St Barbara CEO: Allied Gold Acquisition & Outlook

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St Barbara Limited (ASX: SBM) is proposing to enter into a Scheme of Arrangement with Allied Gold to acquire all the issued shares in Allied Gold in exchange for A$1.025 cash plus 0.8 St Barbara shares for each Allied Gold share, equivalent to a total of A$2.72 (as at 28 June 2012) per Allied Gold share. What is the strategy behind this acquisition?

MD and CEO Tim Lehany

Our declared and consistent strategy for the last three years has been to grow long term earnings per share. We do this through developing our own assets, exploration success and the acquisition of geologically prospective assets with a long reserve life and potential for strong cash generation margins.

For the last two years, we have conducted a disciplined and objective evaluation of advanced gold exploration projects, gold projects in development and gold producing assets in Australasia and South East Asia.

Allied Gold has consistently rated as one of the best value targets in the region for the relatively low cost of acquiring long term gold operations in a highly geologically attractive yet under explored region.

We made this offer for Allied Gold following detailed due diligence of the Allied Gold business, including a detailed review of base data, rebuilding our own mineral resources models from available information and two detailed site visits, involving experienced industry consultants, senior technical staff and senior executives. Full details of the St Barbara offer are set out on our website.

We view the offer value as strongly value accretive per St Barbara share based on our internal models, including being NAV accretive immediately, EPS accretive within the first full year after acquisition and generating a double digit internal rate of return (IRR). Moreover, Allied Gold has two producing gold assets backed by long life reserves, each with near mine and regional exploration potential in the richly endowed Pacific Rim.

We see the two businesses as being entirely complementary, with St Barbara's strong cash flow generation and proven operating capability supporting Allied Gold's exciting growth and expansion potential. Since joining St Barbara I have paid particular attention to developing disciplined systems across all functions within the Company, and I believe we are now well advanced to deploy this capability across more operations. The effectiveness of St Barbara's business systems and operating capability has been demonstrated with our improved production history and reduced operating costs at Gwalia. This will support improved production reliability and cash operating costs reductions for the Allied Gold operations.

Based on the extensive due diligence undertaken, we remain confident that, together with Allied Gold's relatively new site management teams, we can significantly reduce Allied Gold's cash operating costs, through improving operating reliability, completing a number of productivity improvement and cost saving initiatives already underway, and undertaking newly identified improvement projects.

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There are shareholders with large holdings in both Allied and St Barbara. Some commentators have asserted that the Allied deal has been driven by these large holders, for their benefit. What is your response?

MD and CEO Tim Lehany

I want to make it quite clear that at no time has any large St Barbara shareholder come to us suggesting this transaction. Quite the opposite, the thinking behind the St Barbara/Allied combination originated within St Barbara and stemmed from our fundamental geological assessment of the assets and their potential.

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St Barbara shares are now trading at a discount of 36% to the closing price of $2.12 prior to the announcement of the Scheme. Are you chasing scale at the expense of shareholder value and what are you doing to address the fall in the share price?

MD and CEO Tim Lehany

This transaction is definitely not about scale for scale's sake. It is about creating long term value through building a stronger and more profitable company.

Since the announcement, it has become clear that the investment community, particularly in Australia, is not familiar with the Allied Gold assets. In fact none of the twelve analysts that cover St Barbara cover Allied Gold. We have therefore intensified our program of investor engagement and information regarding the detail of the Allied Gold assets, and the fundamental value that we see in a combination with Allied Gold.

The fact remains that the Allied acquisition is fundamentally a transformational opportunity for St Barbara. We believe our shareholders stand to benefit from ownership of a more diversified business, with a broader portfolio of long-life assets, significantly increased production, reserves and resources, and enhanced exploration potential.

The transaction is expected to be immediately accretive to net asset value per share, and EPS accretive for St Barbara shareholders from the first full year after completion (before any fair value, other accounting adjustments or one-off integration costs). It will also leave us with gross gearing of less than 20%.

We also believe there is potential for a re-rating of St Barbara stock on a pre-announcement basis to reflect the quality of the combined group's portfolio relative to peers.

In relation to the fall in the share price, I note in passing the significant extent of indicated short selling of St Barbara shares since the announcement of the offer.

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Investors seem to think that a 90% premium for Allied Gold is excessive. What is the basis of your valuation of Allied Gold and can you amend the terms of the agreement to compensate for the implied change in deal metrics as a result of St Barbara's share price fall?

MD and CEO Tim Lehany

The offer to acquire Allied Gold was very carefully considered by the St Barbara Board after detailed due diligence and consideration of the benefits available to all St Barbara's shareholders.

With regard to the premium I would first make some observations. Allied Gold's share price, like the share prices of a number of listed gold equities, has been under pressure in recent months. Allied Gold was trading at over $3.00 a year ago, compared with $1.44 the day before the transaction was announced. When the in-principle agreement with Allied Gold was reached, the implied premium was approximately 52%, calculated on a 30 day VWAP basis. Over the following few weeks, whilst finance facilities were finalised, the Allied share price fell further relative to the St Barbara share price, resulting in a 74% premium calculated on a 30 day VWAP basis, and a 92% premium to spot price on the day of the announcement.

The Allied share price in my view continued to fall prior to the St Barbara offer partly due to repeated negative operational issues and resultant underperformance of the assets against market expectations. The key point I need to emphasise is that the fundamental value of the Allied Gold assets remains unchanged. The basis of our valuation of Allied Gold was a rigorous, risk adjusted NPV model built on validated due diligence information.

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In light of St Barbara's failed bid to acquire Catalpa Resources last year, how exhaustive was your search for a suitable growth target for acquisition? Are you paying such a high premium for Allied Gold because your organic growth prospects are limited?

MD and CEO Tim Lehany

Catalpa is actually a good example of our disciplined approach. We did not proceed with that transaction because we did not see appropriate value beyond what we had offered to Catalpa - which was rejected. We did not chase after them as we had our price and that was that. This was the same approach we took here. In addition, in Catalpa's case, we were not allowed access to undertake due diligence, and we were therefore not able to adequately verify the value of the assets we sought to acquire, nor to properly investigate the risk profile of the Edna May asset. In contrast, we had access to an extensive Allied Gold data room and our people made a number of visits and spent considerable time on the ground at Allied Gold's operating sites.

Our decision to make an offer for Allied Gold reflects our view that this is an excellent opportunity for our business and our shareholders. We evaluate every opportunity on its merits and the strategic fit with Allied Gold is compelling.

In addition to our operating and management capability, St Barbara has its own strong pipeline of organic growth and exploration projects. The addition of Allied Gold's attractive brownfield and greenfield expansion and exploration opportunities on the highly prospective South West Pacific Rim is likely to result in a larger pipeline of potential growth projects for the merged business, with a development profile spanning exploration to gold production.

This value-add opportunity is a key driver for this transaction.

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The Allied Gold share price had declined 68% to $1.43, from its March 2011 high, before the scheme announcement, due to the poor outlook for its high cost operations and what appear to be low grade reserves. How confident are you of reaching Allied Gold's targeted cash costs of US$850/oz by year end, down from US$1,099/oz in the March quarter and how will this be achieved?

MD and CEO Tim Lehany

Our detailed review of the Mineral Resource Estimates has established the geological robustness of the long life deposits being mined by Allied Gold at both Simberi Island in offshore PNG and Gold Ridge in the Solomon Islands.

We also consider that the operational issues being experienced by Allied are short term issues not atypical of companies shifting from exploration, to development and to production. As a significant proportion of the Allied Gold operating costs are fixed in nature. We expect the achievement of reliable mining rates and plant throughput to significantly lower the cost profile.

Allied has invested in significant capital infrastructure at both Simberi and Gold Ridge that we believe is yet to realise its full potential.

At Simberi an upgrade of its oxide processing facility is in progress to take throughput from 2.0Mtpa to a design capacity of 3.5Mtpa. Allied expect the expanded plant to be commissioned at the end of the 2012 calendar year, with production to increase to around 95,000 ounces per annum. Achieving reliable production at this expanded rate should deliver a significant reduction to unit costs. In addition, Allied has invested capital in installing Wartsila generator sets for the conversion of power generation from diesel to Heavy Fuel Oil, with commissioning expected in late August 2012. The installation of the generators will lead to a significant power cost saving, estimated by Allied Gold to be approximately US$30-50/oz when fully operational.

At Gold Ridge, Allied Gold invested significant capital in the refurbishment of the processing facility in 2010 and 2011. Based on our due diligence the processing plant is in reasonable condition and does not require significant capital expenditure to achieve consistent reliable production.

Specific measures that Allied Gold already has in progress to improve production and reduce cash operating costs, and which were discussed during our due diligence, include:

·; Re-assessing the resource adjacent to existing open pits through well defined drilling programmes to improve mine planning;

·; Increase in grade control activities in conjunction with resource development drilling to assist better mine planning;

·; Implement improved mine planning to better schedule production resulting in better efficiencies and blending capability - enhancing the feed to the processing facility;

·; Improve the utilisation of the mining fleet through developing better haul roads;

·; Continue to reduce site support and administration costs, particularly in the areas of shipping and transport, general administration and corporate overheads.

At Gold Ridge, there is also opportunity to:

·; Increase the mill recovery through optimisation of the mill blend, particularly with the commissioning of the Kupers pit;

·; Modify the front end feed arrangements to the processing facility to enable a more consistent feed to the facility - leading to better throughput rates and recovery;

·; Consider a number of initiatives to reduce power costs through optimising power usage in the processing plant.

Based on our detailed assessment through due diligence we believe these and other pathways will reduce the Allied cash operating costs to at least the stated guidance level of the rate of US$850 per ounce.

I am confident that St Barbara's strong operating and technical support capability in resource modelling, mine planning and execution will facilitate cost reduction at both Simberi and Gold Ridge.

Our strong cash position and cash generation capability will also enable modest capital investment in the Allied Gold operations of up to $40 million over two years to underpin productivity improvement and production reliability. Examples of the types of capital investment identified during our due diligence are:

·; Developing better haul road surfaces to withstand high rainfall

·; Improvements to the open pit mining fleet

·; Modifications to the front end feed arrangements to the processing facilities

·; Investment in grade control drilling programmes and equipment

·; Installation of a reverse osmosis facility at Simberi

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Allied Gold's mines are open pit operations, but St Barbara's expertise is in underground mining. What skills and experience does St Barbara bring to the merger that will extract value in the Allied Gold mines?

MD and CEO Tim Lehany

In fact, the St Barbara management team has significant experience in developing and operating both open pit and underground mining operations. We see significant upside potential from applying our strong operating capabilities and discipline, mine-planning methodology, operating systems, procurement and cost management frameworks to Allied Gold's assets.

Many of the improvement opportunities that I have mentioned have already been identified by the Allied Gold site teams, and we look forward to the opportunity to work with them to execute business improvement programs. What St Barbara will bring to these assets is additional technical support to drive the improvement programs, and capital investment to underpin a number of the productivity and cost reduction initiatives.

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St Barbara has indicated that the combination of its strong existing cash flow and the potential development of Allied Gold's exploration assets is a key driver of the deal. What are the key exploration opportunities in the shorter term and what level of investment is expected in relation to these activities?

MD and CEO Tim Lehany

I should first point out that the exploration potential within the Allied Gold tenements is in our opinion very exciting but is not included in our valuation model at this time. We regard this potential as a significant opportunity for our shareholders.

We have identified a number of near mine extensional targets at both Gold Ridge and Simberi.

In addition, Allied Gold has an exciting and extensive exploration portfolio situated on the richly endowed South West Pacific Rim, including the west part of Simberi Island and the nearby Tabar-Tatau Islands. We expect to commence an exploration program at an early date close to the current operations to extend the known deposits, and also across the relatively unexplored parts of the portfolio.

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Acquiring a business with exposure to Papua New Guinea (PNG) and the Solomon Islands appears to bring considerable sovereign risk to St Barbara's business. How will you manage that risk, and what does St Barbara know about operating in the Pacific region? 

MD and CEO Tim Lehany

Through due diligence we have conducted a thorough risk assessment of operating in PNG and the Solomon Islands, including an extensive on-the-ground assessment of Allied Gold's mining operations at Simberi and Gold Ridge. This informed our decision to progress with this transaction. Based on our work during due diligence and subsequently, we believe that St Barbara will be able to operate successfully for a long time in PNG and the Solomon Islands.

As a combined management team with Allied Gold personnel, we have considerable operational management expertise in the South West Pacific. We have already engaged closely with the relevant authorities in both territories following the announcement of the transaction and the response has been positive. I was in PNG and the Solomon Islands with some St Barbara managers during the week following the announcement of the offer and met with a number of dignitaries and government authorities in Port Moresby and Honiara.

Both governments welcomed the prospect of St Barbara's involvement because they are supportive of responsible mining activities, which provide valuable employment for local communities as well as taxation and royalty revenues.

In the Solomon Islands, the Regional Assistance Mission to the Solomon Islands has confirmed a long term commitment to support the training and development of the Royal Solomon Islands Police Force. We are advised that Gold Ridge represents approximately 20% of the local GDP and we look forward to the opportunity of a long term relationship with local landowner communities and government in that country.

Simberi Island has a long history of being supportive of mining activities, with an estimated 80% of the local workforce engaged directly or indirectly with Allied Gold's Simberi operations.

We do not take local support for granted, and we will work hard to continue good relations with local landholders and other stakeholders. In developing our valuation model for Allied Gold, we factored in appropriate costs for working in these two environments.

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Why aren't St Barbara shareholders required to vote on the transaction, and how were you able to say in your announcements that you had already secured support from 54% of Allied Gold shareholders?

MD and CEO Tim Lehany

The proposed combination has been structured as a friendly transaction and is being implemented by way of a Scheme of Arrangement. The Scheme of Arrangement is between Allied Gold and its shareholders. This is why only Allied Gold shareholders are required to vote.

St Barbara was able to secure the support of 53.5% of Allied Gold shareholders by the time of the announcement, as the UK takeovers law permits a small window of opportunity 48 hours immediately before release of the official announcement for a bidder to seek support from target shareholders.

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St Barbara has been profitable and cash generative, with 1H12 producing NPAT of $46.5 million and the cash position increasing from $79 million as at 30 June 2011 to $185 million as at 30 June 2012. Will this transaction affect the prospect of you paying a dividend in the future?

MD and CEO Tim Lehany

We have a proven track record in translating reserves into operating cash flows and profits, thereby enhancing EPS.

The Board regularly reviews the Company's capital management plans and the consideration of dividend payments forms an important part of that thinking, having regard to the requirements of the company's development and funding profile going forward. Our first priority is to invest cash flows in value accretive growth opportunities, and we see a number of these in the Allied Gold business. Cash that is surplus to capital requirements and investing in accretive opportunities will be considered for potential returns to shareholders in an efficient manner.

St Barbara will have a strong cash balance at the completion of the combination and expects to generate significant free cash flows at current gold prices. The Board will continue to regularly evaluate capital management initiatives and more specifically the payment of dividends.

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Thank you Tim.