Heron Resources : Explanatory Statement - Section 444GA

Heron Resources Limited ACN 068 263 098 (Subject to Deed of Company Arrangement)

Explanatory Statement

For personal use only

Heron Resources Limited ACN 068 263 098 (Subject to Deed of Company Arrangement)

Application for Court approval for a transfer of your Shares for nil consideration

8 April 2022

On 25 February 2022, Heron Resources Limited ACN 068 263 098 (Subject to Deed of Company Arrangement) (Company), its subsidiaries Tarago Operations Pty Ltd ACN 127 810 413 (Subject to Deed of Company Arrangement), Hampton Nickel Pty Limited ACN 100 180 498 (Subject to Deed of Company Arrangement), Ochre Resources Pty Limited ACN 112 833 351 (Subject to Deed of Company Arrangement), Woodlawn Mine Holdings Pty Ltd ACN 612 657 164 (Subject to Deed of Company Arrangement) and Tarago Exploration Pty Ltd ACN 115 529 112 (Subject to Deed of Company Arrangement) (together, the Group), their Administrators and DEVELOP Global Limited ACN 122 180 205 (DOCA Proponent) entered into a deed of company arrangement (DOCA).

The primary objectives of the DOCA are to:

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maximise the chances as much as possible of the Group's business continuing in existence;

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subject to various conditions, provide for the restructure of the Group, including by the transfer of all of the fully paid ordinary shares in the Company (Shares) to the DOCA Proponent (or its nominee); and

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administer the business, property and affairs of the Group in a way that results in a better return for the creditors than would result from an immediate winding up of the companies in the Group.

It is a Condition to completion and effectuation of the DOCA that, amongst other things, the Deed Administrators obtain a Court order pursuant to section 444GA(1)(b) of the Corporations Act 2001 (Cth) (Corporations Act) granting leave to the Deed Administrators to transfer all of the Shares to the DOCA Proponent (or its nominee) (Section 444GA Order). The Deed Administrators have applied for the Section 444GA Order (Section 444GA Application) in the Supreme Court of New South Wales (Court).

This Explanatory Statement provides information to the Shareholders about:

•

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the Section 444GA Application; the right of the Shareholders to object to the Section 444GA Application; and

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the requirement for relief from section 606 of the Corporations Act granted by the Australian Securities and Investments Commission (ASIC) to enable the transfer of all of the Shares to the DOCA Proponent or its nominee in accordance with the Section 444GA Order.

Enclosed with this Explanatory Statement are copies of:

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an Independent Expert's Report prepared by Deloitte Financial Advisory Pty Ltd (Deloitte) concluding that the residual equity value of Shareholders in the Company is nil; and

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the originating process and supporting affidavit of Christopher Clarke Hill filed by the Deed Administrators in support of the Section 444GA Application.

A Directions Hearing relating to the Section 444GA Application has been listed for hearing at the Supreme Court of New South Wales commencing at 10.00am (Sydney time) on 26 April 2022.

As a Shareholder of the Company, you are entitled to oppose the Section 444GA Application. If you wish to appear at the Directions Hearing to make submissions and/or if you intend to oppose the Section 444GA Application at the Final Hearing, you must do so by filing with the Court, and serving on the Deed Administrators and ASIC, an appearance in the Court's prescribed form indicating the grounds of opposition by no later than 4.00pm (Sydney time) on 22 April 2022.

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Explanatory Statement

Heron Resources Limited ACN 068 263 098 (Subject to Deed of Company Arrangement)

If you do not enter an appearance by the deadline of 22 April 2022, the Court may determine that you are not entitled to be heard at any subsequent hearings.

For personal use only

We expect the Final Hearing for the Section 444GA Application will be listed for hearing at the Supreme Court of New South Wales in early to mid May 2022.

The Deed Administrators will release announcements on their website(https://www.fticonsulting.com/creditors/heron-resources-limited-and-its-subsidiaries)and the ASX Company Announcements Platform if there is a change to the scheduled dates for the deadline for filing an appearance and when the date for the Final Hearing has been confirmed.

This is an important document. Shareholders (and their advisors and any other interested parties) should read this Explanatory Statement and accompanying Independent Expert's Report and Court documents in their entirety before making a decision regarding whether or not to take any action in respect of the Section 444GA Application. If you have any questions on the information in this document, you should consult your legal or other professional advisor.

A copy of this Explanatory Statement has been provided to ASIC for the purposes of the application for ASIC Relief. Neither ASIC nor any of its officers takes any responsibility for its contents.

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Explanatory Statement

Heron Resources Limited ACN 068 263 098 (Subject to Deed of Company Arrangement)

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Important information

For personal use only

1.1

Purpose of this Explanatory Statement

This document is an Explanatory Statement for Shareholders issued by the Company in connection with the Section 444GA Application.

If the Section 444GA Order is made and the DOCA is effectuated, all of your Shares will be transferred to the DOCA Proponent pursuant to the terms of the DOCA for no consideration. You will not receive any money and you will cease to own your Shares.

Section4of this Explanatory Statement contains further information regarding the DOCA.

This Explanatory Statement has been provided to you by the Company, to assist you to understand:

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the proposed restructure and its effect on you as a Shareholder;

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the application which has been made, pursuant to the terms of the DOCA, by the Deed Administrators of the Company to the Supreme Court of New South Wales for approval to transfer all of the Shares to the DOCA Proponent pursuant to section 444GA(1)(b) of the Corporations Act;

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the steps which you need to take if you wish to appear at and/or oppose the Section 444GA Application, including that you must file with the Court and serve on the Deed Administrators a notice of appearance before the Directions Hearing by 4.00pm (Sydney time) on 22 April 2022;

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the requirement for the ASIC Relief to enable the transfer of all of the Shares to the DOCA Proponent or its nominee in accordance with the Section 444GA Order; and

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the information which is, and will be, available to assist you in deciding whether to appear at the Directions Hearing.

The Independent Expert's Report prepared by Deloitte, which contains its valuation of the Shares on the basis of the Company in a liquidation, is attached to this document. The opinion set out in the Independent Expert's Report is that the residual equity value of Shareholders in the Company is nil.

1.2

Effect of the DOCA on Shareholders

If the DOCA is effectuated, your shareholding in the Company will be transferred to the DOCA Proponent for nil consideration to you. The Company will be delisted from the ASX following the effectuation of the DOCA.

However, through implementation of the DOCA, the Group will avoid liquidation and continue as a going concern.

Further information regarding the consequences of the successful effectuation of the DOCA on the Group and Shareholders is set out in Section 4.4.

1.3 Status of this document

This document is not a prospectus or other disclosure document under Chapter 6D of the Corporations Act.

A copy of this Explanatory Statement has been given to ASIC for the purpose of obtaining the ASIC Relief referred to in Section 6 below. Neither ASIC nor any of its officers takes any responsibility for its contents.

1.4

Defined terms

Capitalised terms used in this Explanatory Statement have the meanings defined in the Glossary in Section 8, unless the context otherwise requires, or a term has been defined in the text of the Explanatory Statement. All time references in this Explanatory Statement are to Australian Eastern Standard Time (AEST).

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Explanatory Statement

Heron Resources Limited ACN 068 263 098 (Subject to Deed of Company Arrangement)

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Background

For personal use only

2.1

Administration of the Group

The Woodlawn Project was placed on care and maintenance by the Company in March 2020. Following the suspension of operations at the Woodlawn Project, the Group commenced a strategic process aimed at exploring and pursuing a potential transaction, including a capital raise that would fund the recommencement of operations and enable the Group to manage its outstanding liabilities (Strategic Process). On 15 July 2021, the board of Heron concluded that the Strategic Process would not achieve a solvent transaction.

On 16 July 2021, Christopher Hill, David McGrath and Michael Ryan were appointed as the joint and several voluntary administrators of the Company and the Subsidiaries that form part of the Group, pursuant to section 436A of the Corporations Act.

In the Administrator's Section 75-225 Report, the Administrators concluded that the Group was solvent until 15 July 2021, when the directors of the Company concluded that there were no realistic prospects of the Strategic Process achieving a solvent transaction.

As you would have been aware, the Shares have been suspended from trading on ASX since 16 July 2021.

Please refer to section 6.5 of the Administrator's 75-225 Report, which provides a detailed overview of the Group's financial position as at the date of the Administrators' appointment (including amounts owing to financial creditors, employees and others).

2.2

Sale process and formulation of the DOCA

Following their appointment, the Administrators continued with the care and maintenance regime in order to preserve value in the Group's major assets, and took steps to realise the value in the Woodlawn Project, including undertaking a sale/recapitalisation campaign for the Group. This resulted in three final proposals for transactions related to either the Woodlawn Project or the Group as a whole.

One of the 3 proposals was rejected outright on the basis that its terms were materially worse than the other two offers. A short negotiation with the two remaining parties followed, which resulted in the submission of revised proposals. The proposal put forward by the DOCA Proponent was considered to be in the best interests of creditors as a whole, having regard to the sales processes that had been undertaken both pre and post appointment of the Administrators, the quantum of consideration offered and the level of execution risk involved in the transaction. The DOCA Proponent was then granted a short period of exclusivity to perform confirmatory due diligence and finalise a proposed deed of company arrangement and associated documentation, which resulted in the transaction contemplated under the DOCA which in turn was recommended to the Group's creditors by the Administrators.

Please refer to section 6.4 of the Administrator's 75-225 Report, which provides an overview of the sale/recapitalisation campaign conducted by the Administrators.

At a meeting of creditors held on 25 February 2022, the Group's creditors resolved for the Company and the Subsidiaries to enter into the DOCA proposed by the DOCA Proponent. Later on 25 February 2022, the DOCA was executed by the Administrators, the DOCA Proponent, the Company and the Subsidiaries, and the Administrators became the Deed Administrators.

An overview of the DOCA is provided in Section4.

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Independent Expert's Report

The Section 444GA Application has been commenced by the Deed Administrators in the Supreme Court of New South Wales seeking the leave of the Court pursuant to section 444GA(1)(b) of the Corporations Act for the transfer of the Shares to the DOCA Proponent.

Under section 444GA(3) of the Corporations Act, the Court may only grant leave to transfer the Shares to the DOCA Proponent if it is satisfied that the transfer would not unfairly prejudice the interests of the Shareholders. The Deed Administrators intend to rely on the Independent Expert's Report when addressing the issue of unfair prejudice before the Court.

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Explanatory Statement

Heron Resources Limited ACN 068 263 098 (Subject to Deed of Company Arrangement)

The Independent Expert's Report was also prepared for the purpose of applying to ASIC for technical relief from Chapter 6 requirements of the Corporations Act. Please see Section 6 for more information in relation to the ASIC Relief.

For personal use only

To assist in preparing the Independent Expert's Report, Deloitte engaged Behre Dolbear to provide valuations of the fair market value of the Group's mineral assets, including the Woodlawn Project and other tenements and royalty interests, as well as to make an assessment of the reasonableness of the technical project assumptions within the discounted cash flow valuation model of the Woodlawn Project on an underground mining first basis (DCF Model). Mr Stephen Reid of Deloitte was engaged to provide analysis of the value of the Woodlawn Project based on the DCF Model, and Gordon Brothers Pty Ltd was engaged to provide a valuation of the plant and equipment owned by the Group.

As concluded in the Independent Expert's Report, and subject to the assumptions listed at Section 1.4 of the Independent Expert's Report, the value range of the Group's assets in an assumed liquidation scenario is $17.1 million to $143.4 million (preferred valuation $126.1 million). The Group's total indebtedness in an assumed liquidation scenario is estimated to be in the range of $304.9 million to $312.5 million (preferred valuation of $306.3 million).

Consequently, Deloitte has concluded in its report that the residual equity value of Shareholders in the Company is nil.

This deficiency is shown as follows:

Table 1 - Estimated surplus / (deficiency) to Shareholders

$ million	Low	High	Preferred
Total assets	17.1	143.4	126.1
Total indebtedness	(312.5)	(304.9)	(306.3)
Surplus / (deficiency) to	(295.4)	(161.4)	(180.2)
Shareholders
Source: Independent Expert's Report.

A copy of the Independent Expert's Report appends as Annexure A to this Explanatory Statement.

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What is the DOCA?

4.1

Overview

At the second creditors' meeting held pursuant to section 439A of the Corporations Act on 25 February 2022, the creditors of the Group resolved that the Company and the Subsidiaries execute the DOCA proposed by the DOCA Proponent. The DOCA was executed by all parties on 25 February 2022 following the meeting of creditors.

As a consequence of the execution of the DOCA, the Company and the Subsidiaries have exited voluntary administration and are subject to the DOCA from 25 February 2022. The Administrators for the Group's voluntary administration have been appointed as the Deed Administrators of the DOCA.

4.2

Key features of the DOCA proposal

The DOCA proposal features, among other things:

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the transfer of 100% of the Shares to the DOCA Proponent (or its nominee), subject to the satisfaction or waiver of a number of conditions precedent, including the Section 444GA Order;

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payments to be made to OMF Fund II (H) Ltd (Orion), Nomad Royalty Company Limited and Castlelake L.P. affiliates (collectively, the Secured Creditors) to facilitate the release of their security over the assets of the Company and the Subsidiaries, pursuant to bilateral Cooperation Deeds entered into between each of the Secured Creditors and the DOCA Proponent (Cooperation Deeds); and

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the contribution of a fund by the DOCA Proponent (Proponent's Contribution) and the establishment of a Creditors' Trust to facilitate a return to any terminated employees, unsecured creditors and Orion. The Deed Administrators are the trustees of the Creditors' Trust.

The Proponent's Contribution has been paid by the DOCA Proponent to the Deed Administrators in accordance with the terms of the DOCA. The Deed Administrators will hold the Proponent's Contribution in escrow pending satisfaction or waiver of all Conditions under the DOCA, at which point it will be settled in the Creditors' Trust.

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Explanatory Statement