Exhibit 10.1

 

Apollo Management VII, L.P.
9 West 57th Street
New York, NY 10019

 

October 25, 2012

 

STRICTLY  CONFIDENTIAL

 

Prospect Global Resources Inc.
1621 18th Street, Suite 260
Denver, Colorado 80202

 

Dear Mr. Avery:

 

We have been in discussions with you, Prospect Global Resources Inc., a Nevada
corporation (together with its subsidiaries, “Prospect Global”), regarding the
potential purchase (the “Transaction”) of (i) $100 million in principal amount
of 10% second lien convertible notes of Prospect Global (with an initial
conversion price of $3.00 per share) and (ii) an option to acquire 16.7 million
shares of the common stock of Prospect Global at $3.00 (which option would
expire co-terminus with the closing of the Securities Purchase Agreement
referenced below), by an affiliate or affiliates of Apollo Management VII, L.P.
and/or Apollo Natural Resource Partners, L.P. (“Apollo”).  We believe that the
Transaction presents a compelling opportunity for both Prospect Global and
Apollo, and are willing to proceed with finalizing the terms of the Transaction.

 

Prior to the date of this letter, we and our advisors have delivered to you and
your advisors draft documentation for the Transaction, consisting of a draft
Securities Purchase Agreement (delivered to you and your advisors on October 23,
2012), and a draft Investor Rights Agreement (delivered to you and your advisors
on October 19, 2012) (together, the “Draft Documentation”).  You have indicated
that (a) you have reviewed such Draft Documentation and the summary term sheet
attached hereto as Annex A (the “Term Sheet”) and (b) you acknowledge that the
Draft Documentation, together with and as supplemented by the Term Sheet, is
materially consistent with your understanding of the terms being contemplated by
you and us for the Transaction, subject to the conversation concerning the Draft
Documentation between our attorneys yesterday and good faith negotiation of the
final terms by Apollo and Prospect Global.

 

Prospect Global hereby acknowledges that Apollo has already incurred substantial
time, effort and expense to date in connection with its evaluation of the
potential Transaction (including with respect to due diligence, preparation and
negotiation of definitive documentation and arrangement of co-investment
financing) and expects to incur further expenses to complete such work.  In
consideration of such work and in order to induce Apollo to continue to its
evaluation of the Transaction and for other good and valuable consideration (the
receipt and sufficiency of which are hereby acknowledged), Prospect Global
hereby agrees that:

 

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(a) from the date hereof until November 19, 2012 (the “Exclusivity Period”),
neither Prospect Global nor any representative (including directors, officers,
employees, shareholders, partners, agents, advisors, representatives or any
others persons acting under the direction of any of them or any of their
affiliates) (the “Representatives”) thereof, will, in connection with an
extraordinary transaction (as defined below): (x) solicit, negotiate or
otherwise discuss (including continuing any current discussions or negotiations)
with any person or entity other than Apollo and its affiliates and advisors, (i)
the sale, directly or indirectly, of any interest in Prospect Global (including
any equity or equity linked securities, other than (I) ordinary course issuances
of equity to employees, directors and consultants or (II) pursuant to a
Permitted Underwritten Public Offering (as defined below)) or a significant
portion of its assets, (ii) any merger or consolidation involving Prospect
Global, or (iii) any recapitalization or restructuring involving Prospect Global
(any such transaction described in clauses (i) through (iii) being referred to
as an “extraordinary transaction”); (y) furnish any non-public information
concerning Prospect Global to any person or entity, other than Apollo and its
affiliates and advisors, for the purpose of an extraordinary transaction; or (z)
enter into any agreement with respect to an extraordinary transaction with any
person or entity other than Apollo or its affiliates.  In addition, Prospect
Global and its Representatives will (a) immediately terminate all discussions
and/or negotiations with any party other than Apollo which may reasonably be
expected to lead to an extraordinary transaction and (b) immediately cease any
and all work (and not engage in any such work during the Exclusivity Period)
with respect to any extraordinary transaction.  For the avoidance of doubt, the
foregoing is not intended to prevent Prospect Global or its Representatives from
its ordinary course efforts as a public company to develop its public profile
and conduct customary investor relations efforts. Notwithstanding anything to
the contrary in the foregoing, during the Exclusivity Period, Prospect Global
and its Representatives shall be permitted to solicit, negotiate with, discuss
with and provide non-public information to, (a) any bank or other potential
lender in connection with project finance debt funding or debt sufficient to
enable Prospect Global to repay its promissory note issued to The Karlsson
Group, (b) one or more lease counterparties in connection with capital leases in
respect of equipment for Prospect Global’s operations, (c) Buffalo Management
LLC and Grandhaven Energy, LLC in connection with termination of certain rights
under their respective agreements with Prospect Global, (d) one or more
potential Off-Take customers and (e) potential underwriters and investors in
connection with an underwritten public offering of common stock of Prospect
Global, that may close during the Exclusivity Period, provided that such
investors shall not receive any governance rights or any additional economic
value (other than such shares of Prospect Global common stock) and that such
offering will be a broad based distribution (the potential financing described
in this clause (e) being the “Permitted Underwritten Public Offering”) (the
potential financings described in such clauses (a) through (e) being the
“Permitted Financing”); provided, however, that, during the Exclusivity Period,
Prospect Global shall in good faith continue to consult with Apollo, and keep
Apollo reasonably informed, with respect to any such discussions or
negotiations;

 

(b) if Prospect Global and Apollo and certain related parties have not entered
into definitive agreements providing for the Transaction (as contemplated by the
Term Sheet, and including ancillary agreements with Prospect Global and/or its
affiliates and shareholders referenced

 

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in the Draft Documentation) (the “Definitive Transaction Documentation”) on or
prior to November 19, 2012 (the “Signing Deadline”), Prospect Global shall
promptly pay to Apollo (and in no event later than on November 20, 2012) an
amount in cash equal to $7.5 million (the “Delay Fee”), provided that Prospect
Global shall not be obligated to pay the Delay Fee in the event that (i) Apollo
has not indicated in writing to Prospect Global (on or prior to the Signing
Deadline) that it is willing to execute the Definitive Transaction Documentation
(in a form provided by Apollo to Prospect Global on or prior to the Signing
Deadline and that is materially consistent with the Draft Documentation and the
Term Sheet, with such modifications thereto as Apollo reasonably determines are
appropriate in connection with the finalization of such agreements and after its
final evaluation of the Transaction) or (ii) Apollo has not negotiated the
Definitive Transaction Documentation in good faith; and

 

(c) upon the earlier (if any) of (i) the Signing Deadline, if Prospect Global
and Apollo and certain related parties have not entered into Definitive
Transaction Documentation by such date or (ii) such earlier date as Prospect
Global ceases negotiations with Apollo with respect to the Transaction, Prospect
Global shall promptly reimburse Apollo (in any event, within ten days of a
request for reimbursement by Apollo accompanied by an invoice) for 50% of the
fees of SRK Consulting and McKinsey (such 50% fee obligation capped at $637,500)
and 50% of the out-of-pocket expenses of SRK Consulting and McKinsey (in each
case with respect to the services provided by such entity in connection with
Apollo’s evaluation of the Transaction) (provided that Prospect Global shall be
an addressee of any report generated by SRK Consulting and McKinsey and shall
share ownership of such reports with Apollo whether or not Definitive
Transaction Documentation with respect to the Transaction is signed or closed)
(such reimbursable amounts being the “Reimbursable Consultant Costs Amount”).

 

Apollo hereby acknowledges and agrees that this letter agreement (including the
content thereof, including the Term Sheet) will be publicly disclosed by
Prospect Global, including but not limited to by press release and in filings
with the Securities and Exchange Commission; provided, that Prospect Global
agrees that until such time as the parties enter into the Definitive Transaction
Documentation or the parties’ discussions with respect to a Transaction
terminate, any such disclosures by Prospect Global or its Representatives shall
be consistent with (and shall disclose no more than) the disclosures in the
draft press release, draft Form 8-K and draft prospectus supplement for a public
offering of common stock approved by Apollo prior to the execution of this
letter agreement.

 

Apollo and Prospect Global hereby agree that, simultaneously with the execution
and delivery of this letter agreement by the parties hereto, the letter
agreement by and between Apollo and Prospect Global dated September 6, 2012
shall terminate and be of no further force or effect.

 

Apollo, on the one hand, and Prospect Global, on the other hand, further agree
that in the event of any breach of this letter agreement, the other party would
be irreparably harmed and could not be made whole solely by monetary damages. 
Each party accordingly agrees that: (a) the

 

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remedy of specific performance of this letter agreement is appropriate in any
action in court, in addition to any other remedy to which the other party may be
entitled, without proof of special damages; and (b) either party shall be
entitled to seek an injunction or injunctions to prevent breaches of this letter
agreement by the other.

 

This letter agreement is not intended to and shall not confer upon any person
other than the parties hereto any rights or remedies hereunder.

 

This letter agreement does not constitute an agreement to negotiate or an
agreement to enter into the Transaction (or to enter into the Definitive
Transaction Documentation), and there will be no contract or agreement of any
kind in relation to the Transaction (other than (x) Prospect Global’s agreements
in the third paragraph of this letter agreement (including the exclusivity
obligations therein and the obligation to pay the Delay Fee and Reimbursable
Consultant Costs Amount), (y) the parties’ agreement with respect to disclosures
in the fourth paragraph of this letter agreement and (z) the parties’ agreement
in the fifth paragraph of this letter agreement to terminate the previous letter
agreement) by and among Prospect Global and Apollo (or any of their respective
affiliates) unless and until the Definitive Transaction Documentation is
complete and executed by such parties.  This letter agreement, and any
non-contractual obligations arising out of or in connection with it, shall be
governed by and construed in accordance with the laws of the State of Delaware
applicable to contracts made and to be performed entirely within such State
without regard to the conflict of laws provisions thereof and may be amended,
modified or waived only by a separate writing executed by each of the parties
hereto.  This letter agreement may be executed in counterparts, which together
shall constitute one and the same original.

 

The parties hereby irrevocably and unconditionally consent to submit to the
exclusive jurisdiction of the state and federal courts located in the City of
Wilmington in the State of Delaware for any actions, suits or proceedings
arising out of or relating to this letter agreement and the transactions
contemplated hereby.

 

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Very truly yours,

 

 

 

 

 

Apollo Management VII, L.P.

 

 

 

 

 

By: AIF VII Management, LLC,

 

 

its general partner

 

 

 

 

 

By:

/s/ Gareth Turner

 

 

 

Name: Gareth Turner

 

 

 

Title: Partner

 

 

 

 

 

 

 

 

Accepted and Acknowledged

 

 

 

on October 25, 2012

 

 

 

 

 

 

 

Prospect Global Resources Inc.

 

 

 

 

 

 

 

By:

/s/ Patrick Avery

 

 

 

Name: Patrick Avery

 

 

 

Title: Chief Executive Officer

 

 

 

 

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Annex A

 

Summary Term Sheet

 

See attached.

 

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SUMMARY OF POTENTIAL PROSPECT GLOBAL INVESTMENT

 

Deal Overview

 

Prospect Global Resources Inc. (“Prospect”) will sell and issue to Apollo and
its co-investors (the “Investors”)(1) (i) an aggregate of $100 million in
principal amount of Prospect’s convertible springing second-lien notes (the
“Notes”), (ii) an option to acquire 16.7 million shares of Prospect common
stock, (iii) shares of Prospect common stock (issuable under certain
circumstances described in “Additional Common Stock Issuances” below), and (iv)
a royalty interest, for an aggregate consideration of $100 million.

 

Closing of the investment (the “Closing”) is anticipated to occur in the first
half of 2013, subject to the conditions described below in “Closing Conditions”
and in the Securities Purchase Agreement (the “SPA”) to be entered into by the
parties.

 

 

 

Terms of the Notes

 

Interest. 10% per annum, compounded semi-annually and payable semi-annually, of
which (i) 4% per annum will be payable in cash and (ii) 6% per annum will be
payable in kind in additional Notes.

 

Conversion Price. $3.00, subject to the anti-dilution adjustments contained in
the SPA (including for issuances below the Conversion Price). Anti-dilution
protection to begin from the date of signing of the SPA.

 

Maturity. 7th years after Closing. However, if the maturity date of Prospect’s
project financing is later than 6 ½ years after Closing, then the maturity date
for the Notes will be extended to the date that is six months after the maturity
date for the project financing.

 

Ranking. Upon repayment of the note issued by Prospect to the Karlsson Group
(the “Karlsson Note”), the Note will become senior second lien obligations of
the obligors, ranking at least pari passu with all existing and future
indebtedness of the obligors, but junior to the project financing.

 

Security. Upon repayment of the Karlsson Note, security to consist of same
collateral package as the project financing.

 

Conversion. Convertible by Investors at any time. Convertible by Prospect from
and after reaching the “Conversion Milestone,” which occurs when (1) Project
Completion occurs and (2) thereafter, Prospect’s common stock trades at 2.0x
above the conversion price for 20 consecutive trading days.

 

Voting. Votes with the common stock on an as-converted basis. Investors will
also have a separate voting right to elect/appoint the number of Board designees
described below in “Governance Rights”.

 

Put Rights. Putable at the option of the holders at a price of 101% of par upon
change of control transactions or from insurance proceeds in the event of a

 

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(1)  Contracting purchaser entities will be acquisition vehicles formed by
Apollo and its co-investors, supported by equity commitment letters from Apollo
and its co-investors, which equity commitments are assignable among the investor
group and their affiliates prior to closing.

 

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casualty event, or proceeds of a condemnation award, subject to prior prepayment
in full of the project financing and to customary reinvestment rights.

 

Covenants and Events of Default. Covenant package and events of default as
described in the SPA.

 

 

 

Options

 

Investors will receive at signing options to purchase up to 16.7 million shares
of Prospect common stock, at an exercise price of $3.00, subject to customary
anti-dilution adjustments. The options will be exercisable at any time up to the
Closing.

 

 

 

Additional Common Stock Issuance

 

If the definitive feasibility study (“DFS”) indicates that the estimated total
capital costs (the “DFS Estimate”) for the Holbrook project exceeds $1.568250
billion (i.e., more than 2.5% higher than the currently estimated $1.53 billion
of capital costs), then Prospect will issue to Investors at Closing:

 

·              if the DFS Estimate is greater than $1.568250 billion but less
than or equal to $1.6065 billion (i.e., between 2.5% and 5.0% higher), 2.0
million shares of common stock (representing 3.6% of the common stock
then-outstanding, subject to certain anti-dilution adjustments); or

 

·              if the DFS Estimate is greater than $1.6065 billion but less than
or equal to $1.683 billion (i.e., between 5.0% and 10.0% higher), 3.5 million
shares of common stock (representing 6.3% of the common stock then-outstanding,
subject to certain anti-dilution adjustments).

 

 

 

Royalties

 

Upon Closing, Investors and Buffalo Management LLC (“Buffalo”) will each receive
a 1% royalty on the annual gross revenues of Prospect. The current management
fee arrangement with Buffalo, which currently provides for a 2% royalty interest
payable to Buffalo, will be terminated.

 

 

 

Preemptive Rights

 

From signing until Investors hold less than 10% of the outstanding voting power,
if Prospect issues additional shares of common shares or other equity-based
securities, Investors will have preemptive rights on such issuances to maintain
their then-existing ownership percentage.

 

 

 

Governance Rights

 

Board Rights. At Closing, Investors will have the following board designation
rights:

 

·              Four out of nine seats while Investors hold more than 20% of the
outstanding voting power; and

 

·              At below 20%, a number proportionate to Investors’ voting power,
until their voting power would entitle them to designate less than one director,
at which time Investors lose their board rights and may appoint an observer.

 

Investors will also have proportionate rights on board committees and subsidiary
boards. In addition, at signing of the SPA, Investors will have one Board seat
and one observer.

 

Consent Rights. Investors will have a set of consent rights while they hold more
than 20% of the outstanding voting power, as detailed in the Investor Rights
Agreement (the “IRA”) to be entered into by the parties. Certain of the consent

 

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rights will fall away upon a Conversion Milestone.

 

 

 

Default Protection

 

If Prospect is defaulting (or likely to default) on its payment obligations on
the Karlsson Note, Investors have the option to purchase Prospect common stock
at the lower of the conversion price of the Notes or the then-applicable market
price (calculated on a 10 day VWAP average) in an aggregate amount sufficient to
(at Investors’ option) either (x) pay off the Karlsson Note in full or (y) pay
off such lesser amount as would be necessary to avoid or cure the default or
anticipated default. Investors may also elect to purchase notes (with a one-year
maturity and on other terms specified in the SPA) in lieu of common stock.

 

 

 

Standstill

 

Investors may not purchase or acquire any outstanding equity of Prospect for a
period of one year from Closing without Prospect’s consent.

 

 

 

Registration Rights

 

Investors will have demand and piggy-back registration rights for the common
stock receivable upon conversion of the Notes (or otherwise held by the
Investors).

 

 

 

Fees and Expenses

 

Investors will receive a funding fee of 2% and a reimbursement of expenses from
the Company.

 

 

 

Shareholder Approval

 

Transaction is subject to Prospect shareholder approval. Certain shareholders of
Prospect will be asked to enter into support agreements in support of the
transaction.

 

If the deal is terminated for a failure to receive shareholder approval or a
breach by Prospect, Investors will receive a $5 million termination fee plus
reimbursement for expenses.

 

 

 

Closing Conditions

 

Transaction will be subject to (in addition to customary closing conditions
contained in the SPA):

 

·              Receipt of the DFS for the Holbrook project which satisfies
certain minimum conditions;

 

·              Selection of EPC or EPCM firm(s) reasonably acceptable to
Investors;

 

·              No indication that there will be any delay in obtaining necessary
permits in a timely fashion (generally no later than August 31, 2013);

 

·              The hiring of a Project Manager reasonably acceptable to
Investors; and

 

·              Receipt by Investors of updated reports from their commercial and
technical advisors which verify in all material respects the conclusions of the
DFS and otherwise generally support the continued commercial and technical
viability of the Holbrook project, and the market opportunity for it.

 

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