Update on Merger with Polymetals - Notice of Meeting

Gearing
Before WACC can be determined, the proportion of funding provided by debt and equity (i.e., gearing
ratio) must be determined. The gearing ratio adopted should represent the level of debt that the asset
can reasonably sustain (i.e., the higher the expected volatility of cash flows, the lower the debt levels
which can be supported). The optimum level of gearing will differentiate between assets and will include:
• the variability in earnings streams;
• working capital requirements;
• the level of investment in tangible assets; and
• the nature and risk profile of the tangible assets.
As described earlier, we understand the capital of structure of the Merged Entity to be made up of
approximately 65% debt and 35% equity. We have used a cost of debt in the range of 7.50% to 8.50% based
on the indicative debt funding offers received by SXG and PLY.
Calculation of WACC
Based on the above inputs we have calculated the real WACC to be between 5.7% and 7.6% as detailed
below.
WACC
Value Adopted
Low
High
Cost of equity, K e 15.6% 19.8%
Cost of debt, K d 7.50% 8.50%
Proportion of equity ((E/(E+D)) 35.2% 35.2%
Proportion of debt ((D/(E+D)) 64.8% 64.8%
Weighted average cost of capital (nominal) 8.9% 10.8%
Weighted average cost of capital (real)* 5.7% 7.6%
* We have converted the nominal WACC to a real WACC using an inflation rate of 3% as per the following formula:
()
( ) = − 1
Based on the table above our preferred discount rate for the Merged Entity is 6.5%. We note that this is
the same as the discount rate used for SXG.
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