Varyag Resources AB (publ)

Transcription

1 Stockholm, 5 May 2009 Varyag Resources AB (publ) Varyag becomes a forestry company and acquires 50% of RusForest from Vostok Nafta The acquisition is made through an issue in kind to a, by Vostok Nafta, wholly owned subsidiaries of 8,537,640 shares in Varyag in exchange for, inter alia, 50% of the shares in RusForest Ltd and claims of RUB 837,892,777 on RusForest. The issue in kind is subject to a resolution of the issue is taken by an Extraordinary General Meeting that will be held in connection with the Annual General Meeting on 25 May Following completion of the transaction RusForest will be fully owned by Varyag. Vostok Nafta will after completion of the transaction, directly or indirectly, own 9,703,452 shares, corresponding to 44.4% of the share capital and votes in Varyag. The acquisition is a part of a restructuring of Varyag including, inter alia, a change in its business strategy and structure from a private equity company to a forestry company. Varyag, that intends to change its name to RusForest, will own significant forestry assets with annual cutting rights amounting to over 1.6 million m 3 on an area of around 1 million hectares. In addition to that there are sawmills with a current capacity of around 250,000 m 3 which will increase to up to 400,000 m 3 of sawnwood when demand and financing conditions are more favourable. Varyag/RusForest will focus on developing the forestry business. Future ownership of the subsidiary Russian Gravel Co will be evaluated. Due to the change in business strategy the intention is that Torbjörn Gunnarsson will resign as CEO and that Aleksandr Williams will be appointed as the new CEO. The company intends to initiate the process of applying for listing at Nasdaq OMX Stockholm. The acquisition is made through an issue in kind to a, by Vostok Nafta, wholly owned subsidiary of 8,537,640 shares subject to required decision at an Extraordinary General Meeting to be held in connection with the Annual General Meeting on 25 May The total number of shares in Varyag/RusForest will, after the completion of the issue, amount to 21,840,840 shares. Vostok Nafta will then own 9,703,452 shares, corresponding to 44.4% of the share capital and votes in Varyag/RusForest. Due to the change in business strategy the management agreement with the management company, Taiga Capital Ltd, will be terminated. As consideration for the performance based compensation relating to future disposals within forestry-related business it has been suggested that the management company shall receive 1,987,834 warrants in Varyag. These warrants will entitle the holder to subscribe for 1,987,834 new shares at a subscription price of SEK 63 per share during the period 1 July 2009 up to and including 1 January The management company will retain the right to performance based compensation upon a disposal of Russian Gravel Co.

2 New management Due to the change in business strategy the intention is that Torbjörn Gunnarsson will resign as CEO in connection with the completion of the acquisition from Vostok Nafta (expected at the beginning of June 2009) and that Aleksandr Williams will be appointed as the new CEO. Aleksandr Williams is presently the CEO of the management company Taiga Capital Ltd. The company s office in Stockholm will close and the finance function will transfer to Moscow. Vitaly Zhukov, CFO of RusForest, will be appointed as the new CFO of Varyag/RusForest. EGM The board has resolved to call an Extraordinary General Meeting to be held on Monday 25 May, in connection with the Annual General Meeting on the same day. At the Extraordinary General Meeting shareholders will decide on the new issue of shares and warrants and the appointment of Aleksandr Williams as new director of the board. Summon to the Extraordinary General Meeting will be published shortly. Valuation report Varyag acquires 50% of RusForest from Vostok Nafta who is a shareholder in Varyag. The Board has engaged Erik Penser Bankaktiebolag to issue a fairness opinion. The fairness opinion states that the acquisition of RusForest and the consideration has been deemed to be fair from a financial perspective. Financial effects The effect of the acquisition of 50% of RusForest on the accounts depends on the share price in Varyag at the time of the acquisition. At a share price of around SEK 20 a negative goodwill of SEK 173 million will arise which will be booked to the profit and loss statement. At a share price of SEK 46 the effect is zero and at a higher share price goodwill will appear. Listing After the completion of the transaction Varyag/RusForest intends to consolidate the fully owned business in the financial reports. It is the company s intention to start the process of moving from First North and applying for listing at Nasdaq OMX Stockholm. About RusForest background and reasons During the past year significant efforts have been put into making RusForest a fully functioning holding company, with legal and financial transparency and IFRS accounting. The company has also reached considerable scale during the year, controlling around 1,000,000 hectares of forest land and an Annual Allowable Cut (AAC) of 1,645,100 m 3. Additionally, major progress has been made with regard to the company s consolidated sawnwood capacity, which is set to increase to around 400,000 m 3 as a result of the Boguchansky sawmill going into production in October 2008 and the RusForest Magistralny (formerly Nebelsky LPH) mill becoming operational at a later stage. RusForest is currently the sixth largest forestry company in Russia in terms of harvest volumes according to data collated by Lesprom.ru, and is comparable in size to Holmen in terms of forest land controlled. RusForest, and the proposed management team, has through its relatively long presence in the regions where it is active also been able to create relationships, and cement its position, with Regional and Federal authorities along with several forestry working groups active in Russia.

3 Most authorities are supportive of RusForest s operations, which has led to the entering of an agreement on social-economic co-operation with the Administration of the Krasnoyarsk region. These relationships make for a more favourable operational environment. Operational targets RusForest has now reached a scale where focus can shift from acquisitions and land bank growth towards finalising projects and improving operational efficiency. During 2008 the company utilized 48.9% of its consolidated AAC, and the intention is to steadily increase this figure to around 80%, or 1,400,000 m 3, by Sawnwood production is also planned to increase to approximately 400,000 m 3, on an annual basis over time. The planned increase in harvesting volumes will allow for a larger internal supply of raw material, which decreases costs and supply related risks. Achieving these production capacity increases is important in order for RusForest to match its sawnwood production with Russia s implementation of export duties on roundwood, which should be enforced in the medium term. The duties were originally planned to come into effect on 1 January 2009, but have been delayed by 9 12 months according to statements by Prime Minister Putin. In order to utilize the competitive advantage, over western competitors, of having access to an abundance of cheap raw material and lower power costs, RusForest seeks to increase productivity and efficiency throughout its value chains. This is done by implementing modern forestry techniques, control functions and using state-of-the art equipment with qualified staff in both harvesting and sawmilling. The new Boguchansky and RusForest Magistralny sawmills will for instance solely be operating modern sawmilling lines, aiming to reach an operational efficiency in line with Nordic producers. For the less advanced sawmills operating at PIK-89 and Tuba, these levels of efficiency are not realistic. There are however considerable improvements which can be made through relatively small investments, in order to clear bottlenecks, and continued managerial and operational improvements. Best practice starts in the forest, by introducing harvesting and transportation plans closely linked to the production capacity and customer orders at the sawmills. To take further advantage of the increases in production, and sawnwood quality, RusForest aims to control the sales of its goods to a larger extent. This will be done through its recently established and wholly owned trading company, RusForest Trading. RusForest Trading was established in December 2008 as a complement to the PIK 2005 trading house to actively approach new customers and to avoid middlemen in order to increase sales prices and decrease the company s dependency on a small number of customers. RusForest s main target markets are Central Asia, the Middle East, China, Japan and the Russian domestic market. On the basis of these developments the board believes that the time is right for the proposed consolidation, new organizational structure and subsequent divestment of Varyag s Gravel investment. The foundation is in place for a dedicated Russian forestry company able to utilize the competitive advantages available to it in the Russian forestry sector and effectively handle the extremely challenging Russian, and current global, business environment.

4 Capital needs RusForest is now essentially fully invested in terms of forestry assets and new sawmilling capacity, and there are currently no acquisitions planned. The Group companies capital needs therefore mainly relate to follow-on investments in ongoing projects and potential working capital needs over the summer months to cover log shortages and in the event that customer payments are delayed. RusForest is also well positioned in that none of its companies have any significant bank debt. Instead, the portfolio companies financial liabilities predominantly relate to various leasing obligations, which can be met out of the operating cash flow. However, both the Boguchansky and RusForest Magistralny projects are in need of elements of debt funding. Negotiations are ongoing with several different parties but due to the current financial markets, the cost of debt funding has gone up and lead times to secure the funding have increased significantly. As a result of this, bridge loans have been supplied by Varyag and Vostok Nafta during 2008 to both Boguchansky and RusForest Magistralny. A loan agreement between Unicredit and OOO Boguchansky sawmill has been signed and the first disbursement has been received on 13 April 2009; all of the conditions precedent have been fulfilled and the facility amount is in principle available at the company s request. The facility amount is USD 4 million. Going forward, the aim is to introduce parts of debt financing into RusForest and achieve a more diversified capital structure. Currently a low debt-equity ratio is a good thing but as markets stabilise and RusForest s new production assets become operational an increased leverage will provide the company with a means to increase its return on equity. Joint statement by current CEO Torbjörn Gunnarsson and new CEO Aleksandr Williams: - The acquisition and restructuring has strong merits and should create significant shareholder value, as seen from the following points: the company would get a distinct profile on the stock exchange; the company would get an ordinary industrial structure instead of the private equity structure; the company would be the first listed Russian forestry company; ownership of 100% instead of 50% is an improvement of quality from a cash flow point of view and it would facilitate a normal capital structure; the company would get a more efficient cost structure; the relative operational cost would be lower; a forestry company is likely to attract more and new investors due to the company s significant and excellent forestry asset with a potential of multiple value appreciation; in Vostok Nafta, the company would get a main shareholder with outstanding experience of investing in Russia; the dynamic effects of the deal could imply a higher valuation to the benefit of the companies shareholders. Statement by Per Brilioth, CEO of Vostok Nafta: - Over the past years RusForest has positioned itself as a significant player within the Russian forestry industry and Vostok Nafta is looking forward to remain a long term shareholder in Varyag/RusForest as the company continues to develop. I am confident that a publicly listed

5 RusForest will attract a significant interest from investors, thus creating value for the shareholders of RusForest as well as Vostok Nafta. For further information please contact: Torbjörn Gunnarsson, CEO of Varyag Resources AB, phone or Alex Williams, Investment Manager, phone Varyag Resources is a private equity firm whose shares are traded on the First North list of Stockholm Stock Exchange. The business concept is to invest in, actively manage and dispose of investments mainly in unlisted companies in the natural resources sector in Russia and the Commonwealth of Independent States (CIS). Varyag Resources offers a unique investment opportunity for investors in the stock market.