Update on Merger with Polymetals - Notice of Meeting

associated (relative to the comparable companies) with the Merged Entity as a result of production being
scheduled to commence in 2014.
We have calculated the debt to equity structure of the Merged Entity based on the pre-transaction capital
structures of SXG and PLY and the funding assumptions for the Marda Project and Mt Boppy Project as
outlined in Sections 10.1.1 and 11.1.1 respectively. We have based our discount rate assessment on the
Merged Entity having a capital structure comprising 65% debt and 35% equity.
We consider it reasonable to assume that the shareholders of the Merged Entity will determine their
required rate of return, for a particular project, by viewing the risks associated with the future cash flows
of the project. We have regeared the project beta to 2.06 to 2.75 based on the 65% debt and 35% equity
structure.
Cost of Equity
On this basis we have assessed the cost of equity to be:
Input
Value Adopted
Risk free rate of return 3.27% 3.27%
Low
High
Equity market risk premium 6.00% 6.00%
Beta (geared) 2.06 2.75
Cost of Equity 15.63% 19.75%
Weighted Average Cost of Capital
The WACC represents the market return required on the assets of the undertaking by debt and equity
providers. WACC is used to assess the appropriate commercial rate of return on the capital invested in the
business, acknowledging that normally funds invested consist of a mixture of debt and equity funds.
Accordingly, the discount rate should reflect the proportionate levels of debt and equity relative to the
level of security and risk attributable to the investment.
In calculating WACC there are a number of different formulae which are based on the definition of cash
flows (i.e., pre-tax or post-tax), the treatment of the tax benefit arising through the deductibility of
interest expenses (included in either the cash flow or discount rate), and the manner and extent to which
they adjust for the effects of dividend imputation. The commonly used WACC formula is the post-tax
WACC, without adjustment for dividend imputation, which is detailed in the below table.
CAPM
WACC = E K e + D K d (1– t)
Where:
K e
K d
T
E
D
E+D
D+E
= expected return or discount rate on equity
= interest rate on debt (pre-tax)
= corporate tax rate
= market value of equity
= market value of debt
(1- t) = tax adjustment
90