Red Hill Energy Inc.

TSX VENTURE : RH


Red Hill Energy Inc.
Prophecy Resource Corp.

TSX VENTURE : PCY
OTC Bulletin Board : PCRYF
FRANKFURT : 3P1


Prophecy Resource Corp.

January 21, 2010 12:22 ET

Red Hill Energy Inc. and Prophecy Resource Corp. Announce Business Combination, Consolidating Quality Advanced Projects to Appeal to International and Institutional Investors

Red Hill also announces non-brokered private placement

VANCOUVER, BRITISH COLUMBIA--(Marketwire – Jan. 21, 2010) – Red Hill Energy Ltd. (Red Hill) (TSX VENTURE:RH) and Prophecy Resource Corp., (Prophecy) (TSX VENTURE:PCY)(OTCBB:PCRYF)(FRANKFURT:3P1) are pleased to announce that their respective Boards of Directors have unanimously approved a letter agreement dated January 20, 2009 ("LOA") in respect of a friendly transaction to combine the companies through an all share transaction (the "Proposed Transaction"). The combined company is hereinafter referred to as "new Prophecy".

Financial Terms of the Transaction

Per the LOA, Red Hill shareholders will receive 0.92 of a new Prophecy common share for each Red Hill common share held which represents a 26.8% premium to the shareholders of Red Hill as at the close of market on January 20, 2010. All outstanding Red Hill options and warrants will be exchanged for options and warrants of new Prophecy on similar terms.

Highlights of the Proposed Transaction

  • The combined company will have control over NI-43-101 compliant Measured and Indicated mineral resources of 232 million pounds of nickel, 1 billion tonnes of coal and 116 million pounds of copper as well as inferred resources of 500 million tones of coal and 593 million pounds of copper. New Prophecy will also hold properties with significant exposure to vanadium and titanium. The company offers diversified financial leverage to rising commodity prices.
  • Positive synergy in the combined management with expertise in geology, engineering, marketing, and M&A.
  • Broader appeal to international and institutional investors with multiple advanced assets, greater stock liquidity and the benefits of exposure to a broader range of commodities.
  • Enhanced market capitalization and capacity to evaluate and acquire other advanced stage and pre-production stage resource opportunities internationally. 

Arnold Armstrong, Chairman and Chief Executive Officer of Red Hill Energy stated: "Prophecy has demonstrated its vision of creating a quality company focused on acquiring advanced mineral assets internationally. We are particularly impressed with Prophecy's speed of conducting business and its ability to bring quality projects and investors together under one name. I am confident that Red Hill shareholders will reap the rewards by owning the majority of the new Prophecy."

John Lee, Chairman and Chief Executive Officer of Prophecy Resource stated: "I joined Prophecy in October with the goal of amassing advanced assets, management talent, and investors world wide. Our Lynn Lake Nickel project and the newly acquired coal assets provide cornerstones from which Prophecy can now build its legacy. Mr. Armstrong is a highly regarded businessman and I look forward to working with him in his position with new Prophecy in taking our venture to the next level."

Further Detail Regarding the Transaction

It is contemplated that the Proposed Transaction will be a business combination of Prophecy and Red Hill by way of a plan of arrangement and will be structured in a way that will result in the financial terms of the Proposed Transaction being met. The parties have agreed to enter into a definitive agreement by February 28, 2010 and complete the Proposed Transaction by May 15, 2010.

As a result of the Proposed Transaction, all existing warrants, options and other rights to acquire common shares of Red Hill will be deemed to represent comparable securities of Prophecy adjusted on the same share exchange ratio basis. The agreed share exchange ratio is based upon an assessment of the recent trading activity and assets of both Red Hill and Prophecy.

Completion of the Proposed Transaction is conditional upon:

  1. Both the Red Hill shareholders and Prophecy Shareholders having approved the Proposed Transaction;
  2. completion of legal and financial due diligence by each of the parties;
  3. receipt of all necessary regulatory approvals, including the approval of the TSX Venture Exchange (the "Exchange");
  4. certain other customary conditions.

The LOA includes a commitment by both parties to not conduct negotiations or solicit alternative transactions. In certain circumstances, if the Proposed Transaction is terminated by either party, a breakup fee of $500,000 is payable by the terminating party.

On or before the date of execution of the Definitive Agreement, the directors and officers of both Red Hill and Prophecy shall have entered into a share lock-up agreement to vote in favour of the Proposed Transaction.

Upon completion of the Proposed Transaction the current Chairman and CEO of Prophecy, Mr. John Lee, will remain the Chairman & CEO of the combined company which will retain the name "Prophecy Resource Corp." The board of directors of new Prophecy will consist of four nominees from Red Hill and three nominees from Prophecy.

Pursuant to the LOA, Red Hill has the right, prior to closing of the Proposed Transaction, to transfer to a newly formed subsidiary ("NewCo") the following: (i) $1,000,000 cash, and (ii) all of Red Hill's non-Mongolian assets, namely, the Red Lithium Property near Clayton Valley, Nevada and Thor Rare Earth Property in Nevada, and distribute securities of NewCo to shareholders of Red Hill as of a to-be-determined record date by way of spinoff or similar mechanism. Red Hill is reviewing the merits of this proposed spinoff and will update its shareholders in a later news release.

If the Proposed Transaction is completed, and based upon the current issued capital of each company including the private placement to be conducted by Red Hill as described below, new Prophecy will have approximately 85,400,000 common shares issued and outstanding, of which Red Hill shareholders will own approximately 65% and current Prophecy shareholders will own approximately 35%.

Red Hill will conduct a non-brokered private placement consisting of up to 6,500,000 units at a price of $0.35 per unit for total proceeds of CDN $2,275,000. Each unit will be comprised of one common share and one half of one share purchase warrant. Each whole share purchase warrant entitles the holder to acquire one additional common share for a period of two years at a price of $0.60. A finder's fee of 7% of the proceeds placed is payable in cash on portions of the private placement.

Proceeds of the placement will be applied to Red Hill's coal operations and later for general working and development capital for new Prophecy, as well as the $1 million transfer to Newco if the spinout transaction is pursued.

Red Hill Energy Corporate Update

Red Hill announces the resignation of Ranjeet Sundher from the board of directors of the Company. Mr. Sundher will remain as an independent consultant of Red Hill until the closing and then of new Prophecy to facilitate and oversee new Prophecy's Mongolian coal operations. Mr. Paul McKenzie will be appointed as the interim President and CFO of Red Hill. Red Hill wishes to acknowledge Mr. Sundher's many contributions to Red Hill. Red Hill also wishes to announce the termination of its investor relations agreement with Mau Capital Management LLC, effective immediately.

Conference Call

A joint conference call at 9:00 am (PST) January 26, 2010 will be held to discuss the Proposed Transaction. Details of the conference call will follow in a subsequent news release.

Red Hill Energy's Key Assets

Red Hill controls 100% interests in two key Mongolian coal districts. Combined, Red Hill has 504.5 million tons of Measured, 524 million tons of Indicated and 475.9 million tons of inferred thermal coal in Mongolia.

The Ulaan Ovoo Coal Project

The Ulaan Ovoo coal project is 100% owned by Red Hill. The project is located within 10 km of the Russian border, northern Mongolia and is 120km (75 miles) east of the Central Mongolian Railroad which links the project to the vast coal markets of Russia and Asia. The project contains 174.5 million tons Measured, 34.3 million tons Indicated and 35.9 million tons of Inferred thermal coal. The coal is of excellent low ash and sulfur quality at 5,204 KCAL/KG LB which is highly desired regionally. The average seam thickness of the resource is 53.9 metres with a stripping ratio of 2.0:1 on the first 140 million tons. The Mongolian government has granted the project a fully transferable 30 year mining license that can be extended by an additional 40 years. The project has met Mongolian environmental approvals as per the Mongolian Ministry of Nature and the Environment which approved a Detailed Environmental Impact Assessment (DEIA) and Environmental Protection Plan (EPP) specifically for Ulaan Ovoo, an important pre-condition prior to production. The central Russian transmission grid reaches within 25 kilometres to the north of the project. Several economic studies including a Scoping Study conducted by Behre Dolbear (USA) Ltd. of Denver, CO USA and a recently completed Pre-Feasibility Study conducted by Minarco-MineConsult of Sydney, Australia demonstrate the economic potentials of the project. These reports are available at www.sedar.com.

The Chandgana Tal and Chandgana Khavtai Coal Projects

The Chandgana Tal and Chandgana Khavtai coal projects are both 100% owned by Red Hill. The projects share the same Nyalga Basin coal seam and are both contiguous to Vale's (formerly CVRD) largest Mongolian coal project. The Chandgana projects contain a combined total of 819.7 million tons Measured and Indicated and 440 million tons of Inferred thermal coal. (Specifically: Chandgana Tal, 141. 3 million tons Measured, and Chandgana Khavtgai, 188.7 Measured, 489.7 Indicated and 440 Inferred) Both projects have extremely low stripping ratios, 0.53:1 in the case of Chandgana Tal and 2.1:1 in the case of Chandgana Khavtgai with respective average coal seam thicknesses of 40 and 45.4 metres. The Nyalga Coal Basin is within 160 km's (100 miles) of the Central Mongolian Railroad, offering the project a direct link to China, Russia as well as other Asian destinations. Both the Chandgana's coal qualities are of desirable low ash, low sulfur content with KCAL/KG LB averaging up to 4,358. Additional information is available at www.redhillenergy.com and at www.sedar.com.

Red Hill Director Mel Klohn, a Washington State Licensed Geologist, member of the SEG, SME, CIM and an independent Qualified Person as defined by Canada's NI 43-10, has reviewed and approved the information relevant to Red Hill Energy's coal projects as summarized in this press release.

Prophecy Resource Corp.'s Key Assets

The Lynn Lake Nickel Project

Prophecy has entered into an agreement to acquire the Lynn Lake Nickel Project in Manitoba, which the previous owner reported contains a National Instrument 43-101 compliant Measured and Indicated resource of 17 million tonnes with an average grade of 0.62% Nickel and 0.31% Copper at a 0.4% nickel cut-off grade. Prophecy has requisitioned its own technical report for the Lynn Lake property which should be available shortly under its profile on www.sedar.com. The Lynn Lake Nickel Camp, located in northern Manitoba, is the third largest nickel producing region in Canada. Excellent exploration potential exists as in 2008 a new nickel discovery was made one mile from the old workings that featured an intercept of 18 meters of 1.5% nickel and 0.7% copper. Prophecy has optioned or agreed to purchase six of the seven known gabbro plugs in the Lynn Lake area and is now the dominant player in terms of land size and resource base in this premier Lynn Lake nickel district.

The Okeover Project

The Okeover Property (copper-molybdenum) consists of eleven contiguous legacy and cell mineral claims located in the Vancouver Mining Division of southwestern British Columbia, 25 kilometres north of Powell River and 145 kilometres northwest of Vancouver. Collectively, the claims cover an area of approximately 3,950 hectares. Prophecy has spent over $1 million on Okeover and earned a 60% interest. In 2006, Dr. N.C. Carter, PhD, P.Eng, completed a technical report on the Okeover Property pursuant to NI 43-101 that estimated an inferred mineral resource of 86.8 million tonnes grading 0.31% copper and 0.014% MoS2 at a 0.20% copper cut-off grade. Less than 10% of the property has been drilled and there is significant potential to expand the resource. This report is available at www.sedar.com.

The Titan Project

On January 14, 2010, Prophecy entered into an option agreement, subject to Exchange approval, to earn an 80% interest in the Titan Vanadium-Titanium-Iron project located in Ontario, Canada. The project is located in eastern Ontario and consists of 1,052 contiguous hectares (2,600 acres). A total of 4,898 assay intervals are recorded from 38 core holes drilled by previous owners on the property. Drilling highlights reported by past operator included 142 meters of 0.27% vanadium (0.48% vanadium pentoxide) from hole RA-5-21 and 174 meters of 0.26% vanadium (0.46% vanadium pentoxide) from hole RA-5-10. The mineralization started from surface to an open vertical depth of 500 meters. The complete horizontal and vertical extent of the deposit is still to be determined.

For additional information on the Titan project, please refer to January 14, 2010 Prophecy news release or www.prophecyresource.com.

The information concerning the current mineral properties controlled by Prophecy, as described in this news release, has been reviewed and approved by Bill Morton, PGeo, a director of Prophecy and a qualified person under National Instrument 43-101.

Prophecy Resource Corp.
John Lee - Chairman and CEO
Red Hill Energy Inc.
G. Arnold Armstrong – Chairman and CEO

This news release includes certain statements that may be deemed "forward-looking statements". All statements in this release, other than statements of historical facts, including, without limitation, statements regarding potential mineralization, the estimation of mineral resources, the realization of mineral resource estimates, interpretation of prior exploration and potential exploration results, the timing and success of exploration activities generally, the timing and results of future resource estimates, permitting time lines, metal prices and currency exchange rates, availability of capital, government regulation of exploration operations, environmental risks, reclamation, title, and future plans and objectives of the companies are forward-looking statements that involve various risks and uncertainties. Although Red Hill and Prophecy believe the expectations expressed in such forward-looking statements are based on reasonable assumptions, such statements are not guarantees of future performance and actual results or developments may differ materially from those in the forward-looking statements. Forward-looking statements are based on a number of material factors and assumptions. Factors that could cause actual results to differ materially from those in forward-looking statements include unsuccessful exploration results, changes in project parameters as plans continue to be refined, results of future resource estimates, future metal prices, availability of capital and financing on acceptable terms, general economic, market or business conditions, risks associated with operating in foreign jurisdictions, uninsured risks, regulatory changes, defects in title, availability of personnel, materials and equipment on a timely basis, accidents or equipment breakdowns, delays in receiving government approvals, unanticipated environmental impacts on operations and costs to remedy same, and other exploration or other risks detailed herein and from time to time in the filings made by the companies with securities regulators. Readers are cautioned that mineral resources that are not mineral reserves do not have demonstrated economic viability. Mineral exploration and development of mines is an inherently risky business. Accordingly the actual events may differ materially from those projected in the forward-looking statements. For more information on Red Hill and Prophecy and the risks and challenges of their businesses, investors should review their annual filings that are available at www.sedar.com.

"Neither The TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release."

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