GENESIS RESOURCES LIMITED — M&A Activity 2012

Jun 25, 2012

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Clancy Exploration Limited Phone: (02) 6361 1285
3 Corporation Place Fax: (02) 6361 1202
Orange NSW 2800 www.clancyexploration.com
Australia info@clancyexploration.com
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Supplementary Bidder’s Statement for the Offer by Clancy Exploration Limited (ACN 105 578 256) to acquire all the Shares in Genesis Resources Limited (ACN 114 787 469)

This document is a Supplementary Bidder’s Statement given pursuant to Division 4 of Part 6.5 of the Corporations Act 2001 in compliance with the requirements of Section 645 of the Corporations Act ( Supplementary Bidder’s Statement ).

It is the first Supplementary Bidder’s Statement prepared by Clancy Exploration Limited ( Clancy ) in relation to the Offer from Clancy to acquire all the issued shares in Genesis Resources Limited ( Genesis ) to be undertaken under Clancy’s Bidder’s Statement dated 16 May 2012 ( Original Bidder’s Statement ).

This Supplementary Bidder’s Statement supplements, and should be read together with, the Original Bidder’s Statement.

Defined terms used in this Supplementary Bidder’s Statement are capitalised and have the meaning given to them in Section 12 of the Original Bidder’s Statement.

Genesis Shareholders should ACCEPT the Clancy Offer.

On 14 June 2012 the Genesis Board issued its target’s statement ( Target’s Statement ) regarding the Clancy Offer. The Genesis board has accepted a valuation of 30.5 cents for a Genesis Share. This represents a 577% premium to the price the same board issued shares under the Genesis Rights Issue. It is also a 330% premium to the value attributed to Genesis Shares by recent ASX trading. This is illustrated in the chart below:

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35
IER preferred price
30
is not credible
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20
Clancy Bid
15
10
5
0
1. RSM market price 2. Rights Issue 3. RSM preferred value
Cents per Share
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Notes:

1. RSM Market Price: Preferred quoted market price value of a Genesis Share of 7.1 cents as assessed by RSM (IER paragraph 8.29).

2. Rights Issue: Genesis Rights Issue price of 4.5 cents.

3. RSM preferred valuation of a Genesis Share of 30 .5 cents (IER paragraph 2.2).

4. Clancy Bid: VWAP of Clancy Shares over 10 trading days up to 2 April 2012. See Section 2 for details

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This 30.5 cent valuation cannot be accepted and should be disregarded by Genesis Shareholders.

The report prepared by the independent expert retained by Genesis uses a fundamentally flawed methodology to value Genesis. The report has clearly overvalued Genesis. It has also undervalued Clancy not least because it has applied a different valuation methodology to that applied to Genesis. See Sections 1 and 2 of this Supplementary Bidder’s Statement for details.

Genesis Shareholders should also bear the following in mind when reading the Target’s Statement.

Genesis has estimated that it will spend almost $14 million over 30 months to advance the Plavica Project to the stage of full feasibility. Adding general corporate expenses and minimal expenditure requirement on its Australian projects over that time, it is likely that Genesis will need to raise well in excess of $15 million over the next two years. In addition to progress the Plavica Project, Genesis will have to undertake a technically complex program of work in a challenging environment.

The choice before you is therefore not just about the current value of Clancy and Genesis shares. It is also about which board and management team is better placed to deliver the future value that may be unlocked from the Plavica Project.

• Clancy’s Board and management team has the stability and technical experience required to unlock the value in the Plavica Project. Genesis’ board and management do not. See Sections 3 for details.

• The Clancy Board and management team has a strong track record of raising capital which will be necessary to develop the Plavica Project. Genesis’ board and management have not evidenced this ability. See Sections 4 of this Supplementary Bidder’s Statement for details.

• Raising the funds necessary to achieve the 62% ownership of the Plavica project and fund the company would be shared across the combined Clancy and Genesis shareholder base. See Section 3 of this Supplementary Bidder’s Statement for details.

1. The Independent Expert’s Report overvalues Genesis

The Genesis Board has stated in the Target Statement that the Clancy Offer is inadequate. This conclusion is based on an independent expert’s report ( IER ) prepared by RSM Bird Cameron Corporate Pty Limited ( RSM ).

RSM have concluded that the value of a Genesis Share is in the range of 22.5 cents to 39.5 cents with a preferred value of 30.05 cents.

This valuation range is radically different from the price at which Genesis Shares have actually been trading on the ASX. RSM valued a Genesis Share based on the quoted market price of Genesis Shares prior to announcement of the Clancy Offer at 5.4 cents to 6.8 cents (IER paragraph 8.20), or 6.4 cents to 7.8 cents after a control premium is applied. However, RSM have elected not to use a valuation based on the quoted market price of Genesis Shares.

Genesis shareholders would remember that the Genesis Rights Issue announced on 27 March 2012 was undertaken at a price of 4.5 cents per Genesis Share. If the Genesis Board considers that 30.5 cents is a fair value for Genesis Shares, then it calls into question why the Board was willing to issue shares at 4.5 cents. RSM’s preferred value represents a 577% premium to the rights issue price. Accordingly the Board of Clancy believes that this valuation is not credible .

Among Clancy’s concerns with the valuation are the following:

Funding requirements – the RSM valuation is based on the valuation of the exploration assets of Genesis prepared by Ravensgate included in the Target’s Statement. As Genesis has the ability to earn a 62% interest in the Plavica Project, RSM has calculated the value of Genesis’ interest in the project as if it already held 62% of the Plavica Project less the net present value of the estimated expenditure to perform and complete the final feasibility study for the Plavica Project.

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Genesis has no economic interest in the Plavica Project and will not earn an interest until it has completed a final feasibility study for the project. Genesis is manager of the joint venture for the Plavica Project and has sole responsibility for funding all exploration until completion of that final feasibility study.

The expenditure to achieve a final feasibility study for the Plavica Project will be significant. Management of Genesis has estimated these costs over the 30 month period ending 31 December 2014 at $13.74 million (IER paragraph 8.9).

There can be no certainty that this expenditure will be sufficient.

Nor can there be any certainty that expenditure of this sum will in fact result in a final feasibility study entitling Genesis to earn the 62% interest in the Plavica Project. Genesis has not provided any information as to what constitutes a final feasibility study. Such terminology normally refers to a study that confirms that extraction and processing of a resource can be undertaken in a practical and economic manner. Until substantial exploration work is undertaken as well as assessment of technical, regulatory, environmental and financial issues, there can be no certainty that mining of the Plavica resource is feasible. Based on its “strategic plan” announced on 14 May 2012 it seems that Genesis has not even commenced this work. Accordingly, there can be no certainty that this expenditure will yield a final feasibility study.

If “final feasibility study” refers only to a study suggesting that extraction is possible, but without any financial or operating parameters that would support bank finance or a significant equity raising to complete that work, then Genesis Shareholders will be exposed to further costs associated with firming up the economic viability of the Plavica Project.

The Ravensgate valuation of the Plavica Project assumes that extraction of the resource at the project can be undertaken profitably. RSM appears to have assumed that the $13.74 million required to complete a final feasibility study will enable Genesis to extract the entire resource.

The Clancy Board believes that $13.74 million will be insufficient to complete a final feasibility study based on the resource size quoted by Genesis and used to calculate RSM’s preferred value.

If a satisfactory final feasibility study is not prepared, notwithstanding this expenditure, Genesis will have no interest in the Plavica Project. Similarly, if these exploration funds are not available to Genesis, it cannot complete the exploration work necessary to earn an interest in the Plavica Project.

The RSM valuation does not take account of any of the following:

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The potential that expenditure to achieve a final feasibility study will be higher than $13.74 million; and

The risk that a final feasibility study will not be completed.

Any valuation of Genesis based on the value of the Plavica Project must include a discount to reflect the substantial risk that the exploration funds cannot be raised or, even if expended, the risk that such expenditure will not result in the completion of final feasibility study entitling Genesis to earn an interest in the project. RSM has provided no information substantiating that the planned exploration expenditure will be sufficient nor that expenditure of those funds will guarantee completion of a final feasibility study.

Dilution - Irrespective of the Clancy Offer, Genesis Shareholders will suffer significant dilution as a result of any equity issue to fund exploration works on the Plavica Project. The RSM valuation is flawed because it does not take into account how these funds will be raised or at what price they can be realistically raised at. ASIC Regulatory Guide 111 requires any valuation to be determined on a fully funded basis. This is not addressed in the IER.

The only experience the Genesis Board has of raising funds since the Genesis IPO was the Rights Issue at 4.5 cents per Share which was only completed on 2 May 2012. It should be noted that even

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at this price, the shortfall in acceptances under that offer represented around 26.8% of the shares offered by Genesis.

If Genesis is able to raise the $13.74 million at 4.5 cents and no existing Genesis Shareholders participated, existing Genesis Shareholders would hold only 20.7% of the post-issue equity of Genesis. Accepting the Ravensgate valuation of the Plavica Project, such a share issue would reduce the value range per Genesis Share on a net asset basis to 8.2 cents to 11.7 cents with a preferred value of 9.9 cents, in contrast to the RSM valuation of 22.5 cents to 39.5 cents with a preferred value of 30.5 cents. This is illustrated below:

	Low $	High $	Preferred $
RSM Valuation of Genesis Share (unfunded, per Table2.2of IER)	0.225	0.395	0.305
RSM Valuation of Genesis Share amended to take project funding into account	0.082	0.117	0.099
RSM overvaluation of a Genesis Share	0.143	0.278	0.206

2. The Independent Expert’s Report undervalues Clancy

Clancy considers that the RSM IER is flawed as it undervalues Clancy Shares.

RSM has determined that the price at which Genesis Shares trade on ASX does not reflect the true value of the Genesis assets. However, RSM has no hesitation in applying that same analysis to value Clancy Shares.

RSM has determined a value range for Clancy Shares of 2.5 cents to 4.5 cents per Share. However, this value includes trading that took place following announcement of the Clancy Offer. This is inconsistent with the usual practice in independent expert reports. Considering trading up to 2 April 2012 (the Announcement Date ) only, the range of values for a Clancy Share is 4.5 cents to 4.8 cents (being the 10 day and 90 day VWAP to 2 April 2012 respectively).

Based on the 3 for 1 Clancy Offer, the value attributed to a Genesis Share by the Clancy Offer is therefore 11.4 cents to 15.4 cents . This is significantly higher than the value of 7.5 cents to 13.5 cents assessed by RSM (IER paragraph 10.2).

Genesis Shareholders should note that RSM has been inconsistent in its methodology in that it has calculated the market price for Genesis Shares solely on the basis of trading on the ASX for the period up to the Announcement Date (IER paragraph 8.19). No rationale is provided in the IER for using trading data both before and after the Announcement Date for Clancy Shares. This is illustrated below:

	Low $	High $
RSM ValuationofClancy Offer(IERparagraph 10.2)	0.075	0.135
Value ofClancy Offerusing the traded prices to2 April 2012	0.114	0.154
RSMundervaluationofa Clancy Share	0.039	0.019

3. Limited fundraising capabilities

The Genesis Board has estimated that expenditure of $13.74 million will be required to perform and complete a final feasibility study entitling Genesis to earn a 62% interest in the Plavica Project. The Board of Clancy believes that $13.74 million will be insufficient to complete a final feasibility study on a resource of the size quoted by Genesis and used to calculate RSM’s preferred value. In addition, Genesis will need to fund its general corporate expenses and minimum expenditure requirements on the Australian projects over that period. Including the Plavica project, this could result in a funding requirement well in excess of $15 million.

The interest in the Plavica Project joint venture was described in the Genesis prospectus issued on 18 August 2009. Since then, Genesis has only been able to secure access to $1.2 million by way of the Genesis Rights Issue announced in March 2012. This issue was made at a significant discount to the

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value of Genesis Shares provided by RSM and accepted by the Genesis Board. The shortfall in acceptances under that offer represented around 26.8% of the shares offered by Genesis.

In the comparable period, Clancy has successfully raised over $8.4 million. In fact, the last rights issue completed by Clancy in June 2011 was at a premium to the prevailing share price, demonstrating Clancy’s supportive shareholder base and financing power.

Combining the entities means that the fundraising will be shared across the combined shareholder base. As discussed above, if Genesis, in its own right, was to raise the $13.74 million required to fund the Plavica Project at the last rights issue price and no existing Genesis Shareholders participated, existing Genesis Shareholders would hold only 20.7% of the post-issue equity of Genesis. However, if the raising was done by the combined entity at the same price and no existing Genesis Shareholders participated, existing Genesis shareholders would be entitled to 33.7% of the combined entity.

4. The Clancy Board has superior technical skills and experience

The Plavica Project presents a number of technical challenges and it will not be a straightforward development project. The technical issues it faces include definition of the resource to final feasibility status, determination of how to mine the resource, how to process the ore and how to manage the environmental impacts.

An experienced board and management team is therefore required to deliver the final feasibility study for the Plavica Project. Genesis shareholders need to consider which board and management team has the stability, experience and access to capital to deliver the final feasibility study.

Genesis is responsible for management of all exploration activities at the Plavica Project. Despite holding this position for over 2 1/2 years, Genesis still does not have a full time exploration or project manager. Genesis announced on 14 May 2012, after the announcement of the Clancy bid, that it had engaged an interim exploration manager to facilitate exploration at the Plavica Project until a full time exploration and project manager can be found. In addition Genesis still has not engaged a suitable geological and metallurgical consultant to undertake the planned 2012 drilling program and follow-up analytical and metallurgical test work and reporting for the Plavica Project.

The Genesis board has limited experience in undertaking the exploration work contemplated for the Plavica Project. Following the resignation of Dr A. Kerim Sener from the Genesis board on 19 March 2012, the only person on the board with any geological experience is Dr John Parker who is a nonexecutive director not directly involved in the management of Genesis.

On 14 May 2012 Genesis announced the appointment of 3 new directors. Of these, only one director is identified as having any experience serving as a director of a listed mining or exploration company and none of them has any relevant technical qualifications. Relevant expertise identified in the Target’s Statement includes:

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• Mr Peter Kong is a chartered accountant by profession and has been active in audit, finance, management, fundraising and corporate finance. Such expertise, while welcome on a public company board needing to raising significant capital, is not consistent with an executive responsible for managing a significant mineral exploration project. Moreover, Mr Kong is identified as a director who “ represents other founding shareholders of Genesis, mainly from Asia ”. It is reasonable to expect that all directors of a public company, particularly the managing director, will represent the interests of all shareholders.

• Mr Patrick Volpe has skills and experience gained from 12 years in the stockbroking industry. He is the only recently appointed director identified as having experience in the mining and investment community.

• Mr John Zee has worked in the financial services industry in stockbroking, corporate advisory and capital raisings in Australia for over 30 years.

The common feature of the resumes for each director is their involvement in financial services and corporate finance.

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In contrast, the board of Clancy represents a broad range of skills and experience. These include:

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• Dr Michael Etheridge, a geologist, with broad ranging experience over 45 years .

• Mr Gordon Barnes, managing director, who is an exploration geologist with over 25 years of practical experience from active field-based projects through to multi-commodity project generation initiatives across the world.

• Dr James Macdonald, a geoscientist who has over 36 years’ experience in the global exploration and mining industries.

• Mr Mark Lester, a chartered accountant with experience across a range of listed and unlisted entities.

The choice for Genesis Shareholders is therefore not just about the current value of Clancy and Genesis shares; it is also about which board and management team is better placed to deliver the future value that may be unlocked from the Plavica Project.

5. Other considerations

The Genesis Board has provided a number of other reasons why Genesis Shareholders should reject the Clancy Offer. Clancy’s response to these issues is as follows:

The Offer is conditional – Clancy acknowledges that the Offer is conditional. These Conditions are consistent with market practice for an off-market takeover bid. Clancy will continue to consider whether these Conditions are appropriate having regard to the attitude of the Genesis board to the Clancy Offer.

There are risks concerning Clancy’s assets and prospects – Genesis notes that the more advanced projects in which Clancy has an interest are subject to a joint venture in which Clancy has a minority interest. However Clancy’s joint venture partner has expended many millions of dollars in the ground , through drilling, geophysical and geochemical surveys to earn that interest. Furthermore, Clancy has several emerging 100% owned projects, such as Condobolin, that are being advanced by aggressive drilling programs. As noted above, the Plavica Project is a project in which Genesis has no interest until it expends significant exploration funds with no certainty of success.

Clancy’s share price has uncertainties and is subject to change - the price at which Genesis Shares and Clancy Shares trade will remain subject to fluctuations in circumstances affecting both these companies and the general market. Genesis Shareholders will remain exposed to such fluctuations regardless of whether the Clancy Offer proceeds. There is a real risk that the price at which Genesis Shares trade on ASX will fall if the Clancy Offer does not close successfully. Genesis has traded as low as 2.8 cents per share in the last 6 months and despite the Clancy Offer being announced on 2 April 2012, no alternative offer has emerged.

Genesis has put a strategic plan in place to grow the Company to its full potential – Clancy does not believe that the Genesis Board has the technical skills and experience and track record of raising funds to deliver on the Plavica Project.

Genesis Shareholders should ACCEPT the Clancy Offer.

Extension to Offer Period

Clancy announced on 22 June 2012 that the Offer Period has been extended by 4 weeks. The new closing date for the Offer is 7pm (Sydney time) on Monday 30 July 2012.

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Authorisation

This Supplementary Bidder’s Statement is dated 26 June 2012, the date it was lodged with ASIC. This Supplementary Bidder’s Statement has been approved by a unanimous resolution of the Directors.

Dated:

26 June 2012

Signed for and on behalf of Clancy Exploration Limited

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Mike Etheridge Director

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