Flagship announces proposed acquisition of coal interests in Kazakhstan



    VANCOUVER, April 8 /CNW/ - Flagship Industries Inc. (TSXV: FII)
("Flagship" or the "Company") is pleased to announce that it has entered into
an arm's length letter agreement dated April 7, 2009 with Charonga Financial
Corp. ("Charonga") with a view to completing a business combination which will
result in Flagship acquiring certain coal interests located in Kazakhstan (the
"Business Combination").

    Information Concerning the Business Combination

    Flagship and Charonga have entered into a letter agreement dated April 7,
2009 setting out certain terms and conditions pursuant to which the proposed
Business Combination will be completed whereby Flagship will acquire an
interest in the Orlovskoe coal deposit in Kazakhstan (the "Orlovskoe
Deposit"). The Business Combination is subject to the successful negotiation
and entering into of a definitive agreement.
    It is currently anticipated that the Business Combination will be
completed pursuant to the acquisition by Flagship of all of the issued and
outstanding shares of Charonga in consideration for which Flagship shall pay
an aggregate of US$3,000,000 (the "Cash Consideration") and issue an aggregate
of 40,000,000 common shares of Flagship (the "Consideration Shares"). Flagship
will also reimburse the amount of approximately US$250,000 (the "Reimbursement
Funds") for expenses relating to the acquisition by Charonga of an interest in
the Orlovskoe Deposit (the "Property Acquisition").
    While the completion of the Property Acquisition is a condition to the
completion of the Business Combination, Flagship may agree to complete the
Business Combination prior to Charonga completing the Property Acquisition. In
such event, Flagship shall issue an aggregate of 40,000,000 subscription
receipts of Flagship in lieu of the Consideration Shares. Each subscription
receipt will be automatically exercised into one common share of Flagship upon
completion of the Property Acquisition, provided that if Charonga does not
complete the Property Acquisition within 120 days of the closing of the
Business Combination, such subscription receipts will be cancelled and the
transaction shall be terminated and unwound. Upon such event, the Cash
Consideration and the Reimbursement Funds, which will be held in escrow
pending completion of the Business Combination, will be repaid to Flagship. In
connection with the completion of the Business Combination, options to acquire
an aggregate of 8,600,000 common shares of the resulting issuer will be
granted to certain of its directors, officers, employees and consultants. Such
options will be exercisable for a period of ten years following the date of
grant at an exercise price equal to the subscription price in respect of the
Financing (as defined below).
    The completion of the Business Combination is also conditional on
Flagship completing a private placement financing for minimum gross proceeds
of $5,000,000 (the "Financing") at a price to be determined in accordance with
the policies of the TSX Venture Exchange (the "Exchange"). It is anticipated
that pursuant to the Financing, Flagship will issue subscription receipts
which shall be automatically exercised upon the completion of the Business
Combination (or, if subscription receipts are issued as consideration for the
Business Combination, upon the exercise of such subscription receipts). Each
subscription receipt issued pursuant to the Financing will be exercisable for
one common share of Flagship and, if applicable, one-half of one common share
purchase warrant of Flagship. The proceeds from the Financing will be held in
escrow pending the exercise of the subscription receipts. In the event that
the Business Combination and Property Acquisition are completed concurrently,
the Financing may be completed through the issuance of the securities
underlying the subscription receipts without the need to escrow the proceeds.
The proceeds from the Financing will be used to carry out confirmatory
drilling on the Orlovskoe Deposit, a detailed market study, pre-feasibility
and feasibility studies and for working capital purposes. The definitive terms
of the Financing will be determined in the context of the market.
    Each of Flagship and Charonga will pay for their respective costs
incurred with respect to the Business Combination, including legal and
accounting costs, whether or not the Business Combination is completed. In
addition, and in accordance with an advisory agreement between Flagship and
Endeavour Financial ("Endeavour"), Flagship shall, upon closing, issue to
Endeavour 800,000 common shares of Flagship and pay a fee of US$60,000
together with an amount equal to 1% of the gross proceeds of the Financing,
all in consideration for Endeavour's assistance with the Business Combination.
    Upon completion of the Business Combination, it is proposed that Flagship
will change its name to "Flagship Power Corp."
    The completion of the Business Combination is subject to the approval of
the Exchange and all other necessary regulatory approvals. It is also subject
to additional conditions precedent, including shareholder approval of each of
Flagship and Charonga, the completion of the Financing for minimum gross
proceeds of $5,000,000, the satisfactory completion of due diligence reviews
by each party, approvals of the board of directors of each of Flagship and
Charonga and certain other conditions customary for transactions of this

    Information Concerning Charonga

    Charonga is a private company existing under the laws of the British
Virgin Islands. Charonga currently has 10,000 shares outstanding. Charonga has
no other securities outstanding.
    Charonga is currently in the process of acquiring an interest in the
Orlovskoe Deposit in Kazakhstan, 80% of which is to be indirectly owned by
Charonga, through a wholly-owned subsidiary, and the remaining 20% of which is
to be indirectly owned by the Government of Kazakhstan. Charonga was only
recently incorporated for the purpose of acquiring an interest in the
Orlovskoe Deposit and does not currently have an interest in any resource
properties. Further information concerning the Orlovskoe Deposit can be found
in the National Instrument 43-101 technical report dated April 8, 2009
prepared by Vattenfall Europe Mining Consulting ("VEMC") and entitled
"Technical Report for the Orlovskoe Lignite Deposit in Kazakhstan" (the
"Technical Report"), which will be filed on SEDAR and be available at
    In the 1950s and 1970s, extensive exploration activities were conducted
for coal deposits in certain republics of the former Soviet Union, including
in the Turgajskij basin of Kazakhstan, where the lignite fields therein,
including the Orlovskoe Deposit, were considered for large scale lignite-based
power generation. While the area was intensively explored at that time,
including both a preliminary and detailed exploration program, no subsequent
exploration of the Orlovskoe Deposit, or other deposits within a several
hundred kilometre radius, has been carried out by any company.
    The Orlovskoe Deposit was initially held as property of the Soviet state.
Following the end of the Soviet Union, work on the project ceased and the
Kazakh government decided instead to expand the existing hard coal projects in
the Ekibastus and Pavlodar regions of Kazakhstan. Recently, a consortium of
western investors represented by Charonga and certain local partners started
to re-examine the potential of the Orlovskoe Deposit with the objective of
creating an integrated mine to power plant complex and also to provide
electrical power to the region as well as the southern Urals in Russia.
    The property that covers the Orlovskoe Deposit is located in the northern
part of Kazakhstan, 380 kilometres west of the capital of Astana and around
300 kilometres southeast of the city of Kostanai. The property is in the far
west portion of the Akmola region of Kazakhstan near the boundary with the
Kostanai region. The towns of Yesi and Derzhavinsk are about 70 kilometres and
40 kilometres northeast and east of the Orlovskoe Deposit, respectively.
    The geological formations of the area under review are mainly Mesozoic
and Cenozoic sediments within the Kysyltal-Savinkovsko basin. The Orlovskoe
Deposit is located at the western boundary of one of the basin structures
where the basement of the structure is comprised of magmatic and metamorphic
rocks. Overlying the basement rocks are Jurassic sediments and consolidated
sediments that host the coal seams of economic interest. There are a total of
nine coal horizons (I to IX), each of which consists of up to 16 individual
coal seams. Of the nine coal horizons, the youngest five horizons have been
subjected to detailed exploration and sampling. The coal-bearing strata are
overlain by Cretaceous, Tertiary and Quaternary sediments such as sand, clay,
gravel and unconsolidated rubble.
    The proportion of coal relative to non-coal partings within each of the
coal-bearing horizons is approximately 27% for the younger horizons, while the
older horizons yield an average of 13%. These percentage contents of coal
refer only to the coal-bearing horizons and do not include interburden
material between the horizons. The total thickness of humus coal is
approximately 100 metres (referring to horizons I to VI) and has been explored
to vertical depths of between 65 and 550 metres. A current inferred resource
of 1,135 Mt of lignite has been estimated by VEMC for the upper horizons (I to
V) of the deposit in compliance with CIM Definition Standards. The lower
horizons (VI to IX) were excluded from the resource evaluation.
    The available historical reports documenting the previous exploration
efforts record all procedures and results in great detail. Due to this
detailed documentation of the results and the thorough implementation of the
exploration procedures, the degree of exploration has been adequate for the
preparation and reporting of a resource estimate.
    The historical resource for coal horizons I -V was reported to Former
Soviet Union Standards and was primarily all in the A + B and C1 category.
There is no precise correlation between the Russian classification standard
GOST 2160-62 and National Instrument 43-101 resource classification. The
resource estimate was submitted and approved by GKZ (State Committee of
Reserves) in 1980. VEMC is not treating the historical resource as current
mineral resources or reserves; and the historical estimate should not be
relied upon. The table below highlights the historical resource (in millions
of tonnes).

    Rank Coal
    of   Hori-                                                       A + B +
    Coal zons   A        B      A + B    C1     A + B + C1    C2     C1 + C2
    B(2) I   41.750   35.935   77.685  110.751    188.436   7.345    195.780
    B(2) II  67.547  125.237  192.784   64.296    257.080  12.838    269.918
    B(2) III 81.558   48.716  130.274   78.862    209.136   9.074    218.210
    B(2) IV  96.174  114.460  210.634  127.250    337.884  11.326    349.210
    B(2) V    8.815   10.547   19.362   70.677     90.039  11.996    102.035
      total 295.844  334.895  630.739  451.836  1,082.575  52.579  1,135.154

    The coal resource was reconciled by VEMC to the CIM Definitions in
accordance with requirements of National Instrument 43-101 and has been
reclassified as inferred resources. The resources were only estimated and
reported for those parts of the deposit in which the ratio of waste-coal is up
to a maximum of 6.4:1. In addition, a maximum depth of 460 m was considered as
a limit for an opencast mine operation. Mineral resources that are not mineral
reserves do not have demonstrated economic viability.

    No. of Coal Horizon                   Inferred (Mt)
             I                               195.780
            II                               269.918
           III                               218.210
            IV                               349.210
             V                               102.035
           Total                            1,135.154
    Summary of the total resources in the Orlovskoe deposit (March 2009)

    All of the coal in the five coal horizons that comprise the resources are
considered to be humus coal, lignite or brown coal. Extensive analytical
studies of the coal quality parameters have confirmed relatively low ash and
sulphur contents (19.3% and 1.2%, respectively). The heating value Qnet is on
average 3,542 kilocalories, whereas the upper heating value Qdaf was
determined to be approximately 6,688 kilocalories. The coal has a content of
volatiles of approximately 45% and is therefore applicable for use in a power
plant. In contrast, the coal is not applicable for refining (carbonization or
    VEMC used the resource as the basis for completing eight different mine
and power scenarios. Preliminary scheduling and estimating of a Real Average
Cost (RAC) was included for each of these scenarios. The RAC estimates for
eight varying mine plans range between US$10 and US$15 per ton of coal and 3.5
to 4.9 ct per kWh can be reached if the opencast mine output exceeds 7 Mt/a. A
summary of these options are listed below:

    -   Option 1 assumes mine coal production of 2.5 Mt/a and all of this is
        fed to a 500 MW power plant.
    -   Option 2 assumes mine coal production of 10 Mt/a and all is fed to a
        1950 MW power plant.
    -   Option 2a assumes mine coal production of 10 Mt/a and 2.5 Mt/a is fed
        to a 500 MW power plant the same size as option 1.
    -   Option 2b is similar to 2a with the exception of slightly different
        mobile equipment scenario.
    -   Option 3 assume mine coal production of 17.5 Mt/a and all is fed to a
        3400 MW power plant.
    -   Option 4 assumes mine coal production of 15 Mt/a and 10 Mt/a is fed
        to a 1950 MW power plant similar to option 2.
    -   Option 5a assumes mine coal production of 7.5 Mt/a.
    -   Option 5b is the same as 5a with an alternate mobile equipment fleet.

              Option         1      2     2a    2b     3      4     5a    5b
    Annual Lignite
     Output         Mt/a    2.5   10.0  10.0  10.0   17.5   15.0   7.5   7.5
    Total Lignite
     Produced - LOM   Mt     92    349   384   383    607    553   293   293
    Supply of On-
     Site-TPP       Mt/a    2.5   10.0   2.5   2.5   17.5   10.0     -     -
    Lignite Sold    Mt/a      -      -   7.5   7.5      -    5.0   7.5   7.5
    Initial Capital
     Costs (TPP plus
     mine)          MUS$  1,365  3,390 1,330 1,355  5,625  3,310   550   445
    Size of On-
     Site-TPP         MW  2x250  3x650 2x250 2x250  4x850  3x650     -     -
    Total Mining
     Costs          MUS$  1,233  2,814 3,026 3,021  4,684  3,980 2,812 3,570
    RAC of Lignite
     (free off
     mine)         US$/t  22.30  11.29 11.20 11.25   9.86   9.56 13.78 14.76
    Total TPP Costs
     lignite costs) MUS$  4,476 11,965 3,637 3,523 21,167 12,104     -     -
    RAC of generated
     Power (free
     off TPP)     ct/kWh   4.87   3.54  4.06  4.12   3.54   3.50     -     -

    The assessment of RAC is based on a discount rate of 6%, and does not
include financing costs, taxes and escalation rates. All price calculations
for the expenses to build a thermal power plant as well as to purchase mining
equipment have been made based on price levels in 2008/2009. The RAC estimate
is preliminary in nature in that it includes inferred mineral resources that
are considered too speculative geologically to have cost considerations
applied to them that would enable them to be categorized as mineral reserves,
and there is no certainty that the RAC estimates would be realized.
    VEMC has recommended proceeding with the development of the independent
mine and power plant project by undertaking a Phase 1 program consisting of a
market study, geological 3D model, confirmatory drilling (10 holes with
average depth of 400 m) and resource estimation and categorization. The budget
for this Phase 1 program is C$4,224,000 ((euro)2,505,000) and its anticipated
duration is seven months. A Phase 2 program contingent upon the results of the
first phase of work will consist of an open cast mine pre-feasibility study
and a thermal power plant pre-feasibility study has also been recommended and
is contingent upon the results of the Phase 1 program. The budget for this
Phase 2 program is C$1,009,000 ((euro)600,000) and its anticipated duration is
eight months. Additional work and studies are recommended but the scope and
budget for these activities are contingent upon the results of the initial two
phases of work.
    The mining license for the Orlovskoe Deposit should be applied for
simultaneously with the preparation of the prefeasibility studies. The permit
process will take several months and require intensive active participation of
Flagship. It will also be necessary to establish an engineering department for
coordination and control of the implementation of processes and measures for
completing the recommended studies.
    This press release has been reviewed by Stephan Peters, Dipl.-Geol., an
independent qualified person, who has prepared the Technical Report.
    Charonga has only recently been created for the sole purpose of acquiring
an interest in the Orlovskoe Deposit. It has not transacted any material
financial transactions since being incorporated and does not currently have
any material financial information.
    The only principal shareholders of Charonga which own more than 10% of
Charonga's outstanding shares are Eiger Trust and Otan Trust, both trusts
controlled by Pinnacle Trustees Limited, St. Helier, Jersey, and Askar
Urankhayev, a resident of Kazakhstan. The principal shareholders of Charonga
are all arm's length to Flagship.

    Management and Board of Directors of Resulting Issuer

    Upon completion of the Business Combination, it is anticipated that the
management and Board of Directors of the resulting issuer will consist of the
persons identified below:

    Phillip Shirvington, President and CEO

    Mr. Shirvington is a Non-Executive Director of Uranium One Inc. ("Uranium
One"), a TSX listed company with producing assets in Kazakhstan. Prior to
that, he was President and Chief Executive Officer of UrAsia Energy Ltd. from
May 2005 until its merger with Uranium One in April 2007. Mr. Shirvington has
over 40 years experience in the nuclear business, including six years as
Managing Director of Energy Resources of Australia Ltd. ("ERA"), the third
largest uranium producer in the world. Mr. Shirvington has been involved in
the resource business in Kazakhstan since 1992, when he served as General
Manager, Marketing for ERA. Prior to joining ERA in 1980 he was a nuclear
scientist and First Secretary Atomic Energy at the Australian Embassy in
Washington D.C.

    Dr. Sergey V. Kurzin, Director

    Dr. Kurzin is a research engineer who has played a key role in
initiatives to acquire and develop former Soviet Union mining assets,
including Julietta (a high grade gold deposit in Russia, with Bema Gold
Corporation "Bema Gold"), Kupol (a high grade epithermal gold deposit in
Russia, with Bema Gold) and Varvarinskoye (copper and gold skarn deposit,
Kazakhstan, with European Minerals Corporation). He was founder of Oriel
Resources Plc (acquired by Mechel OAO in 2008) and held the position of
Executive Chairman. Dr. Kurzin played a key role in establishing UrAsia Energy
Ltd., a uranium producer with mining operations in Kazakhstan until its
subsequent merger with Uranium One.

    Hon. John Reynolds, P.C., Director

    Mr. Reynolds served as both a Member of the Legislative Assembly in
British Columbia (from 1983 to 1991) and as a Member of Parliament in Ottawa
(from 1972 to 1977 and again from 1997 to 2006). Prior to his recent
retirement from Federal politics he was the Official Opposition House Leader
for the Conservative Caucus. Previously he had been Leader of the Opposition
in the House of Commons for the Canadian Alliance Caucus. Mr. Reynolds is
currently a Member of the Queen's Privy Council for Canada and a Senior
Strategic Advisor for the law firm Lang Michener LLP. He currently sits on
boards of several publicly listed mineral exploration companies, and has been
President of Gainey Consultants Inc. since January 2006.

    Dr. Massimo Carello, Director

    Dr. Carello has over 30 years of international senior management and
director level experience. Dr. Carello was the Chairman and Chief Executive
Officer of Fiat UK from 1990 to 2001 and of Diners Club UK from 2001 to 2004.
Dr. Carello served as a member of the Confederation of British Industry
("CBI") Presidents Committee from 1998 to 2003 and was a member of the CBI
European Committee. He was Vice President of the Italian Chamber of Commerce
in the United Kingdom from 1998 to 2005. Currently Dr. Carello is a
non-executive director and a member of the audit committee of Uranium One. Dr.
Carello also sits on the boards of Canaccord Capital Inc. and Orsu Metals

    Takhirzhan Baratov, Director

    Mr. Baratov, a Kazakh citizen, is Executive Director for Central Asia and
Kazakhstan and currently holds the position of Chairman of the Board of
Varvarinskoye JV. Mr. Baratov graduated from Kazakh State University in 1986,
specializing in applied mathematics. Since the early 1990s he has held mining
directorships with various international natural resource companies such as
European Minerals Corporation, Steppe Gold Resources Ltd., Zincox Resources
plc and Ennex International plc. Mr. Baratov also holds the positions of
Director General of Muzbel LLP and Deputy Director General of GRK Kazakhstan
Nickel LLP and was a former director of Oriel Resources Plc.

    Gordon Keep, Interim CFO and Secretary

    Mr. Keep has wide business experience as an investment banker and has
held several senior positions. From April 1987 until October 1997 he was the
Vice President of Corporate Finance in the natural resource group of Yorkton
Securities Inc. and from September 1997 until March 2004 he was Senior Vice
President and Director of Lions Gate Entertainment Corp. Mr. Keep was Managing
Director of Corporate Finance at Endeavour Financial, an investment banking
firm that specializes in the mining and mineral industries, from January 2001
to July 2007. Mr. Keep is currently Executive Vice President of Fiore
Financial Corporation.

    Information Concerning Flagship

    Flagship is a company existing under the laws of Ontario and is a
reporting issuer in Ontario, British Columbia and Alberta. Flagship currently
has 84,441,375 common shares (the "Flagship Shares") outstanding. In addition,
Flagship has issued warrants to acquire an aggregate of 30,125,000 common
shares at a price of $0.10 per share (the "Flagship Warrants"). Flagship has
also granted stock options to its directors and officers to acquire an
aggregate of up to 850,000 common shares at a price of $0.38 per share and up
to 4,100,000 common shares at a price of $0.11 per share (collectively, the
"Flagship Options"). Other than the Flagship Shares, the Flagship Warrants and
the Flagship Options, no other securities of Flagship are outstanding.
    Further information concerning Flagship can be found on Flagship's SEDAR
profile at www.sedar.com.

    Completion of the transaction is subject to a number of conditions,
including Exchange acceptance and if applicable pursuant to Exchange
requirements, disinterested shareholder approval. Where applicable, the
transaction cannot close until the required shareholder approval is obtained.
There can be no assurance that the transaction will be completed as proposed
or at all.
    Investors are cautioned that, except as disclosed in the filing statement
of Flagship to be prepared in connection with the proposed transaction, any
information released or received with respect to the proposed transaction may
not be accurate or complete and should not be relied upon. Trading in the
securities of Flagship should be considered to be highly speculative.
    This press release contains projections and forward-looking information
that involve various risks and uncertainties regarding future events. Such
forward-looking information may include, without limitation, statements based
on current expectations involving a number of risks and uncertainties and are
not guarantees of the future performance of Flagship. These risks and
uncertainties could cause actual results and Flagship's plans and objectives
to differ materially from those expressed in the forward-looking information.
Actual results and future events could differ materially from those
anticipated in such information. These and all subsequent written and oral
forward-looking information are based on estimates and opinions of management
on the dates they are made and expressly qualified in their entirety by this
notice. Except as required by applicable laws, Flagship assumes no obligation
to update forward-looking information should circumstances or management's
estimates or opinions change.

    Neither TSX Venture Exchange nor its Regulation Services Provider (as
    that term is defined in the policies of the TSX Venture Exchange) accepts
    responsibility for the adequacy or accuracy of this release.

For further information:

For further information: Gordon Keep, President and Director, Suite
3123, 595 Burrard Street, Vancouver, BC, V7X 1J1, Tel: (604) 609-6110

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