08 October 2007
8 October 2007
Dear Celtic shareholder,
On 28 September 2007, Severstal Resurs, through its wholly owned subsidiary
Centroferve Limited, announced an all cash offer for Celtic Resources plc of 270
pence per Celtic share, which values Celtic at approximately £161 million;
significantly higher than the £115 million value of just 11 days previously,
when Celtic announced it had been approached regarding a potential offer for
Celtic. This letter sets out the background to the offer and why it represents
excellent value for Celtic shareholders.
• 43.6% premium to volume weighted average share price for the three
months to 17 September 2007
• 33.0% premium to price on 17 September 2007
The offer represents a substantial 43.6% premium to the volume weighted average
price of a Celtic share for the three months to 17 September 2007, the day prior
to Celtic's announcement regarding a potential offer approach, a 33.0% premium
to the Celtic share price on 17 September 2007, and a 41.4% premium to the
volume weighted average Celtic share price for the one month to 17 September
The offer also represents a 72.0% premium to the volume weighted average price
at which MG Capital, from May to August 2007, sold 149,000 Celtic shares. Peter
Hannen is Celtic's chairman and also MG Capital's chairman and largest
shareholder, but according to Celtic's announcements, 'was excluded from the
procedures whereby this decision was made'.
Barrick Gold Corporation, the world's leading gold producer by market value, has
recognised the attractiveness of the offer by entering into a Letter of Intent
to accept the offer in respect of its 6.6% shareholding in Celtic.
• Certainty and significant cash gain from pre-approach Celtic share price
The offer represents certainty and a significant cash gain relative to Celtic's
recent share price, whereas in the three year period prior to the offer period
(i.e. 17 September 2007), the Celtic Board's confused strategy delivered to you
a total return of -48% - a near halving of the share price.
In the same period, publicly traded gold companies operating in Russia and the
former CIS region delivered a total return of +43% to their shareholders.
Celtic's confused strategy included the reversal on Eureka Mining, first
spinning it off, then buying it back, then selling some of its assets. It also
resulted in the forced sale of the 50% stake in the valuable Nezhdaninskoye gold
mine at a price 'not fully realizing the apparent value of the 50% stake in the
mine' (RBC Capital Markets, 26 June 2006).
• The offer and our stakebuilding is supporting an inflated Celtic share
During the 8 trading days from 5 September 2007, when we first approached Celtic
with the terms of a possible cash offer, and 17 September 2007, the day before
Celtic's announcement regarding a preliminary approach that may or may not lead
to an offer, Celtic's share price increased from 188.5 pence to 203 pence.
Following Celtic's announcement on 18 September, the share price increased from
203 pence to 222.5 pence and then to 231 pence on 27 September 2007, the day
prior to the announcement of Severstal Resurs' offer.
The Severstal Group already owns 29.7% of Celtic. This significant strategic
stake can be used to block any other party from acquiring full control of Celtic
and could potentially dissuade third parties from making a competing offer. In
the absence of our offer, or if our offer is not accepted, there is a likelihood
that the share price of Celtic will fall significantly.
Reasons for the unilateral offer
On 5 September 2007 Severstal Resurs approached both the Chief Executive Officer
and Chairman of Celtic with the terms of a possible cash offer. This proposal
was conditional upon the provision of certain due diligence to the reasonable
satisfaction of Severstal Resurs and the recommendation of the Celtic board of
directors. Severstal Resurs reserved the right to waive, in whole or in part,
any of these pre-conditions at its discretion.
On 18 September the Celtic board of directors rejected Severstal Resurs'
proposal and declined to provide the limited due diligence requested.
On 27 September Severstal Resurs again approached Celtic's Chief Executive
Officer with a proposed cash offer without due diligence conditions and with a
view towards securing a recommendation from the board of directors of Celtic.
Celtic decided not to afford its shareholders the opportunity to consider this
offer, and Severstal Resurs' approach was again rejected. Severstal Resurs
therefore felt there to be no grounds for reaching an agreed outcome.
Following Celtic's refusal to engage in meaningful dialogue on a potential
offer, after the acquisition of an initial 22% interest in Celtic Severstal
Resurs received unsolicited approaches from several shareholders requesting that
it extend the opportunity to other shareholders to exit at similar values. This
included East Guardian Opportunity Fund, from which Severstal Resurs purchased a
further 4.6% of Celtic on 20 September 2007.
On 28 September 2007, Severstal Resurs acquired 3.1% of Celtic from DWS
Investments and in the open market, taking its ownership stake in Celtic to
29.7%. The total percentage of Celtic shares in respect of which support for the
offer has already been expressed is 36.3% including the letter of intent in
support of the offer from Barrick Gold.
In light of Severstal Resurs' desire to increase its ownership in Celtic beyond
the current level, and approaches from Celtic shareholders to Severstal Resurs
to extend its offer to all shareholders, Severstal Resurs has therefore decided
to pursue the transaction on a unilateral basis so that all Celtic shareholders
have the opportunity to benefit from this significant cash premium.
In the event Severstal Resurs does not reach the 80% acceptance level required
for compulsory acquisition, the Severstal Group, as the largest single
shareholder, intends to run Celtic as a subsidiary in accordance with
Severstal's own strategy, subject to regulatory requirements and minority
Support the Severstal Resurs offer
You will no doubt have read Celtic's announcement issued in the early morning
hours of 28 September regarding a bid approach by an unnamed third party, as
well as their subsequent announcement rejecting our offer. However, to date, no
other offer has emerged, and Celtic has admitted that 'no details of the bid are
known' with respect to this supposed third party approach.
You should be disappointed by your board's lack of consideration of our offer
(your board issued its rejection statement a mere 33 minutes after our offer
announcement) and its failure to embrace a value-creating transaction by
rejecting an offer by Severstal Resurs that is public, is fully financed, is at
a substantial premium, and is in cash. The Celtic directors are unnecessarily
placing your money at risk by not recommending that you accept Severstal Resurs'
attractive offer. Your board has demonstrated that it values its continued
independence above shareholder value.
Attached to this letter is the full text announcement of the firm intention to
make an offer under Rule 2.5 of the Irish Takeover Panel Act 1997, Takeover
Rules 2001 to 2006 (the 'Irish Takeover Rules') setting out the detailed terms
of the cash offer. Additionally, in the very near future, and in any event no
later than 26 October 2007, you will receive the offer document in relation to
our offer for Celtic and instructions on how to accept the cash offer. I
strongly encourage you to carefully read both documents and ACCEPT the Severstal
On behalf of Centroferve Limited
Morgan Stanley & Co. Limited ('Morgan Stanley') is acting as exclusive financial
advisor and Freshfields Bruckhaus Deringer and Arthur Cox are acting as legal
advisors to the Severstal Group on the transaction.
The directors of Centroferve and the directors of Severstal accept
responsibility for the information contained in this letter save that the only
responsibility accepted by the directors of Centroferve and by the directors of
Severstal for information relating to Celtic, which has been compiled from
published sources, has been to ensure that such information has been correctly
and fairly reproduced or presented (and no steps have been taken by the
directors of Centroferve or the directors of Severstal to verify this
information). To the best of the knowledge and belief of the directors of
Centroferve and the directors of Severstal (who have taken all reasonable care
to ensure that such is the case), the information contained in this letter for
which they accept responsibility is in accordance with the facts and does not
omit anything likely to affect the import of such information.
Morgan Stanley is acting exclusively for Centroferve and Severstal Resurs and no
one else in connection with the Offer and Morgan Stanley will not regard any
other person as a client in relation to the Offer and will not be responsible to
anyone other than Centroferve and Severstal Resurs for providing the protections
afforded exclusively to its clients or for providing advice in relation to the
Offer, the contents of this letter or any transaction or arrangement referred to
The Offer will not be made, directly or indirectly, in or into any jurisdiction
where it would be unlawful to do so, or by use of the mails, or by any means or
instrumentality (including, without limitation, telephonically or
electronically) of interstate or foreign commerce, or by any facility of a
national securities exchange of any jurisdiction where it would be unlawful to
do so, and the Offer will not be capable of acceptance by any such means,
instrumentality or facility from or within any jurisdiction where it would be
unlawful to do so. Accordingly, copies of this letter and all other documents
relating to the Offer are not being, and must not be, mailed or otherwise
forwarded, distributed or sent in, into or from any jurisdiction where it would
be unlawful to do so. Persons receiving such documents (including, without
limitation, nominees, trustees and custodians) should observe these
restrictions. Failure to do so may invalidate any related purported acceptance
of the Offer. Notwithstanding the foregoing restrictions, Centroferve reserves
the right to permit the Offer to be accepted if, in its sole discretion, it is
satisfied that the transaction in question is exempt from or not subject to the
legislation or regulation giving rise to the restrictions in question.
This letter does not constitute an offer to sell or an invitation to purchase or
the solicitation of an offer to purchase or subscribe for any securities. Any
response in relation to the Offer should be made only on the basis of the
information contained in the document to be sent to shareholders detailing the
terms and conditions of the Offer (the 'Offer Document') or any document by
which the Offer is made.
This letter, including information included or incorporated by reference in this
letter, may contain 'forward-looking statements' concerning the Offer, Celtic or
its Group and the Severstal Group. Generally, the words 'will', 'may', 'should',
'could', 'would', 'can', 'continue', 'opportunity', 'believes', 'expects',
'intends', 'anticipates', 'estimates' or similar expressions identify
forward-looking statements. The forward-looking statements involve risks and
uncertainties that could cause actual results to differ materially from those
expressed in the forward-looking statements. Many of these risks and
uncertainties relate to factors that are beyond the companies' abilities to
control or estimate precisely, such a future market conditions and the
behaviours of other market participants, and therefore undue reliance should not
be placed on such statements. Neither Centroferve nor Severstal assumes any
obligation in respect of, nor intends to update, these forward-looking
statements, except as required pursuant to applicable law.
Any person who is a holder of one per cent. or more of the Celtic shares may
have disclosure obligations under Rule 8.3 of the Irish Takeover Rules,
effective from 18 September 2007.
The Offer will be made in the United States pursuant to an exemption from the US
tender offer rules provided by Rule 14d-1(c) under the US Exchange Act.
Notice to US holders of Celtic shares:
The Offer will be made for the securities of an Irish public limited company
whose shares are listed on the AIM market in the UK and is subject to Irish and
UK disclosure requirements, which are different from those of the United States.
The Offer will be made in the United States pursuant to applicable US tender
offer rules and otherwise in accordance with the requirements of the Irish
Takeover Rules. Accordingly, the Offer will be subject to disclosure and other
procedural requirements, including with respect to withdrawal rights, offer
timetable, settlement procedures and timing of payments that are different from
those applicable under US domestic tender offer procedures and law.
The receipt of cash pursuant to the Offer by a US holder of Celtic shares may be
a taxable transaction for US federal income tax purposes and under applicable US
state and local, as well as foreign and other tax laws. Each holder of Celtic
shares is urged to consult his independent professional adviser immediately
regarding the tax consequences of acceptance of the Offer.
It may be difficult for US holders of Celtic shares to enforce their rights and
any claim arising out of the US federal securities laws, since Centroferve and
Celtic are located in non-US jurisdictions, and some or all of their officers
and directors may be residents of non-US jurisdictions. US holders of Celtic
shares may not be able to sue a non-US company or its officers or directors in a
non-US court for violations of the US securities laws. Further, it may be
difficult to compel a non-US company and its affiliates to subject themselves to
a US court's judgement.
In accordance with normal Irish and UK practice and pursuant to Rule 14e-5(b) of
the US Exchange Act, Centroferve or its nominees, or its brokers (acting as
agents), may from time to time make certain purchases of, or arrangements to
purchase, Celtic shares outside the United States, other than pursuant to the
Offer, before or during the period in which the Offer remains open for
acceptance. These purchases may occur either in the open market at prevailing
prices or in private transactions at negotiated prices. Any information about
such purchases will be disclosed as required in Ireland and the UK, will be
reported to a Regulatory Information Service of the UK Listing Authority and
will be available on the London Stock Exchange website,
Sources and Bases of Information
(i) The value of the entire issued and to be issued share capital of Celtic is
based upon 55,827,026 Celtic Shares in issue and 3,705,506 Celtic Shares
issuable to Celtic Warrantholders under Celtic Warrants with an exercise price
at or below the Offer Price as at close of business on the last business date
prior to the release of the Rule 2.5 Announcement. Information relating to the
share capital of Celtic is based on figures in Celtic's annual report for 2006,
being the latest available annual report, and on filings registered with the
Companies Registration Office in Dublin since that report.
(ii) The price of Celtic shares has in each case been sourced from the Daily
Official List of the London Stock Exchange, and represents the price or the
volume weighted average price, as the case may be, for the relevant periods or
on the relevant dates
(iii) Unless otherwise indicated, the information relating to Celtic in this
letter has been extracted from Celtic's annual report for 2006 and subsequent
press releases on Celtic's website (www.celticresources.com) as well as RNS
(iv) Information relating to the reaction of Celtic and the Celtic board to
Severstal Resurs' offer have been extracted, without material adjustment, from
the RNS announcement issued by Celtic at 12:14 pm on 28 September 2007 and from
the Bloomberg news update, 'Severstal Raises Celtic Resources Bid to $327
Million (Update 1)' at 8:51 am (New York time) on 28 September 2007.
(v) Information on shareholder returns for publicly traded gold companies
operating in Russia and the former CIS region is based on a market
capitalisation weighted index comprising KazakhGold Group, Peter Hambro Mining,
Highland Gold Mining, High River Gold Mines, European Minerals and Polyus Gold
for the period 17 September 2004 to 17 September 2007.
(vi) The information, and quotation, relating to Celtic's sale of the 50% stake
in Nezhdaninskoye gold mine has been extracted from the RBC Capital Markets
report of 26 June 2006, without material adjustment.
(vii) The information relating to Severstal in this letter has been extracted
from Severstal's annual report for 2006 and IPO prospectus dated 8 November
(viii) The information relating to Severstal's iron and coal reserves is
extracted from the IMC report 'Audit of Iron Ore and Coal Reserves for CJSC
Severstal-Resurs' dated August 2006, prepared in accordance with JORC report
About Severstal Resurs and Severstal:
In 2006 Severstal's Mining division produced 5.4 million tons of coal
concentrate, 2.2 million tons of coking coal, 2.1 million tons of steam coal,
9.5 million tons of iron ore pellets and 4.5 million tons of iron ore
concentrate. The reserves and resources of the company were estimated to be 1.8
billion tonnes of iron ore as at 1 January 2006 and 0.7 billion tonnes of coal
as at 1 April 2006. Severstal Resurs also owns a number of scrap metal yards in
the Northwestern, central and Southern parts of Russia.
Severstal is an international steel producer with a listing on the Russian
Trading System and the London Stock Exchange. Incorporated in 1993, the company
focuses on high value-added and unique niche products and has a successful track
record of acquiring and integrating high-quality assets in North America and
Europe. Severstal's mining assets in Russia are securing its supplies of raw
materials. In 2006 Severstal produced 17.6 million tonnes of steel and had
US$12.4 bn, PBT of US$1.8 bn and EPS of US$1.27.
For Further Information, please Contact:
Jon Simmons, Ben Brewerton
Phone: +44 207 831 3113
Morgan Stanley & Co. Limited
Phone: +44 (0) 77899 43482
Phone: +7 494 540 7766
Leonid Solovyev, Anna Shumaylova
Phone: +7 495 795 0623
This information is provided by RNS
The company news service from the London Stock Exchange