China Billion Resources : Letter from the Independent Financial Adviser

095240bd-e509-42d6-a394-fe1bda6c5bdd.pdf SOMERLEY CAPITAL LIMITED

20/F., China Building, 29 Queen's Road Central, Hong Kong

Telephone: [phone] Fax: [phone] E-Mail: [e-mail]

29 January 2016

To: the Independent Board Committee and the Independent S hareholders of China Billion Resources Limited

Dear Sirs,

OPEN OFFER ON THE BASIS ON TWO OFFER SHARES FOR EVERY ONE REORGANISED SHARE

HELD ON THE OPEN OFFER RECORD DATE;

ISSUE OF SETTLEMENT SHARES AND SETTLEMENT CONVERTIBLE BONDS UNDER DEBT SETTLEMENT AGREEMENTS;

AND

APPLICATION FOR WHITEWASH WAIVER

INTRODUCTION

We refer to our appointment to advise the Independent Board Committee and the Independent Shareholders in relation to the Open Offer, the Debt Settlement Agreements and the Whitewash Waiver, details of which are set out in the letter from the Board contained in the Circular to the Shareholders dated 29 January 2016, of which this letter forms a part. Unless otherwise defined, capitalised terms used in this letter shall have the same meanings as those defined in the Circular.

Trading in the Shares on the Stock Exchange has been suspended since 29 June 2011. On 14 December 2015, the Company received the approval from the Stock Exchange ("Conditional Approval") that the Resumption is allowed subject to the completion of the Capital Reorganisation, the Open Offer and the Debt Settlement Agreements.

As at the Latest Practicable Da te, the existing authorised share capital of the Company is HK$800 million, divided into 8,000 million Shares of HK$0.10 each, of which 5,235,303,300 Shares were issued and fully paid up or credited as fully paid up in the amount of HK$523,530,330. As stated in the letter from the Board in the Circular, the Board proposes to implement the Capital Reorganisation (involving the Capital Reduction, the Capital Cancellation, the Share Consolidation, the increase in authorised share capital and the Share Premium Reduction) which will be subject to Shareholders' approval at the EGM.

As stated in the letter from the Board in this Circular, subject to the Capital Reorganisation becoming effective, the Board proposes that the Company makes the Open Offer on the basis of two (2) Offer Shares for every one (1) Reorganised Share held on the Open Offer Record Date by the Qualifying Shareholders. A total of 5,235,303,300 Offer Shares will be allotted and issued by the Company to the Qualif ying Shareholders at the Offer Price of HK$0.03 for each Offer Share and the gross proceeds to be raised from the issuance of the Offer Shares is expected to be approximately HK$157.1 million. The Open Offer is underwritten by the Investor which is wholly and beneficially owned by Mr. Long. As the Open Offer will increase the number of issued Reorganised Shares by more than 50%, the Open Offer is subject to approval by the Shareholders at the EGM by way of poll.

As also stated in the letter from the Board in the Circula r, the Company has entered into Debt Settlement Agreements, comprising the Share Settlement Agreements and the CB Settlement Agreements, with twelve Creditors to settle the relevant outstanding debts together with the accrued interest (where relevant), owed by the Company to the Creditors.

Mr. Long (or Creditor E) is the Chairman, an executive Director and a substantial Shareholder directly interested in, through Creditor A, 762,022,000 Shares, representing approximately 14.56% of the total number of Shares in issuance. Each of the Investor, the Creditor A and the Creditor F is wholly and beneficially owned by Mr. Long. Therefore, each of Mr. Long (or Creditor E), the Investor, the Creditor A and the Creditor F is a connected person of the Company pursuant to the Listing Rules. As such, the entering into each of the Underwriting Agreement, the Share Settlement Agreement A, the Share Settlement Agreement E, the Share Settlement Agreement Fl and the Share Settlement Agreement F2 constitutes a connected transaction of the Company under Chapter 14A of the Listing Rules and (apart from the Underwriting Agreement) subject to reporting, announcement and the Independent Shareholders' approval requirements pursuant to the Listing Rules.

Pu rsuant to Rule 26 of the Takeovers Code and in the absence of the Whitewash Waiver, as a result of the completion of the issuance of the Settlement Shares and the Offer Shares and regardless of whether the Investor is called upon to take up the Offer Shares under the Underwriting Agreement, an obligation to make a mandatory general offer would be triggered on the part of Mr. Long and parties acting in concert with him for all the shares of the Company other than those already owned or agreed to be acquired by Mr. Long and parties acting in concert with him. In this respect, Mr. Long has made an application to the Executive under the Takeovers Code for the grant of the Whitewash Waiver to relieve them from their obligation to make a mandatory general offer as a result of the completion of the issuance of the Settlement Shares and the Off er Shares which may be acquired by the Investor if it is called upon to take up the Offer Shares under the Underwriting Agreement, and such grant will be subject to, among other things, approval of the Independent Shareholders in respect of the Whitewash Waiver at the EGM by way of poll. As stated in the letter from the Board in the Circular, the Executive has indicated that it will grant the Whitewash Waiver subject to the approval of the Independent Shareholders at the EGM.

THE INDEPENDENT BOARD COMMITTEE

The Independent Board Committee comprising all the independent non-executive Directors, namely Mr. Jin Shunxing, Mr. Chiang Tsung-Nien and Ms. Liu Shuang, has been formed to advise the Independent Shareholders on whether terms of the Open Offer, the Debt Settlement Agreements and the Whitewash Waiver, are fair and reasonable so far as the Independent Shareholders are concerned, and whether the Open Offer, the Debt Settlement Agreements and the Whitewash Waiver are in the interests of the Company and the Shareholders as a whole. We, Somerley Capital Limited, have been appointed as the independent financial adviser to advise the Independent Board Committee and the Independent Shareholders on these matters. Our appointment has been approved by the Independent Board Committee.

We are not associated with the Company, the Investor, the Creditor A, the Creditor F, Mr. Long or their respective substantial shareholders (if applicable) or associates and, accordingly, are considered eligible to give independent advice on the Open Offer, the Debt Settlement Agreements and the Whitewash Waiver. Apart from normal professional fees payable to us in connection with this appointment, no arrangement exists whereby we will receive any fees or benefits from the Company, the Investor, the Creditor A, the Creditor F, Mr. Long or their respective substantial shareholders (if applicable) or associates.

BASIS OF OUR OPINION

In formulating our opinion, we have reviewed, among other things, the Debt Settlement Agreements, the Underwriting Agreement, the irrevocable undertaking given by the Creditor A under the Open Offer ("Irrevocable Undertaking"), annual reports of Company for each of the financial years ended 31 December 2012 ("2012 Annual Report"), 2013 ("2013 Annual Report") and 2014 ("2014 Annual Report"), interim report of the Company for the six months ended 30 June 2015 ("2015 Interim Report"), and the Circular.

In addition, we have relied on the information and facts supplied, and the opinions expressed, by the Company and have assumed that the information and facts provided, and the opinions expressed to us are true, accurate and complete in all material aspects at the time they were made and will remain true, accurate and complete up to the Latest Practicable Date. Independent Shareholders will be notified of material changes to such information provided and our opinion, if any, as soon as possible af ter the Latest Practicable Date and until the EGM. We have also sought and received confirmation from the Company that no material facts have been omitted from the information supplied and that the opinions expressed to us are not misleading in any material respect. We consider that the information we have received is sufficient for us to formulate our opinion and recommendation as set out in this letter and have no reason to believe that any material information has been omitted or withheld, nor to doubt the tru th or accuracy of the information provided to us. We have not, however, conducted any independent investigation into the business and aff airs of the Group in its existing state, nor have we carried out any independent verification of the information supplied.

PRINCIPAL FACTORS AND REASONS CONSIDERED

In formulating our opinion with regard to the Open Offer, the Debt Settlement Agreements and the Whitewash Waiver, we have taken into account the following principal factors and reasons:

1. Information on the Group

   
   

2. Background of prolonged suspension of trading in the S hares




The Company was listed on the Stock Exchange in 2000. The Group is principally engaged in provision of beauty treatment and trading of cosmetic and skincare products in Hong Kong, and gold mining, exploration and trading of gold products in the PRC.




Trading in the Shares on Stock Exchange has been suspended at the request of the Company on 29 June 2011 pending the release of an announcement regarding certain price sensitive information, among other things, the default of certain loan

facilities of the Group ("Indebtedness") and that the relevant lender Isecurity agent

had exercised and execu ted the share charges on two of the Company's subsidiaries; and the non-disclosure of information about the loan facilities, pledges of assets and subsidiaries, going concern matter and subsequent events after the year end on the Company's default. The Stock Exchange concerned that the audited accounts of the Company for the financial year ended 31 December 2010 may contain incomplete, false and misleading information and whether the market has the necessary information to appraise the Group's position.




As mentioned in the Company's announcement dated 5 March 2012 and 14 March 2012 (collectively, "March 2012 Announcements"), the Group executed a set of contracts of debt restructuring and handling to fully settle the Indebtedness through transfer of the Group's certain assets and ·investments, whilst the non-disclosure of information about the Company's default as concerned by the Stock Exchange were also clarified in the March 2012 Announcements. Details of which please refer to the March 2012 Announcements.




During the period, the Company has also engaged several professional advisers to address the matters in respect of the Resumption and various steps have been taken by the Company to seek Resumption. As set out in the Company's announcement dated 31 December 2013, an internal control consultant ("Internal Control Consultant") was engaged by the Company to perform an internal control review on the Group. Based on the recommenda tions of the Internal Control Consultant as set out in its preliminary draf t internal control review report, the management of the Company has taken necessary actions and steps to address those internal control issues and deficiencies and, according to a follow-up review by the Internal Control Consultant in May 2015, the Internal Control Consultant concluded that the enhanced financial reporting procedures and internal control systems of the Group are adequate to meet the general principles and obligations regarding corporate governance issues under the Listing Rules.