Eastern Russia's Kekura Unfolds -- Thom @ Large
By February 11, 2012– Published in on
CAPE TOWN -- A large Russian gold project, kissing cousin to Kinross' Kupol Mine in Chukotka, this week made its deal-flow debut.
Geologist Andy Smith and negotiator and Sharprock Resources CEO Harp Sangha "put it out there" to minerals bankers and investors at the Africa mining show in Cape Town.
"It" is called Kekura.
[caption id="attachment_1249" align="alignleft" width="300" caption="Alexander B. in Moscow"][/caption]
As with many aspects of Russia, nearly everything about this 2.93-million-ounce (indicated and inferred) ore field is extreme. "It's extremely cold, extremely rich -- a shear-zone hosted orogenic, and it's 100 kilometers from the region's main town," Russian physicist Valery Karimov tells me. Mr. Karimov and a partner, physicist Anatoly Novikov, begged and borrowed their way into (by some estimates) $150 million of capital, a third of it their own, and all of it spent on the 1,500-square-kilometer expanse since 2005.
The two scientists from Moscow Physical Technology Institute are in their mid-40s, wearing tattered sweaters and wrinkled corduroys. We are sitting in the Moscow law offices of Squire Sanders & Dempsey. The Kekura Ore Field has extreme grades, 8-grams a tonne and greater.
Its location in Chukotka Autonomous Province is close to the Bering Strait, the body of water that separates Russia from Alaska, USA. The Kekura ore field covers about 20 square kilometers and is part of the Karalveemsky deposit cluster, according to a lengthy 43-101 filed compliance report commissioned by Sharprock, a publicly traded Canada company (SHRK).
"During 2010, the company completed 22,200 meters of drilling in 117 holes. A total of 7,700 core samples were taken," says the report by the engineering consulting firm MICON. The economics "are definitely extreme," says Mr. Smith, a Vancouver geologist and CEO of both Canaco Resources and Tigray Resources in eastern Africa.
Mr. Smith and several Canadians, Americans, and Australians are in deal mode, having just sealed a pact with the Russia banks and the two property vendors, our physicists, who happen to operate a successful metals recycling business in the capital city. The transaction is high risk and has at least one red flag.
Insiders, including CEO and president Mr. Sangha, director Craig Alford and two others, acquired 10-cent stock of Sharprock. SHRK is traded on the speculative and lightly regulated OTC market in the USA. The SEC filing, shown here, indicates a recent equity raise of approximately $265,000, resulting in the issuance of 2.65 million shares to a company with less than 25 million shares outstanding.
Those shares, sold to the four directors and officers on January 4 of this year, now look cheap; Sharprock's lightly traded stock sells for more than $1 now. See SEC Form D filing. (More on this below.)
Other risks: the debt load, more than $100 million worth of borrowed rubles, is extreme. The two physicists and their friends are said to have sunk another $50 million into the property, developing roads, performing assays, drilling, trenching, shipping ore to Moscow, and purchasing oodles of equipment.
"There is no doubt Valery and Anatoly could have lost this project, given the amounts of money invested and the lines with the two banks," said Alexander L. Bogdanov, whose Washington, D.C.-based Debt Advisory International represents the two physicists. "They did a fine job erasing most of the exploration risk." (Photo above: Alexander at a Moscow shopping mall -- Thom Calandra photo)
Mr. Bogdanov is a booming 53-year-old man who spends part of his time in Moscow and part in Washington and in Connecticut, where he lives. He is Russian by birth. Other risks are legion: Moscow protesters are willing to challenge the government in growing demonstrations, including one that drew more than 100,000 people the day I departed the capital. Next month is a bellwether election for President Dmitry Medvedev and Prime Minister Vladimir Putin, who hope to switch roles in what many Russians are accepting as "influenced" if not outright rigged contests.
[caption id="attachment_1267" align="alignright" width="300" caption="GATA's Bill Murphy and part of his robust family at Cambridge Indian Wells"][/caption]
Financing is also a risk in a nation that some professional miners and natural resources investors regard as toxic."It is not my cup of tea, but good luck for anyone who can pull it off," says Vancouver mining magnate (copper, silver, hydrothermal) Ross Beaty. Mr. Smith, who is a geologist adviisor to the project, Mr. Harp, and a third mining executive, geologist Daniel Kunz of U.S. Geothermal (HTM) and Gunpoint Exploration Ltd., must present their case to a syndicate of banks willing to support the raising of about $110 million. "This takes the Russian banks out of it," Mr. Smith said from Cape Town.
We'll see. My coverage of Kekura has no strings attached, financially or thematically.I am concerned about the "cheap" equity raise, in which Mr. Kunz, a director, and executive officer Raymond Steele, participated.
For the record, I settled SEC charges in January 2005, and paid more than $400,000 of disgorged profit and penalty, after a dispute about failing to disclose trades of stock when I was an active researcher and newsletter writer for my CBS MarketWatch. I have no trading ban or restrictions on my roles as an investor or a company officer/director. But the affair still hurts and I apologize for it every chance I get. I sit on no boards and have accepted no shares or compensation from Sharprock, outside the expense of my airfare and Russia visa.
I have always loved scale. As in, the immense scale of a brand-new resources project. I was fortunate to see Mongolia's Oyu Tolgoi develop from a Robert M. Friedland pipedream nine or 10 years ago into what will become perhaps the world's second largest copper-gold project, all in line with what the mining tycoon from Ivanhoe Mines promised and is delivering to shareholders and partners.
My desire here is to cover scale, in this case Kekura way out there in eastern Russia where the roads are sturdy when they're frozen, which is much of the year. I hope to have more on valuation and process in coming days and weeks. That is, as long as I am satisfied with the corporate governance.
|As for the pedigree here, it looks good. The Moscow office of this transaction's legal team features Ivan Trifonov, who is active in Russia mining projects. Stephen Nelson, also of Squire Sanders, showed me part of at least 85 pages of translated "contract" covering exploration permits, state NSRs, Russia profit tax, disclosures, share purchases agreements and correspondence with the Russia Mineral Resources Agency.
The two physicists from Moscow claim production could begin as early as late this year-- some 400 tonnes per day. Nearby Kupol, developed by Bema Gold (now Kinross), runs some 18 grams per tonne in parts and is wildly exceeding production targets. In 2010, Kupol produced 800,000 ounces of gold.
David Groves, an Australia doctor of structural geology, is involved as a consultant, Mr. Sangha and Mr. Smith tell me. Mr. Smith has had several decades of experience running mines in Quebec and spawning Canaco and Tigray (TIG).
Mr. Sangha of Sharprock has been a colleague of Andy Smith's for several years and describes himself as an entrepreneur. He previously was CEO of Tanzania prospector Douglas Lake Minerals, which like Sharprock is listed on the dubious OTC bulletin board market of the USA. Stockhouse, the Canada publisher, has written about Douglas Lake Minerals and about Mr. Sangha, who recently resigned that company. See Stockhouse coverage for red flags.
Mr. Sangha, in his late 40s, says, "We have run legal on this up and down and back and forth three times over; it has not been cheap. Whatever the final structure of the Kekura operating company is, I can tell you all shareholders and supporters will be satisfied."
Mr. Kunz, an American, has participated in several Russia transactions and is currently CEO of U.S. Geothermal in Nevada. He is 59.
One of my geologist confidants, Peter J. Hawley of Nevada's Scorpio Gold (SGP), has seen the project and says it is "very promising, very very big." Mr. Hawley, a Canadian, got to share a presidential Russian helicopter with a dozen or so other geos and execs scouting the area around Kupol, which is 135 km from Kekura.
|Mr. Smith says the "deal tension" among banks interested in participating in the debt or eventual equity of the Kekura project already has begun. He and Mr. Sangha have had queries from large investors and from banks at the INDABA mining show that just concluded in Cape Town, RSA.Here is the press release from Sharprock. It explains possible deal structure and earn-ins. Please feel free to comment.
Cambridge At Indian Wells: That's Where I am this weekend. In the Palm Desert, California., It's 84 degrees and I am at this moment having a sparkling water with Chris Powell of GATA.org. See: www.cambridgehouse.com for this weekend's metals investment conference.
The photo above shows Gold Anti-Trust Committee Chairman Bill Murphy, his mom and several brothers, a sister and a family friend at this weekend's investment conference.
I am off to Cambodia next week to see a gold project.
Thom Calandra is Editor-At-Large at Cambridge House Cafe. He spends his time investing, writing and working with Torrey Hills Capital of Del Mar, CALIFORNIA. On disclosure: I own shares of Canaco and Tigray and have visited the two projects in their respective countries. In this article, Peter Hawley's Scorpio Gold is a client of Torrey Hills Capital for investor relations. I have no financial interest in Kekura or any of the other companies in this article. I am off to Cambodia next week to see a gold project and to donate services to a hospital.