Intergeo/Mercator -- summary under Reverse takeovers

Overview

Intergeo (a British Virgin Islands subsidiary of a BVI holding company, Daselina, of a Russian billionaire) which unsuccessfully attempted to go public two years ago, is effecting a reverse (share-for-share exchange) takeover of TSX-listed Mercator pursuant to a BCBCA Plan of Arrangement, with Daselina subscribing U.S.$100M for Mercator shares, so that Daselina will own approximately 85% of the post-reorganization Mercator (a.k.a., the Resulting Issuer) and the Resulting Issuer will own 100% of Intergeo. One Special Share will be issued to each of Daselina and another BVI company with a minor common share holding in the Resulting Issuer (Kirkland), which will provide that they have the right to nominate only three of the nine board members (but with the other six being nominated by the board itself) – but also give them veto rights on major decisions. In order to maintain the public float, Daselina presumably does not wish to buy out the existing shareholders. However, to placate them, they are to receive (under a s. 86 reorganization) the right to put their Common Shares to the Resulting Issuer for $5.00 per share (the equivalent of $0.10 per share before giving effect to a proposed 50-for-1 share consolidation) during an exercise window of 18 to 30 months following the Effective Date of the Plan of Arrangement, with $31.7M being placed into an escrow account to secure this contingent obligation.

Overview of FAD rule application

Although the Special Shares might have the effect of causing Daselina not to be the parent of the Resulting Issuer for foreign affiliate dumping purposes, the Special Shares will not be created and issued until after the reverse takeover (which, in turn, will occur after Intergeo already has acquired control of Mercator under the U.S.$100M private placement), so that the FAD rules will apply to such investment by Mercator in Intergeo. This should be acceptable as Mercator currently has approximately $393M of paid-up capital - so that with PUC-averaging, Daselina's shares will have full PUC. The FAD rules might not apply to the investment by Mercator (as the last step in the Plan of Arrangement) of the private placement proceeds in its Delaware subsidiary, as the board nomination restrictions will then be in effect.

Resulting ownership

Upon completion of the Arrangement, Daselina, Kirkland and the Mercator will own 84.38%, 0.45% and 15.17% of the outstanding Resulting Issuer Common Shares. "Mr. Prokhorov, through Daselina, will be the Resulting Issuer's ultimate principal shareholder. Daselina will have the voting power to control the outcome of most matters to be decided at future meetings of the Resulting Issuer's shareholders."

Mercator

Mercator is a B.C. company listed on the TSX whose principal assets are its 100% owned Mineral Park mine in Arizona (held through a "grandchild" Delaware subsidiary) and its 100% owned El Pilar project in Mexico (held through a Mexican subsidiary which is owned 99.8% by an immediate Canadian subsidiary of Mercator and 0.2% by a grandchild Canadian subsidiary of Mercator). It has 315.7M Common Shares outstanding (equivalent to 6.31M post-consolidation), with a paid-up capital of $393M.

Intergeo

A private BVI corporation owned by Mr. Mikhail Prokhorov (a Russian billionaire). It owns 100% of a Cyprus holding company, which in turn owns 99.5% of a Russian holding company for Russian copper development project subsidiaries (with the other 0.5% owned by Mr. Prokhorov). It filed a preliminary long form base PREP prospectus in Canada on May 15, 2012 in connection with a proposed IPO, but withdrew the prospectus on April 12, 2013 due to market conditions. 114M Intergeo shares are outstanding.

Kirkland

A private BVI corporation whose relationship with Daselina and Mr. Prokhorov is not disclosed.

Plan of Arrangement

1. The Mercator Shareholder Rights Plan will be terminated.
2. The Common Shares held by dissenting Shareholders shall be deemed to have been transferred to Mercator.
3. The Mercator articles will be amended to change the designation of the existing "Common Shares" to "Class A Common Shares" (having two votes per share), and to create "Class B Common Shares" with one vote per share subject to the rights of the Special Shares.
4. Mercator will issue Class B Common Shares to Daselina for $100 million, adding the full amount to stated capital, with Daselina now holding approximately 72% of the Class B Common Shares.
5. Mercator will complete the issuance of Class A Common Shares as payment in respect of each award (with two exceptions) of a RSU and DSU outstanding immediately following the Effective Time.
6. Each Class A Common Share will be exchanged for one Class B Common Share and one Put Right (a.k.a., an Initial Put Right). Such Put Right will entitle the holder thereof to require Mercator to purchase one Class B Common Share from such holder at a price of $0.10 during the "Put Right Exercise Window" commencing on the 547th day (approximately 18 months) following the Effective Date and expiring on the 912th day (approximately 30 months). The stated capital of the Class B Common Shares will equal that of the Class A Common Shares minus the fair market value of such Put Rights.
7. Each Intergeo Common Share will be exchanged for 8.353058 Class B Common Shares, with the fair market value of such exchanged shares being added to the stated capital of the Class B Common Shares.
8. The issued and outstanding Class B Common Shares and Put Rights will be consolidated on a 50-for-1 basis (with the Put exercise price increasing to $5.00).
9. Mercator's articles will be amended to change the designation of the existing "Class B Common Shares to "Common Shares" (a.k.a, New Common Shares"), create "Special Shares", limited to two shares, and change the name of Mercator to "Intergeo Mining Ltd."
10. One Special Share will be issued to Daselina and to Kirkland.
11. Mercator will advance US$37M in cash as an unsecured loan to the Delaware subsidiary holding the Mineral Park mine.

Special shares

Under the terms of the Special Shares (which are not entitled to dividends),for so long as the Daselina Group (i.e., including affiliates and associates) and the Kirkland Group collectively hold at least 30% of the outstanding Resulting Issuer Common Shares, they shall be entitled to nominate two nominees of the Daselina Group and one nominee of the Kirkland Group to the board of directors, which such terms specify shall be composed of nine directors, with the remaining six directors (other than the CEO, if such a nominee) to be independent directors "and with such remaining nominees being nominated for election or appointment by a resolution of the board of directors." The Special Shares also provide that, for so long as the Daselina Group and the Kirkland Group collectively hold at least 33% of the outstanding Resulting Issuer Common Shares, the Resulting Issuer shall not make specified major decisions (including any: share or option issuances; significant (over US$10M) share transfers or acquisition by any group company; incurring of a significant encumbrance; making of any significant loan other than intercompany loans; incurring any significant borrowing or guarantee; or entering into of any significant contract), without the approval of a majority of the Board and with any nominee director(s) of the Daselina Group Share Holder not voting against the decision. Listed actions can be taken only by board resolution.

Put right escrow fund

Daselina will, as of the Effective Date, deposit cash in the amount of approximately C$31.7 million (the "Escrowed Funds") with the Put Right Trustee to be available to support the Resulting Issuer's payment obligation in relation to the Initial Put Rights, but not the "Additional Put Rights" (issued on any exercise of Warrants or vesting of DSUs).

Draw-down

In the event that any Escrowed Funds are drawndown by the Resulting Issuer, Daselina will have the right to elect (when there no longer are any Put Rights outstanding) to convert the unpaid Escrow repayment amount into Resulting Issuer Common Shares at a subscription price of C$6.50 per share, or (if this does not create insolvency issues) into an unsecured promissory note of the Resulting Issuer bearing interest at 10% per annum.

Kirkland Option

Daselina will grant to Kirkland an option to purchase 2,886,162 Resulting Issuer Common Shares representing 6.9% of the issued and outstanding Resulting Issuer Common Shares.

Canadian tax consequences

S. 86 generally will apply to the exchange of Class A Common Shares for Class B Common Shares and Put Rights. Given that the (pre-consolidation) paid-up capital of the current (pre-consolidation) Common Shares is estimated at over $1.25 per share ($393M), no deemed dividend is anticipated.

U.S. tax consequences

Exchange. The exchange by Mercator Shareholders of Mercator Shares for Resulting Issuer Common Shares and Initial Put Rights should qualify as a tax-deferred "recapitalization" within the meaning of Code s. 368(1). Assuming the Arrangement is treated as a tax-deferred recapitalization then, subject to PFIC considerations, the U.S. holders who receive Resulting Issuer Common Shares and Initial Put Rights will recognize gain (but not loss) to the extent of the lesser of (1) the excess of the fair market value of the Resulting Issuer Common Shares and the fair market value of the Initial Put Rights received on the date of receipt over the adjusted tax basis of the Mercator Shares surrendered, and (2) the fair market value of the Initial Put Rights on the date of receipt.

PFIC considerations

Mercator does not believe that it was a passive foreign investment company during 2004 to 2012. Mercator has not made a determination regarding its PFIC status for 2013.

Russian tax issues

Due to an uncertainty in the interpretation of the "beneficial ownership" concept in Russia, a risk exists that Intergeo Cyprus may not be recognized as the "beneficial owner" of income and may be denied benefits under the Cyprus-Russia Tax Treaty. Russian courts have recently used a "conduit company" concept in the context of the Russian thin-capitalization rules. Accordingly, the Russian tax authorities may seek to assert that Intergeo Cyprus should be considered to be a "conduit company" and be denied benefits under the Cyprus-Russia Tax Treaty, resulting in 15% Russian withholding tax.