Lake Shore gets C$64.8 million from Hochschild; China-linked deals from Xinhua, Migao, SouthGobi

By Kenneth Lim

Boston, Feb. 19 - Lake Shore Gold Corp. sold C$64.8 million of its common stock to Hochschild Mining plc in a move that the junior metals exploring company said will help it to become a producer.

Meanwhile, a number of significant deals involving Chinese companies were announced Tuesday.

Xinhua Finance Media Ltd. raised $30 million through a private sale of convertible preferred shares to Yucaipa Cos.

Migao Corp. said it entered into a bought deal financing agreement to raise about $25 million through equity.

Canada's SouthGobi Energy Resources Ltd. said it will sell C$6.4 million worth of common stock in an agreement with CEF (Capital Markets) Ltd., a company linked to Hong Kong tycoon Ka-shing Li.

Lake Shore completes deal

Lake Shore said it sold C$64.8 million of its common stock to Hochschild as part of a new strategic alliance that will see Hochschild become a significant shareholder with board representation at Lake Shore.

The deal comprised 28.1 million common shares at C$2.30 apiece, a 30% to the volume weighted average price of Lake Shore's shares for the week of Feb. 11 to Feb. 15. Lake Shore stock (TSX: LSG) finished at C$2.01 on Tuesday, up by C$0.11 or 5.8%.

Lake Shore, a Vancouver, B.C.-based mineral exploration company, said it will use the proceeds to develop its Timmins West Mine and Bell Creek Mill.

The deal will see Hochschild holding 19.99% of Lake Shore's share capital, and Lake Shore has agreed to issue additional shares that will raise Hochschild's stake to about 35%.

Hochschild will nominate two new members to Lake Shore's board of directors, have a preemptive right to maintain its percentage interest in any future financings, will be Lake Shore's preferred partner for any future joint ventures and will have a first right to acquire any assets Lake Shore decides to sell. It may also seek board representation proportional to its shareholdings. But Hochschild will be subject to a standstill agreement that will limit its shareholdings to no more than 40% for five years.

"Forming the strategic alliance with Hochschild provides the company with access to the investment dollars required to become a significant gold producer, and it also provides access to Hochschild's expertise and extensive networks of industry connections, all of which will help Lake Shore achieve its goals," Lake Shore chairman Alan Moon said in a statement.

Eduardo Hochschild, Hochschild executive chairman, said in the same statement: "At a time when gold companies are struggling to find profitable, high-grade gold resources, our strategic investment in Lake Shore allows Hochschild to capture significant exposure to a high-grade, long-life asset in a mining friendly jurisdiction, without the costs associated with establishing a greenfield operation."

Lake Shore president and chief executive Brian Booth told Prospect News that the alliance allows the "building of a new gold mining company in Canada."

"We entered into this agreement with them to raise the necessary capital with them to raise all our gold property to completion," Booth said. "They have confidence in our assets as well. They're an experienced long-term underground precious metals company, a billion-dollar company on the London exchange, and this alliance will help us to turn from an exploration company to a producer and take advantage of the strong gold prices that we're seeing."

The response from institutional investors has been good, Booth said.

"I've heard from a number of institutional investors, and they've been favorable," he said. "Especially with the fact that the shares were sold at a premium to market in this very difficult market. It's a great endorsement."

Booth said the standstill agreement was a way to protect existing shareholders.

"That standstill doesn't prevent anyone from coming and making an offer for the company, it just means they can't make a hostile takeover," Booth said.

The company chose equity over debt because taking a loan was not feasible, he said.

"Debt financing is always considered, but most junior companies in this transition phase usually don't meet the requirements from the banks," Booth said. "So we did what we could. But we are a year or two away from being able to raise capital through debt."

Chinese companies active

Xinhua Finance Media led the China-linked placements on Tuesday with a sale of $30 million of convertible preferred shares to Yucaipa.

Each preferred is convertible into Xinhua's American Depositary Shares at $6 per ADS or $3 per common share, a 31% premium to Xinhua's Feb. 15 closing stock price. Xinhua's stock (Nasdaq: XFML) slipped 2.18% or 10 cents to close at $4.48.

Xinhua Finance, a Beijing-based media company, said Yucaipa will have a one year lock-up period before it can convert the preferred shares into common shares or American Depositary Shares. The preferred shares have an annual coupon of 8%.

Yucaipa first invested emerged as a major shareholder of Xinhua Finance in September 2007, and has a nominee on the company's board of directors. The deal will bring its shareholding to 12%.

"The increased investment from a world-class, long-term investor like Yucaipa is a vote of confidence in both the fundamentals and growth prospects of our company," XFMedia chairwoman and chief executive Fredy Bush said in a press release. "The investment will strengthen our financial position and enable us to better capitalize on the opportunities in China for growth and expansion."

Meanwhile, Toronto-managed but China-based potash fertilizer producer Migao Corp. said it has arranged to place C$25 million of common shares at C$8 apiece on a bought-deal basis.

CIBC World Markets Inc. and Canaccord Capital Inc are leading the placement efforts. There is an over-allotment option for a further 15%.

The placement price is a 5.3% discount to Migao's (TSX: MGO) Tuesday closing stock price of C$8.45.

The proceeds of the deal will be used to increase capacity at Migao's Guangdong facility.

SouthGobi Energy has also arranged a private placement of shares with CEF (Capital Markets) to raise C$6.4 million, comprising 711,111 common shares at C$9 each.

The placement price is a 19.6% discount to SouthGobi's (TSX: SGQ) Tuesday closing stock price of C$11.20.

CEF is a joint venture between CIBC and Cheung Kong (Holdings) Ltd., a company controlled by Hong Kong tycoon Ka-shing Li.

Vancouver, B.C.-based SouthGobi, a coal mining company, said the proceeds of the deal will be used to finance initial development of an open-pit coal mine at SouthGobi's Ovoot Tolgoi coal project in southern Mongolia, for exploration, development, general corporate and administrative purposes.

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