Proposed restructuring of the ARM Broad-Based Economic Empowerment Trust

1. INTRODUCTION

The ARM Broad-Based Economic Empowerment Trust (“ARM BBEE Trust” or the “Trust”) acquired 28 614 740 ARM ordinary shares (“ARM Shares”) from Harmony Gold Mining Company Limited (“Harmony”) in April 2005. The acquisition was funded by a bank loan by Nedbank to the ARM BBEE Trust (“the Nedbank loan”) without recourse to ARM until 2015 (the “BEE Transaction”).

The ARM BBEE Trust forms an integral part of the empowerment obligations of ARM. The current court process to determine the legal status of the “once empowered, always empowered” principle also makes it necessary that ARM minimises its legal and financial exposure should this principle not be upheld by the court.

During 2015, ARM provided support to the ARM BBEE Trust in the form of guarantees to support the financial covenants of the Nedbank loan. This was required given the fall in the ARM share price following a decline in commodity prices and the overall negative sentiment towards the mining sector. Guarantees provided by ARM amounted to R700 million which were disclosed in ARM’s annual financial statements and integrated annual report for the year ended 30 June 2015 under contingent liabilities.

Post 30 June 2015, the financial covenants of the Nedbank loan came under pressure once again and required that these guarantees be increased to R850 million. Harmony provides R150 million in guarantees to Nedbank in a similar manner. The board of directors of ARM (“Board”) has taken a decision not to provide any further guarantees to the ARM BBEE Trust, but rather to restructure the shareholding of the Trust in ARM and related funding of the ARM BBEE Trust to provide a more sustainable solution.

To facilitate the unwinding of the current funding structure relating to the BEE Transaction, ARM will enter into a repurchase agreement with the ARM BBEE Trust in terms of which, a wholly-owned subsidiary of ARM (“Subco”) will acquire 12 717 328 ARM Shares held by the ARM BBEE Trust (or 5.8% of current issued ARM Shares) at a price of R51.19 per ARM Share, being the 30-day volume weighted average price (“VWAP”) of the ARM Share on 10 February 2016, the last day before the agreement was reached on the transaction structure (“Specific Repurchase”).

Furthermore, to implement a more permanent funding structure, the ARM BBEE Trust bank debt will be refinanced as part of one combined transaction through a combination of the proceeds from the Specific Repurchase, a non-recourse R300 million senior secured loan from Nedbank Limited (“Nedbank”), a Harmony sub-ordinated unsecured loan of R200 million and an ARM sub-ordinated unsecured loan of approximately R800 million (“ARM BBEE Trust Loan Refinancing”) (collectively, the “Transaction”). The Specific Repurchase from the ARM BBEE Trust will be classified as a related party transaction in terms of section 10 of the Listings Requirements of the JSE Limited (the “Listings Requirements”) and so requires approval by ARM shareholders and is also subject to the conditions precedent referred to in paragraph 8 below.

2. RATIONALE

The ARM BBEE Trust forms an integral part of the empowerment credentials of ARM. Whilst the share price of ARM has now recovered to approximately R68.00 since a low of R34.81 on 18 January 2016 the recent market volatility has shown the instability of the current funding structure and the potential flow through to ARM, both in terms of financial loss and risk to its BEE status.

Whilst the bank loan is fully covered by the value of the ARM Shares and neither ARM nor Harmony has suffered any loss, the value of the shares held by the ARM BBEE Trust remains well below the loan covenant. Given the size of the bank loan, the roll up of the interest less dividends received is likely to result in the bank loan balance continuing to increase and thus continue to put pressure on the ARM BBEE Trust’s financial position going forward.

As a consequence, the current ARM BBEE Trust funding structure is untenable and the Board has decided not to continue to provide any further guarantees to the ARM BBEE Trust but rather to restructure the shareholding by the Trust in ARM and related funding of the ARM BBEE Trust to provide a more permanent and sustainable solution to the benefit of shareholders.

The Board believes that the Specific Repurchase and the ARM BBEE Trust Loan Refinancing is the best possible solution in the current environment for the following reasons:

• achieves a more permanent and sustainable solution;
• retains ARM’s black economic empowerment shareholding above 50%;
• demonstrates value to all ARM shareholders; and
• limits stress to the ARM financial position and removes the existing guarantees.

3. TERMS OF THE SPECIFIC REPURCHASE

Subject to certain conditions precedent and receipt of shareholder approval, Subco intends to acquire approximately 12.7 million ARM shares (or 5.8% of the current issued ARM Shares at a price of R51.19 per share, being the 30-day VWAP of the ARM Shares on 10 February 2016, the day immediately preceding the date on which the price of the Specific Repurchase was agreed.

Post the Specific Repurchase, Subco, will hold the 12 717 328 ARM Shares as treasury shares.

The Specific Repurchase will be funded by cash (including the proceeds of the sale of ARM’s 50% effective interest in the Dwarsrivier Chrome Mine).

4. TERMS OF THE ARM BBEE TRUST LOAN REFINANCING

The ARM BBEE Trust’s outstanding bank debt at 31 December 2015 was R1,883 million. It is estimated that the Nedbank loan balance on the estimated closing date in April 2016 will be R1,951 million. Any difference to that estimate will result in the refinancing amount changing, which differential will be adjusted in the amount of the ARM loan. The proceeds from the Specific Repurchase will be utilised by the ARM BBEE Trust to pay down R651 million of the outstanding loan. The remaining R1,300 million will be refinanced as follows:

• Nedbank: R300 million;
• Harmony: R200 million; and
• ARM: R800 million (subject to adjustments for accrued interest)

The Nedbank loan is senior, secured against the remaining shares held by ARM Broad-Based Economic Empowerment Trust with no recourse to ARM. The interest rate is market related with limited covenants.

Key terms of the ARM loan to the ARM BBEE Trust are as follows:

Notes:

1. Johannesburg Interbank Agreed Rate
2. Basis points

The Harmony R200 million loan has the same terms as the ARM loan.

The existing ARM guarantees of R850 million will be removed on implementation of the ARM BBEE Trust Loan Refinancing.

5. IMPACT ON THE FINANCIAL INFORMATION OF ARM

The pro forma financial information which illustrates the impact of the Transaction on the basic earnings per share (“EPS”), headline earnings per share (“HEPS”), net asset value (“NAV”) per share and tangible net asset value (“TNAV”) per share of ARM is set out below and is based on the audited consolidated results of ARM for the year ended 30 June 2015.

The pro forma financial information is presented in accordance with the provisions of the Listings Requirements and the Guide on Pro Forma Financial Information issued by the South African Institute of Chartered Accountants.

These pro forma financial effects are the responsibility of the directors. The pro forma financial effects are presented in a manner consistent with the basis on which the historical financial information of ARM has been presented and in terms of ARM’s accounting policies for the year ended 30 June 2015.

The pro forma financial effects have been presented for illustrative purposes only and, because of their nature, may not give a fair reflection of ARM’s financial position, changes in equity or results of operations post-implementation of the Transaction.

It has been assumed for purposes of pro forma financial effects that the Transaction took place with effect from 1 July 2014 for the statement of comprehensive income purposes and on 30 June 2015 for the statement of financial position purposes.

Notes:

1. The “Before the Transaction” column (A) represents the audited EPS, HEPS, NAV, NTAV as reported in respect of the year ended 30 June 2015.
2. The “After the Transaction” column (B) includes the consolidated EPS, HEPS, NAV per share and NTAV per share of ARM including the ARM BBEE Trust after accounting for the implications of the implementation of the Transaction as outlined above.
3. The “After the transaction” column (B) includes the EPS and HEPS as calculated on the assumption that the Transaction was effective 1 July 2014. The NAV per share and NTAV per share are calculated on the assumption that the Transaction was effective 30 June 2015.
4. The ARM BBEE Trust will be consolidated into the ARM consolidated financial results, as ARM will control the Trust for reporting purposes.
5. Cash used to purchase the ARM Shares from the ARM BBEE Trust is assumed to have been funded from cash resources resulting in reduced interest income impacting HEPS and EPS and is of a continuing nature.
6. The loan from ARM to the ARM BBEE Trust is assumed to have been funded from current corporate facilities resulting in an additional interest expense for HEPS and EPS purposes and is of a continuing nature.
7. As a result of the ARM BBEE Trust being consolidated, additional borrowings of R300 million and R200 million from Nedbank and Harmony respectively, including the interest on these borrowings, will be included in the consolidated financial results of ARM and is of a continuing nature.
8. The ARM Shares bought back and the shares remaining in the ARM BBEE Trust will reduce the number of shares used in the calculation of HEPS, EPS, NAV per share and NTAV per share by 28 614 740.
9. The guarantees from ARM to Nedbank will no longer exist and will no longer be reflected as contingent liabilities.
10. Interest paid by the ARM BBEE Trust is non-deductible for income tax purposes impacting HEPS and EPS and is of a continuing nature.
11. Once-off costs associated with the Transaction are estimated to be approximately R20 million.

6. RELATED PARTY CONSIDERATIONS

The ARM BBEE Trust is a material shareholder of ARM, and is therefore considered a related party under paragraph 10.1(b)(i) of the JSE Listings Requirements.

In terms of paragraph 5.69(b) of the Listings Requirements, a special resolution must be passed by ARM shareholders in order to implement the Specific Repurchase. The votes of the ARM BBEE Trust and its associates will be taken into account in determining whether a quorum of ARM shareholders is present at the general meeting, but their votes will not be taken into account in determining the results of the voting at the general meeting.

7. IRREVOCABLE UNDERTAKINGS

ARM has received from certain ARM shareholders irrevocable undertakings, indications of support or commitments to recommend to their clients to vote ARM Shares held by them as at the date of the general meeting, either as principal or on behalf of clients, in favour of the resolutions to be proposed at the general meeting. Details of the current shareholdings of these parties are as follows:

Notes:

1. Percentage shareholding is based on 217 934 588 ARM Shares.
2. Effective voting rights are based on 189 319 848 ARM Shares, which is comprised of 217 934 588 ARM Shares, excluding the ARM Shares held by the ARM BBEE Trust of 28 614 740 ARM Shares.
3. The sole shareholder of African Rainbow Minerals & Exploration Investments Proprietary Limited is Ubuntu-Ubuntu Commercial Enterprises (Pty) Ltd, the shares of which are held by trusts all of which, except The Motsepe Foundation, own those shares for the benefit of Mr P T Motsepe and his immediate family.
4. All the ARM Shares of which are beneficially owned by trusts which trusts, with the exception of The Motsepe Foundation, hold those ARM Shares for the benefit of Mr Motsepe and his immediate family.
5. These shares are held beneficially by Allan Gray’s clients and not by Allan Gray as principal. Allan Gray has provided undertakings to recommend to its clients to vote their shares in favour of the resolutions.

8. CONDITIONS PRECEDENT

The Transaction remains subject to a number of conditions precedent including, but not limited to:

• ARM shareholders at the general meeting approving the necessary resolutions;
• Finalisation of transaction documentation with Nedbank, ARM’s existing lenders, Harmony and the ARM BBEE Trust, and final Nedbank credit approval; and
• Amendments to the Trust Deed.

9. CIRCULAR TO SHAREHOLDERS AND NOTICE OF GENERAL MEETING

A circular, including a notice of general meeting, detailing the terms of the Specific Repurchase and ARM BBEE Trust Loan Refinancing will be issued to ARM shareholders in due course.

For all investor relations queries please contact:

Jongisa Magagula
Head of Investor Relations and Corporate Development
Office: +27 11 779 1507
Email: jongisa.magagula@arm.co.za

Johannesburg
15 February 2016

Financial adviser and transaction sponsor
UBS South Africa Proprietary Limited

Legal adviser
Bowman Gilfillan Inc.

JSE sponsor
Deutsche Securities (SA) Proprietary Limited