MAGNETITE MINES LIMITED. — M&A Activity 2018

Mar 28, 2018

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ASX Announcement

29 March 2018

Final Framework Agreement for the proposed merger with Lodestone Equities Limited

• Following further due diligence and liaison with ASX, the Framework Agreement entered into in December 2017, which sets out the basis for negotiation of the proposed acquisition of 100% of Lodestone Equities Limited, has been amended

• No changes to assets being acquired – same Lodestone assets with the flagship project – the railway based Olary high grade magnetite project and 100% of the South Australian infrastructure solutions being developed by Braemar Infrastructure

• Formal documentation for the acquisition nearing completion

• Parties targeting a shareholder meeting date of late May/early June 2018 to approve the acquisition once formal documentation executed

The Board of Magnetite Mines Limited (ASX: MGT) ( Company ) refers to its previous announcements regarding the signing of a framework agreement between the Company, Coffee House Group Limited ( CHG ) and Lodestone Equities Limited ( Lodestone ) on 7 April 2017 and 21 December 2017 respectively, as the basis for the negotiation and execution of a formal Share Sale and Purchase Agreement (and associated documents) ( SSPA ) for the proposed acquisition of Lodestone (a private Isle of Man company) by the Company ( Transaction ).

Following further due diligence, negotiations and liaison with the ASX, the Company advises that the terms of a final framework agreement ( Final Framework Agreement ), forming the basis for the finalisation and execution of the SSPA and other related documents for the Transaction, have been agreed. There have been no changes to the assets proposed to be acquired.

A summary of the material terms of the Final Framework Agreement is set out in Annexure 1 to this announcement.

Magnetite Mines Limited | ABN: 34 108 102 432 | 118B Glen Osmond Road, Parkside, SA 5063 | email: info@magnetitemines.com | www.magnetitemines.com | Tel: +61 8 8427 0516 | Fax: +61 8 8427 0515

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As previously advised, CHG is currently the sole shareholder of Lodestone, and is a related party of the Company - being associated with the Company's Chairman and Chief Executive Officer, Mr Gordon Toll ( Mr Toll ). CHG is also a substantial shareholder in the Company, currently owning 14.04% of the fully paid ordinary shares ( Shares ) in the Company. Mr Toll, via CHG and direct interests, holds 18.5% of the Company's Shares. As a result, the Company is required to obtain shareholder approval for the Transaction under ASX Listing Rule 10.1.

The exclusivity period in the Final Framework Agreement now ends on 30 April 2018, and the agreement itself terminates on 30 June 2018 if binding formal documentation for the Transaction is not completed by that time.

As per the previous framework agreement, whilst the Final Framework Agreement is legally binding on the Company, CHG and Lodestone, it does not create any legally binding obligation on any party to acquire or sell Lodestone until the SSPA is executed by the parties and certain conditions precedent are satisfied (see Annexure 1).

Next steps

The independent directors thank shareholders for their ongoing support and patience and will be working as fast as possible to complete all the requisite documentation (including obtaining an independent expert's report opining on the fairness and reasonableness of the Transaction to the unassociated Company shareholders), to enable the Company to hold a shareholder meeting in late May/early June 2018.

The Company will now finalise and complete the due diligence process in relation to Lodestone, its subsidiaries and its assets, and work towards finalising the SSPA with CHG and Lodestone based on the terms in the Final Framework Agreement. This includes liaising further with ASX and receiving approval for the terms of the milestone securities being offered as part consideration for the acquisition, prior to executing the SSPA and finalising the notice of meeting.

For further information, contact:

Peter Schubert Executive Director - Investor Relations & Capital Development +61416 375 346

Frank DeMarte Executive Director & Company Secretary +61419 908 795

Magnetite Mines Limited

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Annexure 1 – Summary of material terms of the Final Framework Agreement

The Company’s binding exclusivity period to proceed with the finalisation of the SSPA to purchase Lodestone has been extended under the Final Framework Agreement to 30 April 2018. The Final Framework Agreement will terminate on 30 June 2018.

Under the terms of the Final Framework Agreement, the parties have agreed the following key terms in respect of the Transaction:

Consideration

• (a) Should the SSPA be executed, the SSPA will provide that the consideration payable for all the Lodestone shares by the Company is as follows:

• (i) at completion of the Transaction ( Completion ), the Company will issue 220,000,000 Shares to CHG (or its nominee(s)) (the Shares will be issued at a deemed issue price equal to the 15 trading day volume weighted average price of the Shares on ASX immediately prior to Completion);

• (ii) at Completion, the Company will issue the following milestone rights to Toll Resources (an entity associated with Mr Gordon Toll):

  • (A) 55,000,000 milestone rights (on customary terms to be approved by ASX) and vesting as set out in the table below. The milestone rights will convert to Shares upon the completion of an industry standard definitive feasibility study ( Milestone 1 ):

Timing for achievement of Milestone 1	Number of Milestone 1 milestone rights that vest on achievement of Milestone 1
If the Milestone 1 is achieved within 24 months from Completion	55,000,000
If Milestone 1 is achieved after 24 months from Completion but within 28 months from Completion	55,000,000 less 3,055,555 for every whole month that Milestone 1 has not been achieved after 24 months from Completion, with all remaining Milestone 1 milestone rights to automatically lapse and be cancelled for no consideration
If Milestone 1 is achieved after 28 months from Completion but within 33 months from Completion	42,777,780 less 8,555,556 for every whole Month that Milestone 1 has not been achieved after 33 months from Completion, with all remaining Milestone 1 milestone rights to automatically lapse and be cancelled for no consideration
If Milestone 1 is achieved after 33 months from Completion	Zero, with all Milestone 1 milestone rights to automatically lapse and be cancelled for no consideration

• (B) 55,000,000 milestone rights (on customary terms to be approved by ASX) and vesting as set out in the table below. The milestone rights will convert to Shares upon the Board deciding to commence commercial mining and magnetite production operations, which can only occur after satisfaction of Milestone 1, and after the Company has obtained a financing facility to develop a magnetite concentrate production operation of at least 5 million tonne per annum on any existing Company (including its subsidiaries) or Lodestone (including its subsidiaries) tenements or subsequently acquired tenements ( Milestone 2 ):

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Timing for achievement of Milestone 2	Number of Milestone 2 milestone rights that vest on achievement Milestone 2
If Milestone 2 is achieved within 51 months from Completion	55,000,000
If Milestone 2 is achieved after 51 months from Completion but within 55 months from Completion	55,000,000 less 3,055,555 for every whole month that Milestone 2 has not been achieved after 51 months from Completion, with all remaining Milestone 2 milestone rights to automatically lapse and be cancelled for no consideration
If Milestone 2 is achieved after 55 months from Completion but within 60 months from Completion	42,777,780 less 8,555,556 for every whole month that Milestone 2 has not been achieved after 55 months from Completion, with all remaining Milestone 2 milestone rights to automatically lapse and be cancelled for no consideration
If Milestone 2 is achieved after 60 months from Completion	Zero, with all Milestone 2 milestone rights to automatically lapse and be cancelled for no consideration

Shares issued upon conversion of the milestone rights issued in accordance with above vesting schedule will be issued at a deemed issue price equal to the 15 trading day volume weighted average price the Shares on ASX immediately prior to satisfaction of the milestone.

• (C) within 10 business days of the receipt of funds under a financing facility MGT has obtained to develop a magnetite concentrate production operation of at least 5 million tonne per annum on the existing MGT or Lodestone tenements or subsequently acquired tenements (such financing facility to be obtained by the date that is 9 years and 364 days after Completion), MGT will pay CHG $2.2 million in cash.

Conditions precedent

Without limiting the terms of the formal Transaction documents, the SSPA will include the following conditions precedent:

• (a) ( Shareholder approval ) the Company and Lodestone obtaining all shareholder approvals required under the Corporations Act, the ASX Listing Rules and any other applicable laws or regulations to give effect to the Transaction;

• (b) ( Regulatory approval ) all regulatory approvals which are required in order to permit the Transaction to take place are granted;

• (c) ( consents from counterparties ) to the extent that it is necessary:

• (i) CHG obtaining from each counterparty of a material agreement a consent to the change in control of CHG and its associated entities; and

• (ii) the Company obtaining from each counterparty of a material agreement a consent to the change in control of the Company;

• (d) ( GT Services Agreement ) Toll Resources (an entity associated with Mr Gordon Toll) and the Company entering into a services agreement (for further details see section below titled 'Gordon Toll Services Agreement'); and

• (e) ( IP Sale Deed ) the parties entering into an IP sale deed regarding the sale of certain intellectual property rights to the Company ( IP Sale Deed ).

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Board representation

• (a) From the date of the Final Framework Agreement, the board of MGT will have the right to appoint an additional director to the board of MGT, who must be an independent director with appropriate skills, expertise, qualifications and experience.

• (b) From the date of the Final Framework Agreement, and subject to MGT first appointing an independent director per paragraph (a) above, CHG will have the right to nominate one director to the board of MGT in addition to Mr Gordon Toll, subject to:

• (i) the relevant person consenting to act as a director and meeting all regulatory requirements for a director set out in the Corporations Act and the ASX Listing Rules; and

• (ii) the terms of appointment between the relevant person and MGT including a provision that the relevant person resigns upon termination of the Transaction.

CHG Loan

• (a) An acknowledgement be included that CHG has loaned $2,000,000 to Lodestone and its subsidiaries ( CHG Loan ) (to be documented under a loan agreement ( CHG Loan Agreement )) and that the CHG Loan Agreement will provide that:

• (i) the CHG Loan is repayable by Lodestone as follows:

  • (A) so long as the Company has at least $500,000 in cash or cash equivalents:

    • (1) the Loan shall not accrue any interest

    • (2) prior to the repayment date (being the date that is the earlier of 9 years and 364 days after Completion or 10 business days following receipt of funds by the Company from the first financial drawdown under the financing facility obtained in connection with the satisfaction of Milestone 2) ( Repayment Date ), is repayable by equal quarterly repayments of $50,000, or such larger amount as may be agreed, on each quarterly anniversary of Completion; and

    • (3) will be due and payable in full on the Repayment Date;

  • (B) if the Company does not have at all times at least $500,000 in cash or cash equivalents, all repayment obligations of Lodestone in respect of CHG Loan will be suspended and the quarterly repayment obligations of Lodestone will be reinstated (together with quarterly repayment obligations outlined above that are in arrears only required to be paid by Lodestone if the Company has at all times at least $1,000,000 in cash but only to the extent that the Company has, and will continue to have, sufficient working capital) once the Company has such funds and commencing and from the date that the Company has such funds (with no interest to be made);

  • (C) Lodestone or the Company may at any time, without penalty, repay the CHG Loan; and

  • (D) from the date that is 10 business days once the Company has received funds from the first financial drawdown under a financing facility as referred to in Milestone 2; and

• (ii) at Completion:

  • (A) if the Company has at least $2,000,000 in cash, the Company will immediately, after Completion, repay $200,000 to CHG plus quarterly repayments of $50,000 for each quarterly anniversary since 1 January 2017, such amounts to be applied in reduction of the CHG Loan; or

  • (B) if the Company has at least $1,000,000 but less than $2,000,000 in cash, the Company will:

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• (1) immediately after Completion, repay $100,000 to CHG, such amount to be applied in reduction of the CHG Loan; and

• (2) repay to CHG an additional $100,000 plus quarterly repayments of $50,000 for each quarterly anniversary since 1 January 2018 once the Company has at least $1,000,000 in cash, such amounts to be applied in reduction of the CHG Loan.

Royalty Payments

The following acknowledgements regarding royalty payments be included:

• (a) ( Royalty payment – Lodestone Existing Tenements ): in relation to tenements located in Australia and registered in the name of Lodestone or any of its wholly owned subsidiaries at Completion, the Company acknowledges that Braemar Infrastructure Pty Ltd ( BIPL ) (a wholly owned subsidiary of Lodestone) is obliged to pay to Global Bulk Limited (an entity associated with Mr Toll) a gross FOB royalty of 2% of the gross FOB revenue on all iron ore product produced and sold from any such Lodestone tenement regardless of the delivery and port system;

• (b) ( Royalty payment – MGT Existing Tenements ): in relation to tenements located in Australia and registered in the name of the Company or any of its wholly owned subsidiaries at Completion (excluding Lodestone or any of its subsidiaries), the Company acknowledges that BIPL is obliged to pay to Global Bulk Limited a gross FOB royalty of 2% of the gross revenue on all iron ore product that is produced and sold and which flows through the IP port infrastructure (to be defined and documented) of BIPL and which satisfies the royalty condition (to be agreed and documented) in accordance with the terms of the IP Sale Deed and that this obligation shall remain in force following Completion; and

• (c) ( Royalty payment – MGT Merged Group New Tenements ): in relation to tenements located in Australia and registered in the name of the Company (or any of its wholly owned subsidiaries) and/or Lodestone (or any of its wholly owned subsidiaries) after Completion (and that were not owned by the Company, Lodestone or any of their subsidiaries at Completion) or any other tenement owner entering into a usage agreement for the use of the IP port infrastructure (to be defined and documented) of BIPL, the Company acknowledges that BIPL is obliged to pay to Global Bulk Limited a gross FOB royalty of 2% of the gross revenue on all iron ore product that is produced and sold and which flows through the IP port infrastructure (to be defined and documented) of BIPL and which satisfies the royalty condition (to be agreed and documented) in accordance with the terms of the IP Sale Deed and that this obligation shall remain in force following Completion.

Gordon Toll Services Agreement

The key terms of the services agreement between the Company and Toll Services (an entity associated with Mr Toll) will provide as follows:

• (a) ( Term ): the term of the agreement will be for a period of five years, commencing on the date of completion of the SSPA;

• (b) ( Scope of services ): Toll Resources will procure that Mr Toll will provide services to MGT during the term of the GT Services Agreement including, but not limited to, services to be provided as chief executive officer of MGT and services relating to the strategic direction and overall management of MGT;

• (c)

( Consideration ):

• (i) subject to shareholder approval, in consideration of the performance of the prescribed services by Toll Resources, the Company will grant to Toll Resources 5,000,000 options for each quarter of the previous year during the term of the agreement in which Toll Resources performs the prescribed services (i.e. a maximum of 20,000,000 options per year) with an exercise price equal to the 15 trading day volume weighted average price of the Shares on the ASX immediately prior to the end of each quarter, and an expiry date that is 5 years after their date of grant; and

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  - (ii) in the event shareholder approval is not given in respect of the above options, the Company shall instead pay an amount determined by the Board with reference to an independent remuneration survey. If Toll Resources disputes this amount, an expert shall be appointed to provide a determination, such determination to be final.

• (d) ( Termination ): the agreement may not be terminated during its term unless:

• (i) Mr Toll becomes incapacitated, in which case the agreement may be terminated at any time by the Company by giving 6 months written notice to Toll Resources;

• (ii) Mr Toll:

   - (A) in the reasonable opinion of the Company, fails or neglects to perform or exercise Mr Toll’s powers or duties in a satisfactory way following notice of the failure or neglect and a reasonable period to rectify; or
  
   - (B) is prohibited under the applicable provisions of the Corporations Act from taking part in the management of the Company,
  

in which case the agreement may be terminated at any time by the Company by giving 4 weeks written notice to Mr Toll; or

• (iii) if Toll Resources or Mr Toll:

• (A) engages in any act or omission which, in the reasonable opinion of the Company, constitutes serious misconduct which has a material adverse impact on the Company and its performance;

• (B) commits a serious or persistent breach or non-observance of fundamental terms of the agreement (to be defined in the agreement);

• (C) has become insolvent, or does something or has done something which prevents Mr Toll from or will result in Mr Toll being unable to properly perform his duties (as defined in the agreement);

• (D) refuses or neglects to comply with any lawful and reasonable direction given to Mr Toll by the Board following notice of the failure or neglect and a reasonable period to rectify;

• (E) has committed any act of fraud or misappropriation of monies in relation to the affairs of the Company (where Mr Toll has been charged and found guilty of an offence); or

• (F) is convicted of a criminal offence which, in the reasonable opinion of the Company, might tend to injure the reputation or business of the Company or a related body corporate,

in which case the agreement may be terminated at any time by the Company.

Gordon Toll Options for Prior Services

Subject to shareholder approval, the Company agrees to grant options to Mr Toll, in lieu of the cash payment of directors’ fees and in lieu of the cash payment for his role as CEO of the Company for each quarter ending 31 March 2017, 30 June 2017, 30 September 2017, 31 December 2017, 31 March 2018, 30 June 2018 and, from 1 July 2018, for each remaining quarter of 2018 which ends prior to Completion with each option having an expiry date that is 5 years after the date of issue, and exercise prices as follows:

• (a) 5,000,000 options, each having an exercise price of $0.045 (for the quarter ending 31 March 2017);

• (b) 5,000,000 options, each having an exercise price of $0.037 (for the quarter ending 30 June 2017);

• (c) 5,000,000 options, each having an exercise price of $0.032 (for the quarter ending 30 September 2017);

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• (d) 5,000,000 options, each having an exercise price of $0.037 (for the quarter ending 31 December 2017);

• (e) 5,000,000 options, each having an exercise price equal to the 15 trading day volume weighted average price of the Company’s shares on ASX immediately prior to the quarter ending 31 March 2018;

• (f) 5,000,000 options, each having an exercise price equal to the 15 trading day volume weighted average price of the Company's shares on ASX immediately prior to the quarter ending 30 June 2018; and

• (g) 5,000,000 options, each having an exercise price equal to the 15 trading day volume weighted average price of the Company’s shares on ASX immediately prior to the end of the remaining quarters in 2018 commencing from 1 July 2018 that end prior to Completion.

Costs and expenses of the Transaction

• (a) MGT must pay its own costs and expenses and reimburse the additional costs and expenses of CHG and Lodestone in relation to the Transaction incurred prior to Completion, the cost of which is $200.000.

• (b) Until the earlier of Completion or the termination or expiry of the Final Framework Agreement, subject to having sufficient working capital, MGT will provide geological and management services in relation to all exploration licences held by Lodestone and its related entities which in no event shall be less than necessary to maintain those exploration licences in good standing. For the avoidance of doubt, MGT will not advance any money to Lodestone or any of the subsidiaries under the Final Framework Agreement, but will procure that MGT’s existing employees provide geological and management services (charged out at their current employment rates) in relation to all exploration licences held, which must not be less than necessary to maintain those exploration licences in good standing.

Magnetite Mines Limited

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