Embed Size (px)
Citation preview
Level 1, 130 Hay Street Subiaco WA 6008
PO Box 8035, Subiaco East WA 6008 Telephone: +61-8-6380 2855 Facsimile: +61-8-6380 1644
E-mail: [email protected] Site: www.elkedra.com.au
28 September 2007 Centralised Company Announcement Office Australian Stock Exchange Limited 10th Floor, 20 Bond Street Sydney NSW 2000 Dear Sir/Madam,
ELKEDRA DIAMONDS NL - SCHEME OF ARRANGEMENT We advise that a shareholders meeting to vote on the scheme of arrangement for Canadian listed diamond group Vaaldiam Resources Ltd to acquire all of the outstanding shares of Elkedra in exchange for Vaaldiam common shares, has been convened for Monday 29 October 2007. Attached hereto is the Scheme Booklet containing the notice of meeting and the information necessary for shareholders to make a decision on how to vote at the scheme meeting. The Scheme Booklet is being despatched to shareholders today, Friday 28 September 2007 For and on behalf of the Board
M.D.J. Cozijn Company Secretary cc: Directors Attach:
For
per
sona
l use
onl
y
THIS DOCUMENT IS IMPORTANT AND REQUIRES YOUR URGENT ATTENTION IF YOU ARE IN DOUBT AS TO HOW TO DEAL WITH IT, YOU SHOULD CONSULT
YOUR LEGAL OR FINANCIAL ADVISER IMMEDIATELY.
ELKEDRA DIAMONDS NL
ACN 092 334 220
PROPOSED MERGER WITH VAALDIAM RESOURCES LTD.
BY WAY OF
SCHEME OF ARRANGEMENT
YOUR DIRECTORS UNANIMOUSLY RECOMMEND THAT YOU VOTE IN FAVOUR OF THE SCHEME OF ARRANGEMENT AT A MEETING OF ELKEDRA SHAREHOLDERS TO BE HELD ON 29 OCTOBER 2007
Legal Advisers to Legal Advisers to Elkedra Diamonds NL: Vaaldiam Resources Ltd.:
Minter Ellison Gadens Lawyers Lawyers Level 25, Bourke Place 152-158 St George's Terrace 600 Bourke Street PERTH WA 6000 MELBOURNE VICTORIA 3000
For
per
sona
l use
onl
y
- ii -
CONTENTS
CHAIRMAN'S LETTER
WHAT DO YOU NEED TO DO?
IMPORTANT DATES
IMPORTANT NOTES
SUMMARY OF THE PROPOSAL
FREQUENTLY ASKED QUESTIONS
1. INTERPRETATION ......................................................................................16
2. INTRODUCTION...........................................................................................18
3. ANALYSIS OF PROPOSAL .........................................................................19
4. BACKGROUND INFORMATION ON ELKEDRA...................................21
5. BASIS OF THE SCHEME.............................................................................21
6. PROCEDURAL STEPS .................................................................................21
7. RELEVANT TIME.........................................................................................22
8. IMPLEMENTATION OF THE SCHEME ..................................................22
9. CLOSING OF REGISTER ............................................................................23
10. TSX QUOTATION .........................................................................................23
11. FOREIGN SHAREHOLDERS......................................................................23
12. TAX IMPLICATIONS ...................................................................................23
13. ADMINISTRATOR........................................................................................23
14. DIRECTORS' RECOMMENDATIONS......................................................24
15. VAALDIAM’S VOTING POWER IN ELKEDRA .....................................24
16. MARKETABLE SECURITIES OF ELKEDRA HELD BY OR ON BEHALF OF DIRECTORS OF ELKEDRA........................................................................24
17. MARKETABLE SECURITIES OF VAALDIAM HELD BY OR ON BEHALF OF DIRECTORS OF ELKEDRA........................................................................24
18. DEALINGS IN MARKETABLE SECURITIES OF ELKEDRA..............24
For
per
sona
l use
onl
y
- iii -
19. DEALINGS IN MARKETABLE SECURITIES OF VAALDIAM ...........24
20. VOTING INTENTIONS OF DIRECTORS AND OTHERS......................24
21. PAYMENTS OR OTHER BENEFITS TO OFFICERS OF ELKEDRA..24
22. INTERESTS OF DIRECTORS AND OTHERS..........................................24
23. OTHER AGREEMENTS OR ARRANGEMENTS WITH DIRECTORS26
24. MATERIAL CHANGES IN THE FINANCIAL POSITION OF ELKEDRA...........................................................................................................................26
25. OTHER MATERIAL INFORMATION.......................................................26
26. INDEPENDENT EXPERT’S REPORT .......................................................26
27. INFORMATION IN RELATION TO VAALDIAM SHARES..................26
28. INTENTIONS OF THE ELKEDRA DIRECTORS ....................................27
29. ADDITIONAL CONSENTS ..........................................................................27
30. ACTION TO BE TAKEN BY SCHEME PARTICIPANTS.......................28
APPENDIX 1 : MERGER IMPLEMENTATION DEED
APPENDIX 2 : SCHEME OF ARRANGEMENT
APPENDIX 3 : TAX IMPLICATIONS
APPENDIX 4 : ELKEDRA OPTIONS
APPENDIX 5 : VAALDIAM'S VOTING POWER IN ELKEDRA
APPENDIX 6 : MARKETABLE SECURITIES OF ELKEDRA HELD BY OR ON BEHALF OF DIRECTORS OF ELKEDRA
APPENDIX 7 : INFORMATION ABOUT VAALDIAM, VAALDIAM SHARES AND THE MERGED GROUP
APPENDIX 8 : SHAREHOLDER RIGHTS IN CANADA
APPENDIX 9 : INDEPENDENT EXPERT’S REPORT
APPENDIX 10 : NOTICE OF MEETING AND PROXY FORM
For
per
sona
l use
onl
y
- 1 -
LETTER FROM THE CHAIRMAN OF ELKEDRA DIAMONDS NL
28 September 2007
Dear Elkedra Shareholders:
On 4 July 2007 the board of Elkedra Diamonds NL announced a proposal to merge with Vaaldiam Resources Ltd., a Canadian company listed on the Toronto Stock Exchange (the “TSX”) which, like Elkedra, has significant diamond projects in Brazil.
The merger is to be implemented through a Scheme of Arrangement under which Elkedra shareholders will receive Vaaldiam shares in exchange for their Elkedra shares. Full details of the proposal are contained in this booklet, which I encourage you to read carefully. In summary, on completion of the merger:
• holders of Elkedra shares will receive 0.52 Vaaldiam shares for each Elkedra share held by them;
• Elkedra shareholders will collectively have an interest of approximately 33.2% in the merged company;
• Elkedra will become a wholly-owned subsidiary of Vaaldiam and will be de-listed from the ASX and AIM; and
• the enlarged Vaaldiam will continue to be listed on the TSX.
Your directors believe that the proposal, which is subject to the approval of Elkedra shareholders, will bring the following benefits to the Merged Group:
• greater ability to raise debt and equity capital;
• improved market sentiment and profile;
• broader geographic spread of investors;
• cost savings through operational synergies;
• ability to negotiate improved product marketing terms;
• stronger management team;
• potential re-rating of the share price of the Merged Group; and
• comparable shareholder rights.
Your directors unanimously support the merger and recommend that you vote in favour of it (as they intend to do in respect of their own holdings of Elkedra shares) at a meeting of Elkedra shareholders to be held on 29 October 2007. If you are unable to attend that meeting, you are encouraged to vote by completing the proxy form enclosed with this booklet and returning it to Elkedra in the enclosed reply-paid envelope as soon as possible – and in any event not later than 11:30am (Perth time) on 27 October 2007.
For
per
sona
l use
onl
y
- 2 -
If you are in doubt as to the action you should take in relation to the merger proposal, you should consult your legal, financial or other professional adviser without delay. If you need any assistance in completing the proxy form, please contact Alan Dworkin at Elkedra on (08) 6380 2855 (telephone) within Australia or +61 8 6380 2855 (outside Australia) or (08) 6380 1644 (fax) within Australia or +61 8 6380 1644 (outside Australia).
Yours sincerely,
Don Best Chairman
For
per
sona
l use
onl
y
- 3 -
WHAT DO YOU NEED TO DO?
Your vote is important
For the merger with Vaaldiam to proceed, it is necessary that sufficient Elkedra shareholders vote in favour of the Scheme of Arrangement.
If you are registered as an Elkedra shareholder as at 11:30am (Perth time) on 27 October 2007, you will be entitled to vote on the resolution to approve the Scheme at the Scheme Meeting.
What you need to do
All you need to do is:
(a) decide whether or not you support the Scheme; and
(b) either attend and vote in person at the Scheme Meeting at 11:30am (Perth time) on 29 October 2007 or return your Proxy Form to Elkedra's registered office at Level 1, 130 Hay Street, Subiaco, WA 6008 (facsimile + 61 (0) 8 6380 1644).
Voting
You may vote at the Scheme Meeting either in person or by proxy, attorney or (in the case of a company) corporate representative.
To vote by proxy, you should complete and return to Elkedra as soon as possible the Proxy Form which accompanies this Scheme Booklet. If you wish to vote FOR the Scheme of Arrangement, you must place a "X" in the FOR box for the resolution on the Proxy Form. To ensure that your Proxy Form is valid, you should return it to Elkedra by no later than 11:30am (Perth time) on 27 October 2007. You can do this by using one of the enclosed reply-paid envelopes or by faxing the Proxy Form to Elkedra's share registry Registrar on (08) 9315 2233 (within Australia) or +61 8 9315 2233 (outside Australia), or to Elkedra itself on (08) 6380 1644 (within Australia) or +61 8 6380 1644 (outside Australia).
Queries
If you have any questions in relation to the Scheme of Arrangement, please call Alan Dworkin at Elkedra on + 61 (0) 8 6380 2855 Monday to Friday between 9.00am and 5.00pm (WST), or consult your legal, financial or other professional adviser.
For
per
sona
l use
onl
y
- 4 -
IMPORTANT DATES
Proxies to be received not later than 11:30am (Perth, Western Australia time):
27 October 2007
Meeting of Scheme Participants to approve the Scheme of Arrangement
29 October 2007
If Scheme Participants approve the Scheme, the EXPECTED timetable is:
Court hearing to approve the Scheme: 2 November 2007
Last day for exercising Elkedra Options (Cut-off Date): 7 November 2007
The Scheme becomes binding (Effective Date): 8 November 2007
Last day of ASX trading in Scheme Shares: 8 November 2007
Record date for determining entitlements (Record Date): 15 November 2007
Scheme Shares transferred to Vaaldiam (Implementation Date): 20 November 2007
Despatch of holding statements for New Vaaldiam Shares and trading in New Vaaldiam Shares on the TSX commences:
23 November 2007
IMPORTANT NOTES
Purpose of this Document
This Scheme Booklet provides information to Elkedra shareholders necessary for them to make a decision as to how to vote on the resolutions to be considered at the Scheme Meeting. It has been prepared pursuant to section 412(1) of the Corporations Act to explain the effect of the Scheme and to disclose such other information in relation to the Scheme as is required by the Corporations Act, the Corporations Regulations, and ASIC Regulatory Guides. The Scheme forms Appendix 2 to this Scheme Booklet.
This Scheme Booklet contains all of the information that would be required under section 710 of the Corporations Act as if this Scheme Booklet were a prospectus offering for subscription the Vaaldiam Shares to be issued to Scheme Participants under the Scheme.
Your directors recommend that you read this Scheme Booklet in its entirety (including its appendices) before making your decision as to how to vote at the Scheme Meeting.
Supplementary Information
A supplementary scheme booklet will be prepared and issued if either Elkedra or Vaaldiam becomes aware, between the date of this Scheme Booklet and the date on which the Vaaldiam Shares to be issued to Scheme Shareholders are quoted on the TSX, that:
(a) a material statement in the Scheme Booklet is false or misleading;
(b) there is a material omission from the Scheme Booklet;
For
per
sona
l use
onl
y
- 5 -
(c) there has been a significant change affecting a matter included in the Scheme Booklet; or
(d) a significant new matter has arisen which would have been required to be included in the Scheme Booklet.
Responsibility for Information
The information concerning Elkedra contained in this Scheme Booklet, excluding the Independent Expert’s Report (Elkedra Information), has been compiled by Elkedra and its directors and is the responsibility of Elkedra. The information concerning Vaaldiam contained in this Scheme Booklet, excluding the Independent Expert’s Report and the Compilation Report contained in Appendix 7 (Vaaldiam Information), has been provided by Vaaldiam and its directors and is the responsibility of Vaaldiam. The information concerning the Merged Group contained in this Scheme Booklet has been prepared jointly by Elkedra and Vaaldiam, based on the Elkedra Information and the Vaaldiam Information. Elkedra assumes no responsibility for the accuracy or completeness of the Vaaldiam Information, and Vaaldiam assures no responsibility for the accuracy or completeness of the Elkedra Information.
BDO Consultants (WA) Pty Ltd. has prepared the Independent Expert's Report contained in Appendix 9 and takes responsibility for that report.
Ernst & Young LLP has prepared the Compilation Report contained in Appendix 7 and takes responsibility for that report.
ASIC
A copy of this Scheme Booklet has been provided to ASIC for review in order that ASIC may provide a statement, in accordance with section 411(17)(b) of the Corporations Act, that ASIC has no objection to the Scheme. Notwithstanding the making of such a statement, neither the ASIC nor any of its officers takes any responsibility for the contents of this Scheme Booklet.
ASX
A copy of this Scheme Booklet has been lodged with ASX. Neither ASX nor any of its officers take any responsibility for the contents of this Scheme Booklet.
Court Order
The order made by the Court pursuant to section 411(1) of the Corporations Act convening the Scheme Meeting to approve the Scheme does not constitute an endorsement by the Court of, or any expression of opinion on, the Scheme or this Scheme Booklet. The notice convening the Scheme Meeting, together with a proxy form for that meeting, accompany this Scheme Booklet.
Foreign Shareholders
If you are a Foreign Shareholder, you should refer to Section 11 of this Scheme Booklet.
Forward-Looking Statements
This Scheme Booklet includes, or may include, forward-looking statements including, without limitation, forward-looking statements regarding Elkedra’s and Vaaldiam’s financial position, business strategy, and plans and objectives for future operations (including development plans
For
per
sona
l use
onl
y
- 6 -
and objectives), which have been based on Elkedra’s and Vaaldiam’s current expectations about future events. These forward-looking statements are, however, subject to known and unknown risks, uncertainties and assumptions that could cause actual results, performance or achievements to differ materially from future results, performance or achievements expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding Elkedra’s and Vaaldiam’s present and future business strategies and the environment in which Elkedra and Vaaldiam will operate in the future.
Matters not yet known to Elkedra and Vaaldiam or not currently considered material to Elkedra and Vaaldiam may impact on these forward-looking statements. The statements reflect views held only as at the date of this document. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this document might not occur. Scheme Participants are therefore cautioned not to place undue reliance on these statements.
Subject to any continuing obligations under applicable law or the Listing Rules, Elkedra and Vaaldiam expressly disclaim any liability or obligation to disseminate after the date of this Scheme Booklet any updates or revisions to such forward-looking statements to reflect changes in expectations or events, conditions or circumstances on which any such statements are based.
Risk Factors
By participating in the Scheme of Arrangement Elkedra shareholders will be investing in Vaaldiam. That investment involves risks normally associated with mining and exploration, as well as risks specific to Vaaldiam. These risks are explained in more detail in Appendix 7.
Elkedra shareholders should also note that the Vaaldiam Shares they will receive in exchange for their Elkedra Shares under the Scheme may be a less liquid form of investment. For further information, see Section 3.3 of this Scheme Booklet.
Investment Decisions
This Scheme Booklet contains general advice only and does not take into account the objectives, financial situation or needs of any particular Elkedra shareholder or any other person. The Scheme Booklet should therefore not be relied on as the sole basis for any decision in relation to the Scheme. Independent financial and taxation advice should be sought before making any investment decision in relation to the Scheme.
Privacy
Elkedra may collect personal information in the process of implementing the Scheme. This information may include the names, contact details and security holdings of Scheme Participants and the names of persons appointed by Scheme Participants to act as proxy, corporate representative or attorney at the Scheme Meeting. The primary purpose of collecting this information is to assist Elkedra in the conduct of the Scheme Meeting and to enable the Scheme to be implemented by Elkedra in the manner described in this Scheme Booklet. Without this information, Elkedra may be hindered in its ability to carry out these purposes to full effect. The collection of certain personal information is authorised by the Corporations Act.
Personal information may be disclosed to Elkedra’s share registry, to print and mail service providers, to authorised securities brokers, and to related bodies corporate of Elkedra and Vaaldiam.
For
per
sona
l use
onl
y
- 7 -
Scheme Participants have the right to access personal information that has been collected. They should contact Elkedra’s share registry in the first instance if they wish to exercise this right.
Scheme Participants who appoint a named person to act as their proxy, corporate representative or attorney at the Scheme Meeting should ensure that they inform that person of the matters outlined above.
Definitions
Capitalised terms used in this Scheme Booklet are defined in Section 1 of this Scheme Booklet.
For
per
sona
l use
onl
y
- 8 -
SUMMARY OF THE PROPOSAL
This summary should be read in conjunction with the remainder of the Scheme Booklet.
The merger
The proposal to merge Elkedra and Vaaldiam essentially involves the transfer of all Elkedra shares to Vaaldiam in exchange for the issue to Elkedra shareholders of 0.52 Vaaldiam Shares for each of their Elkedra Shares. Elkedra will become a wholly-owned subsidiary of Vaaldiam and be de-listed from the ASX and AIM. Elkedra shareholders will initially hold approximately 33.2% of the enlarged Vaaldiam, which will continue to be listed on the TSX (although it will not be listed on the ASX or AIM).
How the merger will affect you?
Under the Scheme of Arrangement:
1 Elkedra Share
=
0.52 Vaaldiam Shares
The Elkedra Shares will be transferred to Vaaldiam in exchange for the issue to Scheme Shareholders of Vaaldiam Shares, on the basis of 0.52 Vaaldiam Shares for every Elkedra Share held on the Record Date.
For example, if you hold 10,000 Elkedra Shares on the Record Date, under the Scheme you would receive 5,200 Vaaldiam Shares.
Foreign Shareholders may not be able to receive Vaaldiam Shares and should refer to Section 11 of this Scheme Booklet for further information.
Future of Elkedra and Vaaldiam
Elkedra has been strongly focused on the Chapada Project in Brazil but has also continued to maintain its diamond exploration activities elsewhere in Brazil and Australia. Vaaldiam, a Canadian company listed on the TSX, is engaged in the exploration and development of diamond deposits in Brazil and Canada. Its principal projects comprise the Pimenta Bueno kimberlite deposit (100%-owned), the Duas Barras alluvial mine (100%), and the Braúna kimberlite deposits (100%).
The merger of Elkedra and Vaaldiam will provide a platform for financing the Merged Group's activities in the global equity markets, which is likely to be necessary for its future development and growth.
For
per
sona
l use
onl
y
- 9 -
Advantages of the merger
The merger should offer Elkedra and its shareholders the following benefits:
• greater ability to raise debt and equity capital; • improved market sentiment and profile; • broader geographic spread of investors; • cost savings through operational synergies; • ability to negotiate improved product marketing terms; • stronger management team; • potential re-rating of the share price of the Merged Group; and • comparable shareholder rights. These benefits are explained in more detail in Section 3.2 and elsewhere in this Scheme Booklet. Potential disadvantages which may result from the merger are set out in Section 3.3 of this Scheme Booklet. Elkedra's directors believe that the advantages of the Scheme significantly outweigh the disadvantages. What does the Independent Expert say? Elkedra commissioned BDO Consultants (WA) Pty Ltd. to prepare a report on the Scheme to ascertain whether the Scheme of Arrangement is in the best interests of the Scheme Shareholders. The Independent Expert has concluded that the Scheme is in the best interests of shareholders, noting that the advantages of the Scheme for Elkedra shareholders outweigh the likely disadvantages.
Your directors recommend you vote in favour
Elkedra's directors unanimously recommend shareholders to vote in favour of the Scheme. Each Elkedra director intends to vote his own shares in favour of the Scheme.
Interests of Elkedra directors
The interests of the Elkedra directors in Elkedra shares and options are set out in Appendix 4 to this Scheme Booklet.
Approvals required and conditions
Shareholder approval
For the Scheme of Arrangement to proceed, a resolution to approve the Scheme must be passed by more than 50% of the Elkedra shareholders present and voting at the Scheme Meeting (in person or by proxy, attorney or corporate representative) and by at least 75% of the votes cast on the resolution.
For
per
sona
l use
onl
y
- 10 -
Court approval
If shareholder approval of the Scheme of Arrangement is obtained, the application for Court approval of the Scheme is expected to be heard on 2 November 2007.
Conditionality
In addition to the approval of Elkedra shareholders and the Court, implementation of the Scheme is conditional on a number of matters which are described in Section 8.1 of this Scheme Booklet.
Tax implications
Details of the tax consequences of the Scheme for Elkedra Shareholders are set out in Appendix 3. In summary, no Australian tax should be payable by Australian-resident Scheme Shareholders who hold their Elkedra Shares on capital account and elect for capital gains tax rollover relief to apply. Australian-resident Scheme Shareholders who hold their Elkedra Shares on revenue account or as trading stock will be assessed on any gain on the exchange of their Elkedra Shares for Vaaldiam Shares as ordinary income and rollover relief will not apply.
The Australian tax implications for non-Australian resident Scheme Shareholders will depend on a number of factors and in some circumstances Australian tax may be payable on any gain arising on the exchange of Elkedra Shares for Vaaldiam Shares. There may also be tax implications in the shareholder's country of residence.
As the comments in Section 12 are general in nature and do not consider the specific circumstances of each shareholder, shareholders should seek independent advice regarding the tax implications applicable to their circumstances.
How to vote
Details of how to vote on the Scheme are contained in the notice convening the Scheme Meeting contained in Appendix 10, and in the accompanying Proxy Form.
Merger Implementation Deed
Elkedra and Vaaldiam entered into a Merger Implementation Deed on 4 July 2007. Pursuant to this deed, Elkedra and Vaaldiam agreed to use their best endeavours to implement the Scheme of Arrangement, subject to the satisfaction of certain conditions.
A copy of the Merger Implementation Deed is set out in Appendix 1.
Implementation and timing
The key dates are set out on page 4 of this Scheme Booklet. The steps necessary to implement the merger include the following:
• Elkedra shareholders will be asked to vote on the Scheme at a meeting to be held on 29 October 2007.
• If the resolution put to Elkedra shareholders at the Scheme Meeting is passed, the Court
will be asked to approve the Scheme.
For
per
sona
l use
onl
y
- 11 -
• If Court approval is received and the other conditions of the Scheme are satisfied,
Elkedra will apply for suspension of trading in Elkedra Shares on ASX on the Effective Date.
• Vaaldiam will issue the Vaaldiam Shares to Scheme Shareholders in exchange for their
Elkedra Shares approximately two weeks after the Court approves the Scheme.
• If the merger is implemented, the Merged Group will be listed on the TSX, though not on the ASX or AIM.
For
per
sona
l use
onl
y
- 12 -
FREQUENTLY ASKED QUESTIONS Set out below are answers to some basic questions that Elkedra shareholders may have in relation to the Scheme of Arrangement. These answers should be read in conjunction with the remainder of the Scheme Booklet.
Question 1: What is proposed?
Vaaldiam, a company listed on the Toronto Stock Exchange (TSX), proposes to acquire Elkedra by means of a scheme of arrangement.
Question 2: Why have I received this booklet?
This booklet has been sent to you because you are an Elkedra shareholder and the proposal for Vaaldiam to acquire Elkedra requires Elkedra shareholder approval. The booklet contains information to help you decide how to vote on the resolution to approve the acquisition.
Question 3: What is a scheme of arrangement?
A scheme of arrangement is a legal arrangement between a company and its shareholders. If shareholders vote in favour of the scheme of arrangement, the scheme becomes binding on the company and the shareholders. Approval of a scheme of arrangement requires a 50% majority of the shareholders voting on the resolution to approve the scheme and a 75% majority of the total votes cast, as well as approval by the Court.
Question 4: What will I receive if the Scheme is approved?
If you are a Scheme Shareholder (other than a Foreign Shareholder; see Question 11), you will receive 0.52 Vaaldiam Shares for each of your Elkedra Shares.
The record date for determining the Elkedra shareholders entitled to receive Vaaldiam Shares will be the fifth Business Day after the Effective Date.
Question 5: Why will I only receive 0.52 Vaaldiam Shares for each of my Elkedra Shares?
The ratio of 0.52:1 reflects the relative market values of Vaaldiam and Elkedra immediately prior to the merger proposal being publicly announced, plus an appropriate premium payable by Vaaldiam to obtain control of Elkedra.
Question 6: Who is Vaaldiam?
Vaaldiam is incorporated in Canada and is listed on the TSX. Its principal activities comprise the exploration for and development of alluvial and kimberlite diamond deposits in Brazil and Canada, including the Pimenta Bueno kimberlite deposit, the Duas Barras alluvial mine (which is in production), and the Braúna kimberlite deposits (all of which are in Brazil). Further information about Vaaldiam is set out in Appendix 7.
Question 7: What is the opinion of the Independent Expert?
The Independent Expert has concluded that the Scheme of Arrangement is in the best interests of Elkedra shareholders, noting that the advantages of the Scheme for Elkedra shareholders outweigh the likely disadvantages. The complete Independent Expert's Report is set out in Appendix 9. You are encouraged to read the report in full.
For
per
sona
l use
onl
y
- 13 -
Question 8: How will fractional shares be treated?
If pursuant to the Scheme you become entitled to a fraction of a Vaaldiam Share, the number of Vaaldiam Shares you will receive will be rounded down to the next lowest whole number.
Question 9: Will I have to pay brokerage fees or stamp duty?
If you are a Scheme Shareholder (other than a Foreign Shareholder; see Question 11) no brokerage or stamp duty will be payable by you in connection with the Scheme.
Question 10: When will I receive my Vaaldiam Shares?
If you are a Scheme Shareholder (other than a Foreign Shareholder; see Question 11), you will receive your Vaaldiam Shares no later than 9 Business Days after the Record Date (this is anticipated to be no later than 28 November 2007).
Question 11: What if I am a Foreign Shareholder?
If you are an Elkedra shareholder whose address in the Company's register of members is a place outside the Commonwealth of Australia, then unless Vaaldiam is satisfied that the laws of your country of residence do not prevent the issue of Vaaldiam Shares to you (or do not prevent their issue except after compliance with conditions that Vaaldiam, acting reasonably, regards as unduly onerous), you will be a Foreign Shareholder for the purposes of the Scheme.
The Vaaldiam Shares to which a Foreign Shareholder would otherwise be entitled under the Scheme will be issued to a nominee appointed for this purpose by Elkedra. The nominee will then sell those shares and pay the proceeds received, after deducting any applicable brokerage and other expenses, to the Foreign Shareholder. Foreign Shareholders should refer to Section 11 of this Scheme Booklet for further information.
Question 12: Will the Scheme be a taxable transaction for Australian tax purposes?
Details of the tax consequences of the Scheme for Elkedra shareholders are set out in Section 12 of this Scheme Booklet.
As the comments in Section 12 are necessarily general in nature and do not consider the specific circumstances of each shareholder, you should seek independent advice regarding the tax implications applicable to your circumstances.
Question 13: How can I trade my Vaaldiam Shares?
Vaaldiam will be listed on the TSX, but not on the ASX or AIM. If you wish to sell the Vaaldiam Shares you receive under the Scheme, or purchase further Vaaldiam Shares, you will need to instruct a stockbroker who is able to execute trades on the TSX.
Vaaldiam has made arrangements through Patersons Securities Limited a leading Australian stockbroker, for Elkedra shareholders to sell their Vaaldiam Shares for a period of one year following implementation of the Scheme. Further details of this facility are set out in Appendix 7.
For
per
sona
l use
onl
y
- 14 -
Question 14: When and where will the Scheme Meeting be held?
The Scheme Meeting will be held on 29 October 2007 at The Celtic Club, 48 Ord Street, West Perth, WA, 6005, Australia commencing at 11:30am (Perth time).
Question 15: Am I entitled to vote?
If you are registered as an Elkedra shareholder as at 11:30am (Perth time) on 27 October 2007, you will be entitled to vote at the Scheme Meeting. You may vote at the meeting in person, or by completing and lodging the Proxy Form accompanying this Scheme Booklet.
Question 16: What voting majority is required to approve the Scheme?
For the Scheme of Arrangement to be approved, votes in favour of the Scheme must be cast by:
• a majority in number of Elkedra shareholders present and voting at the Scheme Meeting (in person, by proxy, by attorney or, in the case of corporate shareholders, by corporate representative); and
• Elkedra shareholders together holding at least 75% of the total number of votes cast on
the resolution. Question 17: Do I have to vote? You do not have to vote. However, Elkedra's directors believe that the proposed merger with Vaaldiam is important to all Elkedra shareholders and recommend that you vote in favour of the Scheme.
Question 18: Do I have to accept Vaaldiam Shares if the Scheme is approved?
If Elkedra shareholders and the Court approve the Scheme, all Elkedra shareholders will be obliged to accept Vaaldiam Shares in exchange for their Elkedra Shares.
Elkedra will then become a wholly-owned subsidiary of Vaaldiam and cease to be listed on the ASX and AIM.
Shareholders not wishing to accept Vaaldiam Shares may elect to sell their Elkedra Shares on the ASX prior to the Scheme coming into effect.
Question 19: What happens if I do not vote, or if I vote against the Scheme?
If you are a Scheme Shareholder and the Scheme is approved, your Elkedra Shares will be transferred to Vaaldiam and you will be entitled to receive Vaaldiam Shares in exchange for those shares. This will be so even if you did not vote or voted against the Scheme. If the Scheme is not approved, you will remain an Elkedra shareholder.
Question 20: When will the results of the meeting be known?
The results of the Scheme Meeting will be announced to ASX and press released shortly after the conclusion of the meeting.. The results will also be published on Elkedra's website (www.elkedra.com.au) as soon as possible after the meeting.
For
per
sona
l use
onl
y
- 15 -
The Scheme is also subject to the approval of the Court. The Court hearing for approval of the Scheme is expected to be held on 2 November 2007.
Question 21: What happens if the requisite majority does not vote in favour of the Scheme?
If the requisite majority (see Question 16) does not vote in favour of the Scheme, the Scheme will not proceed, you will remain an Elkedra shareholder, Elkedra will remain listed on the ASX, and the benefits of the merger with Vaaldiam outlined above will not be realised.
Question 22: What will happen to Elkedra if the Scheme proceeds?
The acquisition by Vaaldiam of 100% of Elkedra will not impact Elkedra's projects. However, the Company's future strategic direction will be determined by Vaaldiam. In this regard you should note that Vaaldiam's head office is in Toronto, Canada.
Question 23: Who can answer any other questions I may have about the Scheme?
If you have any other questions about the Scheme, or if you would like additional copies of this Scheme Booklet or the Proxy Form, please contact Alan Dworkin at Elkedra on +61 (0) 8 6380 2855 or via email to [email protected], or consult your legal, financial or other professional adviser.
For
per
sona
l use
onl
y
- 16 -
1. INTERPRETATION
1.1 In this Scheme Booklet (including the Appendices, other than Appendices 7 and 9), except where the context otherwise requires:
“AIM” means the Alternative Investment Market of the London Stock Exchange;
“ASIC” means the Australian Securities and Investments Commission;
“ASX” means ASX Limited (ABN 98 008 624 691);
“BDO” means BDO Consultants (WA) Pty Ltd. (ACN 008 864 435)
“Board” means the board of directors of Elkedra;
“Business Day” has the meaning given to that expression in the Listing Rules;
“Constitution” means the constitution of Elkedra, as amended or replaced from time to time;
“Corporations Act” means the Corporations Act 2001 (Cth.);
“Court” means the Supreme Court of Western Australia;
“Cut-off Date” means 5pm (Perth, Western Australia time) on the date which is two Business Days after the date of the Second Court Hearing;
“Effective Date” means the date on which the Court order approving the Scheme becomes effective in accordance with section 411(10) of the Corporations Act;
“Elkedra” or “Company” means Elkedra Diamonds NL (ACN 092 334 220);
“Elkedra Group” or “Group” means Elkedra and its controlled entities (which, for the avoidance of doubt, excludes Vaaldiam);
“Elkedra Options” means options to subscribe for Elkedra Shares, details of which are set out in Appendix 4;
“Elkedra Shares” means fully paid ordinary shares in Elkedra;
“Excluded Shareholder” means Vaaldiam or any subsidiary of Vaaldiam;
“Foreign Shareholder” means a holder of Scheme Shares whose address as shown in Elkedra’s register of members is a place outside the Commonwealth of Australia unless Vaaldiam (acting reasonably) is satisfied before the Implementation Date that the laws of that place and all other applicable laws and rules determined by the TSX permit the allotment and issue of Vaaldiam Shares to that holder, either unconditionally or after compliance with conditions which Vaaldiam (acting reasonably) regards as acceptable and not unduly onerous;
“GWD Proposal” means the proposed acquisition by Vaaldiam of the issued share capital of Great Western Diamonds Corp. ("GWD") through a take-over bid, on the basis of 0.45 Vaaldiam Shares for each share in GWD;
“Implementation Date” means the third Business Day after the Record Date;
“Independent Expert’s Report” means the report by BDO set out in Appendix 9;
“Listing Rules” means Official Listing Rules of the ASX, as amended from time to time;
“Lodgement Date” means the date on which a draft of this Scheme Booklet was lodged with ASIC;
For
per
sona
l use
onl
y
- 17 -
“Merged Group” means Vaaldiam and its controlled entities (including Elkedra) after implementation of the Scheme;
“Merger Implementation Deed” or “MID” means the merger implementation deed dated 4 July 2007 between Elkedra and Vaaldiam, a copy of which is set out in Appendix 1 (excluding the schedules to that deed);
“New Vaaldiam Shares” means the Vaaldiam Shares to be issued to Scheme Participants pursuant to the Scheme;
“Nominee” means a nominee for the Foreign Shareholders appointed by Elkedra;
“Record Date” means 5 pm (Perth, Western Australia time) on the date which is 5 Business Days after the Effective Date;
“Regulations” means the Corporations Regulations 2001;
“Relevant Time” means 5 pm on the date which is two Business Days before the despatch of the notice convening the Scheme Meeting;
“Scheme” or Scheme of Arrangement" means the scheme of arrangement under section 411 of the Corporations Act described in the document set out in Appendix 2 (or, if the context so requires, that document itself);
“SchemeBooklet” means this document, including its appendices;
“Scheme Consideration” means the allotment and issue to each holder of Scheme Shares of 0.52 Vaaldiam Shares for each Scheme Share held as at the Record Date (fractional entitlements being rounded down);
“Scheme Meeting” means the meeting of Scheme Participants ordered by the Court under section 411(1) of the Corporations Act to be convened for the purposes of the Scheme;
“Scheme Participants” or "Scheme Shareholders" means the holders of Scheme Shares;
“Scheme Shares” means the Elkedra Shares on issue as at 5.00pm (Perth, Western Australia time) on the Effective Date;
“Second Court Hearing” means the first hearing of the application made to the Court for an order pursuant to section 411(4) of the Corporations Act approving the Shareholders Scheme;
“TSX” means the Toronto Stock Exchange;
“Vaaldiam” means Vaaldiam Resources Ltd, a corporation existing under the laws of Canada;
“Vaaldiam Shares” means common shares (without nominal or par value) in Vaaldiam with the rights and liabilities set out in Appendix 7; and
“WST” means Australian Western Standard Time.
1.2 In this Scheme Booklet (including the Appendices, other than Appendices 7 and 9), except where the context otherwise requires:
(a) a reference to any legislation or legislative provision includes any statutory modification or re-enactment of, or legislative provision substituted for, and any statutory instrument issued under, that legislation or legislative provision;
For
per
sona
l use
onl
y
- 18 -
(b) a word denoting the singular number includes the plural number and vice versa;
(c) a word denoting an individual or person includes a corporation, firm, authority, government or governmental authority and vice versa;
(d) a word denoting a gender includes all genders;
(e) a reference (other than in the appendices) to a Section is to a section of this Scheme Booklet; a reference to an Appendix is to an appendix to this Scheme Booklet; and appendices to this Scheme Booklet form part of this Scheme Booklet;
(f) a reference to any agreement or document is to that agreement or document (and, where applicable, any of its provisions) as amended, novated, supplemented or replaced from time to time;
(g) a reference to any party to the Scheme, or any other document or arrangement, includes that party's executors, administrators, substitutes, successors and permitted assigns;
(h) a reference to a "subsidiary" of a body corporate is to a body corporate which is a subsidiary of the first-mentioned body corporate under section 46 of the Corporations Act;
(i) a reference to "dollars" or "A$" or to "cents" or "¢" is (unless otherwise specified) to an amount in Australian currency;
(j) a reference to "C$" is (unless otherwise specified) to an amount in Canadian currency;
(k) a reference to the "holder" of a Scheme Share at a particular time includes a reference to a person who, as a result of a dealing received by Elkedra or its share registry on or before that time, is entitled to be entered in the relevant register as the holder of that Scheme Share;
(l) words and phrases defined elsewhere in this document shall have the meaning there ascribed to them;
(m) words and phrases defined in the Corporations Act shall have the meaning there ascribed to them;
(n) headings are for convenience of reference only and do not affect interpretation; and
(o) where an expression is defined, another part of speech or grammatical form of that expression has a corresponding meaning.
2. INTRODUCTION
The directors of Elkedra have resolved to recommend to shareholders a proposal under which the Company will merge with Vaaldiam Resources Ltd., a TSX-listed company with significant diamond interests in Brazil.
For
per
sona
l use
onl
y
- 19 -
Subject to the obtaining of all necessary approvals from shareholders and the Court, it is intended to implement this proposal by way of a scheme of arrangement under section 411 of the Corporations Act under which all existing Elkedra shares will be transferred to Vaaldiam in exchange for an issue of shares in Vaaldiam.
Under the Scheme, Elkedra shareholders will receive 0.52 Vaaldiam Shares for each Elkedra share held by them.
Upon the Scheme being implemented, Elkedra will become a wholly-owned subsidiary of Vaaldiam and be de-listed from the ASX and AIM, but Vaaldiam will continue to be listed on the TSX. Vaaldiam will not, however, be listed on the ASX or AIM.
Holders of Elkedra options (which are not the subject of the Scheme) who exercise those options prior to the Cut-off Date will be eligible to participate in the Scheme as shareholders and receive Vaaldiam Shares in exchange for the Elkedra Shares issued to them on exercise of their options.
3. ANALYSIS OF PROPOSAL
3.1 Background Information
Elkedra
Elkedra was incorporated on 4 April 2000. It was listed on the ASX on 8 January 2002 and on AIM on 3 September 2004.
The principal activities of the Elkedra Group are diamond exploration and mining in Brazil, including the Chapada Project.
Vaaldiam
Vaaldiam was incorporated under the laws of British Columbia, on 28 February 1983 and continued under the Canada Business Corporations Act by Articles of Continuation dated 4 March 1987. Vaaldiam was listed on the TSX on 23 March 2006. Its principal activities comprise the exploration for and development of alluvial and kimberlite diamond deposits in Brazil and Canada, including the Pimenta Bueno kimberlite deposit, the Duas Barras alluvial mine, and the Braúna kimberlite deposits (all of which are in Brazil).
Further information about Vaaldiam and the Merged Group is set out in Appendix 7.
3.2 Advantages of the Proposal
In the view of the Elkedra Board the principal benefits of merging with Vaaldiam are:
• access to the greater spread and depth of the North American capital markets. These markets have a strong awareness and understanding of mining opportunities, and in particular diamond mining, in South America and a greater interest in investing in these opportunities than is the case with investors in Australia;
• access to equity funding to finance its projects on terms more favourable than those currently available to Elkedra and Vaaldiam as stand-alone companies;
For
per
sona
l use
onl
y
- 20 -
• a broader geographic spread of investors in the Merged Group should provide greater market liquidity and lead to a re-rating of the share price; and
• the combined production and exploration assets of Elkedra and Vaaldiam should elevate the Merged Group into the middle tier of companies in the diamond sector, thereby generating more growth opportunities - particularly in South America;
• commercial synergies arising from the merger should reduce the operating
costs of the Merged Group, compared to the combined operating costs of Elkedra and Vaaldiam as stand-alone companies, and should enable the Merged Group to negotiate improved product marketing terms; and
• stronger management through combining Vaaldiam's experienced exploration
team with the expertise of Elkedra's personnel in plant design, construction and operation.
These benefits are expanded on in Appendix 7. 3.3 Disadvantages of the Proposal
The Merged Group will be listed on the TSX, though not on the ASX. Australian-resident Elkedra shareholders who wish to trade the Vaaldiam Shares received by them under the Scheme on the TSX may experience higher transaction costs than they have been accustomed to in Australia. This should be alleviated to some extent by the proposal to provide, for a limited time, a facility for Elkedra shareholders to trade their Vaaldiam Shares on the TSX through an Australian-based stockbroker. Further information about this facility is set out in Appendix 7.
The costs to Elkedra of implementing the Scheme of Arrangement (including legal, accounting and corporate advisory fees, as well as ASIC and Court filing fees) are estimated to be in the region of A$250,000. The majority of these costs will be payable regardless of whether the Scheme is successfully implemented or not.
3.4 Terms of the Merger
Under the merger proposal Elkedra shareholders will exchange their Elkedra shares for Vaaldiam shares and will initially have, collectively, a 33.2% interest in Vaaldiam. Upon implementation of the merger, Vaaldiam is expected to have the following capital structure (refer to Appendix 7 for further details):
Vaaldiam Shares
Present issued capital: 112,451,204
To be issued to Elkedra shareholders pursuant to the Scheme
55,622,793*
Total: 168,073,997 *
For
per
sona
l use
onl
y
- 21 -
*These figures have been calculated on the basis that there will be no fractional entitlements to Vaaldiam Shares upon implementation of the Scheme and that no Elkedra Options are exercised between the Lodgement Date and the Cut-Off Date. Accordingly, the actual number of Vaaldiam Shares issued pursuant to the Scheme may differ.
The figures take no account of any Vaaldiam Shares that may be issued pursuant to the GWD Proposal. The directors of Elkedra consider that it would be inappropriate to include those Vaaldiam Shares because, as at the Lodgement Date, there was no certainty that the GWD Proposal would proceed.
In addition to the Vaaldiam Shares referred to in the above table, immediately following implementation of the Scheme of Arrangement Vaaldiam will have outstanding various options, warrants and other securities, details of which are set out in Appendix 7.
4. BACKGROUND INFORMATION ON ELKEDRA
As a disclosing entity under the Corporations Act, Elkedra is subject to regular reporting and disclosure obligations. Copies of documents lodged with ASIC may be obtained from or inspected at any ASIC office.
Prior to the Scheme Meeting, Scheme Participants have a right to obtain, free of charge, copies of the most recent annual report of Elkedra as well as the half-yearly report and continuous disclosure notices that have been lodged since that annual report was lodged with ASIC.
All requests for copies of those documents should be addressed to Alan Dworkin, Elkedra Diamonds NL, Level 1, 130 Hay Street, Subiaco, Western Australia 6008, Australia (telephone: +61 8 6380 2855 ); (fax: +61 8 6380 1644). Alternatively, copies of the reports can be downloaded from Elkedra’s website at www.elkedra.com.au
5. BASIS OF THE SCHEME
Under the Scheme, all Scheme Shares will be transferred to Vaaldiam. In return:
(a) a holder of Scheme Shares will receive 0.52 New Vaaldiam Shares for each Scheme Share held by him at the Record Date; and
(b) all rights and obligations pertaining to the Scheme Shares will be transferred to Vaaldiam.
The formula to be applied in determining the number of Vaaldiam Shares to be issued to Scheme Participants was developed by reference to the respective values of Vaaldiam’s and Elkedra’s underlying assets, as determined by arm’s length negotiations between Vaaldiam and Elkedra.
6. PROCEDURAL STEPS
6.1 For the Scheme to take effect, section 411(1) of the Corporations Act requires a meeting of holders of Scheme Shares to be held at which the Scheme must be agreed to by a majority in number of the holders of Scheme Shares representing in aggregate not less than 75% in nominal value of all the Scheme Shares held by those holders present at that meeting and voting either in person or by proxy. In accordance with the
For
per
sona
l use
onl
y
- 22 -
Corporations Act, the meeting (referred to in this Scheme Booklet as the "Scheme Meeting") has been convened by Elkedra in accordance with an order made by the Court.
6.2 No Elkedra Options will be capable of being exercised after the Cut-off Date. Any purported exercise of Elkedra Options after the Cut-off Date will be void and of no effect, and any notice of exercise or exercise moneys received after that date will be returned to the relevant optionholder. Elkedra will ensure that Elkedra Shares to which a optionholder is entitled in respect of Elkedra Options exercised prior to the Cut-off Date will be issued on or prior to the Effective Date, with the result that those Elkedra Shares will qualify as "Scheme Shares" for the purposes of the Scheme.
6.3 If the holders of Scheme Shares do not approve the Shareholders Scheme, the Scheme will not proceed.
The Scheme Meeting will be held at The Celtic Club, 48 Ord Street, West Perth, WA, 6005, Australia on 29 October 2007 at 11:30am (Perth time).
7. RELEVANT TIME
7.1 For the purpose of establishing the holders of the Scheme Shares entitled to receive notice of the Scheme Meeting, Elkedra’s register of members was closed at the Relevant Time and was re-opened on the Business Day following the day of dispatch of the notice convening the Scheme Meeting. That notice is set out in Appendix 10.
7.2 Any dealings in Scheme Shares not recorded in Elkedra’s register of members at the Relevant Time were entered in the register immediately after the register was re-opened.
8. IMPLEMENTATION OF THE SCHEME
8.1 Implementation of the Scheme is subject to, amongst other things:
(a) approval of the Scheme by the requisite majority at the meeting described in Section 6.1;
(b) the making of an order by the Court approving the Scheme under section 411(4)(b) of the Corporations Act;
(c) the Implementation Agreement not having been terminated by Elkedra or Vaaldiam; and
(d) quotation of the New Vaaldiam Shares on the TSX.
8.2 Application to the Court for the order referred to in Section 8.1(b) will be made as soon as possible after the Scheme Meeting has been held.
8.3 The Scheme will become binding on Elkedra and each Scheme Participant upon the Court making an order under section 411(4)(b) of the Corporations Act and that order becoming effective under section 411(10).
8.4 On the Implementation Date (but with effect from the Effective Date), the Scheme Shares will be transferred to Vaaldiam.
For
per
sona
l use
onl
y
- 23 -
9. CLOSING OF REGISTER
9.1 To enable the Scheme to be implemented, Elkedra's register of members will be closed at the Record Date. No dealing in Scheme Shares (whenever effected) will be recognised if received by Elkedra or its share Registrar after the Record Date.
9.2 On the Effective Date, official quotation of Elkedra Shares on the ASX and AIM will cease.
10. TSX QUOTATION
Application has been made to, and conditional approval has been obtained from, the TSX for quotation X of the Vaaldiam Shares to be issued pursuant to the Scheme. It is a condition of completion of the merger that the New Vaaldiam Shares be quoted on the TSX. Upon the Scheme coming into effect, application will be made for Elkedra to be de-listed from the ASX and AIM.
11. FOREIGN SHAREHOLDERS
Neither this Scheme Booklet nor the Scheme of Arrangement constitute an offer of securities in any place in which, or to any person to whom, the making of such an offer would not be lawful under the laws of any jurisdiction outside the Commonwealth of Australia.
Vaaldiam will be under no obligation to issue Vaaldiam Shares to a Foreign Shareholder. Vaaldiam will instead issue the Vaaldiam Shares in respect of the Scheme Shares held by the Foreign Shareholder to the Nominee.
The Nominee will sell the Vaaldiam Shares as soon as reasonably practicable and account to the Foreign Shareholders for the net proceeds of sale (on an averaged basis so that all Foreign Shareholders receive the same price per Vaaldiam Share, subject to rounding to the nearest cent), after deduction of any applicable brokerage, taxes and charges, at the Foreign Shareholder's risk, in full satisfaction of the Foreign Shareholder's rights under the Scheme.
12. TAX IMPLICATIONS
Participation in the Scheme of Arrangement is likely to have tax consequences for Scheme Participants. Appendix 3 contains a general description of those consequences. However, it should be emphasised that tax consequences can vary according to a Scheme Participant's particular circumstances. Accordingly, each Scheme Participant should consult his own tax adviser as to the consequences of participating in the Scheme.
Scheme Participants who are resident or domiciled outside Australia, or who are citizens of countries other than Australia, are reminded of the possible implications of the Scheme under the tax laws of their place of residence, domicile or citizenship and are advised to also seek independent advice in this respect.
13. ADMINISTRATOR
It is not proposed that any person be appointed to manage or administer the Scheme.
For
per
sona
l use
onl
y
- 24 -
14. DIRECTORS' RECOMMENDATIONS
After considering all relevant factors, the Elkedra directors recommend that Scheme Participants vote in favour of the Scheme to enable the benefits described in Section 3.2 to be realised.
15. VAALDIAM’S VOTING POWER IN ELKEDRA
As at the Lodgement Date, Vaaldiam had a relevant interest in 19,873,280 Elkedra Shares (representing a voting power in Elkedra of 19.00%). This relevant interest results from the lock-up agreements described in Appendix 6. Vaaldiam has no relevant interest in any other marketable securities of Elkedra.
16. MARKETABLE SECURITIES OF ELKEDRA HELD BY OR ON BEHALF OF DIRECTORS OF ELKEDRA
The number, description and amount of marketable securities of Elkedra held by or on behalf of each director of Elkedra as at the Lodgement Date are set out in Appendix 5.
17. MARKETABLE SECURITIES OF VAALDIAM HELD BY OR ON BEHALF OF DIRECTORS OF ELKEDRA
No marketable securities of Vaaldiam are held by or on behalf of any director of Elkedra.
18. DEALINGS IN MARKETABLE SECURITIES OF ELKEDRA
Except as set out in Appendix 6, none of Elkedra, Vaaldiam or any person associated with Elkedra or Vaaldiam has acquired or disposed of any marketable securities of Elkedra in the four months immediately preceding the Lodgement Date.
19. DEALINGS IN MARKETABLE SECURITIES OF VAALDIAM
None of Elkedra, Vaaldiam or any person associated with Elkedra or Vaaldiam has acquired or disposed of any marketable securities of Vaaldiam in the four months immediately preceding the Lodgement Date.
20. VOTING INTENTIONS OF DIRECTORS AND OTHERS
Each director of Elkedra by whom or on whose behalf Scheme Shares are held intends to vote in favour of the Scheme. Details of the Scheme Shares held by or on behalf of directors of Elkedra are set out in Appendix 5.
21. PAYMENTS OR OTHER BENEFITS TO OFFICERS OF ELKEDRA
It is not proposed that any payment or other benefit will be made or given to any director, secretary or executive officer of Elkedra, or of any body corporate related to Elkedra, as compensation for loss of, or as consideration for, or in connection with, his retirement from office in Elkedra, or in any body corporate related to Elkedra.
22. INTERESTS OF DIRECTORS AND OTHERS
22.1 Other than the proposed appointment of Donald Best and Sam Randazzo as a senior executive and director, respectively, of Vaaldiam (referred to in Section 28), no director
For
per
sona
l use
onl
y
- 25 -
of Elkedra has any interest in the Scheme other than as a holder of Scheme Shares, and the effect of the Scheme on those interests is the same as its effect on the like interests of other persons.
22.2 Other than the proposed appointment of Donald Best and Sam Randazzo as a senior executive and director, respectively, of Vaaldiam (referred to in Section 28), no director of Elkedra has any interest in any contract entered into, or proposed to be entered into, by Vaaldiam.
22.3 Other than as set out elsewhere in this Scheme Booklet, no:
(a) director or proposed director of Vaaldiam;
(b) person named in this Scheme Booklet as performing a function in a professional, advisory or other capacity in connection with the preparation or distribution of this Scheme Booklet;
(c) promoter of Vaaldiam; or
(d) financial services licensee named in this Scheme Booklet as a financial services licensee involved in the Scheme,
holds, or has held within two years before the date of this Scheme Booklet, any interest in the formation or promotion of Vaaldiam, in any property acquired or proposed to be acquired by Vaaldiam in connection with its formation or promotion or the offer of Vaaldiam Shares under the Scheme, or in that offer.
22.4 Other than as set out in Section 22.5, no amount has been paid or agreed to be paid (in cash, securities or otherwise), and no benefit has been given or agreed to be given:
(a) to a director or proposed director of Vaaldiam to induce him to become, or to qualify him as, a director of Vaaldiam; or
(b) for services provided in connection with the formation or promotion of Vaaldiam or the offer of Vaaldiam Shares under the Scheme by any director or proposed director of Vaaldiam, any person named in this Scheme Booklet as performing a function in a professional, advisory or other capacity in connection with the preparation or distribution of this Scheme Booklet, any promoter of Vaaldiam, or any financial services licensee named in this Scheme Booklet as a financial services licensee involved in the issue of Vaaldiam Shares under the Scheme.
22.5 Minter Ellison will receive a fee of approximately A$130,000 (plus GST and disbursements) for legal advice in relation to this Scheme Booklet and the Scheme.
BDO will receive a fee of approximately A$40,000 for the provision of the Independent Expert’s Report.
Neither of the entities mentioned above has received any fees from Vaaldiam in the period of two years ending on the date of this Scheme Booklet.
For
per
sona
l use
onl
y
- 26 -
23. OTHER AGREEMENTS OR ARRANGEMENTS WITH DIRECTORS
Other than the proposed appointment of Donald Best and Sam Randazzo as a senior executive and director, respectively, of Vaaldiam (referred to in Section 28), there are no other agreements or arrangements made between a director of Elkedra and another person in connection with, or conditional on, the outcome of the Scheme.
24. MATERIAL CHANGES IN THE FINANCIAL POSITION OF ELKEDRA
Within the knowledge of the directors of Elkedra, the financial position of Elkedra has not changed materially since 30 June 2007, being the date of Elkedra’s latest annual financial report, other than as set out elsewhere in this Scheme Booklet or in the Independent Expert’s Report.
25. OTHER MATERIAL INFORMATION
25.1 There is no information material to the making of a decision in relation to the Scheme, or a decision by a Scheme Participant whether or not to agree to the Scheme, being information that is within the knowledge of any director of Elkedra or of a related body corporate and has not previously been disclosed to Scheme Participants other than as set out in Section 25.2 or elsewhere in this Scheme Booklet (including its Appendices).
25.2 (a) The Foreign Investment Review Board has advised that the Australian Government had no objections to the Scheme of Arrangement in terms of the Government's foreign investment policy.
(b) Agreement has been reached with the holders of Elkedra's options (details of which are set out in Appendix 4) to exchange those options for options of equivalent value to be issued by Vaaldiam. That agreement is conditional on, amongst other things, the Scheme of Arrangement coming into effect.
The replacement options to be issued by Vaaldiam are included in the total number of Vaaldiam options referred to in paragraph 5.2 of Appendix 7.
26. INDEPENDENT EXPERT’S REPORT
26.1 The directors of Elkedra commissioned BDO to report to Scheme Participants on the Scheme. In the Independent Expert’s Report (a copy of which is set out in Appendix 9), BDO concludes that the Scheme is in the best interest of Scheme Participants.
Scheme Participants should read the Independent Expert’s Report in its entirety, including the assumptions on which the report’s conclusions are based.
26.2 BDO has given, and before the lodgement of this Scheme Booklet with ASIC has not withdrawn, its consent to the issue of this Scheme Booklet with the Independent Expert’s Report included in the form and context in which it is included.
27. INFORMATION IN RELATION TO VAALDIAM SHARES
A summary of the rights and liabilities attaching to Vaaldiam Shares is set out in Appendix 7. A description of the rights of shareholders in a Canadian company is set out in Appendix 8.
For
per
sona
l use
onl
y
- 27 -
Vaaldiam Shares are listed for quotation on the TSX. The highest and lowest recorded sale prices of Vaaldiam Shares on the TSX during the three months immediately preceding the Lodgement Date were C$1.07 (on 16 July 2007) and $C0.68 (on 28 August 2007).
The Scheme was the subject of a public announcement on 4 July 2007. The latest recorded sale price of Vaaldiam Shares on the TSX before that announcement was C$0.92.
The latest recorded sale price of Vaaldiam Shares on the TSX before the Lodgement Date was C$0.72. At the exchange rate of A$1.00 = C$0.861 prevailing on the Lodgement Date, this would value the Vaaldiam Shares to be received by Scheme Participants under the Scheme at A$0.435 per Elkedra Share.
Application has been made to, and conditional approval has been obtained from, the TSX for quotation of the Vaaldiam Shares to be issued pursuant to the Scheme. It is a condition of completion of the merger that the New Vaaldiam Shares be quoted on the TSX. Quotation of those Vaaldiam Shares is not guaranteed or automatic but will depend upon compliance with the TSX’s requirements. However, Elkedra has no information to suggest that these requirements cannot or will not be complied with.
28. INTENTIONS OF THE ELKEDRA DIRECTORS
Following implementation of the Scheme, it is proposed that the business currently carried on by Elkedra (as described in Section 3.1) will continue, but as part of the Merged Group. In doing so, it is the intention of Elkedra's directors that:
(a) the business of Elkedra will continue in the same manner as it is presently carried on;
(b) there will be no major changes to that business (including the redeployment of fixed assets); and
(c) except for redundancies resulting from a scaling-down of Elkedra's corporate office in Australia, the employment of Elkedra’s present employees will continue.
Vaaldiam has advised Elkedra’s directors that Vaaldiam has the same intentions as Elkedra’s directors with respect to the matters referred to above.
Upon implementation of the Scheme, two of Elkedra's current directors, Donald Best and Sam Randazzo, will be appointed as a senior executive and director, respectively, of Vaaldiam.
29. ADDITIONAL CONSENTS
Minter Ellison has given, and before the signing of this Scheme Booklet has not withdrawn, its consent to be named as legal adviser to Elkedra in this Scheme Booklet in the form and context in which it is so named. Minter Ellison does not otherwise authorise or cause the issue of this Scheme Booklet and takes no responsibility for its contents.
For
per
sona
l use
onl
y
- 28 -
Gadens has given, and before the signing of this Scheme Booklet has not withdrawn, its consent to be named as legal adviser to Vaaldiam in this Scheme Booklet in the form and context in which it is so named. Gadens does not otherwise authorise or cause the issue of this Scheme Booklet and takes no responsibility for its contents.
Ernst & Young LLP has given its consent to the inclusion in Appendix 7 of its Compilation Report and all statements referring to it and to that report in the form and context in which they are included, and has not withdrawn that consent before the signing of this Scheme Booklet.
Candlewood Financial Corporation ("Candlewood") has given, and before the signing of this Scheme Booklet has not withdrawn, its consent to the inclusion in this Scheme Booklet of statements by Candlewood, and statements said in this Scheme Booklet to be based on statements by Candlewood, in the form and context in which they are included. Candlewood does not otherwise authorise or cause the issue of this Scheme Booklet and takes no responsibility for its contents. Santa Elina Mines Corporation ("Santa Elina")_has given, and before the signing of this Scheme Booklet has not withdrawn, its consent to the inclusion in this Scheme Booklet of statements by Santa Elina, and statements said in this Scheme Booklet to be based on statements by Santa Elina, in the form and context in which they are included. Santa Elina does not otherwise authorise or cause the issue of this Scheme Booklet and takes no responsibility for its contents. Rio Tinto Desenvolvimentos Minerais Ltda ("Rio Tinto") has given, and before the signing of this Scheme Booklet has not withdrawn, its consent to the inclusion in this Scheme Booklet of statements by Rio Tinto, and statements said in this Scheme Booklet to be based on statements by Rio Tinto, in the form and context in which they are included. Rio Tinto does not otherwise authorize or cause the issue of this Scheme Booklet and takes no responsibility for its contents.
30. ACTION TO BE TAKEN BY SCHEME PARTICIPANTS
Appendix 10 contains the notice convening the Scheme Meeting and a Proxy Form for the Scheme Meeting. The Proxy Form should be completed, signed and returned in accordance with instructions set out on the reverse of the Proxy Form. Lodging a Proxy Form will not preclude attendance or voting at the Scheme Meeting.
BY ORDER OF THE BOARD
MDJ COZIJN Company Secretary
28 September 2007
For
per
sona
l use
onl
y
APPENDIX 1
MERGER IMPLEMENTATION DEED
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
For
per
sona
l use
onl
y
APPENDIX 2
SCHEME OF ARRANGEMENT
PURSUANT TO SECTION 411
OF THE CORPORATIONS ACT
BETWEEN
ELKEDRA DIAMONDS NL
ACN 092 334 220
AND ITS SHAREHOLDERS
For
per
sona
l use
onl
y
TABLE OF CONTENTS
1. INTERPRETATION ........................................................................................3
2. THE SCHEME..................................................................................................3
3. DEALINGS IN SCHEME SHARES ...............................................................4
4. NOTICE TO HOLDERS OF SCHEME SHARES........................................4
5. ISSUE OF VAALDIAM SHARES ..................................................................5
6. FOREIGN SHAREHOLDERS........................................................................5
7. WHEN SCHEME BECOMES BINDING ......................................................6
8. GENERAL.........................................................................................................6
For
per
sona
l use
onl
y
1. INTERPRETATION
In this Scheme, except where the context otherwise requires:
“Scheme Booklet” means the explanatory statement relating to this Scheme (to which this document forms Appendix 2) to be sent to Scheme Participants in accordance with section 412(1)(a) of the Corporations Act;
terms which are defined in the Scheme Booklet have the same meanings where used in this Scheme; and
a reference to a Section is to a section of this Scheme.
2. THE SCHEME
2.1 Subject to:
(a) approval of the Scheme by the holders of the Scheme Shares at a meeting of those holders convened by the Court pursuant to section 411(1) of the Corporations Act;
(b) approval of the Scheme by the Court pursuant to section 411(4)(b) of the Corporations Act;
(c) lodgement with ASIC of an office copy of the order of the Court approving the Scheme;
(d) the Merger Implementation Deed not having been terminated by Elkedra or Vaaldiam; and
(e) the New Vaaldiam Shares being quoted on the TSX,
the Scheme Shares, and all rights and entitlements attaching to the Scheme Shares, will be transferred to Vaaldiam with effect from the Effective Date and without the need for any further act by the holders of the Scheme Shares.
2.2 Elkedra will provide to the Court at the Second Court Hearing a certificate stating whether or not the conditions referred to in Sections 2.1(a), (d) and (e) been satisfied or waived.
2.3 This Scheme will lapse and be of no further force or effect if the Effective Date has not occurred on or before 30 November 2007 (or such later date as Elkedra and Vaaldiam may agree).
2.4 In consideration of the transfer of the Scheme Shares to Vaaldiam, and subject to the other terms and conditions of this Scheme, a holder of Scheme Shares (other than a Foreign Shareholder) will receive the Scheme Consideration in respect of the Scheme Shares held by him as at the Record Date.
2.5 Notwithstanding any rule of law or equity to the contrary, holders of the Scheme Shares will be entitled to exercise all voting and other rights attached to the Scheme Shares pending their transfer pursuant to Section 2.1.
For
per
sona
l use
onl
y
2.6 A holder of Scheme Shares will be deemed to have agreed to become a member of Vaaldiam and to have accepted the Vaaldiam Shares issued to him under this Scheme subject to, and to be bound by, Vaaldiam's constitution.
2.7 On the Implementation Date (but with effect from the Effective Date) Elkedra must:
(a) procure the delivery of a transfer in respect of all the Scheme Shares to ASX Settlement and Transfer Corporation Pty Ltd. by a broker nominated in writing by Vaaldiam to effect a valid transfer of all the Scheme Shares to Vaaldiam pursuant to section 1074D of the Corporations Act or, if such a procedure is not available for any reason, deliver to Vaaldiam a duly completed and executed instrument of transfer transferring all of the Scheme Shares to Vaaldiam; and
(b) subject to Vaaldiam having executed that instrument of transfer, enter the name of Vaaldiam in Elkedra’s register of members as the holder of the Scheme Shares.
3. DEALINGS IN SCHEME SHARES
3.1 No dealing in Scheme Shares, whenever effected, will be given effect to if it is received after the Record Date.
3.2 Any purported dealing in Scheme Shares after the Record Date will be void and of no effect.
3.3 No shares or options to subscribe for shares will be allotted or issued by Elkedra after the Effective Date.
4. NOTICE TO HOLDERS OF SCHEME SHARES
4.1 If the Court makes an order approving the Scheme, Elkedra will send to each holder of Scheme Shares notice of that fact not later than nine Business Days after the Record Date.
4.2 The notice given under Section 4.1 will:
(a) (except in the case of a Foreign Shareholder) be accompanied by a holding Scheme Booklet for the Vaaldiam Shares issued to the Scheme Participant pursuant to Section 2.4; and
(b) be sent in the manner provided in, and to the address determined in accordance with, Section 8.3.
4.3 In the case of joint holders of Scheme Shares, the holding Scheme Booklet for the Vaaldiam Shares will be sent to the joint holder whose name appears first in Elkedra's register of members.
4.4 If the Court refuses to make an order approving the Scheme, then Elkedra will send to each holder of Scheme Shares notice of that fact not later than five Business Days after the date of such refusal. The notice will be sent in the manner provided in, and to the address determined in accordance with, Section 8.3.
For
per
sona
l use
onl
y
5. ISSUE OF VAALDIAM SHARES
5.1 Not later than two Business Days after the Implementation Date, Elkedra will give to Vaaldiam a notice specifying the persons to whom Vaaldiam Shares are to be issued pursuant to Section 2.4 and the numbers of Vaaldiam Shares to which they are entitled respectively.
5.2 Vaaldiam must, not later than two Business Days after receipt from Elkedra of the notice referred to in Section 5.1, issue the Vaaldiam Shares in accordance with that notice.
The issue and despatch of a holding statement for those Vaaldiam Shares in accordance with Section 4.2(a) will discharge in full Vaaldiam's obligations under this Section 5.2.
6. FOREIGN SHAREHOLDERS
6.1 The Vaaldiam Shares that would, but for this Section, have been issued to a holder of Scheme Shares who is a Foreign Shareholder must be issued by Vaaldiam to the Nominee.
6.2 Elkedra must procure that the Nominee:
(a) as soon as reasonably practicable sells those Vaaldiam Shares for the benefit of the Foreign Shareholders;
(a) accounts to the Foreign Shareholders for the net proceeds of sale (on an averaged basis so that all Foreign Shareholders receive the same price per Vaaldiam Share, subject to rounding to the nearest whole cent), and any income referable to those Vaaldiam Shares, after deduction of any applicable brokerage, taxes and charges, at the Foreign Shareholders' risk in full satisfaction of the Foreign Scheme Participants’ rights under this Scheme; and
(c) remits the net proceeds of sale to the Foreign Shareholders in the manner provided in, and to the address determined in accordance with, Section 8.3.
7. WHEN SCHEME BECOMES BINDING
7.1 This Scheme will become binding on Elkedra, Vaaldiam and each holder of Scheme Shares only if the Court makes an order under section 411(4)(b) of the Corporations Act approving the Scheme and that order becomes effective in accordance with section 411(10). Elkedra must lodge an office copy of that order with ASIC not later than 20 Business Days after the order has been made.
7.2 If this Scheme becomes binding as provided by Section 7.1, the rights of any holder at the Record Date of a Scheme Share are the same as the rights that the Scheme Participant who held that Scheme Share immediately prior to the Effective Date would have had if he had remained the holder of the share until the Record Date.
7.3 Where this Scheme becomes binding as provided by Section 7.1, a holder of Scheme Shares (and any person claiming through that holder) may only assign, transfer or otherwise deal with those Scheme Shares on the basis that the rights so assigned, transferred or dealt with are limited in the manner described in Section 7.2.
For
per
sona
l use
onl
y
8. GENERAL
8.1 Elkedra may by its counsel or solicitors consent to any modification of or addition to this Scheme or to any condition, which the Court may think fit to approve or impose and to which Vaaldiam has consented.
8.2 The accidental omission to give notice of the Scheme Meeting to any Scheme Participant or the non-receipt of such a notice by any Scheme Participant will not, unless so ordered by the Court, invalidate the Scheme Meeting or the proceedings at the Scheme Meeting.
8.3 For the purpose of Section 4, the expression "sent" means:
(a) sending by ordinary pre-paid post to a holder at the Record Date of a Scheme Share at the address of that holder appearing in the register of members of Elkedra at the Record Date; or
(b) delivery to that address by any other means at no cost to the recipient.
8.4 Each Scheme Participant will be deemed to have irrevocably appointed Elkedra and its officers as his attorney for the purpose of executing any document necessary to give effect to this Scheme.
8.5 Elkedra must execute all deeds and other documents and do all acts and things as may be necessary or expedient on its part to implement this Scheme in accordance with its terms.
8.6 Neither Elkedra nor any of its officers will be liable for anything done or for anything omitted to be done in performance of this Scheme in good faith.
8.7 This Scheme overrides Elkedra's constitution and binds Elkedra, Vaaldiam and the holders of Scheme Shares.
8.8 The proper law of this Scheme is the law of Western Australia.
For
per
sona
l use
onl
y
APPENDIX 3
TAX IMPLICATIONS
Tax consequences for Australian-resident Scheme Participants holding Elkedra Shares on capital account
The disposal of Elkedra Shares under the Scheme of Arrangement would normally trigger a CGT event resulting in either a capital gain or a capital loss being realised by a Scheme Participant. In the case of a realised capital gain, Scheme Participants may be able to avail themselves to the CGT rollover relief described below.
Availability of CGT rollover relief
Subdivision 124-M of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) contains a number of conditions for the eligibility of a taxpayer to choose the CGT rollover relief for share-for-share swaps (which would include the exchange of Elkedra Shares for Vaaldiam Shares under the Scheme). These conditions can be summarised as follows:
1. the taxpayer exchanges its original interest in a company ('the original entity') for a replacement interest in another company ('the acquiring entity');
2. the exchange is in consequence of a single arrangement: • that results in the acquiring entity becoming the owner of 80% or more of the
voting interests in the original entity or, where the acquirer is a member of a wholly owned group, it increases its existing percentage voting interests, and the group's overall percentage, to 80% or more;
• in which all owners of voting interests in the original entity could participate;
and • in which participation was available on substantially the same terms for all the
owners of interests of a particular type in the original entity; 3. apart from the rollover, the taxpayer would make a capital gain; and
4. the replacement interest is in the acquiring entity, or where the acquiring entity is part of a wholly owned group, in the ultimate holding company of the acquiring entity.
The nature of Vaaldiam Shares are such that they conform with the intent of the CGT rollover relief provision to the extent that they are considered to be interests of a similar nature to those which are to be exchanged for Scheme Shares under the Scheme of Arrangement.
Effect of rollover relief
The rollover relief only applies where a Scheme Participant would have realised a capital gain upon the disposal of his Scheme Shares in exchange for Vaaldiam Shares. Rollover relief is not available where the exchange results in a capital loss.
Where a capital gain would be realised by virtue of the exchange under the Scheme of Arrangement, rollover relief will ensure that the gain is deferred until the replacement interests (i.e. Vaaldiam Shares) are ultimately disposed of by the Scheme Participant.
For
per
sona
l use
onl
y
Where a Scheme Participant does not choose rollover relief, any capital gain would be subject to tax, the rate being based on what type of entity the Scheme Participant is (i.e. individual, trust, company or superannuation fund) and the entity's applicable tax rate. Any capital loss would be either offset against other capital gains or, if none were available, would be carried forward until such time as a capital gain was realised.
Tax consequences for Australian-resident investors holding Elkedra Shares other than on capital account
If a Scheme Participant holds Elkedra Shares on revenue account, or as trading stock, any income or loss realised would need to be brought to account at the time the Scheme comes into effect, under the general taxation rules. In this case, the actual income or loss would depend upon the Scheme Participant's particular circumstances.
Canadian Income Tax Considerations
This summary is of a general nature only and is not intended to be, and should not be construed as, legal or tax advice to any particular Scheme Participant. No representation is made with respect to the Canadian tax consequences to any particular Scheme Participant. Accordingly, Scheme Participants should consult their own tax advisers with respect to the Canadian tax considerations relevant to them, having regard to their particular circumstances.
Scheme Participants not resident in Canada
The discussion below applies to Scheme Participants who, for purposes of the Canadian Tax Act and any applicable tax treaty or convention, are not and will not be, or deemed to be, resident in Canada at any time while they held Scheme Shares or will hold Vaaldiam Shares, and to whom such shares are not 'taxable Canadian property' for the purposes of the Canadian Tax Act.
Generally, Scheme Shares will not be taxable Canadian property at a particular time provided that the holder does not use or hold, and is not deemed to use or hold, such shares in a business carried on in Canada.
Generally, Vaaldiam Shares will not be taxable Canadian property at a particular time provided that (i) the shares are listed on a prescribed stock exchange (which currently includes the TSX), (ii) the holder currently does not use or hold, and is not deemed to use or hold, the shares in a business carried on in Canada, and (iii) the holder and/or persons with whom the holder does not deal at arm's length has not or have not owned 25% or more of the issued shares of Vaaldiam at any time within the preceding five years, or held an option over such shares. At the time of disposition, such a holder should consult its own tax advisers to determine whether its Vaaldiam Shares constitute taxable Canadian property at that time.
A non-resident of Canada to whom Vaaldiam Shares constitute 'taxable Canadian property' should consult its own tax advisers with respect to the relevant Canadian tax considerations.
Issue of Vaaldiam Shares for Elkedra Shares under the Scheme of Arrangement
A non-resident of Canada who holds Elkedra Shares will not be subject to tax in Canada on the issue of Vaaldiam Shares in exchange for Elkedra Shares pursuant to the terms of the Scheme.
Dividends on Vaaldiam Shares
For
per
sona
l use
onl
y
Dividends paid or deemed to be paid on the Vaaldiam Shares are subject to non-resident withholding tax under the Canadian Tax Act at the rate of 25%, although this rate may be reduced under the provisions of an applicable Double Tax Agreement. For example, under the Australia-Canada Double Tax Agreement, the rate is generally reduced to 15% in respect of dividends paid to an Australian-resident shareholder.
Disposition of Vaaldiam Shares
A non-resident of Canada who holds Vaaldiam Shares will not be subject to tax under the Canadian Tax Act on the sale or other disposition of those shares, assuming, as discussed above, that such shares do not constitute "taxable Canadian property".
Taxation of Vaaldiam Vaaldiam is resident in Canada for purposes of the Canadian Tax Act because it is incorporated in Canada. As a resident, Vaaldiam is subject to tax in Canada on its worldwide income, computed in accordance with the provisions of the Canadian Tax Act.
For
per
sona
l use
onl
y
APPENDIX 4
ELKEDRA OPTIONS
Number Exercise Price Exercise period 1,250,000 $0.40 Up to 30.11.09 625,000 $0.60 31.12.07 to 30.11.09 625,000 $0. 60 31.12.08 to 30.11.09 333,334 $0.45 Up to 03.09.08
6,250,000 $0.40 Up to 30.09.08 2,000,000 $0.90 Up to 31.05.10 200,000 $1.20 Up to 31.05.10 250,000 $0.35 Up to 30.11.09 150,000 $0.35 01.11.07 to 30.11.09 200,000 $0.65 Up to 31.12.09 125,000 $0.65 04.12.07 to 31.12.09 125,000 $0.65 04.12.08 to 31.12.09
For
per
sona
l use
onl
y
APPENDIX 5
MARKETABLE SECURITIES OF ELKEDRA HELD BY OR ON BEHALF OF DIRECTORS OF ELKEDRA
Elkedra Shares
Name of Director Direct Interest Indirect Interest
D B Best - 999,151
S Randazzo - 9,249,413
M D J Cozijn - 200,000
T Teichmann - -
Elkedra Options
Name of Director Direct Interest Indirect Interest
Number Exercise Price Expiry Date
D B Best - 750,000 $A0.40 31 December 2009
750,000 $A0.60 31 December 2009
S Randazzo - 500,000 $A0.40 31 December 2009
500,000 $A0.60 31 December 2009
M D J Cozijn - 100,000 $A0.65 31 December 2009
T Teichmann - 100,000 $A0.65 31 December 2009
For
per
sona
l use
onl
y
APPENDIX 6
DEALINGS IN MARKETABLE SECURITIES OF ELKEDRA AND VAALDIAM
Elkedra
(a) On 2 July 2007 Vaaldiam entered into lock-up agreements with Samcor Investments Pty Ltd (a company controlled by Mr S Randazzo, a director of Elkedra) and Credit Suisse Client Nominees (UK) Limited in respect of a total of 19,873,280 Elkedra Shares. These agreements oblige the relevant shareholders to vote their shares in favour of the Scheme at the Scheme Meeting.
(b) On 8 August 2007, Samcor Investment Pty Ltd exercised 946,769 warrants to subscribe for Elkedra Shares at A$0.29 per warrant.
For
per
sona
l use
onl
y
APPENDIX 7
INFORMATION ABOUT VAALDIAM, VAALDIAM SHARES AND THE MERGED GROUP
The information contained in this Appendix is to assist Scheme Participants in deciding how to vote in relation to the Scheme of Arrangement. Whilst Elkedra and its directors have no reason to believe that any of the information is false or misleading in any material respect, to the fullest extent permitted by law they expressly disclaim any responsibility for the completeness or accuracy of the information.
PROFILE OF VAALDIAM 1.1 Overview of Vaaldiam Vaaldiam is a Canadian public company listed on the Toronto Stock Exchange (the “TSX”) which is engaged in the mining, exploration and development of diamond deposits. Vaaldiam’s long-term goal is to continue to increase the value of its shareholders’ investment in the company by becoming:
• a profitable producer of rough diamonds from primary (kimberlite) sources; and • a profitable producer of high quality rough diamonds from secondary (alluvial) sources.
Vaaldiam’s general strategy to achieve its long-term goal is to generate early cash flow, by acquiring and sequentially developing to production alluvial diamond deposits, and utilizing the cash flow to fund, at least in part, exploration programs on kimberlite deposits having the potential for the discovery of significant quantities of diamonds and in so doing, minimise shareholder dilution over time arising from the issuance of equity to raise capital. In addition to internally generated projects, Vaaldiam evaluates opportunities to enhance the value of the company through mergers or acquisitions and by restructuring its ownership interests in its properties. Vaaldiam’s proposed merger with Elkedra is consistent with this strategy. Vaaldiam follows a strategy of exploring for both kimberlite and alluvial diamond deposits in areas that have a history of significant diamond production. Coincident with Vaaldiam’s exploration for primary kimberlite deposits, Vaaldiam also pursues the development of relatively low cost, low risk alluvial diamond properties to production. Vaaldiam’s properties in Brazil are believed to have favourable exploration potential and benefit from excellent infrastructure, a hospitable climate and a mine-friendly, low-cost environment. Vaaldiam possesses a balanced portfolio of diamond projects covering all aspects of the diamond “pipeline”, ranging from early exploration, through advanced exploration and diamond production. The following are Vaaldiam’s main properties:
For
per
sona
l use
onl
y
Property Location Deposit Type Interest Status Pimenta Bueno Brazil Kimberlite Deposits 100% Advanced exploration. 39 kimberlites
discovered to date; 19 kimberlites are diamond bearing.
Duas Barras Brazil Alluvial Mine 100% Commercial production to begin in September 2007. Feasibility studies reported indicated and inferred resources of 432,000 carats.
Braúna Brazil Kimberlite Deposits 100% Four diamondiferous kimberlites, 18 kimberlite occurrences discovered along a 15 km long fissure system.
Vaaldiam has other early stage exploration properties namely the Catalão, Umbu and Aroeira properties. Vaaldiam had 100 employees as at 31 July 2007 of which 7 were located in Toronto and 93 were located in Brazil. Operations are conducted directly and through Vaaldiam’s material subsidiaries whose relationship to Vaaldiam is reflected below. A small holding of less than 0.0001% in Vaaldiam do Brasil Mineração (“VBM”) and of less than 0.002 % in Mineração Montes Claros Ltda. (“Montes Claros”) are owned by Vaaldiam executives Mr. José Ricardo Thibes Pisani and Mr. José Fernando Tonoli, respectively, on behalf of Vaaldiam for Canadian legal purposes and exist in order to comply with Brazilian corporate law which requires a minimum of two shareholders. Property Location in Brazil and Summary Mining Duas Barras Mine, Minas Gerais State (100% Interest) • Mine commissioning commenced in May 2007;
Vaaldiam Resources Ltd. (VAA-TSX)
Canada
Vaaldiam do Brasil Mineração Ltda.
Brazil
Mineração Montes Claros Ltda.
Brazil
Cajueiro Mineração Ltda. Brazil
100%
60%
40%
Pimenta Bueno Property
Duas Barras Property Braúna Property
For
per
sona
l use
onl
y
• Commercial production to commence in September 2007; and • Indicated and inferred resource of 432,000 carats. Advanced Exploration Pimenta Bueno, Rondônia State (100% Interest) • 39 kimberlites located on 258,000 hectares of land, with 36 pipes and 3 dikes (or sills); • 49% of which are diamond bearing; and • 16 of the 39 kimberlites were discovered since 2004 Braúna, Bahia State (100% Interest) • Four kimberlite pipe deposits associated with an extensive kimberlite dike system; • Initial mini bulk sample on Braúna 3 pipe indicates a grade of 20.8 carats per hundred tonnes (cpht); and • Extraction of a 5,000 tonne bulk sample and 10,000 metres of delineation drilling scheduled for 2007. Early Stage Exploration Catalão Property, Goias State (100% Interest) • 3 kimberlite pipes discovered; and • mini-bulk sampling by Rio Tinto of the Catalão kimberlite pipe indicates the kimberlites are diamond bearing. Umbu and Aroeira Properties, Bahia State (100% Interest) • diamond bearing kimberlite pipe/dike system situated in the Braúna Diamond District. 1.2 History and ownership
Three Year History Vaaldiam was incorporated under the laws of British Columbia, on 28 February 1983 and continued under the Canada Business Corporations Act by Articles of Continuation dated 4 March 1987. In November 2003, Vaaldiam acquired 99.9999% of VBM from Santa Elina Mines Corporation (“Santa Elina”) for 25,333,333 common shares and 3,000,000 warrants. VBM’s main asset was the Pimenta Bueno property located in the State of Rondônia, Brazil (“Pimenta Bueno Property”). Santa Elina’s interest in Vaaldiam was subsequently transferred to Candlewood Financial Corp. (“Candlewood”). Candlewood owns 28,558,833 common shares or 34.33% of Vaaldiam, acquired from Santa Elina. Vaadiam’s corporate office is located at 55 University Avenue, 11th Floor, Suite 1105, Toronto, Ontario, Canada M5J 2H7. Events of 2004 In February and March 2004, C$445,000 was raised through the issuance of 988,889 units (the “Winter 2004 Units”). Each Winter 2004 Unit consisted of one common share and one common share purchase warrant. Each such warrant entitled the holder to acquire one common share at a price of C$0.65 at any time on or before the 18th month anniversary of its issuance.
For
per
sona
l use
onl
y
This financing was completed in two closings the first of which was completed in February 2004 and the second of which was completed in March 2004. In May 2004, Vaaldiam completed an agreement with Santoy Resources Ltd. (“Santoy”) to earn a 60% interest in Santoy’s diamond property in the Otish Mountain region of Quebec (the “Otish Mountain Property”) by expending C$200,000 on exploration over a two year period and issuing a total of 100,000 common shares to Santoy. In September 2004, Vaaldiam completed a private placement which yielded gross proceeds of C$2,580,000 comprising 5,200,000 units (the “September 2004 Units”) at C$0.40 per September 2004 Unit and 1,250,000 flow-through shares at a price of C$0.40 per share. Flow-through shares are shares which transfer the tax deductibility of Canadian exploration expenses to the investor. Each September 2004 Unit consisted of one common share and one half of one common share purchase warrant. Each whole warrant entitled the holder to acquire one common share at a price of C$0.50 at any time on or before 15 September 2005. Events of 2005 In early 2005, Vaaldiam commenced a core drilling program on the Pimenta Bueno Property involving two rigs. This drill program was suspended in June 2005 when Rio Tinto Desenvolvimentos Minerais Ltda. (“Rio Tinto”) based on the agreement of November 2003 that was executed concurrently with the acquisition of the property, exercised an option to acquire a 51% interest in the Pimenta Bueno Property by agreeing to spend a total of US$12.5 million over a three year period. Since exercising its option, Rio Tinto continued the drill program and also commenced the extraction of mini bulk samples from four kimberlite pipes. Under the terms of the agreement, Rio Tinto could earn a 51% interest in the property by meeting the expenditure requirements. In January 2005, Vaaldiam secured an option from Mineração Marly Ltda. (“Marly”) to acquire a 70% interest in the Duas Barras alluvial diamond property in the state of Minas Gerais, Brazil (the “Duas Barras Property”). In December 2005, Vaaldiam’s board of directors approved the exercise of this option. In April 2005, following a technical review of exploration results to date, Vaaldiam decided to terminate the option relating to the Otish Mountain Property. Also in April 2005, Vaaldiam reached an agreement with Dios Exploration Inc. (“Dios”) under which Vaaldiam could earn a 51% interest in a property (the “Hotish Mountain Property”) in the Hotish Mountain district of Quebec by incurring C$2 million of exploration expenditures over a three year period and issuing 100,000 common shares to Dios over this period. In August 2005, Vaaldiam acquired a 60% interest in the Braúna kimberlite property (the “Braúna Property”) in the state of Bahia, Brazil. Exploration activity commenced in October 2005.
For
per
sona
l use
onl
y
In June 2005, Vaaldiam closed a private placement yielding gross proceeds of C$7,758,920 from the issue of 10,668,666 units (the “2005 Units”) at a price of C$0.60 per 2005 Unit and 2,088,800 flow-through-shares at a price of C$0.65 per share. Each 2005 Unit was comprised of one common share and one half of one common share purchase warrant. Each whole warrant entitled the holder to acquire one additional common share at a price of C$0.80 at any time up to and including 16 December 2006. The terms of the warrants provided that, should the closing price of the common shares exceed C$1.00 for a period of 21 consecutive trading days, Vaaldiam could, at its option, accelerate the expiry date of the warrants by giving notice to the holders thereof, and in such case the warrants would expire on the earlier of (i) the 30th day after the day such notice is given, and (ii) 16 December 2006. This condition was satisfied on 24 February 2006 and Vaaldiam provided holders of these warrants with a notice that the expiry date had been accelerated to 3 April 2006. Events of 2006 In February 2006, Vaaldiam received conditional approval to have its shares listed on the TSX subject to fulfilling certain normal course conditions on or before 2 May 2006. The normal course conditions having been fulfilled, Vaaldiam’s shares commenced trading on the Toronto Stock Exchange on 23 March 2006. Also in February 2006, Vaaldiam completed a private placement for aggregate gross proceeds of C$7,500,000. The offering, which was comprised of 7,777,778 special warrants (“Common Share Special Warrants”) issued at a price of C$0.90 per Common Share Special Warrant and 476,191 flow-through special warrants (“Flow-Through Special Warrants”) issued at a price of C$1.05 per Flow-Through Special Warrant, was fully subscribed including an underwriters’ over-allotment option. The Common Share Special Warrants and Flow-Through Special Warrants are collectively referred to herein as the “Special Warrants”. Pursuant to the terms of the offering, each Common Share Special Warrant was exercisable into one common share at no additional cost and each Flow-Through Special Warrant was exercisable into one common share that would be a “flow-through” share for the purposes of the Canadian Income Tax Act (Canada), at no additional cost. The Special Warrants were exercisable by the holders thereof at any time and were to be automatically exercised at 5:00 p.m. (Toronto time) on the earlier of the following dates: (i) the third business day after a receipt was issued by the last of the securities regulatory authorities in each of the jurisdictions in Canada in which purchasers of the Special Warrants were resident, for a final prospectus qualifying the common shares to be issued upon exercise of the Special Warrants; and (ii) 9 June 2006. If Canadian provincial securities regulators had not issued a receipt for a final prospectus by 10 April 2006, the holder of each Special Warrant would have been entitled to acquire 1.1 common shares in lieu of one common share. On 24 March 2006, a receipt was issued for a final short form prospectus qualifying the common shares to be issued on exercise of the Special Warrants in each of the jurisdictions in Canada in which purchasers of the Special Warrants were resident. As noted above in the description of the private placement of June 2005, Vaaldiam issued a notice of an accelerated expiry date in respect of the 5,088,483 then outstanding common share
For
per
sona
l use
onl
y
purchase warrants underlying the Special Warrants. Pursuant to this notice, the expiry date was changed to 3 April 2006 from 16 December 2006. All of the outstanding warrants were exercised by 3 April 2006 providing an additional C$4,070,786 to Vaaldiam’s treasury. In May 2006, following a review of the exploration results relating to the Hotish Mountain Property, a decision was reached to discontinue exploration of the property following which total deferred exploration expenses to date in the amount of C$456,343 were written off in 2006. Also in May 2006 the contract for the design, fabrication and construction of the diamond recovery plant for the Duas Barras Property was awarded. Site preparation and construction of the mine infrastructure was also initiated. In July 2006, Vaaldiam obtained an exclusive option to acquire a 40% interest in the Coronation Gulf Property in Nunavut, Canada (“Coronation Gulf Property”), from Ashton Mining of Canada Inc., immediately following which an exploration program commenced to extract a 100 tonne sample from the 3.0 hectare Artemisia kimberlite pipe. Also in July 2006, Rio Tinto completed a mini-bulk sampling program on the Cosmos 1 and 3 and Pepper 4 and the 13 kimberlite pipes and agreed to continue one more year of exploration in the Pimenta Bueno Property, to be funded 51% by Rio Tinto and 49% by Vaaldiam. In 2006, the delineation drilling program undertaken on the Duas Barras Property deposit outlined an indicated and inferred gravel resource of approximately 2.7 million bank cubic metres at an estimated grade of 0.16 carats per bank cubic metre representing an in-situ resource of approximately 432,000 carats of diamonds. Also in August 2006 the Departamento Nacional de Produção Mineral (“DNPM”) approved Vaaldiam’s application for a mining permit for the Duas Barras Mine. In September 2006, diamonds recovered from a bulk sample of the Duas Barras deposit indicated a value of US$197 per carat for the diamonds recovered in the bulk sample. In October 2006, a mini-bulk sampling project commenced at the Braúna Property resulting in encouraging results from the first pipe sampled. In November 2006, Vaaldiam increased its interest in the Duas Barras Property from 75% to 100% by agreeing to pay its partner US$1,100,000 in payments conditional on the occurrence of certain events. Events of 2007 to date In January 2007, a diamond sales agreement relating to the marketing of diamonds from the Duas Barras Mine was signed. In March 2007, Vaaldiam acquired the 40% of the Braúna Property not previously owned for C$2,000,000 in cash, 1,733,102 common shares and a 1% gross sales royalty on the property. As a result of this transaction Vaaldiam now owns 100% of the Braúna Property.
For
per
sona
l use
onl
y
In April 2007, Vaaldiam received the results of its mini bulk sampling program on the Artemesia kimberlite pipe in the Coronation Gulf Property which indicated that while the sample results confirmed the presence of commercial sized diamonds, the diamonds present were not in sufficient concentrations that would warrant further exploration by Vaaldiam in this pipe. As a result a total amount of deferred exploration expenses of C$1,640,025 had been written off by June 2007. In May 2007, Vaaldiam commenced commissioning of the Duas Barras Mine. In June 2007, Vaaldiam secured an agreement with Rio Tinto transferring operatorship and 100% ownership of the Southern Block of the Pimenta Bueno Property to Vaaldiam. Rio Tinto retained an option to back-in to a 60% interest in any kimberlite pipe that meets Rio Tinto’s development criteria. In the event Rio Tinto decide to develop one of these kimberlite pipes they would complete and fully fund a feasibility study. Should the feasibility study meet their criteria and Rio Tinto decide to develop a mine they would fully fund the construction of the mine and Vaaldiam would retain a 40% equity interest in cash flow from the mine after repayment of Vaaldiam’s share of construction. In such a case, Vaaldiam would not need to raise development equity funding. Vaaldiam maintained ownership and 100% interest in the Northern Block and in the alluvial deposits in the Pimenta Bueno Property. In July 2007, Vaaldiam announced its intention to acquire all the outstanding shares of Elkedra and Great Western Diamonds Corp. In July 2007, Vaaldiam announced an underwritten private placement financing, the gross proceeds of which would be C$26,325,000 from the sale of 29,250,000 subscription receipts at C$0.90 per subscription receipt. Upon the closing of the offering on 15 August 2007, C$6,072,275, representing 25% of the gross proceeds less commissions and other expenses, was delivered to Vaaldiam while the remaining C$19,743,750 was deposited in escrow. These escrowed funds (less commissions and other expenses) will be released to Vaaldiam after the merger with Elkedra has been completed. The total estimated commissions and expenses to be subtracted from the gross proceeds is C$1,830,000. 1.3 Vaaldiam’s Material Mineral Properties Vaaldiam’s material mineral properties are the Pimenta Bueno Property, the Duas Barras Property and the Braúna Property kimberlite project. 1.3.1 Pimenta Bueno Property In November 2003, Vaaldiam, in a reverse takeover, acquired from Santa Elina approximately 99.99% of the shares of VBM which owns the Pimenta Bueno Property. The Pimenta Bueno Property encompasses 36 kimberlite pipes and 3 kimberlite dike systems. Sampling completed to date has indicated that 17 out of 39 kimberlites are diamond-bearing. Project Description and Location
For
per
sona
l use
onl
y
The Pimenta Bueno Property is comprised of 64 mining claims and exploration permits that currently cover approximately 258,000 hectares. The property is centred approximately at latitude 11º30' South and longitude 60º45' West in the Pimenta Bueno diamond district of the state of Rondônia, Brazil. The property is located immediately east-southeast of the City of Espigão do Oeste, and lies approximately 50 kilometres east of the town of Pimenta Bueno. The Property has been divided into two claim blocks known as the Southern Block consisting approximately 209,000 hectares and the Northern Block comprising approximately 49,000 hectares. History Prior to 1974, access to this region of Brazil was limited and mining was confined to very small mining operations primarily for tin, and to a lesser extent alluvial diamonds. From 1974 – 1982, DeBeers conducted extensive alluvial and geological exploration in the district. It reported the discovery of five kimberlite pipes that included Cosmos 1, 2, 3, 4, and Araras 11. From 1983 to 1990, the state mining company, CPRM, completed geological mapping, prospecting, auger drilling and geochemical (stream and loam) sampling and discovered one kimberlite body, Tumeleiro 3. During the period 1991 to 1992, there was very little diamond exploration completed in the Pimenta Bueno district. Rio Tinto started exploration in the Pimenta Bueno district in April 1993. Rio Tinto’s exploration work covered what is now the Southern Block of Vaaldiam’s property. Rio Tinto selected the exploration area based on the regional geology of the area, which they felt held good potential for economic primary diamond deposits. Initially their exploration work involved the collection of regionally based stream sediment samples for heavy mineral samples. Rio Tinto then carried out the first of two airborne magnetic and radiometric surveys over their property holdings, which resulted in the identification of 41 geophysical anomalies. Ground magnetic surveys accompanied by drilling resulted in the discovery of thirteen new kimberlite pipes. Sampling of the pipes resulted in diamond grades ranging from <1.0 carats per hundred tonnes (cpht) to 24.68 cpht. In an internal report dated 5 January 1996, Rio Tinto reported that "the flat diamond distribution curve suggests the potential for large stones". By the end of 1995, Rio Tinto had acquired a total of 269 claims in the Pimenta Bueno district covering an area of roughly 2.6 million hectares. Exploration conducted by Rio Tinto resulted in the discovery of 20 new kimberlite bodies. By early 1996, Rio Tinto was involved in a feasibility study of the Collier kimberlite pipe in Mato Grosso state and had also started exploration efforts on the Colorado do Oeste area situated to the south of the Pimenta Bueno district. The reduced availability of exploration funding resulted in Rio Tinto surrendering their exploration claims in the Pimenta Bueno district by 2000. Mineração Santa Elina Ind. e Com. S.A. (“Mineração Santa Elina”), then a subsidiary of Santa Elina, started to acquire mining claims in the Pimenta Bueno district in 2000, as part of an acquisition strategy involving the selection of ground that had potential for base metal mineralization. Mineração Santa Elina geologists recognized the potential areas for primary and secondary diamond deposits, and carried out a preliminary exploration program focusing over several of the known kimberlites. Of the29 kimberlites identified in the region by this date, 17
For
per
sona
l use
onl
y
pipes were located on the Mineração Santa Elina ground and 11 of these were sampled. Prospecting during this orientation work resulted in the discovery of the new kimberlite named Chico Bueno. In November 2003, Vaaldiam acquired the Pimenta Bueno Property from Santa Elina through a reverse takeover transaction and concurrently reached an agreement with Rio Tinto, whereby Rio Tinto was granted a right to exercise an option to earn a 51% interest in either or both of the Northern and Southern Blocks following a due diligence review by Rio Tinto of exploration results generated during Vaaldiam’s initial phase of exploration. Vaaldiam's Phase I exploration program was initiated in December 2003 with the objectives of (i) identifying new kimberlite exploration targets on the Pimenta Bueno Property and (ii) assessing the remaining potential of known kimberlites that have mineral chemistry consistent with equilibration inside the diamond stability field. By January 2005 Vaaldiam had identified 30 kimberlite pipes on the property. The evaluation priority for these known kimberlites was established based on petrography, diamond content and indicator mineral chemistry. Based on this information, each of the kimberlite pipes was ranked in relation to their sampling within the diamond stability field. This ranking of the kimberlites was then compared with the macrodiamond and microdiamond sampling data that was available in the Rio Tinto data set. Based on this collective information, a total of 12 kimberlite pipes were selected as priority targets, which warranted continued exploration. Mini-bulk sampling for diamond content and reconnaissance drilling of the first of twelve high-priority kimberlites in the cluster was completed by Vaaldiam on the Tumeleiro 3, Clara 1, Pepper 7 and Pepper 6 pipes. In June 2005, Rio Tinto exercised its option to acquire a 51% interest in the Southern and Northern Blocks. Pursuant to the agreement Rio Tinto could acquire the 51% interest in the Southern Block by spending a total of US$5,000,000 on exploration over a three year period. Rio Tinto could also earn a 51% interest in the Northern Block by spending a total of US$7,500,000 over three years. As Rio Tinto’s expenditures on the Southern Block exceeded US$5,000,000 on a cumulative basis during 2006, Rio Tinto earned ownership of 51% of the Southern Block during 2006. Substantially all of Rio Tinto’s exploration was focused on the Southern Block as a result of which Vaaldiam’s ownership of the Northern Block remained at 100%. The agreement also provided Rio Tinto with the opportunity to increase its interest to 70% in either or both of the Northern or Southern Blocks by completing a feasibility study on any kimberlite deposit found. The feasibility study would have had to be sufficiently comprehensive to enable Vaaldiam to seek bank financing for its interest in the joint venture. Between June 2005 and June 2007 Rio Tinto completed an exploration program consisting of reconnaissance sampling, delineation drilling and mini-bulk sampling of four kimberlite pipes to evaluate diamond distribution. In June 2007, Vaaldiam restructured its joint venture agreement with Rio Tinto whereby Rio Tinto transferred operatorship and 100% ownership of the Southern Block of the Pimenta Bueno diamond project to Vaaldiam. Rio Tinto retained an option to back-in to a 60% interest in any kimberlite pipe that meets Rio Tinto’s development criteria. In the event that Rio Tinto decide to
For
per
sona
l use
onl
y
develop one of these kimberlite pipes they will be required to complete and fully fund a feasibility study. Should the feasibility study meet their criteria and Rio Tinto decide to develop a mine they would fully fund the construction of the mine and Vaaldiam would retain a 40% equity interest in cash flow from the mine after repayment of Vaaldiam’s share of construction funding. In such a case, Vaaldiam would not need to raise development equity funding. Rio Tinto’s back-in rights would be triggered if Vaaldiam recovers at least 200 carats of commercial sized diamonds from a bulk sample on any kimberlite in the Southern Block. Should Rio Tinto progress through to mine construction, it would provide Vaaldiam’s 40% share of costs which would be recovered by Rio Tinto from future cash flows on a non-recourse basis to Vaaldiam. Should Rio Tinto not exercise its option, Vaaldiam would continue to own 100% of the relevant kimberlite. Any alluvial deposits developed on the property would be 100% owned by Vaaldiam. Vaaldiam continues to retain 100% ownership of the Northern Block of the Pimenta Bueno Property. Vaaldiam is currently focused on the continuation of the mini-bulk sampling program started by Rio Tinto in 2006. Geological Setting The Pimenta Bueno Property straddles the northern limits of the Parecis Basin, a rift-sag type basin that trends in a northwestern direction and is locally known as the Fazenda da Casa Branca/ Pimenta Bueno graben. The graben is located at the northwest end of the 125°AZ lineament and is bound to the north by the President Hermes fault (125ºAZ) and to the south by the Itapoa fault (approximately East-West). The graben is filled with Paleozoic sediments of the Pimenta Bueno and Fazenda da Casa Branca Formations. The Pimenta Bueno Formation was deposited during a continent-wide Carboniferous glaciation with tillite, dropstone, shale and arenite facies, and turbidite conglomerates. The depositional environment of the Triassic sediments of the Fazenda da Casa Branca Formation is essentially fluvial, locally aeolian and glacial. A polymictic conglomerate is commonly seen at the base of the Fazenda da Casa Branca sequence and locally carries kimberlite indicator minerals and diamonds. Outside the graben, the geological assemblages are north-northwest trending Precambrian crystalline basement rocks comprising a supracrustal assemblage, the Juruena/Roosevelt belt, of acid sub-volcanic and hypabyssal rocks (1.6 Ga), granitic rocks of the Rondoniense belt (1.3 -0.9 Ga), and mafic intrusions which correspond to the last major tectonic event, the Rondoniense at approximately 1.0 Ga. As of August 2007, a total of 39 kimberlite bodies have been discovered on the Pimenta Bueno Property. Of the these kimberlite bodies, 34 have been classified as kimberlite and five as more evolved related rock types of kamafugitic affinity. In addition, of the 39 kimberlite bodies, 36 of these are classified as pipes while the remaining three are classified as dikes or sills.
For
per
sona
l use
onl
y
The kimberlites occur at the contact zone between the Pimenta Bueno and Fazenda da Casa Branca formations. The kimberlites are considered to be Permian age because the Pimenta Bueno Formation is late Carboniferous to early Permian and the Fazenda da Casa Branca Formation is Triassic in age. The contact between the Fazenda da Casa Branca and Pimenta Bueno Formations is an angular and erosive unconformity and identified by a conglomerate unit at the base of the Fazenda da Casa Branca Formation. Kimberlite indicator minerals do occur in the basal conglomerate of the Fazenda da Casa Branca Formation, which is consistent with the observations that drill holes intersecting kimberlite do not usually exhibit a well developed conglomerate horizon and that conglomerate lenses are more significant at the borders of the graben structure. This suggests a positive topography for the pipes during the deposition of the cover rocks. Crater facies kimberlites occur in the same stratigraphic positioning of the diatreme facies kimberlites. It would appear as if the kimberlites are hosted in the main system of faults and deep-seated linear structures of the Pimenta Bueno graben, which are identified both by means of magnetic surveys and satellite imagery. A group of 26 known kimberlites, within the Pimenta Bueno area, are clustered in a 25 kilometre east-west by 20 kilometre north-south block covering about 500 square kilometres. The 26 known kimberlite intrusions are separated into two groups: the Cosmos-Tumeleiro-Clara bodies and the Pepper bodies. Five of the Cosmos-Tumeleiro bodies are mineralised, the Clara kimberlite is mineralised, and ten of the Pepper intrusions are mineralised. The Tumeleiro 4 to 8 intrusions are also part of the main cluster and are comprised of more evolved rock types that lack kimberlite indicator minerals and characteristically have associated magnetic lows. Aside from the Carolina and Araras-11 kimberlites, the known mineralised kimberlite bodies cluster within a reasonably tight area of approximately 70 square kilometres, where there is a strong structural control on their emplacement. For example, the Cosmos 1, Cosmos 2 and Tumeleiro 3 bodies lie on the intersection of northwest-northeast trends. The Carolina pipe appears as an isolated intrusive that lies just off the property, approximately 50 kilometres to the northwest of the main cluster of pipes that comprise the main cluster of the Cosmos-Tumeleiro-Clara pipes. Isolated magnetic anomalies, which lie within the property boundaries and are situated immediately east of the Carolina body, coupled with associated indicator mineral anomalies, suggest the presence of a second cluster of pipes in the area of the Carolina intrusive. Exploration Results When Rio Tinto assumed the position of operator of the project in June 2005, Rio Tinto continued with the delineation drilling program started by Vaaldiam earlier in the year. Since January 2005, Vaaldiam and Rio Tinto have together completed 10,093.55 metres of drilling in 78 core holes of which 54 holes tested kimberlite.
For
per
sona
l use
onl
y
Seven new kimberlites were discovered during 2006, increasing the total number of kimberlite occurrences to 39, including 36 kimberlite pipes ranging in surface area from one hectare up to 18 hectares in surface area. Two kimberlite dikes, and one kimberlite sill system have also been discovered as a result of the joint venture’s exploration program. Microdiamond analysis indicates that 19 of the kimberlites are diamond-bearing and mini-bulk sampling of four kimberlite pipes has resulted in the recovery of commercial-sized diamonds. The following table presents a list of the kimberlites that have been tested by drilling by both Vaaldiam and Rio Tinto during 2005 and 2006:
Pipe Name No. of Holes Metres Drilled Surface Area of Pipe (in Hectares) Cosmos 1 5 1,148 2.3 Cosmos 3 7 1,530 12.0 Cosmos 4 5 937 5.0 Clara 2 150 Dike Pepper 1 3 454 2.0 Pepper 3 6 854 17.0 Pepper 4 7 891 7.5 Pepper 6 3 330 Sill Pepper 13 3 282 1.5 Pepper 18 2 379 20 (Sill) Tumeleiro 3 3 180 3 (Sill) Tumeleiro 9 2 247 2.0 Tumeleiro 10 1 167 3.0 Tumeleiro 11 2 286 Dike Tumeleiro 12 1 154 2.0 Tumeleiro 13 1 200 3.0 Arara 3 1 134 2.0 Total 54 8,325
During November 2005, Rio Tinto mobilised a reverse circulation drilling unit to the property to commence a mini-bulk sampling program designed to recover 50 tonne mini-bulk samples of kimberlite from each of four pipes that had been selected for sampling. A total of 38 reverse circulation drill holes, utilizing a 51/2 inch tricone drill bit, were completed totalling 7,436 metres of drilling, which resulted in the recovery of 190.9 tonnes of dry kimberlite from the four pipes. The following table summarizes the results of the reverse circulation drilling completed by Rio Tinto as part of their mini-bulk sampling program:
Pipe No. of Holes
Metres Drilled
(m)
Sample Weight
(Dry Tonnes)
No. of Diamonds Recovered (>0.85 mm)
Total Diamond Weight (carats)
Estimated Recovery
(%) Cosmos 1 13 2,576 70.8 117 2.45 75% Cosmos 3 12 2,463 67.2 18 0.44 72% Pepper 4 10 1,896 37.2 25 0.42 72% Pepper 13 3 501 15.7 1 0.05 83% Total 38 7,436 190.9 157 3.20 75%
Granulometry tests of the kimberlite chips recovered by Rio Tinto during the reverse circulation drilling indicate that 40 - 60% of the kimberlite was reduced to a particle size of less than 2 mm. Visual inspection of the diamonds by Vaaldiam, combined with an analysis of the diamond distribution, suggests that diamond breakage may have occurred during the drilling and sample collection stage. Vaaldiam intends to complete a diamond breakage study of the diamonds recovered during the mini-bulk sampling program, to assess the impact that any potential
For
per
sona
l use
onl
y
diamond breakage might have had on the sample results and the diamond distribution analysis. Vaaldiam is currently completing additional mini-bulk sampling from the surface of the Cosmos 1 pipe to confirm the diamond distribution within the pipe, and provide a comparison of the diamond recoveries from surface sampling to those obtained from reverse circulation drilling. 1.3.2 Duas Barras Property Vaaldiam owns a 100% interest in the Duas Barras Property, situated 150 kilometres north of the town of Diamantina in the State of Minas Gerais, Brazil. To date, the combination of bulk sampling and percussion drilling has outlined an indicated resource of approximately 1.8 million bank cubic metres at an estimated grade of 0.16 carats/m3 and 0.18 grams Au/m3, representing an in-situ diamond resource of 295,000 carats and 335 kilograms (10,771 ounces) of gold. In addition, the deposit contains an inferred resource of approximately 0.9 million bank cubic metres at an estimated grade of 0.16 carats/m3 and 0.18 grams Au/m3, representing an in-situ diamond resource of 137,000 carats and 156 kilograms (5,016 ounces) of gold. Diamonds recovered from the bulk sampling program indicated an average value of US$197 per carat. The construction of Vaaldiam’s Duas Barras Mine commenced in January 2007. Commissioning of the diamond recovery plant commenced in May 2007. Commercial production will commence in September 2007 at an expected initial annual production rate of approximately 25,000 carats for 2007 increasing to design capacity of 50,000 carats in 2008. Project Description and Location The Duas Barras Property is situated 150 kilometres north of the town of Diamantina in the State of Minas Gerais, Brazil. The Duas Barras Property lies along the left bank of the upper Jequitinhonha River, which has been a significant diamond producing area since mid 1700s. The mineral rights lie within the Duas Barras Farm, which is owned by Mr. Geraldo Coelho Moura, who controls the surface rights to the farm. The mineral rights are currently held by Marly, a private mining company controlled by Mr. José Wilson Coelho, a local diamond buyer and the nephew of Mr. Coelho Moura, the surface rights owner. The mineral rights are held under a Mining Licence granted by the DNPM under license number 806.569/77 and covers an area of 170.89 hectares. Accessibility, Climate, Local Resources, Infrastructure and Physiography Access is provided along highway 367 which extends northwest from Diamantina to the village of Santana, situated 134 kilometres from Diamantina where there is a truck stop, a small restaurant and hotel. From Santana, the Duas Barras Property is accessible along 34 kilometres of laterite and sand roads which provide access to the farms located along the Jequitinhonha River. There is an 800 metre long laterite airstrip located on the Duas Barras Property, which could be put into serviceable condition with minimal work. The climate is classified as semi-arid climate with rain during a wet season extending from November to March. Mean temperatures range from 17 to 20 degrees Celsius. Exploration can be undertaken throughout the year.
For
per
sona
l use
onl
y
Electrical power is available within 15 kilometres of the Duas Barras Property, as most of the farms situated on the property are connected to the national grid. Power is currently provided by diesel electric generators. The Duas Barras Property area is comprised of rolling hills and valleys, dominated by Jequitinhonha River corridor. Vegetation is comprised of natural scrub bush or caatingas, which is associated with the drier climates in the State. The area is utilized primarily for cattle ranching and the raising of other livestock, as well as the harvesting of eucalyptus trees which grow in plantations and are harvested for the fabrication of charcoal for the metallurgical industry. History Alluvial diamond deposits associated with the Jequitinhonha River have been exploited for over 250 years. Production is from a combination of industrial-scale river dredge operations, and small scale miners workings. The diamonds produced from alluvial gravels along the Jequitinhonha River are predominantly gem-quality goods. A considerable amount of alluvial mining has been carried out along the Jequitinhonha River during the past 250 years, which has served to diminish the exploration and development potential on many of the farms that border the river. Large scale river dredging operations have been conducted both upstream and downstream of the Duas Barras Property, one of Brazil’s largest diamond producers, the Domingas Mine of Mineração Rio Novo, having been located approximately 30 kilometres south of the Duas Barras Property. Exploration records from areas immediately adjacent to the Duas Barras Property provide evidence that significant buried gravel deposits lie within the boundaries of the Duas Barras Property. In January 2005, Vaaldiam’s subsidiary VBM, entered into an option agreement to acquire a 70% interest in the Duas Barras Property from Marly. Under the agreement, should VBM exercise the option, it would be required to pay US$150,000 to Marly within 10 days of Marly assigning all rights, title and interest in the mineral rights of the property to a joint venture to be formed with Marly. VBM would also provide to such joint venture use of equipment and advances of working capital with an aggregate value of US$1,500,000. Marly also granted VBM the option to acquire its remaining 30% interest in the joint venture at any time in return for a payment of US$1,000,000. In addition, the agreement provided for a royalty to be paid to the owner of the surface rights of the Duas Barras Property in the amount of 6% of gross sales revenues. On 22 December 2005 Vaaldiam exercised its option to acquire the 70% interest in the Duas Barras Property. On 31 January 2006 this interest was increased to 75% by an advance payment of US$50,000 to Marly. By an agreement dated 24 November 2006 Vaaldiam exercised its option to acquire the remaining 25% interest in accordance with the terms of the original agreement. Payment terms of the full consideration of US$1,100,000 are as follows:
For
per
sona
l use
onl
y
• US$200,000 to be paid within 5 days after Marly’s submission of an application to the DNPM for the assignment of the Duas Barras Mining Licence to VBM’s subsidiary Montes Claros (this amount was paid in February 2007);
• US$150,000 to be paid within 10 days after the issue of a permanent Licence of
Operation by the Minas Gerais State Environmental Authority (“FEAM”);
• US$400,000 to be paid within 10 days after the DNPM’s approval and registration of the Duas Barras Mining Licence in the name of Montes Claros and the issue of a permanent Licence of Operation by FEAM; and
• US$350,000 to be paid within 10 days after the sale of the first diamond production from
the Duas Barras Mine. During 2005 and 2006, Vaaldiam completed two systematic drilling programs, using both percussion and rotary drills, to confirm the presence of diamondiferous gravels and to determine their areal extent and variable thickness. Concurrently, bulk sampling was undertaken to provide an estimate of the diamond and gold grades of the gravels. Construction of an 80 bank cubic metres per hour diamond recovery plant commenced in January 2007. Commissioning of the production plant commenced in May 2007 and by 26 August 2007 a total of 16,896 diamonds totalling 4,155.50 carats had been recovered from 16,655.25 bank cubic metres of gravel during the plant commissioning reflecting a recovered grade of 0.25 carats per bank cubic metre. Geological Setting The Duas Barras Property is underlain by Proterozoic-age quartzites of the Guinda Group. Alluvial and colluvial gravels overlie the quartzites, and reach thicknesses in some localities of over 15 metres. The Duas Barras Property encompasses an outside bend of the Jequitinhonha River. The river bed is interpreted to have progressively migrated in a southeasterly direction, resulting in the reworking and deposition of alluvial gravel deposits along the left or western bank of the existing river. Alluvial flats extending along the left bank of the river within the Duas Barras Property boundaries exhibit widths averaging 300 metres, and extend over a distance of approximately 1 kilometre. Colluvial gravels, representing an interpreted deflation surface, lie to the west and north of the alluvial flats and appear to form high terraces some 300 to 500 metres from the current river. These surficial gravel deposits were reportedly mined for diamonds in the distant past by small scale miners, and evidence of these past mining operations is apparent along the road leading into the Duas Barras Property. Exploration In August 2005, Vaaldiam started a bulk sampling program on the Duas Barras Property to determine the grade and value of the diamonds found within the alluvial gravels. This bulk sampling program continued during 2006 in association with a percussion drilling program, to define the gravel resources available for mining.
For
per
sona
l use
onl
y
In May 2005 Vaaldiam initiated its self-managed percussion program using a company-owned Banka drill. By March 2006, a total of 63 drill holes, involving 1,092 m of penetration, had been completed on a largely 100 x 100m regular, grid spacing with some infilling at 50 m spacing. Each drill hole provided the bedrock elevation and, from the evidence of the cuttings, the thickness of gravels categorized by colour. In February 2006, the rotary drilling program was added to the exploration program and was carried out by Geoaktivan, a drilling company based in Belo Horizonte, State of Minas Gerais, using a faster, Maquesonda, mechanical rotary drill. This second program served to accelerate the exploration by quickly, and almost completely, infilling the existing grid. By June 2006, an additional 107 drill holes, producing 2,269 m of core, had been completed at 50 x 50m to delineate a gravel deposit with an areal extent of approximately 1,400 m by 250 m and an average thickness of 7 m. The results at 50m spacing demonstrated physical continuity of the gravels and yielded an estimated gravel volume for the northern arm of the Property. In the southern arm 14 drill holes, on a 100 x 100m grid, revealed the presence of additional gravels over an area approximately 250 m by 250 m. To date, 198 holes have been drilled, with the computerized logs available for all 3,837 m penetrated. Of these, some Banka holes had been drilled for the purpose of estimating the gold grade and its variability. Between March 2005 and July 2006, Vaaldiam collected two bulk samples from Pit 1 and Pit 2. Excavation was by means of shovel and truck or gravel pump, as necessary. Each sample was collected and processed in the form of several sub-samples. The objective was to quantify the diamond grade and its variation within four identified stratigraphic gravel units (upper, intermediate, transitional and basal) of differing thickness and degree of representation within the total gravel horizon. All the samples were fed to a dedicated treatment plant incorporating jigs, grease tables and a sluice box to recover both diamonds and gold. The composite bulk sample recovered from Pit 1 yielded 98.02 carats, represented by 436 diamonds, from a total of 1,886 m3. That from Pit 2 produced 61.22 carats, in the form of 179 diamonds, from 721 m3. The overall grade was estimated from the results achieved for the transitional and basal units in Pit 1. The intermediate and upper gravels were excluded because their apparent low grades, possibly a result of dilution by slumped overlying sediments, implied that they are not potentially payable. The average ratio of the basal unit’s thickness to that of the transitional unit in Pit 1 was 6:4. This ratio was applied to the constituent sample grades by assigning 6 parts at 0.22 cts/m3 and 4 parts at 0.07 cts/m3 to give a weighted average of 0.16 cts/m3. A diamond parcel of 169.15 carats, all derived from the bulk sampling, with a lower cut-off size of 2 mm, was evaluated by CIDAMA, a local, independent, diamond evaluation and marketing company. The average size and value were 0.23 ct/stone and US$197/ct. The largest stone, a 4.66 ct white dodecahedron, was alone valued at US$1,395/ct. The parcel contained, in addition,
For
per
sona
l use
onl
y
24 diamonds, totalling 33.23 cts within a 1.0 to 4.0 ct/stone range which were allocated an average value of US$354/ct. The fine fraction from each of seven sub-samples from Pit 1 was processed through a closed circuit Pleitz jig and gold sluice to recover the contained free gold. A resulting enriched concentrate of 297.90 g of gold was recovered. By the same methodology as applied to the diamond grade estimation the gold grade was shown to be 0.18 mg fine gold/m3. Vaaldiam successfully conducted the exploration drilling and bulk sampling programs with the objective of estimating a Mineral Resource for the Property. Each drill hole that intersected gravels was allocated an area of influence to which a corresponding gravel thickness was assigned, to produce a gravel volume, and the results were formatted as a data bank. Such volumes were categorized as either Indicated or Inferred and the summation of each classification provided a 43-101 compliant Indicated Mineral Resource and a compliant Inferred Mineral Resource. No Measured Resource was estimated because grade continuity had not been proven. The resource figures are detailed in the following table.
Mineral Resource
Volume (bcm)
Diamond Grade bcm (cts/bcm)
Diamond Content (carats)
Fine Gold Grade bcm (mg/bcm)
Fine Gold Content
(kg) Indicated 1,843,000 0.16 295,000 182 335 Inferred 856,000 0.16 137,000 182 156 Total 2,699,000 0.16 432,000 182 491
It should be noted that this resource classification is not to the same standards required under the Australian Code for Reporting of Exploration Results, Mineral Resources and Ore Resources (JORC Code). 1.3.3 Braúna Property Vaaldiam holds a 100% interest in the Braúna Property, which is comprised of six exploration concessions covering 8,742.34 hectares. Eighteen kimberlite occurrences have been discovered on the Braúna Property to date which are comprised of four kimberlite pipes and two parallel kimberlite dike systems. Vaaldiam acquired the property in October 2005 and commenced an exploration program which resulted in the discovery of an additional five kimberlite occurrences. Recent exploration by Vaaldiam has focused on two of the larger kimberlite pipes, namely the 1.85 hectare Braúna 3 pipe, and the 1.0 hectare Braúna 7 pipe. Mini-bulk sampling of the Braúna 3 and Braúna 7 pipes has projected recovered grades of 20.78 cpht and 5.11cpht respectively. Project Description and Location The Braúna Kimberlitic Province is located immediately south of the town of Nordestina in the Rio Itapicuru basin in Bahia State, Brazil. The property is centred approximately at latitude 10º55' South and longitude 39º25' West and consists of six exploration permits encompassing approximately 8,742.34 hectares.
For
per
sona
l use
onl
y
Accessibility, Climate, Local Resources, Infrastructure and Physiography The Braúna Property is accessible by road along the State highway BA-120, which is a good paved road that extends 330 kilometres northwest of Salvador (the Capital City of Bahia State). Salvador is serviced on a daily basis by the major airlines operating in Brazil, which have excellent connections to the larger cities such as Brasília and São Paulo. The climate is semi-arid typically hot and dry with a low temperature variation and low levels of rain. Electrical power is available on the property, as most of the farms that are situated within the property boundaries are connected to the national grid. The town of Nordestina is a small farming and mining centre with a population of approximately 15,000. The town has all of the necessary services and suppliers that are typically required to operate an exploration program, including skilled and semi-skilled labour, an adequate supply of fuel, food supplies, construction materials and manufacturing shops. The Braúna Property is predominantly cultivated pasture for grazing, the area having been populated during the past three centuries as a result of a migration away from the coast mainly considering that Salvador was the first capital city of Brazil. Topographic varies at elevations around 300 metres above sea level, with the relief of the land being controlled by the underlying geology, which is marked by flat areas due to the high level of erosion over the basement rocks. Drainage is controlled by north-south faults and fractures. History Vaaldiam acquired the 60% interest in the Braúna Property under the terms of a purchase agreement with Majescor Resources Inc. (“Majescor”), whereby Vaaldiam paid De Beers Brasil Ltda. (“De Beers”) the sum of C$300,000 on behalf of Majescor which represented the balance owed by Majescor under the terms of a purchase agreement between De Beers and Majescor involving the Braúna Property. In addition, Vaaldiam issued a total of 150,000 common shares to Majescor. Vaaldiam and Majescor explored the Braúna Property pursuant to a joint venture agreement. The joint venture agreement dated 31 October 2005 provided that Vaaldiam’s Brazilian subsidiary VBM would own 60% of the joint venture with Majescor owning 40%. Should either party fail to provide its share of exploration expenditures on the Braúna Property then that party’s interest in the joint venture company would decline in accordance with an agreed formula. The shareholders of the joint venture company were entitled to appoint one director to the board of the joint venture company for each whole 20% interest held. Under this joint venture agreement Vaaldiam was appointed as manager of operations, which manager would be paid a fee of 10% of exploration expenditure in accordance with the adopted exploration budget. In 2006, Cajueiro Mineração Ltda., formerly named Cajueiro Mineração S.A. (“Cajueiro”), became the joint venture company owning the Braúna Property, with Cajueiro owned as to 60% by VBM and as to 40% by Majescor. In March 2007, Vaaldiam acquired Majescor’s 40% interest in Cajueiro for C$2,000,000 in cash, 1,733,102 common shares and a 1% gross sales royalty.
For
per
sona
l use
onl
y
Geological Setting The Braúna Property is located in the Serrinha Block in the northeast São Francisco Craton. The São Francisco Craton spreads nearly throughout the Bahia state and over a large part of Minas Gerais state. The Serrinha Block (ca. 2.9-3.0 Ga) is an elongated North-South segment up to 100 kilometres wide occurring in the northeast São Francisco Craton. This block contains orthogneisses, migmatites and tonalites with gabbroic enclaves that are metamorphosed into amphibolite facies. These represent the basement of the Paleoproterozoic Rio Itapicuru and Capim greenstone belts located in the Serrinha Block. The orthogneisses, migmatites and tonalites with gabbroic enclaves are metamorphosed into amphibolite facies. Syntectonic to late tectonic granitoid plutons were emplaced in the greenstone belt. There is sparse geochronological data available for the volcanic rocks from the Rio Itapicuru greenstone belt, the mafic basalt (2.2 Ga) and felsic intermediate (2.1 Ga) units are separated by roughly 100 Ma. The Braúna kimberlites are intruded into the syntectonic Nordestina Granodioritic Pluton, which has been dated at 2.07 Ga. This body is a concordant ovoid/elongated north-south intrusion (360 km2). The rock is foliated and inequigranular, with gneissic borders containing schlieren, pegmatites and a porphyritic core, suggesting a zoned intrusion. A total of 19 kimberlite occurrences, with an approximate N30W trend, have been discovered in the property area, 18 of which are inside the Project claims. Four diamondiferous kimberlite pipes (or blows) along the fissure system have been discovered to date, including Braúna 3, 4, 7 and 16. The largest of these intrusions is the Braúna 3 kimberlite, located on the margin of the Riacho Grande Creek, with a surface area of approximately 1.85 hectares. Exploration The Braúna Property encompasses four known kimberlite pipes, or blows, associated with a system of kimberlite dikes that have been traced over a distance of approximately 15 kilometres. Based only on the surface exposures, the pipes range in surface area from 1.0 hectare at the Braúna 7 pipe, to 1.85 hectares at the Braúna 3 pipe. Surface exposures of kimberlite within the dike or fissure systems indicate widths ranging from 0.7 metres at the Braúna 6 occurrence to 25 metres at the Braúna 18 occurrence. Vaaldiam, as operator of the joint venture, mobilized three drill rigs to the property to complete a program of delineation drilling at the four known kimberlite pipes, in advance of a mini-bulk sampling program that commenced during the last quarter of 2006 and is currently underway. In May 2007, Vaaldiam announced plans to extract a 5,000 tonne bulk sample from the Braúna kimberlite pipes in an aggressive development program designed to evaluate the economics of the diamond-bearing Braúna kimberlites through the recovery of a parcel of diamonds for valuation purposes. The proposed bulk sampling program will focus on the 1.85 hectare Braúna 3 pipe, with the extraction of a 3,000 tonne bulk sample collected from a series of surface trenches excavated across the width of the pipe. Smaller 1,000 tonne bulk samples will also be
For
per
sona
l use
onl
y
excavated from each of the one hectare Braúna 4 and 7 pipes, which are situated within 1.5 kilometres of the Braúna 3 kimberlite. The decision to advance to the bulk sampling stage of development follows successful completion of Vaaldiam’s initial mini-bulk sampling program involved the extraction of 39.9 dry tonnes of kimberlite from three vertical shafts excavated into the Braúna 3 pipe. The kimberlite was extracted in three vertical shafts excavated to depths of approximately 20 metres, testing the northern and southern lobes of the pipe. Processing of the 39.9 dry tonnes of kimberlite resulted in the recovery of 59 diamonds with a total weight of 8.29 carats, indicating a recovered grade of 20.78 carats per hundred tonnes (cpht). The average stone size recovered was 0.14 carats. The five largest stones recovered in the mini-bulk sample weighed 1.13, 0.56, 0.55, 0.49 and 0.46 carats. Mini-bulk sampling was also completed on a dike-like body comprising the central portion of the Braúna 3 pipe, where the kimberlite pipe narrows to a width of approximately 20 metres. The kimberlite comprising the dike system, which forms a link between the northern and southern lobes of the pipes, appears to be a late-stage intrusion representing 15% of the entire Braúna 3 kimberlite, based on drilling completed to date. A total of 35.8 dry tonnes of kimberlite was extracted and processed from this central zone, resulting in recovery of 32 diamonds with a total weight of 2.15 carats, indicating a recovered grade of 6.00 cpht. The average stone size recovered was 0.07 carats. The five largest stones recovered in the mini-bulk sample weighted 0.59, 0.27, 0.09 and 0.08 carats. 1.4 Vision, Goals and Strategies Vaaldiam acquires, explores and develops diamond deposits with the objective of becoming a significant producer of superior quality diamonds. Vaaldiam intends to achieve its objective by applying the expertise of its experienced management and technical committee to its portfolio of properties. Vaaldiam’s management, Board of Directors and technical committee comprise individuals experienced in kimberlite and alluvial diamond exploration, diamond mining and recovery, diamond sorting and sales, as well as individuals skilled in corporate finance and administration. The resource industry and the rough diamond marketing business are both extremely competitive in all respects and Vaaldiam competes or will compete with more established companies that may possess greater financial and technical resources. Notwithstanding the foregoing, Vaaldiam believes that it is currently well positioned both in terms of its technical personnel and working capital to pursue its business plan. Vaaldiam’s long-term goal is to continue to increase the value of its shareholders’ investment in Vaaldiam by becoming
• a profitable producer of rough diamonds from primary (kimberlite) sources; and • a profitable producer of high quality rough diamonds from secondary (alluvial) sources.
For
per
sona
l use
onl
y
Vaaldiam’s general strategy to achieve the above long-term goal is to generate early cash flow, by acquiring and sequentially developing to production, low cost alluvial diamond properties, and utilizing the cash flow therefrom to fund, at least in part, exploration programs on kimberlite properties having the potential for the discovery of significant quantities of diamonds and in so doing, minimize shareholder dilution over time arising from the issuance of equity to raise capital. In addition to internally generated projects, Vaaldiam evaluates opportunities to enhance its value through mergers or acquisitions and by restructuring its ownership interests in its properties. 1.5 Directors, officers and corporate governance 1.5.1 Board Committees Vaaldiam has established several committees of the board of directors to advise its board on special issues. Audit Committee The purpose of the Audit Committee of the Board of Directors of Vaaldiam is to provide an open avenue of communication between management, Vaaldiam’s independent auditor and the Board to assist the Board in its oversight of:
• the integrity, adequacy and timeliness of Vaaldiam’s financial reporting and disclosure practices;
• Vaaldiam’s compliance with legal and regulatory requirements relating to financial reporting; and
• the independence and performance of Vaaldiam’s independent auditor. The Audit Committee shall also perform any other activities consistent with its Charter, Vaaldiam’s articles and governing laws as the Committee or Board deems necessary or appropriate. Compensation Committee The Compensation Committee has been charged with the responsibility of reviewing and making recommendations to the board regarding the compensation of the members of Vaaldiam’s board and members of Vaaldiam’s management team. Technical Advisory Committee The Technical Advisory Committee has the responsibility for reviewing exploration properties from a technical viewpoint prior to acquisition or development. The Technical Advisory Committee, following its technical review, will recommend a course of action to the Board of
For
per
sona
l use
onl
y
Directors. The members of the Committee also advise the President and Chief Executive Officer with regard to technical matters. Public Disclosure Committee The Public Disclosure Committee is responsible for overseeing Vaaldiam’s disclosure practices to ensure compliance with applicable laws and regulations and is also responsible for Vaaldiam’s disclosure policy and determining when developments justify public disclosure, and the content of such disclosure. Code of Ethics In addition to the above governance framework, the Board of Directors has adopted a Code of Ethics and Business Conduct to guide its directors, officers and employees in conducting the affairs of the Corporation. The Code is also meant to assist shareholders, suppliers and other companies in the mining and exploration sector in knowing what to expect from Vaaldiam. The Code deals with responsibility and accountability, the reporting of violations of the Code, and the necessity to act in compliance with the laws, rules and regulations of the locations where Vaaldiam conducts business. In addition, the Code requires that Vaaldiam deals honestly, fairly and ethically with shareholders, suppliers, other mining and exploration companies and its own employees. Rules relating to conflicts of interest and the disclosure of conflicts of interest are also embodied in the Code, together with the preservation of confidential material and the protection and use of corporate assets. Full, fair and accurate recording and reporting of financial information is required in order to satisfy the requirements of the Code as well as to meet Vaaldiam’s disclosure obligations to its shareholders and to conform to the statutory requirements of governments, the accounting regulations of the Ontario Securities Commission and other provincial securities commissions, and the rules of the Toronto Stock Exchange. Kimberley Process Vaaldiam, as a company operating within the jurisdiction of both Canada and the Federative Republic of Brazil which are Participants in the Kimberley Process, is committed to conducting its operations in conformity with the Kimberley Process. In December 2000, the General Assembly of the United Nations unanimously passed a resolution calling for the establishment of a procedure which would certify that rough diamonds traded internationally had not been sold in order to finance armed conflict. Rough diamonds sold to finance armed conflict became known as "conflict diamonds" or "blood diamonds". The Kimberley Process Certification Scheme (the "Kimberley Process"), implemented in January 2003, was the international response to the United Nations resolution.
For
per
sona
l use
onl
y
The Kimberley Process is designed to provide assurance to the ultimate purchaser of a diamond, as well as those intermediaries such as diamond cutters, diamond dealers and selling organizations, that by purchasing a particular diamond they have in no manner contributed to armed conflict in the diamond's country of origin or anywhere else. The Kimberley Process is therefore meant to provide a chain of assurance stretching from the miner of a particular rough diamond to the ultimate purchaser of a faceted stone. The key to providing assurance that a particular stone is conflict free is the Kimberley Process Certification Scheme (“KPCS”). The KPCS requires a Kimberley Process Certificate (the "Certificate") to be prepared and which must accompany each export shipment of rough diamonds. Each Certificate must state: the country of origin of the diamonds being shipped, the issuing authority for the Certificate, the date of issue of the Certificate, the identification of the exporter and the importer, the number of carats in the parcel and the value of the diamonds. All diamonds shipped in accordance with the KPCS must be in tamper and forgery resistant containers. Validation of the Certificate by the authorized Exporting Authority is required. No participant country can export to, or receive diamonds from, a non-participant country. The Kimberley Process, therefore, seeks to create a closed system for legitimate diamond trading, from which conflict diamonds are excluded. 1.5.2 Directors and Executive Officers The name, province or state of residence, position or office held with Vaaldiam and principal occupation during the past five years of each director and executive officer of Vaaldiam are described below:
Name and Address Official Position Held
Previous Service as a Director
Principal Occupation During Past Five Years
Alan Lee Barker Whitby, Ontario Canada
Director Since November 1987
Since June 2002, Mr. Barker has been President of Sparton Resources Ltd. From June 2000 until June 2002, Mr. Barker was a mining consultant.
Antenor Silva Jr. São Paulo, SP Brazil
Director Since November 2003
Yamana Gold Inc. President and Chief Operating Officer since July 2003. President of Santa Elina Mines Corporation prior to July 2003.
Frances Kwong Toronto, Ontario Canada
Controller N/A Chartered Accountant (England & Wales). Since April 2006 Controller of Vaaldiam prior to which she was co-founder and Vice-President of The Gateway to Knowledge Inc., a publisher of school books, since 1996.
José Ricardo Thibes Pisani Sete Lagoas, Minas Gerais, Brazil
Vice President, Exploration
N/A Since August 2005, Vice President, Exploration of Vaaldiam. From October 2004 to August 2005, Project Manager, Vaaldiam Resources Ltd. Prior thereto Project Manager, De Beers Consolidated Mines Limited
Juvenal Mesquita Filho Sao Paulo, SP Brazil
Director Since November 2003
Director of Santa Elina Mines Corporation since 1991. President of Mineração Santa Elina S/A since
For
per
sona
l use
onl
y
1994. Kenneth Johnson Oakville, Ontario Canada
President, Chief Executive Officer and Director
Since August 1997 Vaaldiam Resources Ltd. President and CEO since August 1997.
Peter Bojtos Lakewood, Colorado U.S.A.
Director Since November 1996
Mr. Bojtos is a professional engineer and has been a director of various companies since 1996.
Peter Marrone Toronto, Ontario Canada
Chairman of the Board and Director
Since November 2003
Chairman and CEO of Yamana Gold Inc. since July 2003, prior to which he was Executive Vice President and Managing Director, Investment Banking at Canaccord Capital Corporation since 2001.
Robert Lord Toronto, Ontario Canada
Director Since June 2006 Chartered Accountant and President of Captaur Investments Limited.
Robert Yeoman Toronto, Ontario Canada
Vice President, Chief Financial Officer and Corporate Secretary
N/A Vaaldiam Resources Ltd. Vice President, Chief Financial Officer and Corporate Secretary since June 2000.
On August 29, 2007, the directors and executive officers collectively own 2,379,267 common shares, representing 2.83% of the issued and outstanding common shares. 1.5.3 Qualifications and Experience of Directors Kenneth W. Johnson, President, CEO and Director. Mr. Johnson has 25 years of international mining and mineral exploration experience, with a specific focus on diamond exploration. He has been involved in the planning, financing and implementation of kimberlite and alluvial diamond exploration and development programs in Brazil, South Africa, Canada and Central Africa. He has also been involved in the evaluation of a number of diamond deposits in the Democratic Republic of Congo, Cameroon, Sierra Leone, and Venezuela. He possesses extensive knowledge of the exploration for and recovery of diamonds and is also experienced in the grading and valuation of rough diamonds, holding a diamond grading certificate from International Diamond Education & Consulting of South Africa. He has a significant amount of experience in equity markets and has been directly responsible for over C$50 million in equity financing for Vaaldiam during the past three years. Mr. Johnson holds a Bachelor of Science degree in Geology from the University of Windsor, and is a Member of the Canadian Institute of Mining and Metallurgy, Toronto Branch. He is a Past-Director (1999-2001) of the Prospectors and Developers Association of Canada. Peter Marrone, Chairman and Director Mr. Marrone is Chairman and Chief Executive Officer and a Director of Yamana Gold Inc., a producer of gold in Brazil. Prior to joining Yamana, he was Executive Vice-President and Managing Director of Investment Banking of Canaccord Capital Corporation. Before he joined Canaccord, Mr. Marrone was a senior securities lawyer in Toronto. In addition to having extensive experience with publicly listed mining companies in general, Mr. Marrone also has experience with Brazilian mining companies, both at the development and producer stage. He has served on a number of boards of directors, including mining companies listed on the Toronto Stock Exchange.
For
per
sona
l use
onl
y
Alan Lee Barker, Director & Technical Advisor Mr. Barker is President and CEO of Sparton Resources Ltd. Mr. Barker has held senior management positions in several junior and major mining companies, where he was involved in the discovery and development of a number of base metal, precious metal, and industrial mineral deposits. With over 35 years of experience in the mining industry, Mr. Barker has generated and managed exploration, evaluation, and development programs for various commodities in North and South America, Africa, Australia, and the former Soviet Union. Since 1991, Mr. Barker has been closely involved in the exploration, discovery, evaluation, and development programs of several significant diamond deposits in Canada’s Northwest Territories, South Africa, Angola, and parts of South America. He supervised the initial exploration program on the Diavik Project near Lac de Gras in the Northwest Territories which led to the discovery of over fifty kimberlite bodies, four of which commenced commercial production in 2003. As Executive Vice President of SouthernEra Resources Ltd., Mr. Barker was involved in the discovery and development of the Marsfontein kimberlite pipe in South Africa. Mr. Barker holds an Applied Science degree in Geological Engineering from the University of Toronto and a Master of Science degree in Mineral Exploration and Economics from McGill University. He is a Fellow of the Geological Association of Canada, is a Member of the Society of Economic Geologists, the Canadian Institute of Mining and Metallurgy and the American Institute of Mining Engineers. Mr. Barker has been a Director of Vaaldiam since 1987. Peter Bojtos, Director Mr. Bojtos is a Professional Engineer with over 35 years of international experience in the mining industry. He has an extensive background in corporate management as well as in many facets of the industry, from exploration through the feasibility study stage to mine construction, operations and decommissioning. Mr. Bojtos graduated from the University of Leicester, England in 1972, following which he worked at mines in West Africa, the United States, and Canada. From 1980 to 1992, he was employed by Kerr Addison Mines Limited, a Noranda group company in various management positions, the last being Vice-President, Corporate Development. From 1992 to 1993, Mr. Bojtos was the President and Chief Executive Officer of Consolidated Nevada Goldfields Corporation, which operated precious metal mines in the United States. From 1993 to 1995, he was Chairman and Chief Executive Officer of Greenstone Resources Limited, a company which was developing gold mines in Central America. For the past twelve years, Mr. Bojtos has been an independent director of several mining and exploration companies. He has been a director of Vaaldiam since 1996. Juvenal Mesquita Filho, Director Mr. Mesquita Filho is a senior officer of Santa Elina with over 30 years of business experience in Brazil with particular emphasis on financial administration. He holds a degree in economics from the University of São Paulo and, in addition, has completed post-graduate studies in business administration and finance at the London Chamber of Commerce and Getúlio Vargas Foundation, São Paulo, Brazil. Mr. Mesquita Filho is also a Director of Yamana Gold Inc. Robert Lord, Director Mr. Lord is President of Captaur Investments Limited, an investment holding company. Mr. Lord is a Chartered Accountant and was a partner of Ernst & Young LLP and its predecessors. After retiring from the position as Vice-Chairman of Ernst & Young LLP in 2000, he assumed
For
per
sona
l use
onl
y
the position of Chairman of the Canadian Institute of Chartered Accountants until June 2002. Mr. Lord is also a director of Mackenzie Financial Corporation, Chairman of the Board of Directors of MTI Global Inc., a director of Coretec Inc., and a Trustee of Legacy Hotels Real Estate Investment Trust. Antenor Silva Junior, Director As a mining and metallurgical engineer with 39 years of industry experience, with particular emphasis on the development of mining projects in his native country of Brazil, Mr. Silva brings considerable expertise to Vaaldiam. He also has extensive experience in the fields of project management and finance. Mr. Silva’s career to date includes senior management positions held with Santa Elina, Serrana, CMP (TVX), Petrobrás, Anglo American, Rio Tinto and others. Mr. Silva currently holds the position of President and Chief Operating Officer of Yamana Gold Inc. of which he is also a Director. 1.5.4 Senior Management, Toronto, Ontario, Canada Robert Yeoman, Vice-President, CFO and Corporate Secretary Mr. Yeoman possesses over forty years of experience within the resource industry. He previously held the positions of Senior Vice President, Corporate Development with Brascan Limited, President of Brascade Resources Inc., and Senior Vice-President of Westmin Resources Limited. Prior to his involvement in the Canadian natural resource industry, Mr. Yeoman was an executive with Boart Hardmetals (Pty) Limited, a division of Anglo American Industrial Corporation. Mr. Yeoman has also been a senior officer of several other junior mining corporations. Mr. Yeoman holds a Master of Business Administration degree from Wichita State University, Kansas. He also holds a Master of Economic Science degree and a Bachelor of Commerce degree from University College Dublin, Ireland. Mr. Yeoman also serves on the board of two base metal mining exploration companies. José Ricardo Thibes Pisani, Vice President, Exploration. President Vaaldiam do Brasil Mineração Mr. Pisani is a professional geologist with over 16 years of industry experience. He holds a Bachelor of Science degree in Geology from the Federal University of Mato Grosso State in Brazil. Following graduation, he was employed by De Beers for 13 years, gaining experience in diamond exploration and development, on projects in Brazil, Venezuela, Canada and Zimbabwe. During his tenure with De Beers, José Ricardo received advanced training in South Africa with respect to kimberlite exploration techniques, interpretation of indicator mineral chemistry, and the geology of primary diamond deposits. He also has experience in the economic modeling of diamond deposits, and during his last two years with De Beers he was responsible for exploration target development in South America. During his career, he has been responsible for a number of kimberlite discoveries, including the diamondiferous Braúna kimberlite cluster in Bahia state and the Clara and Pepper clusters in the Pimenta Bueno Property, Rondônia state, Brazil. Frances Kwong, Controller A Chartered Accountant (England & Wales), Certified Public Accountant (Hong Kong), Certified General Accountant (Canada) and Chartered Certified Accountant (U.K), Ms. Kwong had extensive years of senior management level experience in Hong Kong and Asia, including
For
per
sona
l use
onl
y
auditing with Deloitte Haskins and Sells; finance with General Electric Co; and finance, systems implementation, project management, and strategic planning within the Cable and Wireless Group. Ms. Kwong co-founded and managed an educational publishing business and a consulting business in Canada. Cíntia Panucci Zanellato, Manager, Legal Affairs Ms. Zanellato is an internationally trained lawyer with eight years of experience in corporate and tax law, and legal contracts. She received her Bachelor of Law degree from Mackenzie University in São Paulo, Brazil and holds a post-graduate certificate from the Brazilian Institute of Tax Law Studies specializing in Brazilian Tax Law. Prior to taking a position with Vaaldiam, Ms. Zanellato was a Partner with Guarnera Advogados, an international corporate law firm with offices in Brazil and Italy. Ms. Zanellato also holds graduate certificates in Accounting and Economic Fundamentals from Getúlio Vargas Foundation, São Paulo, Brazil. Janet Reid, Manager, Investor Relations Ms. Reid graduated from Queen's University in 1996 with a B.Sc in geology and has seven years of diamond exploration experience. Previously she was a Resource Geologist with the Ministry of Northern Development and Mines in Ontario and was responsible for diamond exploration and target generation in northeastern Ontario. On behalf of the provincial government, Ms. Reid has authored numerous technical papers which focused on diamond exploration activities in the Province, including a technical presentation which highlighted the potential of the Temagami diamond district of northeastern Ontario – an area which has seen a number of kimberlite discoveries during the past few years. For Vaaldiam, Ms. Reid utilizes her diamond exploration experience to accurately inform shareholders of Vaaldiam’s exploration activities. Paul Daigle, Senior Project Geologist A professional geologist with 17 years of experience in mineral exploration and international project development, Mr. Daigle has experience in the exploration and development of alluvial diamond projects in South Africa, Central African Republic, Sierra Leone and Brazil. He has a B.Sc in geology from Concordia University, Montreal, Canada. With Vaaldiam, Mr. Daigle has been responsible for management of bulk sampling programs on both kimberlite and alluvial diamond deposits. Mr. Daigle is currently responsible for resource management at the Duas Barras Mine, and the quality assurance program for the bulk sampling activities on the Braúna diamond project. 1.5.5 Senior Management, Sete Lagoas, Minas Gerais, Brazil Nilson Luciano H. Chaves, Director of Finance and Administration of the Brazilian operations Mr. Luciano Chaves possesses over 15 years of experience within the Finance and Accounting field. He previously held the positions of Controller, Latin America with Hewitt Associates, Controller, BPO Operations with PricewaterhouseCoopers and senior accounting positions with multi-national companies such as British American Tobacco. Mr. Chaves holds a Master of Business Administration degree in Finance, a Master of Business Administration degree in Business and a Bachelors degree in accounting. José Fernando Tonoli, Senior Geologist
For
per
sona
l use
onl
y
Mr. Fernando Tonoli is a diamond geologist with over 28 years of exploration experience. He has 26 years with De Beers in Brazil where he was directly responsible for the discovery of 33 kimberlite deposits in ten different districts. During his tenure with De Beers, Mr. Tonoli has explored for diamonds in Brazil, Bolivia, Venezuela and Angola. He was responsible for Vaaldiam’s acquisition of the Duas Barras Property and played a key role in the discovery of the Clara and Pepper cluster in the Pimenta Bueno Property. He is currently Senior Project Manager of the Duas Barras Mine. Zeli Gomes Gouveia, Financial Manager Mr. Zeli Gouveia has over 24 years of administrative experience in the mineral exploration and development field. Prior to his employment with Vaaldiam, Mr. Gouveia was employed by De Beers Brasil as the Regional Administrative and Financial Director for the exploration division. With Vaaldiam, Zeli is responsible for the administration of Vaaldiam’s subsidiaries and reports directly to the Director of Finance and Administration. 1.5.6 Project Management Key Personnel Romildo Ribeiro Patriota Junior, General Manager, Duas Barras Mr. Patriota graduated from the Federal University of Pernambuco, Brazil, with a degree in mining engineering. With 22 years of industry experience, Mr. Patriota has held senior management positions with Cesbra’s alluvial tin operations, Brascan, Noranda, Rio Tinto and Mineração Caraiba. Gerald Engelsman, Senior Metallurgical Technician Mr. Engelsman received his training in mining and diamond ore beneficiation from De Beers Consolidated Mines of South Africa. He has 23 years of experience in diamond recovery, having gained experience in plant design, construction and operation in South Africa, Sierra Leone, Angola, Democratic Republic of Congo and the Central African Republic, Mr. Engelsman currently oversees all aspects of plant design and diamond recovery at both the Duas Barras Mine and the Braúna Project. Marcelo Parente, Mine Geologist, Duas Barras Mr. Parente graduated from the Universidade Federal de Minas Gerais in July 2005. Prior to his graduation Mr. Parente had experience working in the State of Minas Gerais on various drill and ground water programs. As a mine geologist on site at Duas Barras, Mr. Parente is responsible for grade control at the mine. Fernanda Prendin Ochika, Project Geologist, Braúna Ms. Fernanda graduated from the Universidade Federal do Paraná in 2005 with a degree in geology. Her previous experience includes the coordination, planning and execution of various mineral exploration, environmental and engineering projects. For Vaaldiam, Ms. Ochika is in charge of the drilling and bulk sampling program underway at the Braúna Project. Christian Schobbenhaus, Project Geologist, Pimenta Bueno Mr. Schobbenhaus holds a Bachelor of Science degree in geology from the Federal University of Brasília in Brazil. He has been involved with the supervision and management of all stages in the
For
per
sona
l use
onl
y
exploration program in Pimenta Bueno, having been employed both by Vaaldiam and Rio Tinto. He has been active on the exploration program on the Pimenta Bueno Project since 2004. Danilo Camargo, Field Technician Mr. Camargo is a geological and geophysical technician with over 15 years of industry experience. He was previously employed with Rio Tinto in Brazil for 8 years where he was responsible for the in-field geochemical and geophysical surveys for kimberlites. 1.5.7 Independent Technical Consultant Dr. Richard Garnett Dr Garnett has gained more than 45 years of experience in the international mining industry. He obtained a BSc in Mining Engineering in 1957, followed by a PhD in Economic Geology, from the Royal School of Mines and Imperial College, University of London, England. His career took him from the Cornwall tin mining industry to South-East Asia, for part of the time as regional manager for RioTinto Zinc, interspersed with some years in Spain and Canada on exploration and a variety of base metal projects. After obtaining his MBA degree at Cranfield University in England, he spent many years in South Africa as a division manager and director of several subsidiaries of the Anglo American and De Beers Group. During that time he was deeply involved in exploration, project evaluation and management, corporate planning, and ore marketing. A wide range of commodities and of deposit types was involved both throughout southern Africa and internationally, especially in South America and Australasia. Since 1991 he has resided in Toronto, holding directorships in several exploration and mining companies and providing consultancy services to others. His specialty is placer deposits and, especially, those of marine diamonds and gold. As a director of Diamond Fields Resources he was responsible for the company's early recognition and exploration of the Voisey's Bay deposit in Labrador, later becoming Chairman of Diamond fields. 2. INFORMATION ABOUT THE MERGER OF VAALDIAM AND ELKEDRA 2.1 Merger Benefits The Duas Barras Mine owned by Vaaldiam and the Chapada Mine owned by Elkedra together would constitute the largest diamond producing group in South America. The size of the combined operations presents the opportunity to benefit from economies of scale, particularly in the areas of purchasing, marketing and administration. In addition, it is anticipated that the combined operations could function with a lower level of working capital primarily arising from reduced inventory. It is also anticipated that the combined companies would benefit from improved access to the international capital markets facilitated by the increased market capitalization of the group and the additional stock market liquidity expected. The anticipated increased capitalization and share
For
per
sona
l use
onl
y
liquidity is expected to present a more attractive investment opportunity to larger institutional investors. It is anticipated these benefits will result in improved shareholder value. Economies or efficiencies are expected to be achieved in the following areas:
(a) Reduction in Administration Costs:
Potential economies exist in the areas of accounting, office supplies, rent, computer equipment, insurance, investor relations, legal fees, registrar’s fees, annual meeting expenses, technology support and listing fees.
(b) Exploration:
Vaaldiam has an experienced exploration team with expertise in both alluvial and kimberlite diamond deposits. Elkedra has a significant unexplored land position in proximity to its Chapada Operation. A significant benefit can potentially be derived therefore from the combination of Vaaldiam’s exploration expertise with Chapada’s unexplored land position.
In addition, Elkedra’s opportunity to potentially benefit from the development of larger kimberlite hosted diamond deposits would be enhanced given Vaaldiam’s relatively large kimberlite hosting land position represented by the Pimenta Bueno and Braúna properties.
(c) Plant Construction and Engineering:
Both Elkedra and Vaaldiam have experienced plant design and construction teams as well as experienced operating personnel. Combining the exploration programs of Elkedra and Vaaldiam increases the potential for the discovery and development of further mines which would enable the combined company to more fully utilize the specialized skills of the combined plant design and construction team. Combining the plant construction and engineering teams would facilitate the exchange of ideas and experience both with respect to plan design, construction, commissioning and management and with respect to the improving of the day to day operations of the various plants.
(d) Combined Marketing Arrangements:
While both Vaaldiam and Elkedra have marketing agreements in place for their existing producing properties, the potential exists for securing more favourable marketing terms when these agreements expire and new terms can be negotiated.
For
per
sona
l use
onl
y
(e) Purchasing Benefits:
As many of the supplies and plant and equipment purchased by the Chapada and Duas Barras plants are similar, a single purchasing department for the two mines should enable substantial quantity discounts and shorter lead times to the negotiated resulting in lower inventory and working capital levels.
2.2 Pro-forma balance sheet
For
per
sona
l use
onl
y
COMPILATION REPORT ON PRO FORMA CONSOLIDATED BALANCE SHEET
To the Board of Directors of Vaaldiam Resources Ltd. (the “Company”) We have read the accompanying unaudited pro forma consolidated balance sheet of the Company as at June 30, 2007 and have performed the following procedures: 1. Compared the figures in the column captioned “Vaaldiam Resources Ltd.” on the pro forma consolidated
balance sheet to the figures in the column captioned “Vaaldiam - AIFRS” as shown in note 6 to the pro forma consolidated balance sheet and found them to be in agreement.
2. Recalculated the figures in the column captioned “Vaaldiam - CGAAP” as contained in note 6 to the pro forma
consolidated balance sheet based on the foreign exchange rate contained in the same note and the unaudited interim consolidated financial statements of the Company as at and for the three and six months ended June 30, 2007 and found the amounts to be arithmetically correct.
3. Compared the figures in the column captioned “GAAP Differences” as contained in note 6 to the pro forma
consolidated balance sheet to a schedule prepared by management outlining the significant measurement differences between Canadian generally accepted accounting principles and the Australian equivalent to International Financial Reporting Standards applicable to the Company and found them to be in agreement.
4. Recalculated the figures in the column captioned “Vaaldiam - AIFRS” as contained in note 6 to the pro forma
consolidated balance sheet based on the figures in the columns captioned “Vaaldiam – CGAAP” and “GAAP Differences” and found the amounts to be arithmetically correct.
5. Compared the figures in the column captioned “Elkedra Diamonds NL” on the pro forma consolidated balance
sheet to the audited consolidated financial statements of Elkedra Diamonds NL for the year ended June 30, 2007, and found them to be in agreement.
6. Recalculated the figures in the column captioned “Pro forma Vaaldiam Resources Ltd. (Consolidated)” on the
pro forma consolidated balance sheet based on the figures in the columns captioned “Vaaldiam Resources Ltd.”, “Elkedra Diamonds NL” and “Pro forma adjustments” on the pro forma consolidated balance sheet and found the amounts to be arithmetically correct.
7. Made enquiries of certain officials of the Company who have responsibility for financial and accounting matters
about:
(a) the basis for determination of the pro forma adjustments and the adjustments necessary to reconcile the Company’s unaudited interim consolidated financial statements as at and for the three and six months ended June 30, 2007 measured in accordance with Canadian generally accepted accounting principles to the Australian equivalent to International Financial Reporting Standards; and
(b) whether the unaudited pro forma consolidated balance sheet complies as to form in all material respects with the published requirements of the Australian Corporations Act 2001.
The officials: (a) described to us the basis for determination of the pro forma adjustments and the adjustments necessary to
reconcile the Company’s unaudited interim consolidated financial statements as at and for the three and six months ended June 30, 2007 measured in accordance with Canadian generally accepted accounting principles to the Australian equivalent to International Financial Reporting Standards; and
(b) stated that the unaudited pro forma consolidated balance sheet complies as to form in all material respects with the published requirements of the Australian Corporations Act 2001.
For
per
sona
l use
onl
y
8. Read the notes to the unaudited pro forma consolidated balance sheet, and found them to be consistent with the
basis described to us for determination of the pro forma adjustments. A pro forma financial statement is based on management assumptions and adjustments which are inherently subjective. The foregoing procedures are substantially less than either an audit or a review, the objective of which is the expression of assurance with respect to management’s assumptions, the pro forma adjustments, and the application of the adjustments to the historical financial information. Accordingly, we express no such assurance. The foregoing procedures would not necessarily reveal matters of significance to the pro forma financial statement, and we therefore make no representation about the sufficiency of the procedures for the purposes of a reader of such statements. (Signed) “Ernst & Young LLP” Toronto, Canada Chartered Accountants September 20, 2007 Licensed Public Accountants
For
per
sona
l use
onl
y
PRO FORMA CONSOLIDATED BALANCE SHEET AS AT 30 JUNE 2007
(EXPRESSED IN AUSTRALIAN $ UNLESS OTHERWISE INDICATED) (UNAUDITED)
1
Vaaldiam Resources
Ltd.
Elkedra
Diamonds NL Pro forma
adjustments Note
Pro forma Vaaldiam
Resources Ltd. (Consolidated)
ASSETS Current Assets Cash and cash equivalents $ 3,161,253 $ 2,019,668 $ (121,351) 5 $ 32,185,211 27,125,641 3 Trade and other receivables 268,402 35,355 303,757 Inventories - 230,527 230,527 Other current assets - - - Financial assets - - -
Investments accounted for using equity method - 5,704,088 (5,704,088) 4 -
Total Current Assets 3,429,655 7,989,638 32,719,495 Non-Current Assets Trade and other receivables 127,097 - 127,097 Property, plant and equipment 9,982,086 18,730,742 64,942,878 5 93,655,706 Other non-current assets 13,302,950 43,702 13,346,652 Financial assets 492,223 16,000 508,223
Total Non-Current Assets 23,904,356 18,790,444 107,637,678
TOTAL ASSETS 27,334,011 26,780,082 140,357,173 LIABILITIES Current Liabilities Trade and other payables 740,954 668,475 1,409,429 Short-term borrowings - 3,190,215 3,190,215 Short-term provisions - 369,656 369,656
Total Current Liabilities 740,954 4,228,346 4,969,300 Non-Current Liabilities Long-term borrowings - 5,000,000 5,000,000 Future income taxes 2,082,891 - 20,515,016 5 22,597,907
Total Non-Current Liabilities 2,082,891 5,000,000 27,597,907
TOTAL LIABILITIES 2,823,845 9,228,346 32,567,207
NET ASSETS $ 24,510,166 $ 17,551,736 $ 107,789,966 EQUITY $ 24,510,166 $ 17,551,736 $ (17,551,736) 4, 5 $ 107,789,966 56,154,159 5 27,125,641 3
NET EQUITY $ 24,510,166 $ 17,551,736 $ 107,789,966
For
per
sona
l use
onl
y
PRO FORMA CONSOLIDATED BALANCE SHEET AS AT 30 JUNE 2007
(EXPRESSED IN AUSTRALIAN $ UNLESS OTHERWISE INDICATED) (UNAUDITED)
2
1. BASIS OF PRESENTATION The accompanying pro forma consolidated balance sheet of Vaaldiam Resources Ltd. (“Vaaldiam”) as at 30 June 2007 has been prepared by the management of Vaaldiam after giving effect to the proposed combination of Vaaldiam and Elkedra Diamonds NL (“Elkedra”) and the related transactions on the basis of assumptions as described in notes 2 to 6 below. The pro forma consolidated balance sheet of Vaaldiam has been derived from the following: • the unaudited interim consolidated financial statements of Vaaldiam as at and for the three and six months
ended 30 June, 2007; and • the audited consolidated financial statements of Elkedra as at 30 June 2007. The pro forma consolidated balance sheet has been prepared using accounting policies that are consistent with the policies used in preparing Vaaldiam’s audited consolidated financial statements for the year ended 31 December 2006, as adjusted for the significant measurement differences between Canadian generally accepted accounting principles (“CGAAP”) and the Australian equivalent to International Financial Reporting Standards (“AIFRS”). The pro forma consolidated balance sheet should be read in conjunction with the description of the transaction in the Scheme Document and the above-mentioned financial statements, together with notes thereon. The pro forma consolidated balance sheet has been prepared assuming that the acquisition of Elkedra occurred on 30 June 2007. In the opinion of the management of Vaaldiam, this pro forma consolidated balance sheet includes all adjustments necessary for the fair presentation of the acquisition and transactions described in notes 2 to 6 below in accordance with AIFRS. The pro forma consolidated balance sheet has been prepared for illustrative purposes only and may not be indicative of the combined entities’ financial position that would have resulted had the relevant transactions taken place at the date referred to above. 2. ACQUISITION OF ELKEDRA Vaaldiam and Elkedra signed a Merger Implementation Deed dated 4 July 2007, whereby Vaaldiam and Elkedra agreed to merge (the “Acquisition”) by means of a Scheme of Arrangement (the “Scheme”). Under the planned Scheme, each Elkedra shareholder will be entitled to receive 0.52 of a Vaaldiam common share for each Elkedra ordinary share. The Scheme is subject to a number of conditions, including the absence of adverse material changes and the receipt of all necessary regulatory, shareholder and court approvals. There is no assurance that the Scheme will be completed as proposed. A meeting of the shareholders of Elkedra will be held in October 2007 to consider and possibly approve the Scheme. 3. PRIVATE PLACEMENT FINANCING On 19 July 2007, Vaaldiam entered into an agreement with a syndicate of underwriters led by Canaccord Capital Corporation and included National Bank Financial Inc., Westwind Partners Inc. and Wellington West Capital Markets Inc. (collectively, the “Underwriters”), to purchase, on an underwritten private placement basis (the “Offering”), 29,500,000 subscription receipts (the “Subscription Receipts”) for aggregate gross proceeds to Vaaldiam of C$26,550,000. The terms were subsequently revised on 8 August 2007 to reflect an offering of 29,250,000 Subscription Receipts for aggregate gross proceeds to Vaaldiam of C$26,325,000. Each Subscription Receipt can be exercised for one unit of Vaaldiam (each a “Unit”). Each Unit will be comprised of one common share of Vaaldiam and one-half of one common share purchase warrant (each an “Underlying Warrant”). Each Underlying Warrant can be exchanged for one additional common share of Vaaldiam at an exercise price of C$1.20 per share within 24 months from the Closing Date of the Offering. The Offering closed on 15 August 2007.
For
per
sona
l use
onl
y
PRO FORMA CONSOLIDATED BALANCE SHEET AS AT 30 JUNE 2007
(EXPRESSED IN AUSTRALIAN $ UNLESS OTHERWISE INDICATED) (UNAUDITED)
3
The Underwriting Agreement provided for Vaaldiam to pay the Underwriters a commission of 6% of the aggregate gross proceeds. Vaaldiam will also issue to the Underwriters 1,755,000 warrants (“Broker Warrants”), whereby each Broker Warrant will be exercisable to acquire one Unit of Vaaldiam at a price of $0.90 within 18 months from the Closing Date of the Offering. The pro forma consolidated balance sheet reflects the effect of Vaaldiam’s private placement that was completed in August 2007 for assumed net proceeds of $27,125,641. 4. IN SPECIE DISTRIBUTION OF ASSOCIATE COMPANY BY ELKEDRA On 3 March 2007, Uramet Minerals Limited (“Uramet”) was registered as a wholly owned subsidiary of Elkedra, with Elkedra holding 25,000,000 ordinary shares. On 13 April 2007, Elkedra entered into a Mineral Rights Deed with Uramet to spin off its uranium and base metal properties in Australia to Uramet. On 2 May 2007, Uramet filed a prospectus for an Initial Public Offering of 35,000,000 ordinary shares, which closed on 6 June 2007. In the related prospectus, Elkedra indicated that, subject to obtaining the necessary shareholder and regulatory approvals, Elkedra will distribute its shares in Uramet in specie to the existing Elkedra shareholders within 12 months of Uramet’s listing on the ASX. On 15 June 2007, Uramet was admitted to the Official List of the ASX and commenced to trade on the ASX on 19 June 2007. On 30 June 2007, Elkedra held 25,000,000 Uramet shares (the “In Specie Shares”), representing 38.46% of the Uramet shares on issue. At a shareholders’ meeting held on 17 August 2007, resolutions were passed to distribute the In Specie Shares to shareholders on a pro-rata basis by way of a reduction of Elkedra’s share capital. The In Specie distribution will take place on 10 September 2007, prior to the Acquisition by Vaaldiam. As a result, the carrying value of the investment at 30 June 2007, amounting to $5,704,088, was assumed to not be included in the net assets acquired (see note 5). 5. PRO FORMA ASSUMPTIONS AND ADJUSTMENTS RELATED TO THE ELKEDRA ACQUISITION Based on Vaaldiam’s closing price of C$0.87 on 30 June 2007, and assuming 107,330,655 Elkedra ordinary shares outstanding on the same date, Vaaldiam will issue approximately 55,811,940 common shares valued at C$48,556,388 (equivalent to A$53,776,199) to Elkedra shareholders. The Acquisition has been accounted for using the purchase method of accounting and is summarized below:
Issuance of 55,811,940 Vaaldiam shares $ 53,776,199 Issuance of 6,309,334 Vaaldiam options 2,377,960 Transaction costs (estimated) 750,000 Purchase price $ 56,904,159
The preliminary allocation of the purchase price to the net assets acquired is as follows:
Current assets $ 2,914,199 Property, plant and equipment 83,733,322 86,647,521 Less: current liabilities (4,228,346) Less: long-term liabilities (5,000,000) Less: net future income taxes (20,515,016) Fair value of net assets acquired $ 56,904,159
It has been assumed for the purposes of the pro forma consolidated balance sheet that all of Elkedra’s outstanding stock options and warrants that were in the money as at 30 June 2007 were considered exercised as at that date for total gross proceeds of $628,649, while those that were out of money were issued Vaaldiam options with a fair value of $2,377,960.
For
per
sona
l use
onl
y
PRO FORMA CONSOLIDATED BALANCE SHEET AS AT 30 JUNE 2007
(EXPRESSED IN AUSTRALIAN $ UNLESS OTHERWISE INDICATED) (UNAUDITED)
4
The above purchase price allocation has been made on a preliminary basis. The determination of the purchase price will be based upon the fair value of the assets purchased and the liabilities assumed at the effective date of the acquisition and other information available at that date and the determination of certain tax values of those net assets. Accordingly, the actual amounts for each of the assets and liabilities acquired may differ from the pro forma amounts, and the variations may be material. 6. HISTORICAL VAALDIAM BALANCE SHEET
Vaaldiam - CGAAP
GAAP Differences
Vaaldiam - AIFRS
ASSETS Current Assets Cash and cash equivalents $ 3,161,253 $ $ 3,161,253 Trade and other receivables 268,402 268,402 Inventories - - Other current assets - - Financial assets - -
Investments accounted for using equity meth - -
Total Current Assets 3,429,655 3,429,655
Non-Current Assets Trade and other receivables 127,097 127,097 Property, plant and equipment 3,338,881 6,643,205 9,982,086 Other non-current assets 19,946,155 (6,643,205) 13,302,950 Financial assets 492,223 492,223
Total Non-Current Assets 23,904,356 23,904,356
TOTAL ASSETS 27,334,011 27,334,011
LIABILITIES Current Liabilities Trade and other payables 740,954 740,954 Short-term borrowings - - Short-term provisions - -
Total Current Liabilities 740,954 740,954
Non-Current Liabilities Long-term borrowings - - Future income taxes 2,082,891 2,082,891
Total Non-Current Liabilities 2,082,891 2,082,891
TOTAL LIABILITIES 2,823,845 2,823,845
NET ASSETS $ 24,510,166 $ 24,510,166
EQUITY $ 24,510,166 $ 24,510,166
TOTAL EQUITY $ 24,510,166 $ 24,510,166 F
or p
erso
nal u
se o
nly
PRO FORMA CONSOLIDATED BALANCE SHEET AS AT 30 JUNE 2007
(EXPRESSED IN AUSTRALIAN $ UNLESS OTHERWISE INDICATED) (UNAUDITED)
5
Vaaldiam’s consolidated balance sheet as at 30 June 2007 was prepared in accordance with CGAAP, which differs in some respects from AIFRS. The effect of such differences on Vaaldiam’s consolidated balance sheet, where material, is set out below: Property, plant and equipment, mineral properties and deferred exploration cost: Under CGAAP, exploration and development costs of mineral properties can be deferred until the mine is in full commercial production, whereby such costs will be amortized over the life of the mine using a unit of production basis. Under AIFRS, an exploration asset will not be classified as such when the technical feasibility and commercial viability of extracting a mineral resource are demonstrable. As at 30 June 2007, Vaaldiam’s Duas Barras mine is being commissioned, and its costs are recorded as mineral properties and deferred exploration costs. Under AIFRS, these would be classified as property, plant and equipment. The reporting currency of Vaaldiam is the Canadian dollar. The consolidated balance sheet of Vaaldiam as at 30 June 2007 has been converted into Australian dollars using a foreign exchange rate of C$1 = A$1.1075.
For
per
sona
l use
onl
y
3. RISK FACTORS 3.1 Introduction Despite the positive expectations arising out of the Merger, after Vaaldiam has acquired all of the Scheme Shares, the financial performance of Vaaldiam and/or the value of its Common Stock may be adversely affected by a number of factors, either specific to Vaaldiam, Elkedra or the mining industry. The material risks set out in this section 3 may not be exhaustive. Additional risks and uncertainties not presently known to Vaaldiam or that the directors of Vaaldiam presently do not consider to be material, may also affect Vaaldiam’s business after the merging of its business with Elkedra. None of Vaaldiam, its directors or any other person warrants, or guarantees in any respect whatsoever, the financial performance of Vaaldiam or the price of the common stock. Scheme Participants in doubt about how to act, should seek independent professional advice before deciding on how to vote on the Scheme of Arrangement. The following discussion of risk relates to the risks associated with mining and exploration in general and Vaaldiam in particular. Vaaldiam endeavours to hedge risk by acquiring and developing mainly advanced properties and by maintaining a satisfactory working capital position. In addition, Vaaldiam endeavours to structure its relationships with its joint venture partners so as to minimize the amount of equity that would have to be raised to bring a property to production. For example, the arrangements with Rio Tinto relative to the Pimenta Bueno and Catalão Properties. 3.2 External Risk Factors Mineral Exploration Risks Mineral exploration and development involves a high degree of risk as few properties which are explored are ultimately developed into profitable producing mines. With respect to Vaaldiam’s properties, should diamond resources exist on a property, significant expenditures would be required to confirm ore reserves or resources sufficient to commercially mine and to obtain the necessary equity and debt financing to develop the property to production. Should a diamond resource be outlined on a property, there can be no assurance that the diamond resource on such property can be commercially mined. Whether or not a particular property is identified to contain a commercially exploitable diamond deposit would depend on the results of an exploration program and a feasibility study and the recommendations of duly qualified engineers, geologists and diamond appraisers, all of which involves significant expenditures. Any decision to advance a property to production would involve careful consideration of certain factors including, but not limited to: (a) the cost of bringing the property to production, including exploration and development expenditures, completion of a feasibility study and construction of production facilities; (b) availability and cost of financing; (c) estimated ongoing production costs; (d) estimated market prices for the various qualities of diamonds to be produced; (e) the cost of environmental compliance; and (f) the perceived risk of investing in, or lending to, operations in a particular country. Even after careful consideration has been given to the aforementioned economic variables, actual results can vary significantly from what was expected.
For
per
sona
l use
onl
y
Availability of Capital Since there are many junior, intermediate and senior mining companies competing for investment capital, sufficient funding may not be available for Vaaldiam to undertake the required exploration expenditures on its properties, and even where a property might be determined to be economically feasible to develop to production, the necessary funding to do this might not be available at a particular time or at all. Vaaldiam relies to a great degree on outside financing to provide working capital for exploration, administration expenses and to maintain properties in good standing. The unavailability of outside capital when needed could result in the curtailment or slow down of exploration activities or possibly the loss of a property and could hinder the ability of Vaaldiam to function. Environmental Risks and Other Regulatory Requirements The current or future operations of Vaaldiam, including development activities and commencement of production on its properties, require permits from various federal and local government authorities, and such operations are and would be governed by laws and regulations governing prospecting, development, mining, production, mine safety and other matters. Companies engaged in the development and operation of mines and related facilities generally experience increased costs and delays in production and other schedules as a result of the need to comply with applicable laws, regulations and permits. There can be no assurance that all permits which Vaaldiam may require for the commencement of exploration, construction of mining facilities and conduct of mining operations will be obtainable on reasonable terms or that such laws and regulations would not have an adverse effect on any mining project which Vaaldiam might undertake. Failure to comply with applicable laws, regulations and permitting requirements may result in enforcement actions including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional equipment or remedial actions. Parties engaged in mining operations may be required to compensate those suffering loss or damage by reason of the mining activities and may have civil or criminal fines or penalties imposed upon them for violation of applicable laws or regulations. Amendments to current laws, regulations and permits governing operations and activities of mining companies, or more stringent implementation thereof, could have a material adverse impact on Vaaldiam and cause increases in capital expenditures or production costs or reductions in levels of production at producing properties or require abandonment or delays in the development of new mining properties. Country Risk Vaaldiam’s operations may be exposed to various levels of political, economic, and other risks and uncertainties depending on the country or countries in which it operates. These risks and uncertainties include, but are not limited to, terrorism; hostage taking; military repression; fluctuations in currency exchange rates; high rates of inflation; labour unrest; the risks of civil unrest; expropriation and nationalization; renegotiation or nullification of existing concessions, licenses, permits and contracts; illegal mining; changes in taxation policies; restrictions on foreign exchange and repatriation; and changing political conditions, currency controls, and governmental regulations that favour or require the awarding of contracts to local contractors, or require foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction.
For
per
sona
l use
onl
y
Future political and economic conditions may result in a government adopting different policies with respect to foreign development and ownership of mineral resources. Any changes in policy may result in changes in laws affecting ownership of assets, foreign investment, taxation, government royalties, rates of exchange, diamond sales, environmental protection, labour relations, price controls, repatriation of income, and return of capital, which may affect both the ability of Vaaldiam to undertake exploration and development activities in respect of future properties in the manner currently contemplated, as well as its ability to continue to explore, develop, and operate those properties to which it has rights relating to exploration, development, and operations. Currently, Vaaldiam is materially dependent upon its foreign operations, as its primary properties are located in Brazil. Any changes in regulations or shifts in political attitudes in Brazil are beyond the control of Vaaldiam and may adversely affect its business, financial condition and prospects. Future development and operations may be affected in varying degrees by one or more of the factors set forth above. The effect of these factors cannot be accurately predicted. 3.3 Vaaldiam’s Specific Risks Dependence on Key Personnel Vaaldiam’s management is comprised of relatively few key individuals. The loss of any of these key individuals, if not replaced, could have an adverse effect on Vaaldiam’s business, financial condition and prospects. Marketing and Foreign Exchange Risk As rough diamond prices are normally denominated in United States dollars, as Vaaldiam generates sales revenues in the future from the sale of diamonds, a weakness in the United States dollar could reduce overall sales revenues expressed in currencies which the United States dollar has weakened against. Title to Properties Although Vaaldiam has taken steps to verify title to mineral properties in which it has an interest, these procedures do not guarantee Vaaldiam’s title. Such properties may be subject to prior agreements or transfers and title may be affected by undetected defects. Diamond Prices The profitability of Vaaldiam’s operations will be dependent upon, among other things, the market price of the diamonds extracted. The market for diamonds is sensitive to changes in the global economic climate, particularly the United States economy. Prices of diamonds are affected by numerous factors beyond the control of Vaaldiam, including international, economic and political conditions, levels of supply and demand, currency availability, inventory levels, interest rates, rate of inflation and currency exchange rates. If the market price of diamonds should drop dramatically, the value of Vaaldiam’s properties which are being explored or developed could also drop dramatically and Vaaldiam may not be able to recover its investment in those properties. The decision to put a mine into production, and the commitment of the funds necessary for that purpose, must be made long before the first revenues from production will be received. Diamond price fluctuations as well as production costs between the time that such a
For
per
sona
l use
onl
y
decision is made and the commencement of production can significantly change the economics of any mine. With increasing competition in the diamond industry, the prices for rough diamonds may be subjected to the effects of market forces, both positive and negative, to a higher degree than has been experienced in the past. This may lead to more frequent price fluctuations than has previously been the case. Relationship with Joint Venture Parties From time to time, Vaaldiam enters into joint ventures with other mining companies and are subject to the risks normally associated with the conduct of joint ventures. The existence or occurrence of one or more of the following circumstances and events could have a material adverse impact on Vaaldiam’s profitability or the viability of its interests held through joint ventures, which could have a material adverse impact on Vaaldiam’s results of operations and financial condition:
• inability to exert influence over certain strategic decisions made in respect of joint venture properties;
• disagreement with partners on how to develop and operate mines efficiently; • inability of partners to meet their obligations to the joint venture or third parties; and • litigation between partners regarding joint venture matters.
Failure to Make Required Royalty Payments Vaaldiam’s mining properties are subject to various royalty and land payment agreements. Failure by Vaaldiam to meet its payment obligations under these agreements could result in the loss of related property interests which could have an adverse effect on Vaaldiam’s business, financial condition and prospects. Competition Vaaldiam competes with other mining companies and individuals for mining claims and leases on exploration properties and the acquisition of exploration and mining assets. Vaaldiam also competes with other mining companies to attract and retain skilled and experienced executives. Vaaldiam cannot assure that it will continue to be able to compete successfully with its competitors in acquiring such properties and assets or in attracting and retaining skilled and experienced executives and such inability could have an adverse effect on Vaaldiam’s business, financial condition and prospects. Enforcement of Civil Liabilities As the major assets of Vaaldiam are located outside of Canada, it may be difficult or impossible to enforce judgments granted by a court in Canada against the assets of Vaaldiam, or the management of Vaaldiam, residing outside of Canada. Future Profitability of Operations Cannot be Assured Vaaldiam had net losses of C$1,007,251 and C$3,517,506 for 2005 and 2006, respectively and C$4,147,487 during the six months ended 30 June 2007. Vaaldiam’s ability to operate profitably in the future will depend on, among other things, the success of its exploration activities, its ability to bring its properties into production, the price of diamonds and its ability to control
For
per
sona
l use
onl
y
costs. There can be no assurance Vaaldiam can become profitable or even generate sufficient cash flow to sustain its operations and development and exploration activities at current levels. Insurance Coverage Vaaldiam’s business is subject to a number of risks and hazards generally, including adverse environmental conditions, accidents, labour disputes, adverse property ownership claims, unusual or unexpected geological conditions, ground or slope failures, changes in the regulatory environmental and natural phenomena such as inclement weather conditions, floods and earthquakes. Such occurrences could result in damage to mineral properties or production facilities, personal injury or death, environmental damage to Vaaldiam’s properties or the properties of others, delays in mining, monetary losses and legal liability. Available insurance does not cover all the potential risks associated with a mining company’s operations. Vaaldiam may also be unable to maintain insurance to cover insurable risks at economically feasible premiums, and insurance coverage may not be available in the future or may not be adequate to cover any resulting loss. Moreover, insurance against risks such as the validity and ownership of mining claims and environmental pollution or other hazards as a result of exploration and production is not generally available to Vaaldiam or to other companies in the mining industry on acceptable terms. As a result, Vaaldiam might become subject to liability for pollution or other hazards for which it is uninsured or for which it elects not to insure because of premium costs or other reasons. Losses from these events may cause Vaaldiam to incur significant costs that could have a material adverse effect upon its financial condition and results of operations.
For
per
sona
l use
onl
y
4. VAALDIAM’S CONSIDERATION FOR ELKEDRA’S SHARES Under the Scheme of Arrangement, the shareholders of Elkedra will receive 0.52 of a Vaaldiam share for each Elkedra share held by them. The value in Australian dollars of the Vaaldiam offer per Elkedra share will fluctuate from day to day due to a combination of movements in Vaaldiam’s share price on the Toronto Stock Exchange and movements in the rate of exchange between the Australian and Canadian dollars. Vaaldiam has arranged with the Australian stockbroking firm of Patersons Securities Limited to sell Vaaldiam shares on behalf of former Elkedra shareholders for a period of one year from the date that the Scheme becomes effective. Patersons Securities Limited's contact details are as follows: Level 23, Exchange Plaza, 2 The Esplanade, Perth, Western Australia, 6000 - GPO Box W2024, Perth, Western Australia, 6846 (reference: Sandra Burton: (08) 9263-1201, [email protected], or Jane Wallace (08) 9263-1193, [email protected]). 5. INFORMATION ABOUT VAALDIAM SHARES 5.1 Rights Attaching to Vaaldiam Shares
The following is a brief summary of the rights and liabilities which will attach to the Vaaldiam Shares to be issued pursuant to the Scheme: Holders of Vaaldiam Shares will be entitled:
• to receive notice of and attend at all general meetings of shareholders of Vaaldiam; • to vote at all general meetings of shareholders;
• to receive pro rata dividends, if and when declared by Vaaldiam on the common shares;
• to receive pro rata the remaining property or assets of Vaaldiam on the liquidation,
winding-up or dissolution of Vaaldiam; and
• to elect a board of directors consisting of the number of directors set pursuant to Vaaldiam’s constitution.
The authorized capital of Vaaldiam consists of an unlimited number of common shares without par value. 5.2 Issued and Outstanding Securities Upon implementation of the Scheme of Arrangement and the acquisition by Vaaldiam of all outstanding Elkedra Options, Vaaldiam will have the following securities on issue: Common shares issued and fully paid 168,073,997 Common shares issuable on exercise of warrants 17,257,500 Common shares issuable on exercise of stock options 13,364,334 Total 198,695,831
For
per
sona
l use
onl
y
5.3 Details of Current Substantial Holders of Common Shares
Shareholder Shares Held % CANDLEWOOD FINANCIAL CORP. 28,558,833 34.3 RBC GLOBAL PRECIOUS METALS FUND 4,000,000 4.8 CAISSE DE DEPOT ET PLACEMENT DU QUEBEC 3,071,000 3.7 DMP RESOURCE CLASS 3,000,000 1.4 STANDARD SECURITIES CAPITAL CORPORATION 2,780,885 3.3 SENTRY SELECT PRECIOUS METALS FUNDS 2,144,000 2.6 MAJESCOR RESOURCES INC. 1,733,102 2.1 BTR GLOBAL PROPERTIES TRADING LIMITED 1,269,592 1.5 AGF PRECIOUS METALS FUND 1,252,500 1.5 GOODMAN AND COMPANY 1,200,000 1.4 PETER MARRONE 1,105,749 1.3 USGI WORLD PRECIOUS METALS FUND 1,081,000 1.3 USGI GLOBAL INVESTORS FUND 1,002,000 1.2 CAMBRIDGE INVESTMENTS CV 858,487 1.0 AGF CANADIAN SMALL CAP 626,250 0.8 KENNETH JOHNSON 528,287 0.6 FRANKLIN TEMPLETON FUND 513,800 0.6 CIBC SECURITIES 468,300 0.6 CANADIAN EQUITY FUND 315,700 0.4 CAPTAUR INVESTMENTS LTD 227,205 0.3 SENTRY SELECT MINING FUND 200,000 0.2 FIRST CANADIAN INSURANCE 160,000 0.2 ANTENOR SILVA 150,000 0.2 JUVENAL MESQUITA 150,000 0.2 HSBC FUND 150,000 0.2 PETER BOJTOS 110,375 0.1 Total 56,657,065 65.8
5.4 Substantial Shareholders As of the date of this Scheme Booklet, to the knowledge of the directors and senior officers of Vaaldiam, no individual or corporation beneficially owns, directly or indirectly, or exercises control or direction over greater than ten percent (10%) of the issued and outstanding securities of Vaaldiam other than Candlewood which owns 28,558,833 common shares or 34.3% of the issued and outstanding common shares. 5.5 Vaaldiam’s Stock Option Plan The following is a brief description of the principal terms of the Option Plan, in its current form, which description is qualified in its entirety by the terms of the Option Plan:
1. The aggregate number of common shares which may be issued and sold under the Option Plan will not exceed 10% of the issued and outstanding common shares at the time of grant of any option under the Option Plan. The maximum number of options currently issuable is 8,320,120. There are 7,055,000 options issued representing approximately 8.5% of the issued and outstanding common shares as at 30 June 2007 with a maximum of 1,265,120 (representing approximately 1.5% of the issued and outstanding common shares as at 30 June 2007) options eligible to be granted as at 30 June 2007.
For
per
sona
l use
onl
y
2. The Board of Directors of Vaaldiam (“Board”) shall fix the option price per share which shall not be less than the market price in Canadian dollars on the TSX of the common shares at the time of granting of such option.
3. Stock options under the Option Plan may be granted by the Board to directors, senior
officers, employees or consultants of Vaaldiam, collectively known as the Participants.
4. Options granted under the Option Plan are exercisable over a period not exceeding
ten years.
5. At the discretion of the Board options granted may vest immediately on the date of grant or in stages.
6. The aggregate number of common shares that can be issued under the Option Plan is
restricted as follows:
(a) The maximum number of common shares which may be issued to any one individual in a 12 month period under the Option Plan, together with all other share incentive arrangements, shall not exceed 5% of the issued shares of Vaaldiam at the time of granting;
(b) The maximum number of common shares which may be issued to all insiders at
any time under the Option Plan, together with all other incentive agreements, shall not exceed 10% of the issued shares of Vaaldiam; and
(c) The maximum number of common shares which may be issued to any one
consultant in a 12 month period shall not exceed 2% of the issued shares of the Vaaldiam at the time of granting.
7. No option is transferable or assignable by the Participant other than by will or the
laws of descent and distribution and an option shall be exercisable during his or her lifetime only by the participant.
8. Appropriate adjustments in the number of common shares and in the exercise price of
the options, are to be made to give effect to adjustments in the number of common shares resulting from any subdivisions, consolidations or reclassifications of the common shares, the payment of stock dividends by Vaaldiam or other relevant changes in the capital structure of Vaaldiam.
9. Options granted under the Option Plan terminate on the earlier of (i) their date of
expiration, (ii) 90 days after the option holder ceases to be an eligible person, other than by reason of retirement, permanent disability or death, (iii) 180 days after the date of the death of the option holder, (iv) 90 days after termination of the option holder by reason of permanent disability or retirement, provided that if the option holder shall die within such 90 day period, then such right shall be extended to 90 days following the end of such 90 day period.
10. The Board may amend, vary or discontinue the Option Plan at any time subject to
certain regulatory restrictions. Any such amendment, variance or discontinuance of the Option Plan is subject to the approval thereof by any stock exchanges on which the common shares are listed and posted for trading.
For
per
sona
l use
onl
y
5.6 Dividends There are no restrictions in Vaaldiam’s constating documents that would restrict or prevent Vaaldiam from paying dividends. Vaaldiam has not paid any dividends on its common shares to date. It is the present policy of the board of directors of Vaaldiam to retain any earnings to finance the growth and development of Vaaldiam’s business and therefore management of Vaaldiam does not anticipate paying any dividends in the immediate or foreseeable future. 6. VAALDIAM’S REPORTING Vaaldiam is subject to the continuous disclosure requirements of the TSX and the various Canadian Securities Commissions. Vaaldiam continuous disclosure filings are reflected on the following websites:
Website Information Filed www.sedar.com Annual and quarterly reports, news, releases, material change
reports, technical reports, notice of meetings, management information circulars, certifications of filings, management discussions and analysis reports and code of conduct
www.sedi.ca Insider reports 7. VAALDIAM’S SIGNIFICANT ACCOUNTING POLICIES 7.1 Basis of Preparation The consolidated financial statements have been prepared by Vaaldiam in accordance with Canadian generally accepted accounting principles (“CGAAP”). 7.2 Principles of Consolidation The consolidated financial statements include the accounts of Vaaldiam, its wholly owned subsidiary, Vaaldiam do Brasil Mineração Ltda. (“VBM”), VBM’s wholly owned subsidiary Mineração Montes Claros Ltda. (“Montes Claros”) and VBM’s 60.0% owned subsidiary Cajueiro Mineração Ltda. (“Cajueiro”), all incorporated in Brazil. Vaaldiam owns 40% of Cajueiro directly. All inter-company balances and transactions have been eliminated on consolidation. 7.3 Cash and Cash Equivalents Cash and cash equivalents include all cash on hand, bank and all highly liquid short-term investments. Vaaldiam considers all highly liquid short-term investments with a maturity of three months or less at the date of purchase to be cash equivalents. 7.4 Property and Equipment Vaaldiam’s property and equipment is recorded at cost and is amortized over the useful life of the assets as follows:
Leasehold improvements - 30%, declining balance basis Exploration Machinery - 30%, declining balance basis Vehicles - 30%, declining balance basis Furniture and Fixtures - 20%, declining balance basis Computers - 30%, declining balance basis
For
per
sona
l use
onl
y
7.5 Assets Under Construction Vaaldiam’s assets under construction are recorded at cost and are transferred to property and equipment together with any pre-production revenues at the commencement of commercial production. 7.6 Exploration Properties Vaaldiam considers its exploration costs to have the characteristics of property, plant and equipment. As such, Vaaldiam defers all exploration costs including acquisition costs, field exploration and field supervisory costs relating to specific properties, until those properties are brought into production, at which time they will be amortized on a unit-of-production basis based on proven and probable reserves or until the properties are abandoned, sold or considered to be impaired in value, at which time, an appropriate charge would be made. The recoverability of the carrying value of exploration properties is dependent upon the discovery of economically recoverable reserves, the ability of Vaaldiam to obtain financing or other means to complete development of the properties, and the future profitable production or proceeds from the disposition of the properties. The amounts capitalized represent costs to be charged to operations in the future and do not necessarily reflect the present or future values of particular properties. 7.7 Future Income Taxes Vaaldiam uses the liability method of accounting for income taxes. Under this method of tax allocation, future income and mining tax assets and liabilities are determined based between the financial statement carrying values and their respective income tax bases (temporary differences). Future income tax assets and liabilities are measured using the enacted tax rates and laws expected to be in effect when the temporary differences are likely to reverse. The effect on future income tax assets and liabilities of a change in tax rates is included in income in the year in which the change is enacted or substantially enacted. The amount of future income tax assets recognized is limited to the amount that is more likely than not to be realized. 7.8 Stock-Based Compensation Vaaldiam has a stock-based compensation plan. Vaaldiam accounts for all stock-based payments using the fair value method, calculated based on the Black-Scholes valuation model. Under this method, compensation cost attributable to options granted is measured at fair value at the grant date and amortized at that date if the options granted vest immediately. Options normally vest immediately under Vaaldiam’s policy. As the amount of compensation cost amortized is offset by a credit to stock options in the shareholders’ equity account, the compensation cost amortized has therefore no effect on total shareholders’ equity. 7.9 Loss Per Share Basic loss per share is computed by dividing loss available to common shareholders by the weighted average number of common shares outstanding during the year. The treasury stock method is used to calculate diluted loss per share. Diluted loss per share is similar to basic loss per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding assuming that options and warrants, with average
For
per
sona
l use
onl
y
market prices of the year greater than their exercise prices, were exercised and the proceeds used to repurchase common shares. 7.10 Use of Estimates The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, particularly mineral properties, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. 7.11 Long-Lived Assets Long-lived assets are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. To the extent that the carrying amount is not recoverable, an impairment loss is recognized if the carrying amount of the asset exceeds its fair value. 7.12 Asset Retirement Obligations Vaaldiam accrues the legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or normal operation of a long-lived asset. The fair value of a liability for an asset retirement obligation is recorded in the period in which it is incurred. When the liability is initially recorded, the cost is capitalized by increasing the carrying amount of the related long-lived asset. Upon settlement of the liability, a gain or loss is recorded. 7.13 Foreign Currency Translation Vaaldiam’s foreign subsidiaries are operationally and financially dependent and as such, are translated using the temporal method. Under this method, monetary assets and liabilities are translated into Canadian dollars at the rate of exchange in effect at the consolidated balance sheet date and non-monetary assets and liabilities are translated at the historical rate of exchange. Revenues and expenses are translated into Canadian dollars at the annual average exchange rates. Foreign currency gains and losses are recognized in the consolidated statements of loss and deficit. Vaaldiam’s foreign currency balances and transactions are translated under the same method as its subsidiary. 7.14 Flow Through Common Shares Vaaldiam has financed a portion of its exploration activities through the issuance of flow-through shares, which transfer the tax deductibility of exploration expenditures to the investor. The proceeds received on the issuance of such shares have been credited to share capital and the related exploration costs are deferred to exploration properties when incurred. Resource expenditure deductions for income tax purposes related to exploration and development activities funded by flow-through share arrangements are renounced to investors in accordance with
For
per
sona
l use
onl
y
income tax legislation. When these expenditures are renounced, temporary taxable differences created by the renunciation will reduce share capital.
For
per
sona
l use
onl
y
APPENDIX 8
SHAREHOLDER RIGHTS IN CANADA
Vaaldiam is a public company existing under the laws of Canada. The rights of holders of Vaaldiam Shares are governed by Canadian law and by Vaaldiam’s constating documents. As a TSX-listed company, Vaaldiam is subject to the continuing requirements of the listing rules the TSX as well as applicable Canadian securities laws.
Upon implementation of the Scheme, holders of Elkedra Shares will become holders of Vaaldiam Shares.
There are a number of differences between the rights of holders of Elkedra Shares and the rights of holders of Vaaldiam Shares arising from the differences between the corporate laws of Australia and Canada and the constitutional documents of the two companies.
While Elkedra and Vaaldiam believe that the following description covers the material differences between the two companies’ governing laws and constitutional documents, it is a summary only and may not contain all of the information that is important. The summary is qualified in its entirety by applicable Canadian and Australian law and the constitutional documents of Elkedra and Vaaldiam.
VAALDIAM’S CONSTATING DOCUMENTS
Vaaldiam’s constating documents consist of its Articles (which can be amended by a special resolution of shareholders, requiring a two-thirds majority of votes cast at a meeting of shareholders) and its by-laws (which can be amended by special resolution of Vaaldiam's shareholders, requiring a two-thirds majority of votes cast at a meeting of shareholders). The Articles and by-laws together cover substantially the same matters as, and confer on shareholders broadly similar rights as, Elkedra’s constitution.
ADDITIONAL SHAREHOLDER RIGHTS IN CANADA
Takeovers
Acquisitions of Vaaldiam Shares are regulated by provincial securities legislation in Canada. Under this legislation, an offer to acquire Vaaldiam Shares made to a person resident in a province that will result in the offeror holding in excess of 20% of Vaaldiam’s issued shares would constitute a takeover bid. For the purpose of calculating whether the 20% threshold has been reached, securities that are convertible into Vaaldiam Shares are generally required to be included as if such conversion had taken place. Subject to limited exceptions, an offeror must (i) provide all shareholders with a takeover bid circular which includes disclosure about the offer, the offeror, and the target company; (ii) keep the bid open for at least 35 days; and (iii) deliver the circular to each shareholder of Vaaldiam, with the ultimate purchase of shares being pro rata amongst those shareholders who have tendered their shares under the bid. The exceptions to these requirements include the purchase of less than 5% of the issued share capital over a period of 12 months, and offers to no more than five persons in private transactions at no greater than 115% of market price.
The takeover legislation does not apply to acquisitions by way of an issue of new shares (as distinct from a purchase of existing shares).
For
per
sona
l use
onl
y
Canadian takeover legislation also provides an early warning system to notify the market of significant accumulations of securities. Under this system, an acquirer must issue a press release to the public and file a report with provincial securities commissions upon the acquisition of 10% or more of the share capital of a company and upon the acquisition of each additional 2%. The Canada Business Corporations Act (the “Canadian Act”) permits a person who (i) makes a takeover bid for a company, and (ii) under that bid acquires 90% or more of the company’s shares (other than shares held by the offeror or its nominee and affiliates), to acquire the company’s remaining shares, which will be acquired at the bid price unless a court orders otherwise on an application made by the offeree.
As an alternative to a takeover bid, control of a company in Canada may pass through the implementation of a plan of arrangement, which requires shareholder and court approvals as well as, in certain circumstances, an independent valuation.
Share Buybacks
Subject to limited exceptions, the Canadian Act provides that a company may not make a payment to purchase or otherwise acquire shares issued by it if there are reasonable grounds for believing that (i) the company is insolvent, or (ii) making the payment or providing the consideration would render the company insolvent.
Subject to limited exceptions, provincial securities legislation in Canada provides that any offer made by a company to purchase or otherwise acquire any of its shares must comply with the requirements described above in relation to takeover bids. Available exceptions include a purchase in accordance with the rules of a recognised stock exchange (which includes the TSX), and a purchase pursuant to a right contained in the terms and conditions attaching to the securities. The rules of the TSX currently allow Vaaldiam to repurchase up to either 10% of its public float or 5% of its issued capital on market in any 12 month period, provided that no more than 2% is repurchased in any 30-day period.
Reduction or Return of Capital
The Canadian Act provides that a company may reduce its capital with the approval of shareholders given by special resolution (requiring the approval of the holders of two-thirds of the votes cast at a meeting of shareholders). So long as the capital is reduced to an amount that is not less than the realizable value of the company's assets, less its liabilities.
Derivative Actions
The Canadian Act provides that with the leave of the Court:
(i) a registered holder or a beneficial owner and a former registered holder or beneficial owner of a security of Vaaldiam or of any of its affiliates;
(ii) a director or an officer or a former director or officer of Vaaldiam or any of its affiliates; or
(iii) any other person who, in the discretion of a court, is a proper person to make an application
For
per
sona
l use
onl
y
may bring an action in the name and on behalf of Vaaldiam or its subsidiaries or intervene in an action to which either Vaaldiam or its subsidiaries is a party, for the purpose of prosecuting, defending or discontinuing the action
The Court may grant leave if:
(i) the complainant has given notice to the directors of Vaaldiam or its subsidiary of the complainant's intention to apply to court not less than 14 days before bringing the application, or as otherwise ordered by the court, if the directors of Vaaldiam or its subsidiary do not bring, diligently prosecute or defend or discontinue the action;
(ii) the complainant is acting in good faith; and
(iii) it appears to the Court that it is in the best interests of Vaaldiam or its subsidiary for the legal proceeding to be brought, prosecuted, defended or discontinued.
The Court has broad powers to direct the conduct of any such legal proceeding.
Representative Shareholder Actions
The general civil laws of a number of Canadian provinces make provision for the conduct of class or representative actions. Subject to compliance with the requirements of those laws, Vaaldiam shareholders would, in appropriate circumstances, have resort to representative or class actions to enforce their rights under common law and applicable securities legislation.
Receipt of Notices of Meetings, Accounts and Other Materials
The Canadian Act and applicable Canadian provincial securities legislation require Vaaldiam to send to each of its shareholders copies of:
• its annual financial Scheme Booklets and management’s discussion and analysis of those Scheme Booklets;
• its interim financial Scheme Booklets for the first three, six and nine months of its financial year and management’s discussion and analysis of those Scheme Booklets; and;
• a notice of meeting, form of proxy and an information circular in respect of each meeting of shareholders, including its annual meeting.
Rights to Vote
Each holder of a Vaaldiam Share has the right to vote in the election of directors and in respect of any other matter that is placed before the shareholders for approval. Holders of Vaaldiam Shares also have the right to appoint another person (who need not be a shareholder) to act as their proxy at any meeting of shareholders.
The Canadian Act requires that shareholders of a company approve any sale, lease or other disposition of all or substantially all of the property of the company other than in the ordinary course of business. The approval must be given by special resolution (being a resolution passed by a two-thirds majority of votes cast at a meeting of shareholders).
For
per
sona
l use
onl
y
If a significant transaction by a company otherwise requires the prior approval or acceptance of the TSX, the TSX has the discretion to require shareholder approval of the transaction where it is of the opinion that such approval is desirable having regard to the interests of the company’s shareholders and the investing public. A significant change in Vaaldiam’s business or an acquisition or disposal of substantial assets might, in appropriate circumstances, require such approvals. However, there is no general TSX requirement that shareholders approve such transactions.
Applicable Canadian securities legislation contains comprehensive rules regulating the conduct of related party transactions. Subject to certain exceptions, a related party transaction must:
• be approved by the company’s disinterested directors;
• be the subject of an independent valuation that is provided to shareholders and prepared under the supervision of the disinterested directors; and
• be approved by the disinterested shareholders.
For
per
sona
l use
onl
y
APPENDIX 9
INDEPENDENT EXPERT’S REPORT
For
per
sona
l use
onl
y
FINANCIAL SERVICES GUIDE
AND
INDEPENDENT EXPERT’S REPORT
Elkedra Diamonds NL
18 September 2007
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
Level 8, 256 St George’s Terrace Perth WA 6000 PO Box 7426 Cloisters Square Perth WA 6850 Tel: (61-8) 9360 4200 Fax: (61-8) 9481 2524 AFS Licence Number 246328 Email: [email protected] www.bdo.com.au
BDO Consultants (WA) Pty Ltd
Financial Services Guide
18 September 2007
BDO Consultants (WA) Pty Ltd ABN 92 008 864 435 (“BDO Consultants ” or “we” or “us ” or “ours ” as appropriate) has been engaged by Elkedra Diamonds NL (“Elkedra ”) to provide an independent expert’s report in relation to the proposed merger by scheme of arrangement (“the scheme ”) with Vaaldiam Resources Limited (“Vaaldiam”) You will be provided with a copy of our report as a retail client because you are a shareholder of Elkedra.
Financial Services Guide
In the above circumstances we are required to issue to you, as a retail client, a Financial Services Guide (“FSG”). This FSG is designed to help retail clients make a decision as to their use of the general financial product advice and to ensure that we comply with our obligations as financial services licensees.
This FSG includes information about:
♦ Who we are and how we can be contacted; ♦ The services we are authorised to provide under our Australian Financial Services Licence,
Licence No. 246328; ♦ Remuneration that we and/or our staff and any associates receive in connection with the general
financial product advice; ♦ Any relevant associations or relationships we have; and ♦ Our internal and external complaints handling procedures and how you may access them. Information about us
BDO Consultants (WA) Pty Ltd is a member firm of the BDO Kendalls network in Australia, a national association of separate partnerships and entities. The financial product advice in our report is provided by BDO Consultants (WA) Pty Ltd and not by BDO Kendalls or its related entities. BDO Kendalls and its related entities provide services primarily in the areas of audit, tax, consulting and financial advisory services.
We do not have any formal associations or relationships with any entities that are issuers of financial products. However, you should note that we and BDO Kendalls (and its related entities) might from time to time provide professional services to financial product issuers in the ordinary course of business.
Financial services we are licensed to provide
We hold an Australian Financial Services Licence that authorises us to provide general financial product advice to retail and wholesale clients in relation to proposed or actual mergers, acquisitions, takeovers, corporate restructures or share issues in relation to:
♦ derivates limited to old law securities options contracts and warrants; ♦ debentures, stocks or bonds issued or proposed to be issued by a government; ♦ interests in managed investments schemes (excluding investor directed portfolio services); ♦ securities; and ♦ superannuation.
When we provide the authorised financial services we are engaged to provide expert reports in connection with the financial product of another person. Our reports indicate who has engaged us and the nature of the report we have been engaged to provide. When we provide the authorised services we are not acting for you.
General Financial Product Advice
We only provide general financial product advice, not personal financial product advice. Our report does not take into account your personal objectives, financial situation or needs. You should consider the appropriateness of this general advice having regard to your own objectives, financial situation and needs before you act on the advice
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
Financial Services Guide Page 2
Fees, Commissions and Other Benefits that we may re ceive
We charge fees for providing reports, including this report. These fees are negotiated and agreed with the person who engages us to provide the report. Fees are agreed on an hourly basis or as a fixed amount depending on the terms of the agreement. The fee for this engagement is approximately $40,000.
Except for the fees referred to above, neither BDO Consultants, nor any of its directors, employees or related entities, receive any pecuniary benefit or other benefit, directly or indirectly, for or in connection with the provision of the report.
Remuneration or other benefits received by our empl oyees
All our employees receive a salary. Our employees are eligible for bonuses based on overall productivity but not directly in connection with any engagement for the provision of a report.
We have received a fee from Elkedra for our professional services in providing this report. That fee is not linked in any way with our opinion as expressed in this report.
Referrals
We do not pay commissions or provide any other benefits to any person for referring customers to us in connection with the reports that we are licensed to provide.
Complaints resolution
Internal complaints resolution process
As the holder of an Australian Financial Services Licence, we are required to have a system for handling complaints from persons to whom we provide financial product advice. All complaints must be in writing addressed to The Complaints Officer, BDO Consultants (WA) Pty Ltd, PO Box 7426 Cloisters Square, Perth WA 6850.
When we receive a written complaint we will record the complaint, acknowledge receipt of the complaint within 15 days and investigate the issues raised. As soon as practical, and not more than 45 days after receiving the written complaint, we will advise the complainant in writing of our determination.
Referral to External Dispute Resolution Scheme
A complainant not satisfied with the outcome of the above process, or our determination, has the right to refer the matter to the Financial Industry Complaints Service Limited (“FICS”). FICS is an independent company that has been established to provide free advice and assistance to consumers to help in resolving complaints relating to the financial service industry. FICS will be able to advise you as to whether or not they can be of assistance in this matter. Our FICS Membership Number is F-3820.
Further details about FICS are available at the FICS website www.fics.asn.au or by contacting them directly via the details set out below.
Financial Industry Complaints Services Limited PO Box 579 Collins Street West Melbourne VIC 8007 Toll free: 1300 780 808 Facsimile: (03) 9621 2291 Email: [email protected] Contact details
You may contact us using the details set out at the top of our letterhead on page 1 of this FSG.
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
ELKEDRA DIAMONDS NL
INDEPENDENT EXPERT’S REPORT
TABLE OF CONTENTS
1. I N TR O D U C TI O N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. S UM M AR Y AN D O P I N I O N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
3. D E T AI L S O F TH E SC H EM E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
4. P R O F IL E O F EL KE D R A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
5. R E P O R T R E Q UI R EM E N TS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
6. B AS I S O F EV AL U AT I O N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
7. P R O F IL E O F V AAL D I AM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
8. D I AM O N D M I N I N G AN D TH E D I AM O N D IN D U S TR Y . . . . . . . . . . . . . . . . . . . . . . . . 12
9. V AL U AT I O N M E TH O D O L O G I ES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
10. V AL U ATI O N O F EL K E D R A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
11. V AL U ATI O N O F C O N S I DE R ATI O N TO B E P AI D B Y V AAL D I AM . . . . . . . . . . . 24
12. IS T H E SC H EM E F AI R ? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
13. OTH E R CO N S I D E R ATI O N S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
14. IS T H E SC H EM E RE AS O N AB L E ? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
15. CO N C L U S I O N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
16. SO U R C E S OF IN F O RM ATI O N . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
17. IN D E P E N D E N CE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
18. QU AL I F I C ATI O N S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
19. D I S C L AI M E RS A N D CO N S E N TS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
A P P E N D I C E S
APPENDIX 1 GLOSSARY OF TERMS APPENDIX 2 ASSESSMENT OF THE APPROPRIATE DISCOUNT RATE APPENDIX 3 SYNOPSIS OF COMPARABLE COMPANIES APPENDIX 4 INDEPENDENT SPECIALIST ’S REPORT
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
Level 8, 256 St George’s Terrace Perth WA 6000 PO Box 7426 Cloisters Square Perth WA 6850 Tel: (61-8) 9360 4200 Fax: (61-8) 9481 2524 AFS Licence Number 246328 Email: [email protected] www.bdo.com.au
BDO Consultants (WA) Pty Ltd
18 September 2007
The Directors Elkedra Diamonds NL Level 1 130 Hay Street Subiaco WA 6008 Dear Sirs
INDEPENDENT EXPERT'S REPORT – MERGER WITH VAALDIAM RESOURCES LIMITED
1. INTRODUCTION
BDO Consultants (WA) Pty Ltd (“BDO”) has been engaged by Elkedra Diamonds NL (“Elkedra ”) to prepare an Independent Expert’s Report (“our Report ”) to express an opinion as to whether or not the proposed scheme of arrangement whereby Vaaldiam Resources Limited (“Vaaldiam” ) will acquire all of the issued shares in Elkedra for a consideration of 0.52 Vaaldiam shares for each Elkedra share held (“the Scheme ”) – is in the best interests of non-associated shareholders (“Shareholders ”) of Elkedra.
Our Report is to be included in the Scheme Booklet to be sent to all Shareholders to assist them in deciding whether to accept or reject the Scheme.
2. SUMMARY AND OPINI ON
2.1 Opinion
In Section 13 we determined that the Scheme consideration compares to the value of an Elkedra share, as detailed hereunder.
Value per Share
Low High
Value of an Elkedra share (Section 10) 0.28 0.31
Consideration Offered (Section 12) 0.34 0.38
The above pricing indicates that the Scheme is fair for Shareholders and is in the best interests of Shareholders.
2.2 Reasonableness
We have considered the analysis in Sections 13 and 14 of this report, in terms of both
• advantages and disadvantages of the Scheme; or
• alternatives, including the position of Shareholders if the Scheme does not proceed.
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
In our opinion, the position of Shareholders if the Scheme proceeds is more advantageous than the position if the Scheme does not proceed. Accordingly, we believe that the Scheme is reasonable for Shareholders.
The respective advantages and disadvantages considered are summarised below:
ADVANTAGES AND DISADVANTAGES
Section Advantages Section Disadvantages
14.1.1 The Scheme is fair 14.2.1 Dilution of control
14.1.2 The new enlarged Company will be a leading diamond producer
14.2.2 Risks associated with Great Western transaction
14.1.3 Management expertise drawn from the two companies
14.2.3 Shareholders will hold shares in a TSX listed company rather than an ASX listed company
14.1.4 Vaaldiam has significant cash resources as a result of a recent private placement
14.1.5 Diversified project base, both geographically and geologically, reduces Shareholder risk
3. D E T AI L S O F TH E SC H EM E
3.1 The Scheme
On 4 July 2007 Elkedra announced a proposal from Vaaldiam, whereby Vaaldiam would acquire 100% of Elkedra by way of a Scheme of Arrangement (“the Scheme ”). An overview of the Scheme is provided below.
3.2 Scheme Overview
The Scheme involves the transfer of all Elkedra shares to Vaaldiam in exchange for the issue to Elkedra shareholders of 0.52 Vaaldiam Shares for each of their Elkedra Shares. Elkedra will become a wholly-owned subsidiary of Vaaldiam and be de-listed from the ASX and AIM. Elkedra shareholders will initially hold approximately 40% of the enlarged Vaaldiam, which will continue to be listed on the TSX.
3.3 Merger Implementation Deed
Elkedra and Vaaldiam have entered into a Merger Implementation Deed (“MID”) under which the companies have agreed to merge by way of a Scheme of Arrangement.
Vaaldiam has executed lock-up agreements with existing shareholders of Elkedra who have agreed to vote, in aggregate, approximately 19% of the ordinary shares of Elkedra in favour of the arrangement.
3.4 The Scheme consideration
As stated above, the effect of the implementation of the Scheme is such that each Shareholder will receive 0.52 of a Vaaldiam share for every Elkedra share held.
After the implementation of the Scheme, Vaaldiam will be the only shareholder in Elkedra and the current Elkedra shareholders will hold shares in Vaaldiam instead. Vaaldiam has executed lock-up agreements pursuant to which a number of existing shareholders of Elkedra have
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
agreed to vote an aggregate of 19.9 million Elkedra shares in favour of the Arrangement, representing approximately 18.6% of all outstanding Elkedra shares.
3.5 Capital Structure
The table below shows the current capital structure of Elkedra immediately prior to the Scheme being approved and the capital structure of Vaaldiam after the implementation of the scheme.
Elkedra Pre Scheme Share Structure
Number of Ordinary Shares Number %
Non-associated Shareholders 106,996,910 100%
Total 106,996,910 100%
Vaaldiam Post Scheme Share Structure
Number of Ordinary Shares Number %
Non-associated Shareholders 55,622,793 40.1%
Existing Vaaldiam shareholders 83,201,204 59.9%
Total 138,823,997 100%
4. PROFILE OF ELKEDRA
4.1 Background
Elkedra is a diamond producer and mining and exploration company listed on the Australian Securities Exchange (“ASX” ) and the Alternative Investments Market (“AIM” ) of the London Stock Exchange. Elkedra was listed on the ASX in January 2002 and was admitted to the AIM market in the UK following a placement of 22.5 million shares to UK investors in September 2004.
In 2004, Elkedra acquired 100% of Chapada Diamonds Ltd which through its 100% subsidiary owns and operates the Chapada Alluvial Diamond Project in the state of Mato Grosso in Brazil. Production commenced in June 2006 in Chapada, and the first diamonds produced from the mine were sold in August 2006.
The Company recently undertook a spin-off of its Australian operations into a company called Uramet Limited (“Uramet ”). Uramet raised $7 million through an IPO prospectus and was successfully listed on the ASX on 15 June 2007. The shares in Uramet have been distributed in specie to its Shareholders in recent days.
4.2 Chapada Alluvial Diamond Project
The Chapada alluvial diamond mine is located in the Brazilian state of Mato Grosso, 80km north east of the state capital of Cuiabá.
The Chapada mine is currently the largest diamond mine in South America. The Company operates the mine on a 24 hours a day, 7 days a week basis, and employs approximately 110 people on a full time basis, in addition to a further 70 staff who are employed by a local mining contractor that Elkedra has contracted to work on the mine.
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
The Brazilian tenements secured by Elkedra cover a combined surface area of 285km2, however the probable reserves announced by the Company are based on exploration and sampling contained within two tenements, Quilombo and Peba Lagoinha, which together cover 15km2 .The Company also owns a further seven tenements, comprising 270km2 which are located within a 50km radius of the processing plant.
The Kimberlite source of the Chapada diamonds has not yet been explored for, but the Company believes that the stone size distribution analysis based on the diamonds recovered during bulk sampling indicates that the source of the diamonds may be close to the Company’s tenements.
Development of the Chapada mine and diamond recovery processing plant was completed in June 2006. The Company has disclosed probable reserves of 5.4 million bcm of diamondiferous gravels at a recovered grade of 0.05 carats per bcm (2.1 cts per hundred tonnes) from the Chapada project. The expected life of the mine is 9 years based upon the proposed initial processing rate of 600,000 bcm per annum.
The Company has entered into a marketing agreement with LLD Diamonds Limited, a member of the Lev Leviev Diamond Group. Under this agreement Leviev will acquire all of the diamonds produced by the Chapada project for a period of 8 years from July 2006, at prices determined by independent market valuation. This agreement will remain in force following the implementation of the Scheme.
4.3 Other exploration areas
A further seven tenements comprising an additional 270km2 are located within a 50km radius of the processing plant. To date, no substantial modern exploration work has been carried out on these tenements, in particular they have not been expensively sampled, but their geological setting is almost identical to that of the existing mine.
4.4 Capital Structure
The capital structure of Elkedra as at 17 September 2007 was as follows:
Ordinary Shares 17 September 2007
Total Ordinary Shares on Issue 106,966,910
Top Twenty Shareholders – Ordinary Shares 78,835,906
Top Twenty Shareholders - % of Ordinary Shares on Issue 73.7%
Source: Elkedra Share Registry report as at 17 September 2007
The spread of Elkedra shareholders as at 17 September 2007 was as follows:
Range of Shares Held No. of Ordinary Shareholders
No. of Ordinary Shares
1-1,000 120 77367
1,001-5,000 466 1,411,950
5,001-10,000 213 1,737,633
10,001-100,000 367 12,010,479
100,001 – and over 59 91,729,481
TOTAL 1,225 106,966,910
Source: Elkedra Share Registry report as at 17 September 2007
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
The number of Shares held by the most substantial shareholders as at 17 September 2007 is detailed below:
Shareholder Ordinary Shares
% Shares Held
Credit Suisse Client Nominees (UK) Limited 17,734,134 16.58
L L Mining Corporation BV 10,000,000 9.35
ANZ Nominees Limited 9,954,183 9.31
Samcor Investments PL 9,249,413 8.65
Sevices RBC Dexia Invest 7,515,728 7.03
Credit Suisse Client Nominees (Europe) 5,253,671 4.91
HSBC Custody Nominees (Aust) Limited 3,465,765 3.24
HSBC Global Custody Nominee (UK) (Gartmore) 2,675,000 2.50
Citicorp Nominees Pty Ltd 2,504,151 2.34
Source: Elkedra Share Registry report as at 17 September 2007
4.5 Consolidated Historical Balance Sheets
Elkedra Diamonds NL Ref Audited
30 June 2007 $
Audited 30 June 2006
$
Audited 30 June 2005
$ Current assets
Cash and cash equivalents 2,019,668 4,235,270 2,564,273
Trade and other receivables 35,355 6,100 -
Inventories 230,527 52,182 -
Other current assets - 6,294 - Investments accounted for using the equity method
1 5,704,088 - -
Total current assets 7,989,638 4,299,846 2,564,273
Non-current assets
Property, plant and equipment 18,730,742 20,614,490 10,986,885
Other non-current assets 43,702 - 217,878
Financial assets 16,000 13,500 6,000
Total non-current assets 18,790,444 20,627,990 11, 210,763
Total assets 26,780,082 24,927,836 13,775,036
Current liabilities
Trade and other payables 668,475 751,334 500,531
Short term borrowings 2 3,190,215 2,853,314 1,063,327
Short term provisions 369,656 196,529 27,898
Total current liabilities 4,228,346 3,801,177 1,59 1,756
Non-current liabilities
Long term borrowings 2 5,000,000 8,028,787 2,089,889
Total non-current liabilities 5,000,000 8,028,787 2,089,889
Total liabilities 9,228,346 11,829,964 3,681,645
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
Elkedra Diamonds NL Ref Audited
30 June 2007 $
Audited 30 June 2006
$
Audited 30 June 2005
$ Net Assets 17,551,736 13,097,872 10,093,391
Equity
Issued capital 30,696,272 23,002,328 17,960,750
Reserves 7,771,072 2,162,765 -
Accumulated losses (20,915,608) (12,067,221) (7,867,359)
Total equity 17,551,736 13,097,872 10,093,391 Source: Elkedra 2005 and 2006 annual reports and audited accounts for the year ended June 2007
Notes to the Balance Sheet 1. Investments comprise Uramet Limited Shares which were distributed in specie to
Shareholders on 17 September 2007. 2. Short and long term borrowings comprise loans from LinQ Capital Limited, which
were drawn down to finance the Chapada project.
4.6 Consolidated Historical Income Statements
Elkedra Diamonds NL
Note Audited Year ended
30 June 2007 $
Audited Year ended
30 June 2006 $
Audited Year ended
30 June 2005 $
Revenue 1 10,386,999 - 129,724 Cost of sales 1 (13,015,452) - -
(2,628,453) - 129,724 Other Income 241,987 452,737 - Depreciation and amortisation (299,307) (121,479) (75,004) Employee benefits (2,391,767) (945,301) (888,622) Site infrastructure costs (468,381) - - Other site expenses (350,465) - - Drilling costs - - (101,337) Tenement holding costs - - (182,521) Other field exploration costs (257,953) (430,282) (206,503) Administration expenses (1,512,124) (1,194,545) (902,059) Tenements written off - (152,400) (2,275,202) Finance costs (1,023,497) (276,162) (252,737) Share based payment (70,714) (1,577,444) - Foreign exchange translations 173 45,014 39,346 Share of net losses of associates (45,912) - - Other expenses (41,974) - (61,653) Loss before income tax (8,848,387) (4,199,862) (4,7 76,568) Income tax expense - - -
Loss for the year (8,848,387) (4,199,862) (4,776,56 8) Loss attributable to members of the parent equity (8,488,388) (4,199,862) (4,776,568)
Source: Elkedra 2005 and 2006 annual reports and audited accounts for the year ended June 2007
Note 1: Revenue and Cost of sales have increased in 2007, and Production costs have arisen due to the company commencing production from the Chapada diamond mine.
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
5. REPORT REQUIREMEN TS
The Scheme is to be implemented pursuant to Section 411 of the Corporations Act (“Section 411”). Part 3 of Schedule 8 to the Corporations Act prescribes the information to be sent to shareholders in relation to schemes of arrangement pursuant to Section 411.
Section 411 of the Corporations Act requires an independent expert’s report if:
o The corporation that is the other party to the Scheme has a common director or directors with the company which is the subject of the Scheme; or
o The corporation that is the other party is entitled to more than 30% of the voting shares in the subject company.
Following the Scheme, Vaaldiam will own 100% of Elkedra. The existing Elkedra shareholders will receive approximately 40% of the voting shares in Vaaldiam. This means that, initially, Vaaldiam shareholders will retain approximately 60% of the voting shares in Vaaldiam, which in turn controls 100% of Elkedra.
Accordingly, there is a requirement for an independent expert’s report to be provided to Elkedra Shareholders pursuant to Section 411. The Directors of Elkedra have requested that BDO prepare this Report in accordance with Section 411, and to provide an opinion to Shareholders as to whether the Scheme is fair and reasonable and in the best interests of Shareholders.
6. BASIS OF EV ALU ATIO N
6.1 Regulation Guidelines
In determining whether the Scheme is fair and reasonable and in the best interests of Shareholders, we have had regard to the views expressed by the ASIC in their Regulatory Guides 12, 42, 74 and 75. These Regulatory Guides suggest that an opinion as to whether schemes of arrangement are fair and reasonable should entail consideration of all the circumstances of the scheme.
Such consideration includes a comparison of the likely advantages and disadvantages for shareholders if the scheme is accepted, with the advantages and disadvantages to shareholders if it is not accepted.
Schemes of arrangement pursuant to Section 411 can encompass a wide range of transactions. Accordingly, “in the best interests” must be capable of a broad interpretation to meet the particular circumstances of each transaction. This involves a judgement on the part of the expert as to the overall commercial effect of the transaction, the circumstances that have led to the transaction and the alternatives available. The expert must weigh up the advantages and disadvantages of the proposed transaction and form an overall view as to whether Shareholders are likely to be better off if the proposed transaction is implemented than if it is not.
6.2 Adopted Basis of Evaluation
BDO consider that a report and analysis undertaken under the concepts of fair and reasonable as expressed in Regulatory Guide 75 is consistent with determining whether the Scheme is fair and reasonable and in the best interests of Shareholders.
Having regard to the above, BDO has completed this analysis as follows:
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
o A comparison between the Scheme consideration for each Elkedra share (ie 0.52 of a Vaaldiam share) and the value of each Elkedra Share (fairness– see section 12 “Is the Scheme fair?”);
o An investigation into other significant factors to which Shareholders might give consideration, prior to approving the Scheme, after reference to the value derived above (reasonableness – see section 14 – “Is the Scheme reasonable”); and
o Consideration of the likely position of Shareholders if the Scheme is rejected (best interests – see section 13.3).
We have assessed that in all cases the advantages and disadvantages of rejecting the Scheme are the inverse of accepting the Scheme. Thus, for simplicity and ease of evaluation, we have set out the significant factors in section 14 only in the context of accepting the Scheme.
The Scheme could be considered “reasonable” if there are valid reasons to approve the Scheme, notwithstanding that it may not be regarded as “fair” to Shareholders.
7. PROFILE OF VAALDI AM
7.1 Background
Vaaldiam is a Canadian based diamond company listed on the TSX. Vaaldiam is primarily involved in diamond production, mine development and exploration in Brazil. It is currently developing three advanced stage diamond properties in Brazil.
7.2 Duas Barras Diamond Mine
Vaaldiam holds a 100% interest in the Duas Barras diamond property, situated 150 kilometres north of the town of Diamantina in the State of Minas Gerais, Brazil. This diamond district was the world’s largest diamond producing area prior to 1870. The 7,000 hectare Duas Barras property encompasses a 5 kilometre portion of the Jequitinhonha River. The diamonds produced from alluvial gravels along the Jequitinhonha River are predominantly gem-quality cuttable goods.
Vaaldiam acquired the property in 2005 and expects that production during 2007 will be approximately 25,000 carats, increasing to 50,000 carats in 2008.
7.3 Brauna Diamond Project
Vaaldiam Resources has a 100% interest in the Brauna diamond project in the state of Bahia, Brazil. The Brauna project is comprised of three exploration concessions which encompass four diamondiferous kimberlite pipes or blows that are associated with a system of kimberlite dykes that have been traced over a distance of 15 kilometers or 5,000 hectares.
The Brauna property is located south of the town of Nordestina in Bahia State, Brazil. The property is situated approximately 350 kilometres from the city of Salvador, the state capital, and is easily accessible by road on a year-round basis. Skilled labour and complete infrastructure including power and water are readily available in the area.
Vaaldiam has started an aggressive program to evaluate the economic potential of the kimberlite deposits on the property. It is expected that a feasibility study on the project will be completed in 2008.
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
7.4 Pimenta Bueno
In November 2003 Vaaldiam acquired the Pimenta Bueno located in Rondonia State, Brazil. The property covers approximately 248,000 hectares and encompasses 38 kimberlite pipes and 3 dyke systems. Vaaldiam subsequently entered into a joint venture arrangement with a subsidiary of Rio Tinto Mining and Exploration Limited (“Rio Tinto”), whereby Rio Tinto has an option to back in to a 60% interest in any kimberlite pipe that meets their development criteria. In the even that Rio Tinto decides to develop one of these kimberlite pipes they will be required to complete and fully fund any feasibility study. Should the feasibility study meet their criteria, and it is decided to develop a mine, Rio Tinto would fully fund the construction of the mine and Vaaldiam would retain a 40% equity interest in cash flow from the mine after repayment of Vaaldiam’s share of construction funding.
7.5 Aroeira and Umbu Kimberlite Properties
Vaaldiam has recently acquired a 100% interest in the Aroeira and Umbu Kimberlite deposits which were discovered by DeBeers in the early 1990’s. Initial surface sampling carried out by DeBeers indicated that the Kimberlites were diamond bearing. Vaaldiam plans on completing ground geophysics and drilling on both the Aroeira and Umbu properties in 2007 to assess the economic potential of these diamond bearing Kimberlites.
7.6 Share capital and ownership
The capital structure of Vaaldiam as at 17 September 2007 was as follows:
Ordinary Shares 17 September 2007
Total Ordinary Shares on Issue 83,201,204
Top Twenty Shareholders – Ordinary Shares 56,657,065
Top Twenty Shareholders - % of Ordinary Shares on Issue
65.8%
Source:Vaaldiam Share Registry report as at 17 September 2007
The spread of Vaaldiam shareholders as at 17 September 2007 was as follows:
Range of Shares Held No. of Ordinary
Shareholders
No. of Ordinary
Shares
1-1,000 854 220,721
1,001-5,000 848 4,006,079
5,001-10,000 287 7,942,331
10,001-100,000 58 15,773,063
100,001 – and over 15 55,259,010
TOTAL 2,062 83,201,204
Source: Vaaldiam Share Registry report as at 17 September 2007
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
The number of Shares held by the most substantial shareholders as at 17 September 2007 is detailed below:
Shareholder Ordinary Shares % Shares Held
Candlewood Financial Corp 28,558,833 34.4%
RBC Global Precious Metals Fund 4,000,000 4.8%
Caisse De Depot et Placement Du Quebec 3,071,000 3.7%
DMP Resource Class 3,000,000 3.6%
Standard Securities Capital Corporation 2,780,885 3.3%
Sentry Select Precious Metals Funds 2,144,000 2.6%
Majescor Resources Inc. 1,733,102 2.1%
Source: Vaaldiam Share Registry report as at 17 September 2007
7.7 Vaaldiam Historical Balance Sheets
The audited balance sheets of Vaaldiam, expressed in Canadian Dollars for the two years ended 31 December 2005 and 31 December 2006, are set out below:
Vaaldiam Resources Limited
Note Unaudited 30 June
2007 CAD$
Audited 31 December
2006 CAD$
Audited 31 December
2005 CAD$
Current assets
Cash and cash equivalents 1 2,699,799 12,318,783 6,817,542
Restricted cash 184,606 429,300 1,331,916 Sundry receivables and prepayments 242,349 224,963 134,451
Total current assets 3,096,754 12,973,046 8,283,90 9
Non-current assets
Property and equipment 1,312,013 819,202 369,604 Assets under construction
1,702,778 601,834 -
Exploration properties 2 18,010,072 10,468,100 4,940,049
Investment 3 444,445 - - Brazilian sales tax recoverable
114,760 - -
Total non-current assets 21,584,068 11,889,136 5,3 09,653
Total assets 24,680,822 24,862,182 13,593,562
Current liabilities Accounts payable and accrued liabilities 669,033 1,517,336 316,914
Long term liabilities
Future income taxes 1,880,714 - -
Total liabilities 2,549,747 1,517,336 316,914
Shareholders Equity
Minority interest in equity - 168,778 -
Common shares 4 28,100,302 26,437,578 13,315,518 Common share purchase warrants
- 277,333 1,147,751
Stock options 3,364,235 1,868,910 703,626
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
Vaaldiam Resources Limited
Note Unaudited 30 June
2007 CAD$
Audited 31 December
2006 CAD$
Audited 31 December
2005 CAD$
Contributed surplus 277,333
Deficit (9,555,240) (5,407,753) (1,890,247) Accumulated other comprehensive loss 3 (55,555) - -
Total shareholders equity 22,131,075 23,344,846 13,276,648
24,680,822 24,862,182 13,593,562 Source: Vaaldiam 2005 and 2006 annual reports & unaudited financial statements for the six months ended 30 June 2007
Notes to the Balance Sheet
1. In the year to 31 December 2006, Vaaldiam raised approximately CAD$12.1 million through a private placement and the exercise of warrants and options. Much of the cash was used to acquire additional property, plant and equipment and mineral exploration expenditure. A small proportion was used for operating activities and the remainder is included in the cash and cash equivalents balance at 31 December 2006.
2. Significant expenditure was incurred in 2006 on Vaaldiam’s exploration properties. Vaaldiam acquired a 60% interest in the Brauna property during the year to 30 June 2006, and in November 2006 exercised its option to acquire the remaining 25% interest in the Duas Barras property. Vaaldiam also acquired geological data for a number of areas in Brazil. In Canada, Vaaldiam has entered into a number of options whereby exploration expenditure must be incurred by specified dates and during the year incurred CAD$1.4 million in relation to the Coronation Gulf property, which has been capitalised in the balance sheet.
3. During the six months ended 30 June 2007 Vaaldiam acquired in excess of 1.1 million units of Great Western Diamonds Corp at $0.45 per unit. Each unit consisted of one common share and a half warrant to acquire one common share at an exercise price of $0.60. On 30 June 2007 the closing price of Great Western’s common shares on the TSX Venture Exchange was $0.395 giving rise to an ‘other accumulated loss’ of $55,555.
4. During 2006, Vaaldiam issued 15,630,350 common shares. Approximately 6.1 million was as a result of warrants that were exercised, 1.2 million were options that were exercised and 8.2 million shares were issued through a private placement. The share capital was increased by CAD$13,122,060.
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
7.8 Historical Income Statements (Statements of Los s and Deficit)
Vaaldiam Resources Limited
Note Unaudited 6 months ended 30 June 2007
CAD$
Audited Year ended
31 December 2006 CAD$
Audited Year ended
31 December 2005 CAD$
Expenses Corporate and general
1,005,794 1,453,089 968,299
Capital tax 22,410 - - Stock based compensation 1 1,495,325 1,418,100 232,771 Amortisation 117,458 167,758 95,915 Loss on foreign exchange
2,959 16,068 12,296
2,643,946 3,055,015 1,309,281 Less: Interest income
137,082 523,464 97,132
2,506,864 2,531,551 1,212,149 Loss before the following
(2,506,864) (2,531,551) (1,212,149) Other expenses Write off of exploration properties 2 (1,640,025) (1,165,678) (283,881) Loss before income taxes
(4,146,889) (3,697,229) (1,496,030)
Income tax recovery
- 180,600 488,779
Net loss before minority interest
(4,146,889) (3,516,629) (1,007,251) Minority Interest (598) (877) - Net loss for the year
(4,147,487) (3,517,506) (1,007,251)
Deficit, beginning of the year
(5,407,753) (1,890,247) (882,996) Deficit, end of year
(9,555,240) (5,407,753) (1,890,247)
Source: Vaaldiam 2005 and 2006 annual reports & unaudited financial statements for the 6 months ended June 30 2007
Notes to the Income Statement
1. Vaaldiam maintains a stock option plan for the employees, directors, officers and consultants of the company. During the year to 31 December 2006, a stock based compensation expense of $1,418,100 was recognised, and in the six months to 30 June 2007 a stock based compensation expense of $1,495,325 was recognised.
2. Exploration properties written off during the year to 31 December 2006 were the
Hotish Mountain property in Canada and the CAR-Haute Kotto Property in the Central African Republic. In the six months to 30 June 2007 a decision was made to
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
terminate the Coronation Gulf property and all expenditures incurred were written off.
8. D IAMOND M IN ING AN D THE D IAMOND INDU STRY
8.1 Formation of diamonds
Diamonds are created when carbon is put under immense pressure and temperature deep within the earth—at distances of up to 400 kilometres or more. Diamonds come from two types of deposits. Primary deposits generally consist of diamond-bearing "pipes" of a volcanic rock called "kimberlite." From deep in the earth these deposits are carried to the surface in molten rock, known as magma. Secondary deposits, also referred to as alluvial, are formed as a result of erosion of material from primary deposits and contain diamonds that may have travelled some distance from their original source.
8.2 Mining
Primary deposits, in which diamonds are contained in kimberlite pipes, require open pit or underground mining operations. Secondary deposits require alluvial mining, which uncovers diamonds in riverbed, coastal and marine/undersea locations. In open pit and underground mines, the ore is crushed to uncover the diamonds. Coastal mining involves the excavation of sand to find diamonds. Undersea mining entails drilling into the seabed to recover diamond-bearing gravels. Riverbed mining is often on an informal, smaller scale, also known as artisanal digging, and involves the most basic of equipment, such as sieves and pans, to find diamonds. Presently about 30 major Kimberlites are being mined worldwide.
8.3 Alluvial and Kimberlite
The characteristics of alluvial and kimberlite deposits are set out below:
Alluvial Kimberlite o Higher quality stones commanding
higher prices. o Larger, lower quality stones with higher
grades and tonnages.
o Exploration is relatively quick and low cost, reducing exploration risk.
o Exploration is costly and time-consuming.
o Resource estimation is difficult due
to high variability of grade. o Exploration risk is high but production
risk is low. Diamond grades tend to be more uniform and more consistent.
o Operational risk is higher, while
operating profits are lower and more difficult to forecast.
o Operating profits are usually higher and easier to forecast.
8.4 Classification and distribution
Once mined, rough diamonds are delivered to sorting experts who categorise and assign a value to them. It is here that industrial quality diamonds and gem quality diamonds are identified. Industrial diamonds are used in the industrial sector, mainly drill bits and lathes, and gem quality diamonds are used to manufacture jewellery.
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
Those diamonds that are of gem quality are classified into thousands of categories based on size, shape, quality and colour. The majority of diamonds fall within a range of standard colours from colourless to faint yellow or brown tints. Almost all rough diamonds have some distinguishing marks, known as inclusions, which make each one unique.
After sorting, the gem quality diamonds are cut and polished. Currently cutting and polishing take place in southern Africa, Belgium, China, India, Israel, Russia and the US, among other countries. After a stone has been cut, it is then polished and classified again, this time by its cut, colour, clarity and carat weight, also known as the "Four Cs."
After being cut, polished and categorised, diamonds are then sold via one of the 24 registered diamond exchanges (also known as 'bourses') located around the world or direct to wholesalers or diamond jewellery manufacturers.
8.5 World Production
Annual world production of natural rough diamonds has been steadily increasing over the last 35 years from around 40 million carats in 1970 to 163 million carats in 2006. The chart below shows 2006 global diamond production by value.
8.6 Uses
There are a number of different uses for diamonds based on the category they fall into. Gem diamonds are diamonds of a high quality - cut, colour and weight are used for jewellery. Low quality and small gem quality are used for the low end of the jewellery market. 80% of mined diamonds are unsuitable for use as gemstones and are known as industrial diamonds. They are valued for their heat conductivity and hardness and are used for cutting, drilling, grinding and polishing.
2006 Global Diamond Production by value
Botsw ana, 3.3
Russia, 2.3
South Africa, 1.7Canada, 1.3
Others , 0.7
DRC , 0.8
Namibia, 0.9
Angola, 1.6
Australia, 0.5
Value (US$ Billion)
Source: International Diamond Consultants Ltd
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
8.7 Demand
The US is the largest market accounting for almost 50% of global demand, followed by Europe and Japan, which together account for approximately 30%. Future demand is likely to be driven by China, India and the Middle East. China has doubled jewellery purchases since 2001. Global jewellery demand in 2006 was US$74bn and is expected to reach US$90bn by 2010.
8.8 Supply
Supply of diamonds is falling, as a number of existing large mines are entering into declining years. There are no major large emerging mines on the horizon, and DeBeers and Russian stockpiles have been depleted. Any major Kimberlite discovery would take at least 6 years to bring to production. It is estimated that demand may outstrip supply by as much as US$7bn by 2012.
8.9 Prices
The price of diamonds is largely determined by supply and demand. The average price of rough diamonds increased by almost 60% between 2003 and 2005. Prices increased by 9% in 2005 and is expected to increase by as much as 30% by 2012.
9. VALU ATIO N METHODO LOGIES
Methodologies commonly used for valuing assets and businesses are as follows:
9.1 Capitalisation of future maintainable earnings (“FME”)
This method places a value on the business by estimating the likely FME, capitalised at an appropriate rate which reflects business outlook, business risk, investor expectations, future growth prospects and other entity specific factors. This approach relies on the availability and analysis of comparable market data.
The FME approach is the most commonly applied valuation technique and is particularly applicable to profitable businesses with relatively steady growth histories and forecasts, regular capital expenditure requirements and non-finite lives.
The FME used in the valuation can be based on net profit after tax or alternatives to this such as earnings before interest and tax (“EBIT”) or earnings before interest, tax, depreciation and amortisation (“EBITDA”). The capitalisation rate or "earnings multiple" is adjusted to reflect which base is being used for FME.
9.2 Discounted future cash flows (“DCF”)
The DCF methodology is based on the generally accepted theory that the value of an asset or business depends on its future net cash flows, discounted to their present value at an appropriate discount rate (often called the weighted average cost of capital). This discount rate represents an opportunity cost of capital reflecting the expected rate of return which investors can obtain from investments having equivalent risks.
A terminal value for the asset or business is calculated at the end of the future cash flow period and this is also discounted to its present value using the appropriate discount rate.
DCF valuations are particularly applicable to businesses with limited lives, experiencing growth, that are in a start up phase, or experience irregular cash flows.
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
9.3 Net tangible asset value on a going concern bas is (“NTA”)
Asset based methods estimate the market value of an entity’s securities based on the realisable value of its identifiable net assets. Asset based methods include:
• Orderly realisation of assets method
• Liquidation of assets method
• Net assets on a going concern method
The orderly realisation of assets method estimates fair market value by determining the amount that would be distributed to entity holders, after payment of all liabilities including realisation costs and taxation charges that arise, assuming the entity is wound up in an orderly manner.
The liquidation method is similar to the orderly realisation of assets method except the liquidation method assumes the assets are sold in a shorter time frame. Since wind up or liquidation of the entity may not be contemplated, these methods in their strictest form may not be appropriate. The net assets on a going concern method estimates the market values of the net assets of an entity but does not take into account any realisation costs.
Net assets on a going concern basis is usually appropriate where the majority of assets consist of cash, passive investments or projects with a limited life. All assets and liabilities of the entity are valued at market value under this alternative and this combined market value forms the basis for the entity’s valuation.
Often the FME and DCF methodologies are used in valuing assets forming part of the overall Net assets on a going concern basis. This is particularly so for exploration and mining companies where investments are in finite life producing assets or prospective exploration areas.
These asset based methods ignore the possibility that the entity’s value could exceed the realisable value of its assets as they do not recognise the value of intangible assets such as management, intellectual property and goodwill. Asset based methods are appropriate when entities are not profitable, a significant proportion of the entity’s assets are liquid or for asset holding companies.
9.4 Past Expenditure
The Past Expenditure method is a method of valuing exploration assets in the resources industry. It is applicable for areas which are at too early a stage of prospectivity to justify the use of alternative valuation methods such as DCF. The Past Expenditure method is often referred to as the Multiple of Exploration Expenditure method.
Past expenditure, or the amount spent on exploration of a tenement, is commonly used as a guide in determining value. The assumption is that well directed exploration adds value to a property. This is not always the case and exploration can also downgrade a property. The Prospectivity Enhancement Multiplier (“PEM”) which is applied to the effective expenditure therefore commonly ranges from 0.5 to 3.0. The PEM generally falls within the following ranges:
♦ 0.5 to 1.0 where work to date or historic data justifies the next stage of exploration;
♦ 1.0 to 2.0 where strong indications of potential for economic mineralisation have been identified; and
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
♦ 2.0 to 3.0 where ore grade intersections or exposures indicative of economic resources are present.
9.5 Quoted Market Price Basis
Another alternative valuation approach that can be used in conjunction with (or as a replacement for) any of the above methods is the quoted market price of listed securities. Where there is a ready market for securities such as the ASX, through which shares are traded, recent prices at which shares are bought and sold can be taken as the market value per share. Such market value includes all factors and influences that impact upon the ASX. The use of ASX pricing is more relevant where a security displays regular high volume trading, creating a “deep” market in that security.
10. VALU ATIO N OF ELKE DR A
The NTA basis is an appropriate approach in valuing Elkedra. In arriving at the value of the Company on a NTA basis we have valued the sum of the parts of the Company and have valued the Chapada project separately. We consider the DCF methodology to be the most appropriate method of valuation for this project to adopt as reliable cash flow forecasts are available and the project has a finite life.
Furthermore, in arriving at a valuation on a NTA basis, we have obtained an independent valuation of the Company’s exploration tenements. This independent valuation has been undertaken by Hugh Durey and Associates and is included at Appendix 4.
As Elkedra is an ASX listed company the Quoted Market Price basis is also appropriate to consider in valuing the Company’s shares.
10.1 Valuation of the Chapada Project
The method which we have adopted in valuing the Chapada project is the DCF method. The DCF method estimates the fair market value by discounting the future cash flows arising from the project to their net present value. To value the Chapada project in this way requires the determination of the following:
♦ future cash flows
♦ an appropriate discount rate to be applied to the cash flows
♦ an estimate of the terminal value
Our consideration of each of these factors is presented below:
10.1.1 Future Cash Flows
The management of Elkedra has prepared a detailed cash flow model for the Chapada project which we have used to assist us in the preparation of our own model. Our model has been prepared having regard to the Elkedra base case model but has been amended to reflect our own alternative assumptions where considered appropriate. The cash flow model extends to 31 December 2014 being the anticipated life of the Chapada project.
We have not undertaken a review of the cash flow forecasts in accordance with Australian Auditing Standard AUS 804 ‘The Audit of Prospective Financial Information’ and do not express an opinion on the reasonableness of the assumptions or their achievability. However, nothing has come to our attention as a result of our procedures
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
to suggest that the assumptions on which the forecasts are based have not been prepared on a reasonable basis.
With the assistance of Hugh Durey and Associates, International Diamond Consultants we have undertaken an analysis of Chapada’s cash flow model that included:
♦ reviewing the financial model provided by Elkedra’s management;
♦ reviewing the reasonableness of the assumptions adopted by Elkedra such as life of mine, grade, throughput, operating costs, capital expenditure, diamond prices; and
♦ preparing our own cash flow model.
10.1.2 Assumptions
The key assumptions adopted by us in the preparation of the cash flow forecasts are set out below. In arriving at these assumptions we have relied on advice provided by Hugh Durey and Associates.
♦ Average sales prices for diamonds of US$415
The average sales price for the eleven diamond sales to date from the Chapada mine has been US$390 per carat, however growth in diamond prices is expected internationally and taking into account the potential for larger diamond discoveries at Chapada, we have assumed an average diamond price of US$415 for the cash flow model.
♦ Grade 0.04 carats bcm
Since August 2006 monthly grade figures have averaged 0.038 cts/bcm. We have therefore assumed an overall grade of 0.04 cts/bcm for the purposes of the cash flow model.
♦ Output of 2,600 carats each month
Based on monthly plant throughput to date and a grade target of 0.04 cts/bcm, a diamond output of 2,600 carats per month has been adopted for the purposes of our cash flow model.
♦ Operating costs based on average operating costs ex perienced in the mine to date
The Company has provided us with details in relation to operating costs based on contracted rates for overburden and gravel removal, and on actual costs for a typical period for other costs.
♦ Stripping ratio
A stripping ratio of 4.6 has been demonstrated from mining to date. Based on advice from Hugh Durey we have adopted a stripping ratio of 4 for the purposes of our cash flow model.
♦ Exchange rates BRL:AUD – 1.638:1.
All exchange rates used in the projections are based on the exchange rates at 27 August 2007.
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
♦ Terminal value
We have been advised by the Directors of Elkedra that the plant and equipment would have an estimated terminal value of 10% of the original cost after the nine year life of the mine. If the plant was demobilised at the end of 2008, the residual value would be approximately 50% of the original cost.
10.1.3 Discount Rate
A discount rate of 8.2% has been used to derive the net present value of the future cash flows.
In selecting this discount rate we have considered:
♦ The required rates of return on comparable Australian listed companies;
♦ The specific business and financing risks of Elkedra;
♦ Elkedra’s current cost of debt; and
♦ Elkedra’s current level of financial gearing.
A detailed consideration of how we arrived at the adopted discount rate is shown in Appendix 2.
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
10.2 Chapada valuation summary
In estimating the value of the Chapada project we have undertaken a range of sensitivities. We have set out the sensitivity of the valuation of the project to changes in certain assumptions adopted in the preparation of the cash flow forecasts as set out below:
Chapada Project Discount rate
6% 7% 8.2% 9% 10%
Base Case AUD$(000) (9,168) (8,727) (8,234) (7,926) (7,561) Diamond Price for 2008 to 2014 (base case is US$415 per carat)
US$400 per carat (12,069) (11,485) (10,831) (10,422) (9,939)
US$425 per carat (7,233) (6,889) (6,503) (6,261) (5,975)
US$450 per carat (2,445) (2,339) (2,218) (2,142) (2,050)
Exchange rate (base case is BRL:AUD 1.654:1)
AUD strengthen 10% (8,362) (7,962) (7,515) (7,236) (6,905)
AUD weaken 10% (10,155) (9,663) (9,113) (8,769) (8,362)
Grade (base case is 0.4ct/tonne)
0.035 (19,203) (18,263) (17,214) (16,559) (15,786)
0.045 716 665 611 579 542
0.050 4,096 3,903 3,690 3,558 3,403
Strip Ratio
3.5 (4,828) (4,606) (4,356) (4,199) (4,012)
4.5 (14,307) (13,608) (12,828) (12,340) (11,764)
The analysis above indicates that the net present value is highly sensitive to assumptions on grade, strip ratio and diamond price.
Based on the above analysis the net present value of the Chapada project using a DCF methodology appears to be negative in the majority of circumstances– even taking various sensitivities into account. In arriving at a range of values for the project we have therefore considered two alternative scenarios:
• The Company continues to operate the project in the belief that circumstances will change and the project will become cash-flow positive. Our DCF model – based on assumptions as set out in 10.1, results in a negative net present value of $8.2 million, which we have used as our “low” scenario in section 10.3 below.
• The Directors decide to terminate the operation of the mine at the end of 2008. The plant and equipment is demobilised and sold for 50% of its original cost. This would result in a positive net present value of $2.5 million, which we have used under our “high” scenario in section 10.3.
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
10.3 Net Asset Value
Elkedra Diamonds NL Ref Unaudited
30 June 2007 AUD$
Value low AUD$
Value high AUD$
Current assets
Cash and cash equivalents 1 2,019,668 2,093,409 2,093,409
Trade and other receivables 35,355 35,355 35,355
Investments 4 5,704,088 - -
Inventories 230,527 230,527 230,527
Total current assets 7,898,638 2,359,291 2,359,291
Non-current assets
Financial assets 16,000 16,000 16,000 Property, plant and equipment
1,318,265 1,318,265 1,318,265
Chapada project assets 2 17,412,477 (8,234,167) 2,508,759
Mineral interests 3 43,702 5,300,000 7,900,000
Total non-current assets 18,790,444 (1,599,902) 11,743,024
Total assets 26,780,082 759,389 14,102,315
Current liabilities
Trade and other payables 668,475 668,475 668,475
Short term provisions 369,656 369,656 369,656
Short term borrowings 5 3,190,215 3,190,215 3,190,215
Total current liabilities 4,228,346 4,228,346 4,228,346
Non-current liabilities
Long term borrowings 5,000,000 5,000,000 5,000,000
Total non-current liabilities 5,000,000 5,000,000 5,000,000
Total liabilities 9,228,346 9,228,346 9,228,346
Net Assets 17,551,736 (8,468,957) 4,873,969
Total Ordinary shares on issue as at 17 September 2007
106,966,910 106,966,910 106,966,910
Total warrants on issue as at 17 September 2007
363,745 363,745 363,745
107,330,655 107,330,655 107,330,655 Net asset value per share (cents)
nil 4.5
Notes to the balance sheet
1. The restated cash and cash equivalents balance represents cash included in the unaudited balance sheet as at 30 June 2007, less cash relating to the Chapada project totalling $631,423, which is included in the discounted cash flow valuation. The restated cash balance is based on the assumption that all warrants outstanding
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
at 30 June 2007 are exercised at GBP £0.12 ($2.43) which raises $705,164 in additional cash.
2. Included in plant, property and equipment in the management accounts is an amount of $17,412,477 which relates to the Chapada project. We have replaced this amount with the values attributed to the Chapada project under the DCF methodology as set out in section 11.2 above.
3. Mineral interests relate to expenditure incurred in acquiring the Company’s exploration licences at Bom Jardin, Acorá, Estiva, Casca, Roncador and Jangada. We have replaced the book value of these exploration licences with the range of values ascribed to them by Hugh Durey as set out in his Specialist Expert’s Report included at Appendix 4. The report values the exploration licences at between $5.3 million and $7.9 million. The report assesses the value based on the DCF methodology and the comparative transaction method. Although the DCF methodology results in a nil value, the comparative transaction value results in a value of $6.6 million to the licences. The report allows for a 20% variance each way to arrive at a range of values which we have included in the balance sheet above.
4. Investments relate to shares in Uramet Ltd which were distributed in specie to shareholders on 17 September 2007, therefore we have excluded them from the low and high scenarios.
5. Other current liabilities relate to convertible notes & lease liabilities.
10.4 Quoted Market Prices for Elkedra Securities
We have assessed the value of an Elkedra share based on market prices. The following chart provides a summary of the share price movement over the year to 3 July 2007.
-
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Volume
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80Share Price ($)
Total monthly volume traded on-market Weighted average on-market monthly share price
Source:Bloomberg
The daily price of Elkedra shares from 4 July 2006 to 3 July 2007 has ranged from a high of $0.76 on 10 July 2007 to a low of $0.30 on 29 June 2007. The proposed merger was announced to the market on 4 July 2007. We have taken into account pre announcement pricing only, however the market response to the announcement was positive with the share price reaching a high of $0.455 in the period following the announcement.
To provide further analysis of the market prices for an Elkedra share, we have also considered the weighted average market price for 10, 30, 60 and 90 day periods to 3 July 2007.
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
Elkedra Share Price 3 July 07 10 Days 30 Days 60 Days 90 Days
Closing price ($) 0.330
Weighted Average price 0.331 0.362 0.471 0.453
An analysis of the volume of trading in Elkedra shares for the twelve months to 3 July 2007 is set out below:
Share
price low $ Share
price high $
Cumulative Volume traded
As a % of Issued capital
1 day 0.330 0.340 111,620 0.11%
1 week 0.300 0.345 868,600 0.82%
1 month 0.300 0.405 2,008,955 1.89%
3 months 0.300 0.630 8,982,672 8.46%
6 months 0.300 0.630 14,837,135 13.98%
12 months 0.300 0.760 33,439,434 31.51%
This table indicates that Ekledra shares display quite a low level of liquidity, with only 31.5% of the Company’s current issued capital being traded in a twelve month period. For this measure to be reliable there needs to be a ‘deep’ market in the shares. In the case of Elkedra this is not the case therefore we have applied a discount as set out in section 10.5 to arrive at a value that is based on the quoted market price of the shares.
10.5 Discount for lack of marketability
Elkedra shares are thinly traded, with only 31.5% being traded in a twelve month period and only 8.5% being traded in the three months prior to the announcement. We believe it is necessary to apply a discount to the quoted market price to compensate for the lack of liquidity and arrive at a value for the shares that is based on the market value, but which also accounts for possible limitations regarding the marketability of the shares.
In arriving at a discount factor to apply to the quoted market price we have examined the Private Company Price Index (“PCPI”). Private companies are valued at a discount to comparable listed companies. The private company discount is observable from actual transactions. The BDO Stoy Hayward Private Company Price Index (“PCPI”) is a UK based research index which tracks the relationship between the current four month rolling average FTSE Non-Financials price earnings ratio and the price earnings ratios being paid on the sale of private companies. The PCPI tracks the discount between how public and private companies are being valued. This discount enables valuers to use valuation techniques which are only relevant to public companies and apply them to private companies in the same sector.
The PCPI is generally recognised as the most authoritative source on private company values by practitioners in the UK market, including the Inland Revenue and leading accounting firms.
The PCPI for Quarter One of 2007, indicates that Private companies are being sold at an average Price Earnings (“PE”) multiple of 14.8 while the four month average FT Non-Financials PE is 15.8. Therefore private companies are currently being valued at a discount of 7% to public companies.
The long term range of the PCPI however is in the range of 20 percent to 40 percent. Whilst we believe a discount to the quoted market price is appropriate, we believe that Elkedra
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
shares are more liquid than shares in a private company and therefore we have assumed a discount factor of 15% - being half of the mid point of the long term PCPI range.
10.6 Application of the discount
Based upon the information as set out in section 10.4, our assessment is that a range of values for an Elkedra share based on market pricing is between $0.33 and $0.36 before applying a discount.
Assuming a discount factor of 15% results in a value of between $0.28 and $0.31.
10.7 Elkedra valuation summary
The results of the valuations performed are summarised in the table below:
Valuation Value per Elkedra Share
Low
$ High
$ ASX market prices (Section 10.3)
0.28 0.31
Net tangible assets (Section 10.2)
Nil 0.045
10.8 Preferred valuation
We believe that the quoted market price is the most relevant in assessing the value of the shares held by the Elkedra shareholders as it reflects the value that they could have received had they disposed of their shareholding prior to the announcement of the Vaaldiam offer. In the absence of the proposed Scheme we have no reason to assume that the Elkedra quoted market price would vary significantly from the value calculated above. As this exceeds the net asset value of the Company, in our opinion the quoted market price best reflects the value of an Elkedra share to a Shareholder.
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
11. VALU ATIO N OF CONSI DER ATION TO BE P AI D BY VAAL DI AM
The consideration being offered to Elkedra shareholders is 0.52 of a Vaaldiam share for each Elkedra share held. In order to assess if the Scheme is fair for Elkedra Shareholders we have to examine the value of a Vaaldiam share.
We consider the Quoted Market Price Basis to be the most appropriate valuation methodology to value the Vaaldiam shares to be issued to Elkedra shareholders. In our opinion this approach is appropriate because the value of the scrip consideration should be the amount that Elkedra Shareholders could reasonably expect to realise if the Scheme is approved and they sold their Vaaldiam shares either immediately or in the short term. The full underlying value of Vaaldiam as a whole is not relevant to Scheme Shareholders accepting the share consideration as these shareholders will only hold a portfolio interest in Elkedra post transaction. The following chart provides a summary of the share price movement over the year to 17 September 2007. The share price is quoted in Canadian Dollars.
-
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
9,000,000
10,000,000
Sep-06
Oct-06
Nov-06
Dec-06
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Volume
0.00
0.20
0.40
0.60
0.80
1.00
1.20
Share price CAD (cents)
Total monthly volume traded on-market Weighted average on-market monthly share price
Source:Bloomberg
The daily price of Vaaldiam shares from 18 September 2006 to 17 September 2007 has ranged from a high of CAD$1.10 on 24 May 2007 to a low of $0.68 on 28 August 2007.
An analysis of the volume of trading in Vaaldiam shares for the twelve months to 17 September 2007 is set out below:
Share
price low $ Share
price high $
Cumulative Volume traded
As a % of Issued capital
1 day 0.820 0.850 31,000 0.04% 1 week 0.770 0.860 172,590 0.21% 1 month 0.680 0.860 5,585,419 6.71% 3 months 0.680 1.070 16,831,336 20.23% 6 months 0.680 1.100 26,645,572 32.03% 12 months 0.680 1.100 43,088,915 51.79%
The table above illustrates that the shares in Vaaldiam display a low level of liquidity, with only 51.8% of the issued share capital being traded in a twelve month period.
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
To provide further analysis of the market prices for a Vaaldiam share, we have also considered the weighted average market price for 10, 30, 60 and 90 day periods to 17 September 2007.
CAD$ CAD$ CAD$ CAD$ CAD$
Vaaldiam Share Price 17-Sept-07 10 Days 30 Days 60 Days 90 Days
Closing price 0.850 Weighted Average price 0.757 0.777 0.882 0.899
Our assessment is that a range of values for a Vaaldiam share based on market pricing is between CAD$0.75 and CAD $0.85 prior to any discount for lack of liquidity. As set out in section 10.5 we believe it is appropriate to apply a discount to the value of the shares on a quoted market price basis to take into account the low level of liquidity of the shares. We have therefore applied a discount of 15% to the value of the shares.
This equates to a value in Canadian Dollars of between CAD$0.64 and CAD$0.72, which when translated into Australian Dollars equates to between $0.74 and $0.84. Elkedra shareholders are being offered 0.52 of a Vaaldiam share for each Elkedra share therefore the value of the consideration, based on the quoted market price of Vaaldiam, equates to between $0.38 and $0.44.
We have used both pre and post announcement pricing for Vaaldiam shares. It is common market practice to value scrip included as part of a bid by reference to the market price of that share.
12. IS THE SCHEME FAIR ?
The following table summarises our assessment of the value of an Elkedra share and the value of the consideration to be paid by Vaaldiam. We have considered the market capitalisation of both companies to determine the value of a Vaaldiam share following the Scheme.
Low High
Number of Elkedra shares on issue 106,966,910 106,966,910
Value per Elkedra share as set out in section 10 $0.28 $0.31
Number of Vaaldiam shares on issue 83,201,204 83,201,204
Value per Vaaldiam share as set out in section 11 $0.74 $0.84
Market Capitalisation of Elkedra 29,950,735 33,159,742
Market Capitalisation of Vaaldiam 61,568,891 69,889,011
Market Capitalisation of Vaaldiam and Elkedra
combined
91,519,626 103,048,753
Total Vaaldiam shares post Scheme 138,823,997 138,823,997
Notional value per Vaaldiam share post Scheme $0.66 $0.74
Value received by Elkedra Shareholders per share $0 .34 $0.38
Elkedra Shareholders are receiving 0.52 of a Vaaldiam share for each Elkedra share held. The table below illustrates the value of an Elkedra share and the value received is set out in the table below:
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
Ref Low
AUD$
High
AUD$
Value of an Elkedra share 10 0.28 0.31
Value of consideration 12 0.34 0.38
As such in our opinion the Scheme is fair to Shareholders.
13. OTHER CONSIDERATI ONS
13.1 Great Western Diamonds Corp Transaction
13.1.1 Vaaldiam offer to Great Western Diamonds Cor p
Vaaldiam has also made an offer to acquire all of the shares in explorer Great Western Diamond Corp (“Great Western ”), which is a Canadian based company listed on the Toronto Stock Exchange (“TSX”). Vaaldiam has offered 0.45 of a Vaaldiam share for each Great Western share held. The Elkedra Scheme is not contingent upon completion of the Great Western offer; however the Great Western acquisition is contingent on the completion of the Elkedra Scheme. Lock-up agreements have been executed pursuant to which a number of existing shareholders have irrevocably agreed to tender an aggregate of 43.6 million Great Western shares to the Offer, representing approximately 49% of all outstanding Great Western shares.
The transaction with Great Western may or may not proceed, however as lock-up agreements have been executed in relation to 49% of the shares we have included some information on Great Western. Should the transaction proceed, Great Western’s assets and liabilities would become part of the assets and liabilities of the enlarged group and the merger would have a dilutionary effect on Elkedra Shareholders’ percentage shareholding in Vaaldiam.
13.1.2 Profile
Great Western is a Canadian corporation, based in Saskatchewan, which is engaged in the acquisition, exploration and development of diamond properties. Great Western was incorporated in 2005 and trades on the TSX Venture Exchange under the symbol GWD. Great Western is a subsidiary of Great Western Minerals Group Ltd. which trades on the TSX Venture Exchange under the symbol GWMG. The total issued share capital of Great Western at 21 May 2007 was as follows:
Common shares issued and outstanding: 88,800,000
Unexercised warrants 28,800,000
Unexercised share options 3,700,000
Fully diluted common shares 121,300,000
13.1.3 Projects
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
Great Western Diamonds is currently focused on the 100% owned Candle Lake Diamond Project in central Saskatchewan where an evaluation program is targeted on reaching a pre-feasibility decision on the Candle Lake kimberlites by the end of 2008.
Great Western also owns the 830,000 hectare Rondônia Project in Brazil, which is situated to the north west of Vaaldiam’s 248,000 hectare Pimenta Bueno property. The Rondônia property encompasses eight kimberlite pipies, five of which are known to be diamond bearing based on the limited sampling to date.
Great Western continues to build a balanced and geographically diverse project portfolio with both advanced and grass-root diamond properties in Canada and Brazil. In order to diversify its project portfolio, Great Western is initiating early exploration programs on two grassroots prospects named Brown Bay and Centennial, both of which are located in Saskatchewan, and will also continue to seek new diamond resource opportunities in Canada at all stages of exploration.
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
13.1.4 Historical Balance Sheets
The audited balance sheets of Great Western, expressed in Canadian Dollars for the two years ended 31 December 2005 and 31 December 2006, are set out below:
Great Western Diamonds Corp Audited
31 December 2006 CAD$
Audited 31 December 2005
CAD$ Current assets
Cash and cash equivalents 2,055,165 2,613,895
Accounts Receivable 244,923 34,388
Due from a related party 35,546 -
Prepaid expenses 130,000 140,000
Total current assets 2,924,667 2,788,283
Mineral properties 7,306,793 2,281,749
Capital assets 84,991 -
Total assets 10,316,451 5,070,032
Current liabilities
Accounts payable 1,240,301 189,893
Current portion of due to a related party - 97,524
1,240,301 287,417
Shareholders Equity
Common shares 9,726,475 4,677,320
Convertible preferred shares - 350,000
Contributed surplus 1,000,422 544,247
Deficit (1,650,747) (788,952)
9,076,150 4,782,615
10,316,451 5,070,032 Source: Great Western Diamonds Corp 2006 annual report
13.2 Alternative Proposal
We are unaware of any alternative proposal which would offer the Shareholders of Elkedra a premium over the value ascribed to that resulting from the Scheme.
13.3 Implications of the Share Scheme not being app roved
If the Scheme is not approved then the merger with Vaaldiam cannot go ahead. Elkedra shareholders will continue to hold shares in Elkedra and will not receive any Vaaldiam shares.
Elkedra will continue to pursue the development of its own projects, acquisition of additional projects and other growth opportunities to enhance shareholder value. Based on our discounted cash flow model of the Chapada project it is likely that further fundraising would be required to fund the continued operation of the mine. If further funds were raised via a share issue the existing shareholders would be further diluted. Were it not possible to raise further funds the Company would have to consider the viability of continuing the operation of the mine. If a decision was made to discontinue the operation of the mine, it would result in a significant reduction in shareholder value.
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
13.4 Premium For Control
ASIC Regulatory Guide 74 requires that the expert give an opinion as to whether the proposed issue of shares will result in the Company receiving any premium for control. We have estimated the amount of any premium for control being paid by Vaaldiam as the amount by which the Scheme consideration exceeds the value of the assets to be acquired.
We have assessed that the value of the shares to be acquired is between $0.28 and $0.31 and that the value of the consideration for the acquisition to be $0.34 and $0.38. Accordingly, Vaaldiam will be paying a premium of between $0.03 to $0.10 per share to acquire its 100% interest in Elkedra.
13.5 TSX v’s ASX
Shareholders will now own shares which are traded on the TSX. The Toronto Stock Exchange is Canada's largest stock exchange, North America's third largest stock exchange, and the sixth largest in the world. Many companies that are located in other countries are also listed in the TSX. The TSX lists more than 1,300 companies that are traded electronically similar to the NASDAQ. A broad range of businesses from Canada, the United States and other countries are represented on the exchange. In addition to conventional securities, the exchange lists various exchange-traded funds, income trusts and investment funds. On May 11, 2007, the main index of the Toronto Stock Exchange traded above the 14,000 point level for the first time ever In 2001, the Toronto Stock Exchange acquired the Canadian Venture Exchange, which was renamed the TSX Venture Exchange in 2002. The venture exchange consists mainly of small cap Canadian Companies.
13.6 Taxation implications for shareholders
Shareholders are advised to seek their own independent tax advice in relation to the implications for their shareholding. Shareholders will be receiving shares in a different tax jurisdiction and special circumstances will apply. A consideration of the tax implications is set out in Appendix 3 of the Scheme Booklet.
14. IS THE SCHEME RE ASON ABLE ?
We have considered the position of the Shareholders if the Scheme is accepted and have taken into account the following advantages and disadvantages in this assessment.
We have assessed that in all cases the advantages and disadvantages of rejecting the Scheme are the inverse of accepting the Scheme. Thus for simplicity and ease of evaluation of the Scheme, we have set out the significant factors only in the context of approving the Scheme.
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
14.1 Advantages of approving the Scheme
14.1.1 The Scheme is fair
As set out in section 12 the Scheme is fair.
14.1.2 Leading Diamond Producer
The merger of Vaaldiam, Elkedra and (should the subsequent transaction proceed) Great Western, will create a leading diamond production, exploration and development company with a pro-forma market capitalisation in excess of CAD$160 million (AUD$177 million). This is made up as follows:
Company
Market Capitalisation CAD$ million
Vaaldiam 78.5
Elkedra 32.4 Great Western 38.8 New Vaaldiam 169
The new enlarged company will own 53 kimberlite deposits and control approximately 1.5 million hectares of diamond exploration concessions in Brazil and Canada. It will also own 100% of two producing diamond mines with initial mine lives in excess of eight years. Its larger capitalisation and increased liquidity will be of interest to a broader group of international investors. As such it will be able to raise any funding required for exploration and development of current projects as well as further acquisitions.
14.1.3 Management Expertise
The combined group will have strong management expertise drawn from the two Companies. The CEO and Chairman of Vaaldiam, Ken Johnson and Peter Marrone, will continue in their current roles, and the will be joined on the executive team by Sam Randazzo and Don Best of Elkedra. The management of Vaaldiam are currently undertaking an audit of Elkedra’s operations and have brought their considerable experience to bear in a number of recommendations for cost and operational efficiency.
Should the transaction with Great Western Proceed, the Board will also include Brent Jellicoe of Great Western
14.1.4 Vaaldiam Private Placement
On 19 July 2007 Vaaldiam announced an underwritten private placement to raise gross proceeds of CDN$26.5 million (AUD$29.5 million). 75% of the proceeds are being held in escrow until the Elkedra transaction has been completed. This significant cash injection will provide the new Vaaldiam with the financial capacity to realise the potential value of the extensive exploration portfolio and to capitalise on future acquisition opportunities.
14.1.5 Diversified Project Base
The shareholders will become shareholders in a new enlarged company which will have a diversified project base, with two producing mines in Brazil and exploration projects in Brazil and Canada. Furthermore Elkedra’s Chapada mine in Brazil is an alluvial diamond
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
mine. Vaaldiam’s Duas Barras mine is also an alluvial mine but Vaaldiam also holds interests in a number of Kimberlite mines.
Alluvial mines produce higher quality stones with lower grades than kimberlite mines. Stones produced from kimberlite mines generally command lower prices but the operational risk is lower and operating profits are usually higher and easier to forecast. Overall, the effect for shareholders on having a diversified project base, both geographically and geologically, is that their overall risk is reduced.
14.2 Disadvantages of Accepting the Scheme
14.2.1 Dilution of control
Non associated shareholders of Elkedra currently hold 100% of the Company. If the Scheme is approved the non-associated Elkedra Shareholders will hold 40.1% of the enlarged Vaaldiam.
14.2.2 Risks associated with Great Western acquisit ion
Vaaldiam has entered into an agreement with Great Western whereby on successful completion of the merger with Elkedra, Vaaldiam will offer to acquire 100% of the shares in Great Western for a consideration of 0.45 Vaaldiam shares for each Great Western share held. There are currently 88.8 million issued shares on issue in Great Western, together with 28.8 million unexercised warrants and 3.7 million unexercised options, therefore if the transaction with Great Western proceeds the Elkedra Shareholders’ interest in Vaaldiam would be significantly further diluted.
Furthermore, the agreement with Great Western provides for an expense reimbursement fee in the amount of $710,000 payable by Vaaldiam under certain circumstances should the transaction not proceed.
14.2.3 Trading on TSX
If the Scheme is approved, Shareholders will hold shares in an overseas company trading on a foreign stock exchange, ie the TSX. The implications of this are that shareholders need to engage the services of a stockbroker that is entitled to execute trades on the TSX. This will inevitably incur higher transaction costs. Vaaldiam has made arrangements through an Australian stockbroker for Elkedra shareholders to sell their Vaaldiam Shares at a reduced brokerage rate for a limited time following implementation of the Scheme
15. CO N C L U S I O N
We have considered the terms of the Scheme as outlined in the body of this report and have concluded that the Scheme is fair and reasonable and in the best interests of shareholders.
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
16. SO U R C E S OF IN F O RM ATI O N
This report has been based on the following information:
♦ Audited financial statements of Elkedra for the financial years ended 30 June 2006 and 2005;
♦ Unaudited management accounts of Elkedra for the year ended 30 June 2007;
♦ the draft Scheme Booklet issued on or about the date of this report;
♦ Independent specialist report on the Chapada Project prepared by Hugh Durey and Associates, International Diamond Consultants;
♦ Independent report on the value of the Company’s exploration licences prepared by Hugh Durey and Associates, International Diamond Consultants;
♦ Internal financial model prepared by Elkedra on the Chapada project;
♦ ASX announcements and share price data for Elkedra;
♦ Discussions with Directors and Management of Elkedra;
♦ Hanson Westhouse Sector Review – The Diamond Industry;
♦ National Bank Financial Diamond Quarterly Review dated April 23 2007;
♦ Vaaldiam annual reports;
♦ Vaaldiam share registry information;
♦ Bloomberg
♦ Great Western share registry information; and
♦ Information available in the public domain.
17. IN D E P E N D E N CE
BDO Consultants (WA) Pty Ltd is entitled to receive a fee of $40,000 (excluding GST) for the preparation of this report. Except for this fee, BDO Consultants (WA) Pty Ltd has not received and will not receive any pecuniary or other benefit whether direct or indirect in connection with the preparation of this report.
Prior to accepting this engagement BDO Consultants (WA) Pty Ltd considered its independence with respect to Elkedra and Vaaldiam and any of their respective associates with reference to the ASIC Regulatory Guide 42 entitled “Independence of Expert’s Reports”. In our opinion BDO Consultants (WA) Pty Ltd is independent of Elkedra, Vaaldiam and their respective associates.
Neither the two signatories to this report nor BDO Consultants (WA) Pty Ltd have had within the past two years any professional relationship with Elkedra or Vaaldiam, or their associates, other than in connection with the preparation of this report.
A draft of this report was provided to Elkedra and its advisors for confirmation of the factual accuracy of its contents. No significant changes were made to this report as a result of this review.
In addition, BDO Consultants (WA) Pty Ltd has been indemnified by Elkedra in respect of any claim arising from BDO Consultants (WA) Pty Ltd’s reliance on information provided by the
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
Elkedra, including the non provision of material information, in relation to the preparation of this report.
18. QU AL I F I C ATI O N S
BDO Consultants (WA) Pty Ltd is wholly owned by BDO Kendalls, a member of BDO International, which has extensive experience in the provision of corporate finance advice, particularly in respect of takeovers, mergers and acquisitions.
BDO Consultants (WA) Pty Ltd holds an Australian Financial Services Licence issued by the Australian Securities and Investment Commission for giving expert reports pursuant to the Listing rules of the ASX and the Corporations Act.
The persons specifically involved in preparing and reviewing this report were Sherif Andrawes, Matt Giles and Caitriona Callaghan of BDO Consultants (WA) Pty Ltd. They have significant experience in the preparation of independent expert reports and valuations.
In preparing this report BDO engaged the services of Hugh Durey and Associates; International Diamond Consultants. Hugh Durey (B.Sc.(Hons)Geol., F.AusIMM., CP(Geol)) is a consulting diamond geologist and principal of Hugh Durey & Associates. Hugh has 36 years experience in the mineral exploration and mining industry and has worked in this field in 15 countries. He has previously held directorships for a number of diamond exploration companies including Striker Resources NL, Kimberlite Resources International NL, Blina Diamonds Limited and Nyala Resources (Pty) Ltd. He has also undertaken consultancy, project management, and provided independent technical reports for numerous companies.
19. D I S C L AI M E RS A N D CO N S E N TS
This report has been prepared at the request of Elkedra for inclusion in the Scheme Booklet which will be sent to all Elkedra Shareholders.
BDO Consultants (WA) Pty Ltd hereby consents to this report accompanying the above Scheme Booklet. Apart from such use, neither the whole nor any part of this report, nor any reference thereto may be included in or with, or attached to any document, circular resolution, statement or letter without the prior written consent of BDO Consultants (WA) Pty Ltd.
BDO Consultants (WA) Pty Ltd takes no responsibility for the contents of the Scheme Booklet other than this report.
BDO Consultants (WA) Pty Ltd has not independently verified the information and explanations supplied to us, nor has it conducted anything in the nature of an audit of Elkedra. However, we have no reason to believe that any of the information or explanations so supplied are false or that material information has been withheld.
With respect to taxation implications it is recommended that individual Shareholders obtain their own financial and taxation advice, in respect of the Scheme, tailored to their own particular circumstances. Furthermore, the advice provided in this report does not constitute legal or taxation advice to the Shareholders of Elkedra or any other party.
The statements and opinions included in this report are given in good faith and in the belief that they are not false, misleading or incomplete.
The terms of this engagement are such that BDO Consultants (WA) Pty Ltd has no obligation to update this report for events occurring subsequent to the date of this report.
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
Yours faithfully BDO CONSULTANTS (WA) PTY LTD
Sherif Andrawes Director
Matt Giles Director
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
Appendix 1 – Glossary of Terms
Reference Definition
The Act The Corporations Act
ASIC Australian Securities and Investments Commission
ASX Australian Securities Exchange
AUD Australian Dollar
BCM Banked Cubic Metres
BDO BDO Consultants (WA) Pty Ltd
BRL Brazilian Real
CAPM Capital Asset Pricing Model
CTS Carats
The Company Elkedra Diamonds NL
DCF Discounted Future Cash Flows
EBIT Earnings before interest and tax
EBITDA Earnings before interest, tax, depreciation and amortisation
Elkedra Elkedra Diamonds NL
FME Future Maintainable Earnings
Great Western Great Western Diamonds Corp
MID The Merger Implementation Deed entered into between Vaaldiam and Elkedra dated 4 July 2007
NTA Net Tangible Assets
The Scheme The proposed scheme of arrangement between Vaaldiam and Elkedra
Our Report This Independent Expert’s Report prepared by BDO
PEM Prospectivity Enhancement Multiplier
Scheme Booklet The document prepared by Elkedra accompanying this Independent Expert’s Report
Shareholders Shareholders of Elkedra not associated with Vaaldiam
Uramet Uramet Limited
Vaaldiam Vaaldiam Resources Limited
WACC Weighted Average Cost of Capital
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
Appendix 2 - Assessment of the Appropriate Discount Rate
Determining the correct discount rate, or cost of capital, for a business requires the identification and consideration of a number of factors that affect the returns and risks of a business, as well as the application of widely accepted methodologies for determining the returns of a business.
The discount rate applied to the forecast cash flows from a business represents the financial return that will be before an investor would be prepared to acquire (or invest in) the business.
The capital asset pricing model (“CAPM”) is commonly used in determining the market rates of return for equity type investments and project evaluations. In determining a business’ weighted average cost of capital (“WACC”) the CAPM results are combined with the cost of debt funding. WACC represents the return required on the business, whilst CAPM provides the required return on an equity investment.
Cost of Equity and Capital Asset Pricing Model
CAPM is based on the theory that a rational investor would price an investment so that the expected return is equal to the risk free rate of return plus an appropriate premium for risk. CAPM assumes that there is a positive relationship between risk and return, that is, investors are risk averse and demand a higher return for accepting a higher level of risk.
CAPM calculates the cost of equity and is calculated as follows:
CAPM
Ke = Rf + β x (Rm – Rf)
Where:
Ke = expected equity investment return or cost of equity in nominal terms
Rf = risk free rate of return
Rm = expected market return
Ra = inherent risk adjustment
Rm – Rf
= market risk premium
β = equity beta
The individual components of CAPM are discussed below.
Risk Free Rate (R f)
The risk free rate is normally approximated by reference to a long term government bond with a maturity equivalent to the timeframe over which the returns from the assets are expected to be received. Having regard to the period of the operations we have used the current yield to maturity on the 10 year Commonwealth Government Bond which was 5.95% per annum as at 29 August 2007.
Inherent Risk Adjustment
A risk adjustment is commonly added to the CAPM formula to factor in specific risks that are inherent to the Company being valued over and above the risks of comparable companies in the market. We have adopted an inherent risk adjustment of 3%.
Market Risk Premium (R m – Rf)
The market risk premium represents the additional return that investors expect from an investment in a well-diversified portfolio of assets. It is common to use a historical risk premium, as expectations are not observable in practice.
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
For the purpose of this report we have adopted a market risk premium of between 6% and 8%.
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
Equity Beta
Beta is a measure of the expected correlation of an investment’s return over and above the risk free rate, relative to the return over and above the risk free rate of the market as a whole. A beta greater than one implies that an investment’s return will outperform the market’s average return in a rising market and underperform the market’s average return in a falling market. On the other hand, a beta less than one implies that the business’ performance compared to that of a business whose beta is greater than one will provide an inverse relationship in terms of the market’s average return.
Equity betas are normally either an historical beta or an adjusted beta. The historical beta is obtained from the linear regression of a stock’s historical data and is based on the observed relationship between the security’s return and the returns on an index. An adjusted beta is calculated based on the assumption that the relative risk of the past will continue into the future, and hence derived from the historical data. It is then modified by the assumption that a stock will move towards the market over time, taking into consideration the industry risk factors which make the operating risk of the investment project greater or less risky than comparable listed companies when assessing the equity beta for an investment project.
It is important to note that it is not possible to compare the equity betas of different companies without having regard to their gearing levels. Thus, a more valid analysis of betas can be achieved by “ungearing” the equity beta (βa) by applying the following formula
βa = β / (1+(D/E x (1-t))
In order to assess the appropriate equity beta for Elkedra we have also had regard to the equity betas of listed companies involved in similar activities in similar industry sectors:
Company Market Capitalisation
A$’m
Geared Beta
Gross debt/equity
%
Ungeared Beta
Elkedra Diamonds NL 40 1.03 66.10% 2.23
Petra Diamonds Ltd 564 2.7 0.00% 2.70
Blina Diamonds NL 100 1.38 0.00% 1.38
Vaaldiam Resources 80 -1.28 0.00% -1.28
Gravity Diamonds NL 42 -0.47 0.00% -0.47
Flinders Diamonds NL 7 1.27 0.00% 1.27
Average 139 0.77 0.99
Median 61 1.15 1.33
Source: Australian Graduate School of Management’s Risk Measurement Service & ASX
Having regard to the above we consider that a range around the Company’s own ungeared beta of 0.7 to be appropriate. In order to provide a high and low scenario we have selected a range of ungeared betas of 0.65 to 0.75.
Having determined an appropriate ungeared beta it is necessary to regear the beta to reflect the financial gearing of Elkedra. The current debt:equity ratio of Elkedra is 66%. This results in a regeared beta of approximately 0.95 to 1.10.
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
Cost of Equity On this basis we have assessed the cost of equity to be:
Input Value Adopted
Low High
Risk free rate of return 5.86% 5.86%
Equity market risk premium 6.00% 8.00%
Inherent risk adjustment 3.00% 3.00%
Beta 0.95 1.10
Cost of Equity 14.56% 17.64%
Weighted Average Cost of Capital
The WACC represents the market return required on the total assets of the undertaking by debt and equity providers. WACC is used to assess the appropriate commercial rate of return on the capital invested in the business, acknowledging that normally funds invested consist of a mixture of debt and equity funds. Accordingly the discount rate should reflect the proportionate levels of debt and equity relative to the level of security and risk attributable to the investment.
In calculating WACC there are a number of different formulae which are based on the definition of cash flows (ie, pre-tax or post-tax), the treatment of the tax benefit arising through the deductibility of interest expenses (included in either the cash flow or discount rate), and the manner and extent to which they adjust for the effects of dividend imputation. The commonly used WACC formula is the post-tax WACC, without adjustment for dividend imputation, which is detailed in the below table.
CAPM
WACC = E Ke + D Kd (1– t)
E+D D+E
Where:
Ke = expected return or discount rate on equity
Kd = interest rate on debt (pre-tax)
T = corporate tax rate
E = market value of equity
D = market value of debt
(1- t) = tax adjustment
Gearing
Before WACC can be determined, the proportion of funding provided by debt and equity (ie, gearing ratio) must be determined. The gearing ratio adopted should represent the level of debt that the asset can reasonably sustain (ie, the higher the expected volatility of cash flows, the lower the debt levels which can be supported). The optimum level of gearing will differentiate between assets and will include:
♦ the variability in earnings streams; ♦ working capital requirements; ♦ the level of investment in tangible assets; and
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
♦ the nature and risk profile of the tangible assets.
Cost of Debt
A cost of debt of 10% has been used. This is in line with the current loan agreements with LinQ Capital Limited.
Calculation of WACC
Based on the above inputs we have calculated the WACC to be between 11.5% and 13.9%.
Input Value Adopted
Low High
Cost of equity 14.56% 17.64%
Cost of debt 10.00% 10.00%
Corporate tax rate 30.00% 30.00%
Proportion of debt (D/E+D) 39.79% 39.79%
Proportion of equity (E/E+D) 60.21% 60.21%
WACC (rounded) 11.5% 13.4%
As we have chosen to perform our modelling in real (not inflation adjusted dollars), it is necessary to convert the WACC obtained above from nominal to real terms. In order to do this we have adopted the Fisher equation, which is defined as:
k = (1+r)/(1+i) – 1
where:
k is the real WACC
r is the nominal WACC, calculated above
i is the expected inflation rate over the forecast period
Applying the Fisher equation, assuming an inflation rate of 3.8% to 4.2% gives a real post-tax WACC of 7.5% to 8.8%. We have therefore selected a real WACC of 8.2% for the purposes of our analysis.
For
per
sona
l use
onl
y
BDO CONSULTANTS (WA) PTY LIMITED
The Directors Elkedra Diamonds NL 18 September 2007
Appendix 3 – Synopsis of comparable companies
Set out below are companies comparable to those considered in this report. Each of these companies trades on the Australian Stock Exchange, apart from Vaaldiam.
All of these comparable companies are diamond exploration companies. All are of a similar market capitalisation to Elkedra, apart from Petra Diamonds Ltd, which has a considerably larger market capitalisation.
Gravity Diamonds Ltd Gravity Diamonds Ltd (“Gravity ”) is listed on the Australian Stock Exchange (“ASX”) and on AIM in London. Its major shareholders, who account for more than 60 per cent of the ownership, include BHP Billiton and investors from within the diamond trading industry. Through its wholly owned subsidiary Diamond Mines Australia Pty Ltd, Gravity is exploring for diamonds in Australia and the DRC. . Blina Diamonds NL Blina Diamonds NL (“Blina ”) is an extremely active diamond explorer with interests in tenements covering 1750sq km located in the West Kimberley region of Western Australia. The company is undertaking a range of advanced and regional exploration programs in close proximity to two operating diamond mines run by Kimberley Diamond Company (KDC) in the Ellendale Field. Petra Diamonds Ltd Petra Diamonds Ltd (“Petra ”) is a diamond mining group focused on the exploration, mining and beneficiation of diamonds in Africa. Petra’s strategy is to build a portfolio of revenue producing and exploration assets, as AIM’s first mid-tier integrated diamond group. Petra has four producing mines in South Africa, has blue sky exploration operations in both Angola and Botswana and is near production in Sierra Leone. Flinders Diamonds Ltd The objective of Flinders Diamonds Ltd (“Flinders ”) is to explore for diamonds, discover and develop commercial diamond mines. The company has prospective projects for diamonds in South Australia, the Northern Territory and Western Australia. The company listed on the ASX in February 2002
For
per
sona
l use
onl
y
Appendix 4 – Independent Geologist Report
11th August 2007
The Directors BDO Kendalls Level 8, 256 St Georges Terrace PERTH WA 6000.
Dear Sirs,
INDEPENDENT CONSULTING GEOLOGIST’S REPORT AND VALUA TION EXPLORATION LICENCES OF ELKEDRA DIAMONDS NL
IN VICINITY OF THE CHAPADA MINE, MATO GROSS STATE, BRAZIL
Hugh Durey and Associates (HDA) has been commissioned by BDO Consultants (WA) Pty Ltd (BDO), in a letter dated 9th July 2007, to provide an independent opinion on the valuation of Elkedra’s exploration assets in Brazil. This valuation is for inclusion in the Independent Expert’s Report by BDO in relation to the proposed merger by way of a scheme of arrangement between Elkedra and Vaaldiam Resources Limited.
This report has been prepared in accordance with and under the guidelines of the VALMIN Code (2005 Edition). The VALMIN Code is binding upon all members of the Australasian Institute of Mining and Metallurgy (AusIMM) and incorporates the JORC Code for the reporting of exploration results, mineral resources and ore reserves.
Valuing of the exploration licences utilised discounted cash flow analysis, yet had to rely on the comparative transaction method for a meaningful, conservative and commercial valuation estimate. A preferred, mid range value of AUD6.6 million is assigned to the exploration licences.
HDA has no material or contingent interest in the outcome of this report and will receive no financial benefit other than an agreed professional fee based on normal commercial rates. HDA is an international diamond exploration and mining consulting company in operation since 1983. Hugh Durey, the author of this report, has been employed in the diamond industry for 36 years in 15 countries including Brazil.
Although a site visit to Chapada was not undertaken specifically for this report, Hugh Durey is well aware of the potential and layout of the exploration areas having travelled to Chapada in 1989 and 2001 and having compiled the Independent Consulting Geologist’s Report for Elkedra’s Prospectus in 2004. He has the relevant qualifications, expertise, competence and independence to be considered a specialist under the definitions stipulated in the VALMIN Code.
No field evaluation of the exploration licences has been conducted by Elkedra since approval of the original applications as development and commissioning of the Chapada Mine had priority. HDA is satisfied that there has been full disclosure of data from Elkedra, particularly in relation to mine production and operational costs.
Yours faithfully,
Hugh Durey, BSC(Hons), FAusIMM, CP(Geol)
Principal of Hugh Durey & Associates
For
per
sona
l use
onl
y
VALUATION OF EXPLORATION LICENCES
As with the Chapada diamond mine at Quilombo, the Company’s six exploration licences target extensive terrace areas associated with major river systems within the Casca Basin that tap the secondary diamond source of the Bauru Conglomerate. These exploration permits, all within a 35 km radius of the mine, have evidence of artisanal workings but have not yet been subjected to systematic field evaluation such as the drilling and bulk sampling undertaken at Quilombo and Peba Lagoinha.
Exploration Licence DNPM N o Grant date Renewal Date Area (hectares)
Bom Jardim 866.307/2004 10/06/2005 10/06/2008 3,598
Acorá 866.308/2004 10/06/2005 10/06/2008 3,366
Estiva 866.309/2004 07/03/2005 07/03/2008 2,206
Casca 866.310/2004 03/03/2005 03/03/2008 6,621
Roncador 866.311/2004 03/03/2005 03/03/2008 5,253
Jangada 866.312/2004 03/03/2005 03/03/2008 5,888
The exploration licences are 100% owned by Elkedra’s subsidiary, Chapada Brasil Mineração Ltda and together cover an area of 26,932 hectares. The total strike length of available river terrace along the major drainages is 93 km.
Substantial artisanal or garimpeiro mining was conducted from the 1940s onwards prior to RTZ Corporation’s interest in the region’s alluvial diamond potential in 1981. Not only was approximately 2 million m3 of gravel extracted from Peba Lagoinha but another 1 million m3 was estimated to have been mined from alongside the Agua Fria River, one of the major drainages between the Estiva and Bom Jardim exploration licences. The diamond population at Agua Fria was allegedly similar to that at Quilombo and the largest stone noted was 64 carats. The widespread extent of Bauru Conglomerate and artisanal activity in an identical geological setting demonstrates the potential for equivalent diamond grade and quality in the exploration licences as that experienced at the Chapada Mine.
The largest diamond recovered to-date from the mining operation at Chapada is 27.35 carats. Production over the past 12 months has confirmed 90% gem quality and a high average stone size of 0.53 carat. Little if any descriptive information is available on diamond parcels although previous assessments by Independent Diamond Valuers Pty Ltd in 2004 of bulk sample diamonds inferred a close kimberlite provenance. Although diamond size distribution and crystal features, as well as regional geology, support the opportunity for nearby primary source rocks, it is unlikely that kimberlites would occur within the current exploration licences.
The exploration licences have no established alluvial diamond resource, yet RTZ’s interpretation of aerial photography outlined 106 km2 prospective for terrace gravel and was partly instrumental in later selection of the licence areas. However, the geological model, the scale of artisanal interest and the results from the Chapada Mine intimate that these licences can support additional economic resources as long as core components such as diamond price, grade and currency rates return to more favourable levels and if further cost reductions can be implemented.
For
per
sona
l use
onl
y
The comparative transaction method of valuation considers the price paid for a similar property with equivalent geological potential and at the same stage of development. An alluvial diamond project that meets these requirements is Duas Barras in Minas Gerais State, 100% owned by Vaaldiam Resources Ltd. Stretching over 70 km2 along 5 km of the Jequitinhonha River, this deposit is credited with an indicated and inferred resource of 430,000 carats at an overall grade and diamond price of 0.16 cts/m3 and US$197 per carat respectively. Vaaldiam recently purchased the outstanding 25% in the project by staged payments amounting to US$950,000. Mining was commenced in June 2007 with first year production budgeted at 25,000 carats.
Translated to 100% equity, this transaction places a value of AUD 62,400 per km2 on the project at Duas Barras. If only the 106 km2 area of designated terrace within the Chapada exploration licences is selected for comparison, a corresponding, minimum valuation of AUD 6.6 million would result.
With the advantage of production statistics and increased technical knowledge from the Chapada Mine as an economic model, discounted cash flow analysis is an appropriate and comparative method of valuation for the neighbouring exploration licences. For such an alluvial diamond deposit, discount rates of between 15% and 20% are commonly applied to projected cash flows for a range in base case net present value to counteract the risk and uncertainty inherent in the key assumptions and in the vagaries of foreign exchange. In addition, as a further measure to acknowledge the limited data available and the degree of risk at this early stage of resource evaluation, a probability factor of 40% is assigned to the base case NPV to provide fair market value.
Although 106 km2 have been previously demarcated as potential terrace in the six licences, 20% of the area or 21 million m3 of gravel is considered a conservative inferred resource
For
per
sona
l use
onl
y
estimate for such a valuation, given factors such as the lack of ground investigation, excised river reserve corridors and portions of terrace not meeting mining grade and cost parameters.
Key Assumptions
Inferred resource (million bcm) 21
Plant throughput (million bcm) 1.44
Grade (carats/bcm) 0.038
Mine life (years) 14.5
Carats per year 54,720
Stripping ratio 4.0
Contractor mining cost (AUD/bcm) 10.18
Processing and security cost (AUD/bcm) 11.17
Administration and supervision cost (AUD/bcm) 4.11
Capital cost (AUD million) 9.7
Diamond price (AUD/carat) 448
Diamond marketing 5% of gross sales
Government royalty 0.3% of net sales
Tax rate % 14.25
Exchange rate (USD:AUD and BRL:AUD) 0.8778 and 1.6303
The size and geographic distribution of the resource demands a second treatment facility with the same capacity and design as that currently operating at Chapada. Mobile on-site screening and washing stations may need to be employed to minimise haulage to central HMS plants. The stripping ratio, grade, mining costs and diamond price are based on production data at Chapada since full operating capacity was achieved six months ago. The administration and supervision cost includes both Brazilian and Australian management expenditure and corporate overheads. As the mine falls within the Amazon Development Area and is afforded major tax concessions, the reduced company tax rate is 14.25%.
The financial model is currently cash flow negative and not viable. The original reserve grade of 0.05 cts/m3 and diamond price of US$411 per carat at Chapada have been rarely achieved since mine commissioning and added to the worsening exchange rate, recent production results from Quilombo do not appear to be sustainable or are marginal in the present economic climate. Nevertheless, the exploration licences possess the potential to significantly bolster the resource size and longevity of the project when profitable conditions return.
The future outlook for diamond sales, however, is positive; in part influenced by declining global rough production and few if any development projects of substance on the immediate horizon to shore up supply. A minimum US$3 billion shortfall of diamonds has been estimated by 2012 given predicted demand levels, ensuring that diamond prices will remain robust and likely to escalate further in set categories.
Although discounted cash flow analysis portrays a zero valuation, the exploration licences are still an important asset complementing the mining operation and infrastructure at Chapada and will likely offer significant value in future and a much extended mine life. In recognition of this and the current strength of the diamond market, valuation should rely on the comparative transaction method. Allowing for 20% variance, a valuation range between AUD 5.3 million
For
per
sona
l use
onl
y
and 7.9 million is recommended for the exploration licences at Chapada as of 11th August 2007.
Sources of Information
Durey H.J., 2004. Independent Consulting Geologist’s Report and Valuation. Proposed Prospectus of Elkedra Diamonds NL. Hugh Durey & Associates.
Polished Prices website. 2007. News. Diamonds new love affair.
Yiannopoulos N., 2004. Chapada Diamond Price Data Analysis. Independent Diamond Valuers Pty Ltd.
Glossary of Technical Terms
Alluvial deposit Deposit resulting from erosion and weathering of primary occurrence or previous sediment and later transported, relocated and concentrated by a river.
Bedrock footwall The basement layer or interface upon which the alluvial deposit lies. Bedrock channels are developed where incision occurs and reworking of confined gravel often leads to improvement in grade.
Bulk sample A large sample for more representative and reliable grade and diamond data.
Carat Unit of measure for gemstones, one metric carat = 0.2 gram.
Conglomerate Rounded gravel clasts cemented together and deposited by the action of water.
Cts / bcm Grade reported as carats per cubic metre.
Garimpeiro Artisanal Brazilian alluvial diamond miner.
HMS plant Sophisticated heavy media separation plant for treatment of ore by gravity means using cyclones and a ferrosilicon medium for efficient recovery.
Limonite Iron-rich nodules and clasts within gravel and commonly sourced from laterite.
Mineral resource Concentration or occurrence of material of intrinsic economic interest in such form and quantity that there are reasonable prospects for eventual economic extraction.
Million bcm Million cubic metres (bank or in-situ).
Overburden Waste horizon that lies on top of an ore deposit.
Ore reserve Economically mineable part of a measured or indicated mineral resource. It includes diluting materials and allowances for losses that may occur when the material is mined.
For
per
sona
l use
onl
y
Rotary pan Processing plant designed for heavy mineral concentration and diamond recovery by rotating angled tynes in a density controlled slurry bed of gravel.
Stripping ratio Ratio between overburden and ore thickness.
For
per
sona
l use
onl
y
APPENDIX 10
ELKEDRA DIAMONDS NL ACN 092 334 220
NOTICE OF SCHEME MEETING
TO: The holders of the Scheme Shares
NOTICE IS HEREBY GIVEN that, pursuant to an order of the Supreme Court of Western Australia made on 20 September 2007 a meeting of the holders of the Scheme Shares (the "Scheme Meeting") will be held at The Celtic Club, 48 Ord Street, West Perth, WA, 6005, Australia on 29 October 2007 at 11:30am (Perth time) for the purpose of considering and, if thought fit, agreeing (with or without modification) to the proposed Scheme of Arrangement between Elkedra Diamonds NL and the holders of Scheme Shares.
In accordance with section 412(1) of the Corporations Act, a copy of the proposed Scheme of Arrangement and a copy of the Explanatory Scheme Booklet in relation to the Scheme of Arrangement accompany this Notice.
By the order referred to above, the Court has directed that Donald Best or, failing him, Neil Christian Fearis to act as Chairman of the Scheme Meeting.
The Scheme of Arrangement is subject to subsequent approval by the Court.
Words and expressions defined in and for the purpose of the Scheme of Arrangement have the same meanings where used in this Notice.
DATED: 28 September 2007.
M D J Cozijn Company Secretary
For
per
sona
l use
onl
y
ELKEDRA DIAMONDS NL (ACN 092 334 220)
PROXY FORM
SCHEME MEETING
I/We,............................................................................................................................................................ of ..................................................................................................... being a holder/holders of Scheme Shares hereby appoint ...............................……………………… of ....................................................................... ................................................ (or failing him) the Chairman of the Meeting as my/our proxy to vote for me/us and on my/our behalf at the meeting of holders of Scheme Shares convened pursuant to an order of the Supreme Court of Western Australia made on 20 September 2007 for the purpose of considering and, if thought fit, agreeing to the proposed Scheme of Arrangement between Elkedra Diamonds NL and the holders of Scheme Shares, such meeting to be held on 29 October 2007 at 11.30am, and at any meeting held subsequent and pursuant to an adjournment of that meeting. This form is to be used in accordance with the directions below. Unless the proxy is directed, he may vote as he thinks fit.
Words and expressions defined in and for the purposes of the Scheme of Arrangement have the same meanings where used in this form.
For: Against:
Approve the Scheme of Arrangement
Instructions:
1. To direct the appointee to cast all votes covered by this instrument in a particular manner, place a sufficient indication (including, without limitation, a tick or a cross) in the relevant box.
2. To direct the appointee to cast some only of the votes covered by this instrument in a particular manner, place in the relevant box either the number of votes to be cast in that manner or the percentage of the total votes covered by this instrument.
3. A holder of Scheme Shares entitled to attend and vote at the Scheme Meeting is entitled to appoint not more than two proxies to attend and, on a poll, to vote in his stead.
4. Where two proxies are appointed, neither proxy shall be entitled to vote on a show of hands and, on a poll, the appointment shall be of no effect unless each proxy is appointed to represent a specified proportion of the holder’s voting rights.
5. A proxy need not himself be a holder of Scheme Shares.
6. The Proxy Form must be signed by the holder or his attorney duly authorised in writing (or, if the holder is a corporation, either under the common seal of that corporation or under the hand of an officer or attorney of the corporation duly authorised in writing).
7. The Proxy Form (and any power of attorney or other authority pursuant to which the Proxy Form has been signed) must be deposited at the registered office of the Company not later than 48 hours before the time fixed for the holding of the Scheme Meeting.
Dated: ..................................... 2007
Signed .................................
For
per
sona
l use
onl
y
