December 2014 is neither fair nor reasonable nor in the interests of the Company and the Shareholders as a whole and the advice to vote against the extension.

On 23 September 2013, Sino Prosper issued a further notice to Shareholders clarifying certain information contained in the Micro Finance Transaction circular, and announcing various amendments to the terms of the Micro Finance Transaction and the proposal to defer the consideration by Shareholders of the resolutions to approve the Micro Finance Transaction from 30 September 2013 to 11 October 2013.

Unless Independent Shareholders take action to oppose the Transactions, Somercourt is concerned that the Transactions may be approved by default and, if so, this will be materially prejudicial to the interests of the Independent Shareholders of Sino Prosper.

Somercourt therefore urges Shareholders:

• to carefully read this announcement and review the circulars released by Sino Prosper on 2 September, 11 September and 24 September 2013 ahead of the EGMs;
• to attend the EGMs in person or by proxy;
• to vote against each of the resolutions proposed by Sino Prosper; and
• in the meantime, to contact it at Email: somercourt.sinoprosper@gmail.com or Phone: (+852) 9557 5891

Terms are defined in the section headed "Definitions" at the end of this announcement.

MICRO FINANCE TRANSACTION

The Micro Finance Transaction is the proposed acquisition of a start-up micro finance business in Jilin City, the PRC, from the Chairman (as vendor) for a purchase price of up to HK$850 million.

The Company signed the agreement relating to the Micro Finance Transaction on 27 September 2012, announced the transaction nearly 3 months later on 21 December 2012, and circulated the Micro Finance Circulars to Shareholders on 11 September and 24 September 2013, almost 12 months after the agreement was first signed.

The Micro Finance Circulars contain numerous warnings and risk factors which is highly unusual in the context of a transaction circular. Somercourt believes that it is likely that the lengthy delay in the distribution of a circular was because the Stock Exchange had been applying a high level of regulatory scrutiny to the transaction and the contents of the circular.

Despite the lengths that the Company has gone to in the Micro Finance Circulars to try to explain and justify the transaction, Somercourt still believes that there are a considerable number of significant issues that have been unsatisfactorily addressed or remain unanswered. Some of these issues are as follows:

Excessive purchase price and concerns with valuation

• Somercourt believes that the consideration to be paid by the Sino Prosper group to the Chairman is excessive and unjustified and does not reflect normal commercial terms and arm's length negotiations.
• The maximum consideration of HK$850 million payable represents approximately 13 times the amount originally paid by the Chairman (1), and approximately 16 times the amount originally paid by the Chairman after taking into account the RMB150 million to be injected by Sino Prosper (note not the Chairman) as registered capital of Target PRC No.1 after Completion.
• The initial upfront consideration of HK$450 million payable on Completion is alone over 200% more than the Company's current market capitalisation, and payment of the maximum consideration of HK$850 million would be over 400% more than the Company's current market capitalisation.  
• The staged T2 and T4 payments (of HK$170 million and HK$85 million) are subject to conditions linked to very low turnover requirements in the six month periods ending 30 September 2013 and 31 March 2014. The turnover thresholds can be achieved by a few non-recurring transactions and do not justify the significant additional sums that would be payable. The first six month period is nearly over, but the Company has provided no data on performance to-date.
• There are already 337 micro finance businesses in operation in Jilin Province (2), so the  purchase price cannot be justified by the uniqueness of the business opportunity.
• The Micro Finance Transaction represents a dramatic divergence from Sino Prosper's existing ordinary course operations and yet no member of the Board has experience in operating the Target Business in the PRC and no member of the Board has any experience in investing and operating any business in Jilin City.
• Somercourt considers that the projections for revenue, cost of bank financing and default rates used to support the purchase price are based on inappropriate methodology and comparisons. Not enough information has been provided in the Micro Finance Circulars to enable shareholders to evaluate whether these projections are realistic (3).
• The Tax Benefits are a key assumption of the valuation. Yet the Micro Finance Circulars state that they are not part of the PRC government's policy for the micro finance sector but are only benefits granted by local government to Target PRC No.2 and are subject to annual renewal. If the Tax Benefits are not renewed the valuation of the Target Group will decrease by more than 50%. In Somercourt's view, this represents a very high risk strategy for which the Chairman (as vendor) bares no part of as the purchase price is not subject to adjustment if the tax benefits are lost.
• A one percentage change in the cost of equity that is assumed in the valuation report would lead to a more than RMB100 million change in the market value ascribed to the Target Group.

Non-arm's length terms of the deposit

• The unusually large deposit of HK$200 million already paid by the Company to the Chairman:
  • constituted the entire cash element of the purchase price, 47% of the unconditional element of the purchase price, and was equal to over 70% of the market capitalisation of the Company for the five business days immediately preceding the date of the transaction; and
  • was also paid to the Chairman on an interest-free and unsecured basis, which Somercourt considers to be extraordinary for a sum that represented approximately 42% of the Company's cash and bank balance as at 31 March 2012,
  and yet the Board has stated that it considers that the terms of the deposit were fair andreasonable to the Company and the Shareholders as a whole. Somercourt disagrees.

Dilution of Independent Shareholders and further risk

• The combined effect of the Transactions (assuming conversion in full of the various Convertible Bonds) will be a significant dilution of the shareholding rights of the Independent Shareholders (diluting the shareholdings of public Shareholders from approximately 79.5% to approximately 15.9% (4)) effectively passing control of the Company to the Chairman.
• The Board has stated numerous reasons why the performance of the business to be acquired is subject to risk and cannot be guaranteed, and this creates significant risk that the Company will not be able to meet its obligations under the Promissory Notes and the Convertible Bonds. Failure to meet those obligations could result in the Company becoming insolvent or a debt capitalisation exercise which would potentially further dilute the public shareholders.

Postponement of the date for consideration of the resolutions relating to the Micro Finance Transaction

On 23 September 2013, Sino Prosper issued a further notice to Shareholders clarifying certain information contained in the Micro Finance Circular, and announcing various amendments to the terms of the Micro Finance Transaction and the proposal to defer the consideration by Shareholders of the resolutions to approve the Micro Finance Transaction from 30 September 2013 to 11 October 2013.

Whilst the delay proposed by Sino Prosper is necessary to give Shareholders additional time to consider the new information, Somercourt considers that none of the new details change its fundamental objection to the terms and the merits of the Micro Finance Transaction.

Somercourt therefore considers that there is no compelling reason for Shareholders not to proceed with the votes relating to the Micro Finance Transaction at the EGM to be held on 30 September 2013 if they consider, as Somercourt does, that the terms of the Micro Finance Transaction are not fair and reasonable and that the Micro Finance Transaction is not in the interests of the Company and the Shareholders as a whole.

REQUEST FOR SHAREHOLDER ACTION

For the reasons noted above, Somercourt strongly urges Independent Shareholders to attend the EGM at 10:30 a.m. on 30 September 2013 in person or by proxy and:

• vote against the proposal to adjourn the meeting convened to consider the resolutions to approve the Micro Finance Transaction; and
• if the meeting on the 30 September 2013 is not adjourned, to vote against the resolutions relating to the Micro Finance Transaction.

QING JIAO TRANSACTION

The Qing Jiao Transaction is the proposed acquisition of Success State Development Limited from the Chairman (as vendor) for a purchase price of RMB550 million.

Despite being announced on 30 December 2011 (more than 20 months ago), Independent Shareholders have still not received adequate details of the transaction or had an opportunity to exercise their right to vote on whether the transaction should go ahead.

The Company is now seeking Independent Shareholder consent to extend the Long Stop Date to 31 December 2014, with the expected time for despatching a substantive circular being delayed to on or before 30 November 2014.

Somercourt is astonished by the suggestion of extending the Long Stop Date and the date for despatching a substantive circular for a further 15 months. This would mean a potential delay of approximately 3 years before Shareholders were given proper disclosure about the proposed acquisition. 

Somercourt notes that both the Independent Board Committee and the Independent Financial Adviser are of the opinion that the extension of the Long Stop Date is not fair and reasonable and is not in the interests of the Company and the Shareholders as a whole and advise the Independent Shareholders to vote against the resolution at the Qing Jiao EGM.

Issues of immediate relevance to Independent Shareholders are as follows:

Excessive purchase price

• Somercourt believes that the consideration to be paid by the Sino Prosper group to the Chairman (as vendor) is excessive and unjustified and does not reflect normal commercial terms and arm's length negotiations.
• The consideration of RMB550 million payable represents approximately 6.8 times the original acquisition price of RMB80 million for the interest in Target PRC paid by the Chairman less than 12 months prior to the date of the Qing Jiao Transaction.
• The Company has not explained or supported the considerable uplift in consideration offered to the Chairman. Indeed, the information which has been disclosed indicates that:
  • the mining permits are of short duration and are due to expire in less than two years' time (July 2015). This is only a matter of months after the Long Stop Date now proposed by the Company in the Qing Jiao Circular;
  • the valuation of the relevant mining assets represents a valuation per ounce of gold which Somercourt believes is significantly above the comparable market value of junior gold exploration companies;
  • the registered capital and paid up capital of Target PRC was only RMB10 million;
  • the unaudited net loss (before and after taxation and extraordinary items) of Target PRC for each of the two years ended 31 December 2010 was RMB85,639 and RMB101,800 respectively; and
  • the unaudited net assets of Target PRC as at 31 December 2012 were approximately RMB21.2 million,
  none of which justifies the considerable consideration of RMB550 million.

• No adequate explanation has been given as to how Sino Prosper will be able to meet its obligations to pay amounts due under the relevant Promissory Notes and the Convertible Bonds.
• No risks have even been referred to in the Qing Jiao Circular (as they have at least been in the Micro Finance Circulars), and Somercourt fails to understand how the Company expects Shareholders to be able to make an informed decision on the merits of the extension without being given further details of the proposed acquisition.

Substantial deposit

• As with the Micro Finance Transaction, the initial deposit paid by the Company to the Chairman under the Qing Jiao Transaction constituted the entire cash element of the consideration and was paid to the Chairman on an interest-free and unsecured basis for a significant period of time in advance of completion of the transaction and without shareholder approval. 
• In this case the deposit was RMB120 million, representing over 100% of the Company's current market capitalisation (which is relevant to the Shareholders as they are only being asked to vote on the extension now rather than in December 2011 when the Company had a larger market capitalisation).
• The proposed extension to the Long Stop Date would mean that the Chairman will have enjoyed the benefit of the loan of the deposit for a total period of approximately 3 years on an interest free basis, representing a significant opportunity cost of the Company.

REQUEST FOR SHAREHOLDER ACTION

For the reasons noted above, Somercourt strongly urges Independent Shareholders to attend the EGM at 10:00 a.m. on 30 September 2013 in person or by proxy and vote against the proposed extension of the Long Stop Date for the Qing Jiao Transaction.

DEFINITIONS

In this announcement, unless the context requires otherwise, expressions shall have the meaning given to them in the relevant Circulars (as defined below) or in previous announcements made by Sino Prosper referred to in the Circulars and the following expressions shall have the following meanings: