Smart Rich secures funding for Indonesian mine purchase

Hong Kong-listed Smart Rich Energy Finance has secured a large portion of the funding needed to cover its earlier announced acquisition of a gold and silver mining project in Indonesia, following an upsized $257 million share placement to a group of cornerstone investors and the sale of a further $250 million worth of shares to investors linked to the company.

Smart Rich will raise a further $80 million through an offering to institutional investors before the end of June to achieve the full targeted amount of HK$4.55 billion ($587 million). Morgan Stanley is acting as the placement agent for the entire fundraising package.

The greenfield mining project, which is located on the western side of the island of Sumatera in the province of North Sumatra, will result in a significant change in the company's business focus from its current activities, which mainly comprise trading of electronic goods and accessories and the provision of financial information through the internet and mobile phones. However, people familiar with Smart Rich describe it primarily as a shell company. According to a company statement issued last Thursday, the new shares that are being issued will account for about 95% of the company's enlarged and fully diluted share capital, which means the new shareholders will essentially take over the company, making the fund-raising exercise akin to a re-IPO. The pre-acquisition public shareholders will see their combined stake fall from 49.3% to 1.6%.

Smart Rich has had its sights set on the mining sector for a few years already though, and in January 2006 it invested in Madagascar Petroleum International, making it a major asset of the company. While the intention was to remain involved in this company through the initial project stages, Smart Rich ended up selling the holding in August last year as it saw a good opportunity to realise a reasonable return on its investment. As part payment for Madagascar Petroleum it received shares in Sino Union Petroleum, which gives it indirect exposure to the further development of Madagascar Petroleum's rights in oil field block 2104.

Smart Rich also tried to acquire certain exploration and mining rights in Mongolia last year, but that deal was terminated due to "various uncertainties surrounding the acquisition". Since then, the company has, according to its own admission, been actively searching for and assessing investment opportunities in the natural resources sector, particularly in Ghana, Indonesia and Mongolia.

The Martabe project in Indonesia was put up for sale earlier this year by its Australian owner OZ Minerals, which holds 95%. Smart Rich didn't have the funding to bid for it straight away, but introduced the project to Hong Kong-listed China Sci-Tech Holdings which was able to buy it for cash. China Sci-Tech is considered a third party, but three of Smart Rich's directors also serve as independent directors on its board, which suggests pretty close connections between the two. A series of option agreements will ensure that the asset will eventually end up in the hands of Smart Rich, which will pay a 10% premium (in the form of new shares) to China Sci-Tech as a thanks for its assistance.

Smart Rich has said that between $221 million and $232.4 million of the gross proceeds from its share sale will be used to pay for the acquisition; $284.5 million will be used to bring the Martabe project into the production stage; and the rest will be used to fund the development of the project after its completion, as well as for acquisition-related expenses, working capital and general corporate purposes with regard to said project.

A source close to the deal said the fundraising completed last week includes a private tranche of $250 million and a cornerstone tranche that was upsized to $257 million from $180 million after a five-day roadshow resulted in strong demand. The latter tranche was placed with 10-12 investors, which according to the company statement included BlackRock, China Construction  Bank's asset management arm, Franklin Advisers and J.P. Morgan's asset management arm.

The private tranche, meanwhile, was divided into three parts: $30 million was bought by Smart Rich's new CEO, Owen Hegarty, who was a director of OZ Minerals until December 2008 following the merger between Oxiana (which he founded) and Zinifex in June last year; $30 million was bought by a company owned by the Soeryadjaya family, which has extensive experience in Indonesia's mining sector and will act as Smart Rich's Indonesian partner with respect to the Martabe project; and the remaining $190 million was taken up by various private equity funds as well as friends and family-type investors.

The shares were sold at a price of HK$0.35 apiece, which represented a discount of 79% to the closing price on June 2, before the shares were suspended pending the announcement of the placement. However, the share price only reached those levels at the end of May after Australia's Foreign Investment Review Board cleared the acquisition. Before that, Smart Rich's shares were trading below HK$0.20 apiece.

Because the cornerstone portion of the deal was upsized, the remaining placement to other institutional investors has been reduced by the same amount to $80 million from $150 million. The source said that placement is likely to be preceded by another three-day roadshow to ensure investors understand the company's strategy following the acquisition.

According to an independent technical report, the Martabe project has "proved" and "probable" reserves of approximately 35.7 million tonnes of ore, averaging 1.9 grams per tonne of gold and 26 grams per tonne of silver. This implies 2.2 million ounces of gold and 29.7 million ounces of silver respectively. It also has "measured", "indicated" and "inferred" resources of 138.1 million tonnes, averaging 1.3 grams per tonne of gold and 14 grams per tonne of silver, implying 5.9 million ounces of gold and 61.5 million ounces of silver. Its existing approvals refer to the construction stage only and are valid for three years from April 24, 2008.

A feasibility study completed in November 2007 also noted that among the key attributes of the mine are the significant potential for additional ore resources in nearby deposits; a large-scale ore processing plant treating nominally 4.5 million tonnes of ore and a good level of existing social licence with local community and the Indonesian government. The project is also situated close to existing infrastructure, including ports, power facilities and the Trans-Sumatera highway.

In recognition of the company's changed business focus, Smart Rich will change its name to G-Resources.