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Gold loves chaos and should be hitting new highs, especially with inflation coming down and with it, two rate cuts likely before year’s end.
Last week witnessed a tit-for-tat press release exchange between $11M market cap TNR Gold [TNR – TSX.V] and $549M market cap Minera Andes [MAI – TSX] over a hotly contested Argentinian copper property known as the Los Azules. Projected to produce upwards of 375 million pounds of copper annually, it’s no wonder that each party is fighting tooth and nail to retain as much interest in the project as possible for their shareholders.
If not settled before the clash lands each party in the Supreme Court of British Columbia come November, a multitude of scenarios could unfold. If Minera Andes and its leader Rob McEwen (CEO of both Minera Andes and US Gold) get their way, the court would dismiss TNR’s claims and the project would move on unfettered. But, through the claims levied by TNR, the court could also dish out one of two outcomes that would be in TNR’s favour.
The initial claim would potentially award TNR its claimed right to “back in” a 25% interest of the proposed mine site, which in total holds indicated resources of some 2.2 billion pounds of copper. But even more gasp-worthy would be the scenario for which could flip 100% ownership back to the company on a critical technicality.
Some background explanation at this point is important, and the details from both sides remain dicey at best. To start, the property began in TNR’s hand, as an option agreement was arranged with Xstrata Copper in 2007. Under the terms of the deal, Xstrata could acquire 100% interest in the property by meeting a $1 million exploration expenditure requirement.
In early September, 2007, TNR Gold originally signed off on the option agreement, stating in a press release, “All cash payments due by May 15, 2008 have now been received. All exploration expenditures have also been incurred.”
However, according to court documents, TNR Gold alleges Xstrata and subsequently Minera Andes (which later acquired the rights from Xstrata) failed to actually meet the expenditure requirements, through an alleged rush to hit the $1 million mark in order to “take-out” TNR Gold’s 25-percent back-in right on the property as quickly as possible.
TNR’s claim is that it was essentially duped into signing off on a back-in right with an expiry. In the final draft of the option agreement stipulated TNR Gold could acquire a 25% stake over a 120-day period if Xstrata (or later Minera Andes) completed a feasibility study within 36 months of exercising the TNR Gold-Los Azules option.
The dispute heats up around the time-limit clause, which TNR Gold states publicly never was discussed with Xstrata, and that initial drafts of the option didn’t include. The allegation is that the time limit was added after initial discussions on the option agreement were concluded, and that were unnoticed for years after they were added.
It is of TNR’s opinion that Xstrata never intended to produce a feasibility study to begin with. Brought forward in the claims is a quote from an email between two Xstrata employees at the time which TNR Gold claims read, “Yes, taking Solitario (TNR Gold subsidiary) out of the game is a good idea. All we have to do now is not complete a feasibility study within the next three years!”
That said, 36 months passed without a feasibility study, and in early 2010 TNR Gold passed along to Minera Andes that it wanted to exercise its back-in right by waiving the feasibility requirement. This marks the beginning of the disagreements between the parties, as Minera Andes disagreed with TNR Gold’s claim.
Minera Andes’ claim was that TNR’s back in right was dependent upon the production of a feasibility study, which was never produced, and publicly declared so on April 1, 2010. The company added, “Further, Minera Andes disputes the legal ability to waive this condition.”
This is the position that Minera Andes is taking, asking the court to see its side that any back-in notice from TNR prior to or on April 23, 2010 be null, void and of no force and effect. The point from Minera Andes’ side is that a feasibility study must’ve been completed on the project prior to TNR being entitled to exercise its back-in right.
Enter TNR’s second mode of attack. According to TNR, they claim that Xstrata and Minera Andes inflated their exploration expenditures by including 250 metres of 1,574.15 metres of drilling outside of the claims in question into the $1 million expenditure requirement. If true, TNR’s point is that Xstrata didn’t actually meet the conditions necessary for exercising the option, and thus were in breach of their agreement. Thus the latest court claim that TNR has requested asks in return the northern (most valuable) Los Azules properties or equivalent damage; A bold move on behalf of TNR, which undoubtedly upset Minera Andes.
In turn, Minera Andes and its leader McEwen outwardly rejected the insufficient expenditures claim, labeling TNR’s arguments as “creative” and “strange.” To be fair to Minera Andes, an official TNR press release did indeed claim to have signed off on the expenditures.
For its part Minera Andes categorically rejected the new claim it had made insufficient exploration expenditures at Los Azules in a press release responding to the new allegation. And on Friday Minera Andes’ McEwen called all of TNR Gold’s court arguments “creative” and referred to the most recent concerning exploration spending as strange.
Which brings us up to last week’s exchanges between the parties. On Wednesday, TNR put out a press release pointing out that the impending merger of Minera Andes with US Gold will not effect TNR’s resolve with the litigation. A Notary Public has been engaged, accompanied by Argentinean mining police, to conduct a physical site verification of the Escorpio IV mining property as to whether or not Minera Andes trespassed on the claims.
Meanwhile, while the party was marching towards the property for investigation, TNR reiterated an offer made on January 10, 2012 for a settlement amount of US$125 million to drop the lawsuit. The conditions of the settlement were amended to extend an acceptance period for the offer to this Wednesday, January 18, 2012.
Kirill Klip, Chairman of TNR stated: “We strongly believe that our settlement offer is in the best interests of the shareholders of TNR, Minera Andes and US Gold. The Los Azules project is considered to represent one of the largest undeveloped copper projects in the world but the current legal uncertainty over its legal ownership is detracting from the value of the project for shareholders of all three companies.”
The response from Minera Andes did not indicate that the settlement would be accepted. After consideration, Minera Andes responded on Friday, stating:
“After due consideration and having received the input of the Special Committee, the Board of Directors of Minera Andes resolved unanimously to reject the offer from TNR Gold as unreasonable. Minera Andes continues to reject TNR Gold’s claims and intends to continue to vigorously defend against those claims and looks forward to resolving this matter in the courts of British Columbia.”
So, as the clock ticks down towards the Wednesday deadline, it appears that this ongoing legal battle will see its day in court. Set for November, the details on the claims are getting more interesting in the lead up, with much to gain and/or lose by both parties. Should Minera Andes win its side of the argument, the Los Azules will move on into the highly valuable production it is set to provide.
In turn, should TNR receive a favourable outcome of either of its claims (25% or 100%), the project would most likely instantly vault the value of TNR in the eyes of the market. And with the third outcome, Minera Andes agreeing to the settlement, TNR would receive US$125 million, which equates to more than ten times TNR’s market cap. From an outsider’s viewpoint, the moves by TNR are a Hail Mary pass, that could vault the company forward, and it’s obvious why this saga continues, as there’s just too much to lose from both parties.
G. Joel Chury
Editor in Chief
VantageWire.com
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