Highfield Creates a New Globally Diversified Potash Company

Highfield Resources Limited (ASX: HFR) (Highfield or the Company) is pleased to announce that it has entered into binding agreements with Yankuang Energy Group Co., Ltd (Yankuang Energy) and a number of strategic investors including Beijing Energy International Holding Co., Ltd (Beijing Energy) and Singapore Taizhong Global Development Pte. Ltd. (Taizhong), in relation to a transaction which is expected to transform Highfield into a globally diversified potash company and deliver the remaining funding for Phase 1 of the Muga potash project (the Transaction).

The Transaction comprises the raising of US$220 million in equity capital by Highfield from Yankuang Energy and the strategic investors (Cornerstone Placement) and the inter-conditional acquisition from Yankuang Energy of the Southey potash project in Saskatchewan, Canada (Southey Vend-in) by way of the direct or indirect acquisition of 100% of the shares in Yancoal Canada Resources (a subsidiary of Yankuang Energy) (Yancoal Canada), as further outlined below.

 

Strategic Rationale and Key Highlights of the Transaction

• The construction-ready Muga Phase 1 project is expected to be fully funded from completion of the Transaction
• Establishing, with the addition of Southey, a leading pure play potash company with a diversified portfolio of projects in tier-1 jurisdictions underpinned by strong ESG credentials.
• An experienced leadership team with a proven track record in project development
• Attractive premium benefiting Highfield shareholders, with new fully paid ordinary shares in the Company (Shares) to be issued by Highfield for both the Southey Vend-in and Cornerstone Placement at a price of A$0.50 per Share, being a:
  • 64% premium to last close price of the Shares on ASX on 18 July 2024, representing the
    undisturbed price; and
  • 63% premium to 30-day volume weighted average price of Shares on ASX as of 18 July 2024.
• Opportunity to unlock significant value with the support from a strong shareholder base
  • the establishment of a partnership with Yankuang Energy, a leading diversified Chinese energy company, with deep global connections and financial resources which is committed to support Highfield’s growth and development
  • Additional synergies and value creation opportunities expected from partnering with Beijing Energy, Taizhong and other investors.

 

Overview of Southey

The Southey project is wholly owned by Yancoal Canada, which is a subsidiary of Yankuang Energy, and was established in 2011. Southey is a greenfield potash mine project located approximately 60 km north of Regina, Saskatchewan, Canada. The Southey project has been the subject of significant investment by Yancoal Canada – this includes:

• a feasibility study completed in 2016 by Yancoal Canada and its technical consultants¹; and
• a primary environmental approval is in place².

It is intended that Southey will be a solution mining potash project. Solution mining is a proven technology which involves drilling both injection and extraction wells to the target ore body. Heated brine is injected underground, where the water dissolves the potash layer, and the potash rich brine is pumped back to the surface for processing.

 

Overview of Transaction

Cornerstone Placement:

• Highfield has entered into binding equity subscription agreements (ESAs) with each of Yankuang Energy, Beijing Energy and Taizhong, to issue new Shares at a price of A$0.50 per Share
• Under the ESAs, Yankuang Energy, Beijing Energy and Taizhong have agreed to subscribe for up to US$90 million, for US$50 million, and for US$30 million of new Shares under the Cornerstone Placement, respectively, for a total of US$170 million
• In addition, Highfield has entered into a non-binding letter of intent (LOI) with another strategic investor in relation to the subscription for US$20 million of new Shares, at a price of A$0.50 per Share, under the Cornerstone Placement, and is negotiating with other strategic investors in relation to subscriptions for a further US$50 million of new Shares. Commitments to subscribe for such Shares is subject to Highfield entering into final, binding ESAs with each of those strategic investors
• If the total subscriptions under all ESAs entered into prior to completion of the Transaction exceed US$220 million before completion of the Cornerstone Placement, the amount subscribed by Yankuang Energy may, at its election, reduce (provided that the Cornerstone Placement raises at least US$220 million).

Southey Vend-in:

• Highfield and Yankuang Energy have entered into a binding implementation agreement (Implementation Agreement) pursuant to which Highfield has agreed to acquire directly or indirectly, all of the issued capital of Yancoal Canada (which owns the Southey asset) for consideration valued at US$286 million³ subject to certain completion adjustments described in the investor presentation released to ASX on the date of this announcement (Investor Presentation))
• The consideration for the acquisition of Yancoal Canada referenced above will be satisfied by Highfield issuing new Shares to the value of that consideration at A$0.50 per Share, to Yankuang Energy.

The Transaction is expected to result in Yankuang Energy being Highfield's majority shareholder. Also, under the Implementation Agreement, Yankuang will have the right to appoint nominees directors to the Highfield Board comprising a majority of the Highfield Board with effect on and from completion.

Completion under the Implementation Agreement is inter-conditional and simultaneous with closing under the ESAs (and conditional on the amount subscribed for under the ESAs (including the ESA to which Yankuang Energy is a party and any ESA signed before completion of the Transaction) being no less than US$220 million in aggregate).

Completion of the Transaction is subject to the satisfaction of certain conditions including receipt of required regulatory approvals (including approval from the Foreign Investment Review Board, and approval from relevant regulators in Spain, Canada and China), Highfield shareholder approval (under item 7 of section 611 of the Corporations Act 2001 (Cth)) in connection with the Southey Vend-in and under ASX Listing Rule 7.1 in connection with the Cornerstone Placement), project finance lender and other material contract counterparty
consent and conversion of all convertible notes on issue in Highfield (details of which were announced to ASX on 23 May and 22 December 2023), confirmation from certain key management personnel that they will remain in their positions at completion and that they waive any severance pay in connection with the Transaction, the completion of certain transactions in relation to property rights relating to Muga, entry into an offtake agreement between Highfield and Yankuang Energy, entry into certain other ancillary agreements with certain of the other participants in the Cornerstone Placement, the Transaction resulting in Yankuang Energy holding a majority of the shares on issue in Highfield immediately after completion, and other closing conditions customary for a transaction of this kind.

Assuming all conditions are satisfied, Highfield anticipates that the Transaction will complete in early 2025.

The Implementation Agreement contains limited termination rights, including that either party may terminate in the event of an unremedied material breach by the other party. 

Highfield will be subject to exclusivity obligations, including no shop, no talk and no due diligence obligations (the latter two subject to a fiduciary exception), notification obligations and a matching right. A market standard break fee will be payable by Highfield to Yankuang Energy in certain limited circumstances.

A copy of the Implementation Agreement, which sets out the terms and conditions of the Southey Vend-in and associated matters and includes the form of the Yankuang Energy ESA (which sets out the terms and conditions of the Cornerstone Placement), is attached to this announcement at Annexure 1. The ESAs entered into by Taizhong and Beijing Energy are on materially similar terms to the Yankuang Energy ESA (save as described in the Investor Presentation, which also contains more detail on the terms of the Implementation Agreement and the ESAs).

 

Board recommendation and shareholder support

Highfield’s Board intends to unanimously recommend that Highfield shareholders vote in favour of the resolutions which will be required to approve the Transaction, subject to an independent expert concluding that the Transaction is fair and reasonable, or is not fair but is reasonable, or is in the best interests of HFR shareholders, and in the absence of a superior proposal.

Each of EMR Capital GP Limited as general partner of EMR Capital Resources Fund, LP, EMR Capital Investment (No.2B) Pte. Ltd. and Potash (Muga) and Copper (Patagonia) Holdings Limited (formerly known as EMR Capital Investment (No. 3) Cayman Ltd) (together, the EMR Shareholders) have also confirmed to the Company that they intend to vote in favour of the resolutions required to approve the Transaction subject to there not being any superior proposal, the Highfield Board continuing to recommend that Highfield shareholders vote in favour of the Transaction, and any independent expert appointed by Highfield to consider the merits of the Transaction concluding that the Transaction is fair and reasonable, or is not fair but is reasonable, or is in the best interests of HFR shareholders.

The holders of the convertible notes (including the EMR Shareholders (or their affiliates)) have agreed to convert their convertible notes before or upon the completion of the Transaction. The terms of the convertible notes have been amended such that the convertible notes convert at conversion prices in effect at the date of this agreement, on a basis which is inter-conditional with the Transaction.

 

Short Term Funding

Highfield is seeking to raise up to US$15 million (~A$22.4 million) (Short Term Funding) to support the Company’s planned activities between this announcement and completion of the Transaction⁴ and has the support of the EMR Shareholders in this initiative.

The Short Term Funding is expected to take the form of an institutional placement to raise up to US$12 million (~A$17.9 million) (Institutional Placement) of New Shares with US$5 million (~A$7.5 million) of this amount committed from an entity managed by EMR Capital and affiliated with the EMR Shareholders (EMR Subscriber) with such committed amount being conditional on HFR shareholder approval at an extraordinary general meeting of HFR) (Conditional Placement), and a follow-on offer of New Shares under a share purchase plan (SPP) which will be made available to existing shareholders of the Company with a registered address in Australia and New Zealand.

No component of the Short Term Funding is being underwritten. Further details of the Short Term Funding can be found at Schedule 1 of this announcement.

 

Ignacio Salazar, the CEO and Managing Director of Highfield, said:

“This is an outstanding outcome which is expected to result in the commencement of Muga construction and puts Highfield on a very strong platform of growth for the future. We are delighted to have reached agreement with organisations with the reputation, track record and balance sheet strength of Yankuang Energy, Beijing Energy, and Taizhong. On completion of this deal, we believe we will have the assets, the team and the capital to unlock and create significant value for Highfield.”

 

Further details of Southey and the Transaction can be found in the Investor Presentation.

Highfield’s financial advisor in relation to the Transaction is Morgan Stanley Australia Limited, and its legal advisors are MinterEllison and Herbert Smith Freehills. Morgan Stanley Australia Limited and DBS Bank Ltd. are joint lead managers in relation to the Cornerstone Placement and the Short Term Funding.

 

Investor Call

An investor call on the Transaction will be held at 4:30pm AEST on 24 September 2024. Please use the following registration link: https://s1.c-conf.com/diamondpass/10042283-kj8u7y.html

 

Footnotes:

1 The study includes a historic foreign estimate of mineral reserves and mineral resources, which require further technical work to be undertaken before those reserve and resource estimates are sufficiently reliable to be disclosed in accordance with relevant ASX requirements.

2 The current environmental approval will expire if development does not commence by August 2026. The provincial government has already extended the approval for 5 years and historically has been favorable in granting extensions.

3 See the definition of 'Yancoal Target Locked Box Value' in the Implementation Agreement. This amount is defined to comprise of net assets of approximately US$181.4 million, Yancoal Canada shareholder loans net of cash of approximately US$90 million and cash of approximately US$14.6 million, all as at 30 April 2024.

4 Depending on the amount raised under the Short Term Funding and the SPP and other factors (including certain factors beyond Highfield's control), Highfield may need to raise further capital prior to completion of the Transaction (see the risk factors in the Investor Presentation dated 23 September 2024).

 

Media and Investor inquires:

Elvis Jurcevic
Investor Relations – Australia
+61 408 268 271
ej@highfieldresources.com.au

Olivier Vadillo
Investor Relations – Global
+34 609 811 257
olivier.vadillo@highfieldresources.com.au