Adriana Resources Inc.
TSX VENTURE : ADI

Adriana Resources Inc.

November 29, 2016 08:08 ET

Sprott Resource and Adriana Resources Announce Proposed Business Combination and Concurrent $15 Million Private Placement

TORONTO, ONTARIO--(Marketwired - Nov. 29, 2016) -

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Sprott Resource Corp. ("SRC") (TSX:SCP) and Adriana Resources Inc. ("ADI") (TSX VENTURE:ADI) announced today that they have entered into a definitive agreement to effect a business combination of SRC and ADI pursuant to a plan of arrangement under the Canada Business Corporations Act (the "Arrangement"). In connection with the Arrangement, Sprott Inc. ("Sprott"), a fund managed by a subsidiary of Sprott, and Term Oil Inc. (a corporation controlled by Arthur Richards (Rick) Rule IV, Chairman of Sprott US Holdings Inc.) have agreed to invest, concurrently with the closing of the Arrangement, an aggregate of $15 million in the combined company by purchasing a combination of ADI common shares and Warrants (as defined below) (collectively, the "Private Placements"). Shareholders of ADI will be asked to approve a name change to Sprott Resource Holdings Inc. ("SRH"), conditional upon successful completion of the Arrangement. The Arrangement, the Warrant Distribution (defined below) and the Private Placements are referred to collectively as the "Transaction".

Under the Arrangement, SRC would become a wholly-owned subsidiary of ADI and holders of common shares of SRC ("SRC Shareholders") would receive 3.0 ADI common shares per common share of SRC (the "Exchange Ratio"). ADI shareholders of record on the business day immediately prior to the closing date for the Arrangement would receive one-quarter of a warrant in respect of each ADI share held, with each whole warrant (each, a "Warrant") having a five-year term and a strike price of $0.333 per share (the "Warrant Distribution"). In the Arrangement Agreement, each of ADI and SRC have agreed to use its commercially reasonable efforts to obtain conditional approval of the Toronto Stock Exchange (the "TSX") for the listing of the ADI common shares and Warrants on the TSX.

Highlights of the Transaction

• Increased Net Asset Value ("NAV") and Cash Position

NAV of SRH following completion of the Transaction would be approximately $150 million ($0.29 NAV per ADI share), an increase of 42% from SRC's most recently reported NAV of $106 million. SRH's pro forma cash balance following closing is expected to be approximately $55 million with no debt.

• Aligned Equity Investment

$15 million investment by Sprott and certain related entities aligns SRH shareholders with the manager of SRH and other well-known resource investors.

• Equity Raise at a Premium

The Transaction will provide new capital and increased liquidity to support new and existing investments. Taking into account the Exchange Ratio, SRC and ADI expect that the Private Placements (which remain subject to the acceptance of the TSX Venture Exchange ("TSX-V") will be priced at a premium of approximately 50% to the November 28, 2016 closing price of the SRC common shares and a 79% premium to the November 28, 2016 closing price of the ADI common shares.

• Strengthened Board and Management

The Board of Directors of SRH will include the current members of the board of directors of SRC (other than Peter Grosskopf, who would step down from the board of directors of SRC in connection with the closing of the Arrangement) together with Donald K. Charter, Chairman of ADI, Rick Rule, Chairman of Sprott US Holdings Inc., and a nominee to be identified by WISCO. Rick Rule will be Vice Chairman of the SRH board of directors.

Mr. Rule will also become Chief Investment Officer ("CIO") of SRH and Michael Harrison, President and CEO of ADI, will be Managing Director.

"Each of the proposed directors and senior management of SRH brings with them a wealth of experience in the natural resource sector, a deep network of industry contacts and a proven ability to identify and originate new investments," said Steve Yuzpe, CEO of SRC. "By combining SRC and ADI we will create an integrated company with approximately $150 million in investable capital."

"I'm delighted to be taking on the CIO role at SRH and believe the combined entity will have tremendous opportunities to create shareholder value in one of the most attractive markets that I have seen in my 40 years as a natural resource investor," said Rick Rule.

"We believe this transaction is in the best interest of ADI shareholders," said Donald K. Charter, Chairman of ADI. "Through this business combination, we will create a unique resource-focused company with a strong cash position to allow it to take advantage of new investment opportunities at an ideal time in the natural resource cycle."

Benefits to SRC Shareholders

  • Increases scale and broadens range of investment opportunities available
  • Provides immediate liquidity and capital to support new and existing investments
  • Increased ownership by Sprott and new investment from both a fund managed by a subsidiary of Sprott and Term Oil Inc.

Benefits to ADI Shareholders

  • Alignment with Sprott, a well-known resource investment firm
  • Transaction is immediately accretive to the NAV per ADI common share
  • Future NAV growth through diversified portfolio of investments
  • Larger capital base to invest in a diversified portfolio reducing single project, single commodity risk
  • Warrants to provide further value upside to ADI shareholders
  • Retained ownership of existing interest in Lac Otelnuk Project

Transaction Details

  • Under the Arrangement, SRC Shareholders would receive ADI common shares based on the Exchange Ratio resulting in SRC becoming a wholly-owned subsidiary of ADI.
  • ADI shareholders of record on the business day immediately preceding the closing date for the Arrangement would receive one-quarter of a Warrant in respect of each ADI common share held. Each Warrant would be exercisable to purchase one common share of SRH at a price of $0.333 per share for a period of five years. If, four months after the closing of the Warrant Distribution, the daily weighted average trading price of the SRH common shares for any 45 consecutive trading day period is greater than $0.583 per SRH common share, the expiry date of the Warrants may be accelerated by SRH. The distribution of Warrants to ADI shareholders in the United States is subject to satisfaction of certain U.S. securities law qualifications and, otherwise, such ADI shareholders will receive cash proceeds from the sale of such Warrants by a transfer agent.
  • Concurrent with the completion of the Arrangement, pursuant to the Private Placements (i) Sprott will invest $10 million in ADI common shares at a proposed price of $0.233 per share; and (ii) a fund managed by a subsidiary of Sprott together with Term Oil Inc. will invest a total of $5 million in units of ADI (each unit comprised of one ADI common share and one Warrant) at a proposed price of $0.25 per unit. The offering prices proposed pursuant to the Private Placements of $0.233 and $0.25, respectively, remain subject to the acceptance of the TSX Venture Exchange (the "TSX-V"). There can be no assurance that the TSX-V will provide approval of the Private Placements.
  • Completion of the Arrangement is subject to, among other conditions, court approval, certain regulatory approvals, approval by SRC Shareholders, and approval by ADI shareholders of the ADI Shareholders Resolutions (as defined below).
  • Sprott Resource Consulting Limited Partnership will receive 21,750,000 Warrants as a long-term incentive to replace the profit distribution program that is currently in place at Sprott Resource Partnership and which will be terminated upon completion of the Transaction.
  • Upon completion of the Transaction, on a basic shares outstanding basis, existing SRC Shareholders, ADI shareholders, Sprott, a fund managed by a subsidiary of Sprott together with Term Oil Inc. are expected to own approximately 57%, 31%, 8% and 4%, respectively, of SRH.
  • Under a management services agreement between Sprott Consulting Limited Partnership and SRH, annual management fees plus Adjusted Annual Operating Expenses for SRH will be capped at 3.25% of average NAV in 2017 (on a pro-rata basis from closing of the Arrangement) and then capped at 3.0% of average NAV for 2018 onwards.
  • The terms and conditions of the Arrangement will be described in a joint SRC and ADI management proxy circular, which is expected to be filed and mailed to SRC Shareholders and ADI shareholders in late December 2016.
  • ADI shareholders holding approximately 36.3% of ADI common shares have signed voting support agreements with SRC and agreed to vote their ADI common shares in favour of the ADI Shareholders Resolutions. All of the directors and officers of SRC, together with Eric Sprott and Sprott, have signed voting support agreements with ADI and agreed to vote their SRC common shares in favour of the Arrangement.

GMP Securities L.P., the financial advisor to SRC, has provided an opinion to the board of directors of SRC that, subject to certain assumptions, qualifications and limitations contained therein, the consideration to be received by the SRC Shareholders in connection with the Arrangement is fair, from a financial point of view, to the SRC Shareholders. Primary Capital Inc., the financial advisor to ADI, has provided an opinion to the board of directors of ADI that, subject to certain assumptions, qualifications and limitations, the Arrangement and the Warrant Distribution are fair, from a financial point of view, to ADI shareholders.

The board of directors of SRC recommends that SRC Shareholders vote in favour of the resolution approving the Arrangement. The board of directors of ADI recommends that ADI shareholders vote in favour of the resolution approving the Arrangement and certain related matters, including the "Change of Management" of ADI in connection with the Arrangement, and the resolution approving the change of name of ADI to "Sprott Resource Holdings Inc." (the "ADI Shareholders Resolutions").

"We are very pleased to have the opportunity to invest alongside current SRC and ADI shareholders to increase Sprott's ownership at what we believe is a very exciting time for the company," said Peter Grosskopf, CEO of Sprott.

"On behalf of the SRC Board of Directors and management team, I would like to thank Mr. Grosskopf for his many contributions and valuable insight as a director of SRC," said Terry Lyons, Chairman of the SRC board of directors. "As CEO of Sprott, Peter will continue to be a trusted advisor to SRH, and Sprott, through its proposed equity investment, will become one of SRH's largest shareholders."

Subsequent to the completion of the Arrangement, SRH intends to transition from a private equity firm to a diversified holding company focused on owning businesses that its management team believes can generate sustainable free cash flow or attractive returns on investment in the natural resource industry. Management expects that it will take less than 12 months to make the transition from a private equity firm to a diversified holding company.

SRC and ADI have each engaged Kingsdale Shareholder Services as Strategic Advisor and Proxy Solicitation Agent. Shareholders with questions are encouraged to contact Kingsdale Shareholder Services at 1-877-518-6805 toll-free within North America, or 1-416-867-2272 (for collect calls outside North America), or e-mail at contactus@kingsdaleshareholder.com.

The securities described in this press release have not been, and will not be, registered under the U.S. Securities Act of 1933, as amended (the "U.S. Securities Act") or any U.S. state securities laws and may not be offered or sold in the United States absent registration or an available exemption from the registration requirements of the U.S. Securities Act and applicable U.S. state securities laws. This press release shall not constitute an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities, in any jurisdiction in which such offer, solicitation or sale would be unlawful.

About Sprott Resource Corp.

SRC is a publicly-listed private equity firm focused on the natural resource sector. The company currently has investments in energy production and services, mining and agriculture. SRC creates value for its investors by applying a disciplined investment process to deploy capital while managing risk within highly cyclical sectors. SRC is a business builder that is committed to being a value-added partner with proven management teams. SRC supports its investments through active management and the provision of long-term capital, as well as strategic, financial and governance oversight. Founded in 2007, the Company is based in Toronto, Canada and is managed by an experienced team of private equity specialists, supported by the technical and investment resources of Sprott Inc. and its subsidiaries and affiliates. Management of SRC is dedicated to generating long-term superior returns on capital for its shareholders, while focusing on risk management and real wealth preservation. To learn more, please visit www.sprottresource.com.

About Adriana Resources Inc.

Adriana Resources Inc. owns 40% of the Lac Otelnuk iron ore project in Northern Quebec. Adriana's 60% joint venture partner in Lac Otelnuk Mining Ltd. ("LOM JV") is WISCO International Resources & Investment Limited, a subsidiary of Bao Wu Steel Ltd. In April 2015, the LOM JV published a NI43-101 compliant Technical Report on the feasibility of the Lac Otelnuk project. Adriana reported a cash position of $28.6 million as at September 30, 2016. The LOM JV is currently on care and maintenance, and the JV has a cash position of $7.9 million as of September 30, 2016. Adriana has a Board of Directors and management team with extensive experience in the resource sector and has been undertaking a strategic review of opportunities to create shareholder value while the LOM JV project is on care and maintenance.

Forward-Looking Information and Statements

Certain statements in this press release contain forward-looking information (collectively referred to herein as the "Forward-Looking Statements") within the meaning of applicable securities laws including, but not limited to, statements about: the completion of the proposed transactions, including the Transaction and expected timing; the anticipated benefits of the Transaction to SRC and its securityholders and to ADI and its securityholders; the timing and anticipated receipt of required stock exchange, court and securityholder approvals for the proposed transactions; the ability of SRC and ADI to satisfy the other conditions to, and to complete, the Transaction; the anticipated mailing of the joint information circular regarding the Transaction; the intended transition from a private equity firm to a diversified holding company and anticipated benefits therefrom; and similar statements concerning anticipated future events, results, circumstances, performance or expectations, that reflect management's current expectations and are based on information currently available to management of SRC, ADI and their respective subsidiaries.

Forward-Looking Statements are based on a number of expectations or assumptions which have been used to develop such statements and information but which may prove to be incorrect. Although SRC and ADI believe the expectations and assumptions reflected in such Forward-Looking Statements are reasonable, undue reliance should not be placed on Forward-Looking Statements because SRC can give no assurance that such expectations and assumptions will prove to be correct. The Forward-Looking Statements included in this news release are not guarantees of future performance and should not be unduly relied upon. Such information and statements, including the assumptions made in respect thereof, involve known and unknown risks, uncertainties and other factors, which may cause actual results or events to differ materially from those anticipated in such Forward-Looking Statements, including, but not limited to, a failure to realize the anticipated benefits of the Transaction and to successfully integrate SRC and ADI and the failure of SRC or ADI to obtain necessary securityholder, regulatory, court and other third party approvals, or to otherwise satisfy the conditions to the Transaction, in a timely manner, or at all. The foregoing list of factors is not exhaustive. Additional information on other factors that could affect the operations or financial results of SRC, ADI and the combined company are included in reports on file with applicable securities regulatory authorities, including, but not limited to, those listed under the heading "Risk Factors" in SRC's annual information form dated March 4, 2016 and those listed under the heading "Risks and Uncertainties" in ADI's Management's Discussion and Analysis for the Year Ended December 31, 2015 dated February 26, 2016. Should one or more of these risks or uncertainties materialize, or should assumptions underlying the Forward-Looking Statements prove incorrect, actual results, performance or achievements could vary materially from those expressed or implied by the Forward-Looking Statements contained in this news release.

The Forward-Looking Statements contained in this news release speak only as of the date of this news release, and each of SRC and ADI do not assume any obligation to publicly update or revise any of the included Forward-Looking Statements, whether as a result of new information, future events or otherwise, except as may be expressly required by applicable securities laws.

Neither the Toronto Stock Exchange nor 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 press release.

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