[Cancelled] CDB provides AUD 496 million term loan for Boseto Copper Mine Acquisition Project

On September 21, 2012, Cathay Fortune Corporation Co., Ltd. (CFC) — a Chinese private equity firm — and China-Africa Development Fund (CAD Fund) made a non-binding indicative offer to acquire an 88.32% stake in Australia-listed Discovery Metals Limited (DML) for $1.7 AUD ($1.73 USD) per share, with Cathay Fortune Investment Limited (CF Investment) that, upon completion of the acquisition, would be jointly owned by Cathay Fortune International Company Limited (CF International) (75% equity stake), a wholly-owned subsidiary of CFC, and China-Africa Liantuo Mining Co., Ltd. (CADFund Liantuo) becoming the shareholder of Discovery Metals Limited. On October 19, 2012, China Development Bank (CDB) entered into a $496 million AUD term loan facility agreement with Cathay Fortune Investment Limited — a special purpose vehicle and joint venture of Cathay Fortune International Company Limited (75% equity stake) and China-Africa Liantuo Mining Co., Ltd (25% equity stake) that is legally incorporated in Hong Kong — to exclusively support the cash consideration payable for the acquisition of Discovery Metals. This facility carried an availability period of the earlier of 12 months, 18 months if extension was granted due to the acquisition being uncompleted, or the date when CF Investment notified that the acquisition had been cancelled. The use of the facility was contingent on satisfaction of a number of conditions precedent, including a provision of a guarantee and indemnity by CFC in favor of CDB; a provision of a share charge by CF Investment over Discovery shares held or to be held in favor of CDB; the execution of a sponsorship agreement in connection with the share charge between CF Investment and CDB in relation to the Discovery shares held or to be held by CF Investment; the execution of an account supervision agreement by CF Investment in favor CDB; and other procedural conditions normal for this kind of facility. Additionally, CF Investment was obligated to obtain approval from the National Development Reform Commission (NDRC) for the acquisition; approval from State Administration of Foreign Exchange (SAFE) for the guarantee and a registration certificate issued by it; and approval from Botswana's Minister for Mines, Botswana Competition Authority, and the BSE Listing Committee. The facility agreement was governed by Hong Kong law. In addition to the $496 million AUD debt, this for $826,407,299.70 million AUD acquisition was to be financed by $248 million AUD in cash from CF Investment and CF Investment and $83 million AUD from CAD Fund, with only $713 million AUD the maximum amount of cash CF Investment would be required to pay if acceptances were received for all outstanding Discovery shares except the shares already owned. At the time the offer went public in early October 2012, CFC had already owned a 13.7% stake in DML. In late September or early October 2012, Australia's Foreign Investment Review Board (FIRB), despite increasing scrutiny into Chinese investment into Australia's mining sector, approved the transaction. In early October 2012, CFC and CAD Fund stated they intended to offer a retention and incentive agreement to DML's existing senior management. On October 4, 2012, China's NDRC approved the transaction. Then, on October 11, 2012, the Board of Directors of DML notified CFC and CAD Fund that the offer price was insufficient and the board recommended that shareholders not take action of the proposal; then, as of October 13, 2012, the Board of Discovery Metals rejected the offer. DML's Board argued that the offer undervalued the company; the rejection was to the surprise of investors, as the price of DML's shares had fallen below the offer price. Additionally, the Discovery Board felt that the offer was opportunistic as DML had just begun to shift from explorer to producer and too conditional to allow the exclusivity rights sought by Cathay Fortune. Then, on October 23, 2012, CFC and CAD Fund turned the takeover bid into a hostile bid, with Cathay Fortune's head and founder Chinese billionaire Young Yu citing DML's board's refusal of access to due diligence "without any reasonable basis" as to why the hostile takeover was pursued; 51% acceptance by DML's shareholders was required for the deal to proceed. The hostile takeover offer began on November 8, 2012 and was originally scheduled to close on December 13, 2012, but was extended until January 11, 2013 on December 5, 2012 and then extended again to February 8, 2013 on January 3, 2013. On January 30, 2013, Cathay Fortune extended the offer period by another seven days to February 15, 2013. Meanwhile, in December 2012 and January 2013, various approvals from SAFE, BSE, the Botswana Competition Authority, and Botswana's Ministry of Minerals, Energy and Water Resources were granted. Then, on CFC and CAD Fund cancelled the acquisition on February 1, 2013, citing that it was not allowed to conduct due diligence on the Boseto Copper Project. The hostile takeover bid lapsed on February 15, 2013. Thus, AidData codes the CDB loan facility as having been cancelled. Cathay Fortune Investment Limited ceased to be a substantial holder of DML on September 9, 2013. After the failure of the bid, Cathay Fortune chairman Yu Yong went on a campaign against DML that the Australian Financial Review described as "trashing Discovery's share price and reputation" and, in what it called a "rare but brutally public exhibition of aggressive frustration from a Chinese company", CFC employed its numbers to complicate plans for capital raising that could have helped DML avoid financial problems. Then, on April 24, 2013, Cathay Fortune released a letter to Discovery shareholders proposing a fresh offer to buy Discovery Metals as long as it stopped the planned $75 million AUD equity raising; in the letter, CFC also warned that due to start-up issues at the Boseto Copper Project, tight capital markets, and poor prospects for commodities prices, DML was set to face cash issues and could collapse and be set into receivership without drastic changes, namely Cathay Fortune's offer instead of the equity raising. Discovery Metals executives argued that the comments were denigrating and part of a strategic scheme by CFC to acquire DML's Boseto Copper Project at the lowest possible price possible. The offer, pitching at between $0.3 AUD and $0.4 AUD per share, conditional on the due diligence DML had refused to provide to CFC the first time. Yu and Cathay Fortune ultimately decided to abandon efforts to acquire DML. However, in the years afterward, Discovery Metals suffered under severe financial problems, with waves of senior management joining and departing and there being several attempts to refinance the $170 million AUD in debt used to construct Boseto, pay a $3.2 million AUD settlement to the contractor, and get the project working properly. DML had confidently rejected Cathay Fortune, believing in its own plans, which would massively disappoint, were the superior option. Discovery Metals went into liquidation in June 2015, proving Cathay Fortune's warnings to be accurate. Discovery Metals Limited held a 100% ownership stake in the Boseto Copper Project in Botswana. The mine opened on September 7, 2012. The Boseto copper mine is an open-cut mine located in Ngamiland in the Kalahari copper belt of northwest Botswana. Cuprous Capital Limited and Resource Capital Fund purchased the Boseto mine and renamed it 'Khoemacau' after DML's liquidation.

Additional details

1. China-Africa Development Fund (CAD Fund) is a Chinese state-owned private equity fund backed by China Development Bank (CDB). 2. China-Africa Liantuo Mining Co., Ltd. (CADFund Liantuo) is a Hong Kong-incorporated special purpose vehicle and wholly-owned subsidiary of CAD Fund. 3. Cathay Fortune Investment Limited (CF Investment) is a Hong Kong-incorporated special purpose vehicle (SPV) and joint venture. 4. SNR Denton acted as legal counsel to CDB. King & Wood Mallesons and DLA Piper  also advised on the transaction.

Number of official sources

3

Number of total sources

27