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| ||Mon Aug 18, 1997|
Tracker 1997-21: Kenrich - Sorting out the deal with Prime Resources Group
Publisher: Kaiser Research Online
Author: Copyright 1997 John A Kaiser
| ||Kaiser Bottom-Fish Tracker 1997-021|
August 18, 1997
Kenrich Mining Corp (KRC-V: $0.68)
Tel: (800) 322-3311
Sorting out the deal with Prime Resources Group
Neither Ken Trociuk, the VSE, nor the company's accountant have done Kenrich any favours in the way they have described Kenrich's farmout deal with Prime Resources Group (PRU-T) on the Corey property in the Eskay Creek area of northwestern British Columbia. The deal as described struck me as a weak one that left Kenrich at the mercy of Prime and its parent, Homestake, but after a lengthy conversation with Trociuk on Friday, after which he faxed me the letter of intent, I finally got the key terms of the deal straightened out. On June 30 Kenrich had announced a complex deal with Prime that I can now say is a very good one. Prime has the option to earn up to 70% of the northwestern portion (6,000 ha) of the 18,700 ha Corey property located about 10 km south of the Eskay Creek deposit. To earn 51% Prime must spend $6,804,000 by Dec 31, 2003 and pay $2.5 million on Dec 31, 2003. Of this amount $2,004,000 must be spent by July 31, 2000 and will be contributed by Prime through the purchase of Kenrich stock. Prime has taken down a private placement of 1.5 million units at $1.00, of which 80% is flow-thru and earmarked exclusively for the optioned block. Kenrich has put $1.2 million into a flow-thru trust account. The remainder of the money can be used by Kenrich for any corporate purpose. The 750,000 warrants are exercisable at $1.34 for a two year period. Kenrich is responsible for providing another $804,000 in the third year, and here is where the confusion arose. Neither the company's news release, the audited financials nor the VSE approval notice make it clear that if Prime does not exercise its warrants within two years, the option terminates. Kenrich has also granted Prime 300,000 warrants to buy stock at $2.00-$2.75 between July 31 2000-2001. Prime must exercise these warrants to keep the option alive. Once Prime is vested for 51%, it has until July 31, 2005 to decide whether or not to fund another $10 million toward a feasibility study in order to earn another 19%, bringing its total interest in the PRU block to 70%. If Prime earns 70%, it will be required to lend to Kenrich its 30% share of all subsequent costs, with Kenrich's 30% interest in the PRU block as collateral for repayment. In short, Kenrich has a 30% carried through production net interest if Prime finds something good. Prime also retains a one time right to fold into its block up to two claims that adjoin the original PRU block by paying Kenrich $1 million cash. However, Prime's interest in this additional ground will be limited to 50%. The purpose of this provision is to ensure that Prime does not have a problem if it discovers an orebody that straddles the Kenrich block. The part of the agreement just described is not unusual, but the second part reveals a fair bit of imagination on behalf of both Kenrich and Prime. While Prime is operator of the PRU block, Kenrich remains operator on the remaining two-thirds (the Kenrich block). Once Prime has vested for 51% of the PRU block, it will have a right until July 31, 2004 to back-in for 50% of the Kenrich block by paying Kenrich $7 million and reimbursing 200% of Kenrich's expenditures since March 1, 1997. Prime retains a right of first refusal on Kenrich's net stakes in the Corey property as long as its option remains in good standing.
The second part of the deal is clever because it allows Kenrich to carry on exploration on the Kenrich block with its own money, which in turn gives Prime incentive to give the PRU block its best shot. Prime has obviously selected the northwestern third of the Corey property because it believes this part has the best potential for another Eskay Creek style deposit, but in light of numerous showings on the eastern-central part of the property, including the barren but intriguing black smoker HSOV showing, you never know where a big deposit may lurk. Should Kenrich find something good on the Kenrich block while Prime gets skunked on the PRU block, both parties have incentive to renegotiate the terms of the deal in order to facilitate fast track development of a discovery on the Kenrich block. The three key showings on the PRU block are the Battlement, Bench and Cumberland zones. While no mineralization comparable to Eskay Creek has been found, these zones are hosted by stratigraphy similar to that of Eskay Creek, which was discovered in 1989 when Murray Pezim's Calpine Resources pulled the famous hole 109 (208 metres of 0.875 opt gold) in a big stepout from the 21A Zone. At the end of the day the 21B Zone had been traced over a 600 m strike, with a width of 60-120 metres and a thickness ranging 2-12 metres. Homestake, which acquired control of Prime and the deposit through its takeover of Corona, put the deposit of 1.2 million tons of 1.91 opt gold and 85.5 opt silver into production in 1995. Since then Homestake has been busy looking for additional mill-feed (initially the ore was shipped direct to smelter, but earlier this year Prime received approval to construct a mill) and establishing this area north of Stewart as its special turf. The Eskay Creek deposit is classified as a volcanogenic massive sulphide deposit which may have undergone gold enrichment after the polymetallic massive sulphide lens was laid down. Such deposits tend to occur in clusters, and the dream of explorationists in the Stewart area has been to find another Eskay Creek deposit. The problem with this search is that Eskay Creek was found because the host stratigraphy was tilted to expose its cross section, and the Eskay Creek lens happened to be close to the surface. Unfortunately, the exposed stratigraphic cross section represents only a fraction of the geology in the Stewart area. While there may be many more Eskay Creek style lenses within the favorable horizon, they will either have been eroded away or are buried too deeply down the dip of the stratigraphy to be easily found. The Corey property is intriguing because it represents 12 km of Eskay Creek style stratigraphy that has received relatively light exploration. Gerry Blackwell, who ran the exploration program on Eskay Creek, was sufficiently enthusiastic to let himself at one point be appointed president of Kenrich before leaving to concentrate on Gitennes Exploration. Gold and silver mineralization is present on the Corey property, as are the black smoker systems associated with VMS deposits. What Kenrich and Prime still have to find is where they come together in economic concentrations resembling Eskay Creek. Prime will be conducting a $500,000 program that includes drilling in late August. Kenrich, which only has about $250,000 working capital not counting the money earmarked for the PRU block, would like to undertake a $750,000 program this year. While Kenrich would like to drill some holes, most of this work will involve surface exploration aimed at identifying drill targets for next year. Trociuk claims that two-thirds of the property sits in a valley and can be worked nearly all year except from December to January, though mobility depends on fog and cloud cover.
The company has sunk nearly $8 million into the project so far, and has still only scratched the surface. Kenrich has 23.9 million shares issued, and 27.8 million fully diluted. Trociuk himself owns about 2.4 million shares, and while he may not be the most popular promoter on Vancouver's Howe Street, neither are the financial backers with whom he has crossed swords during the past five years. Trociuk claims support from a group of European shareholders, who at this stage have little other choice. He also claims that at least 5 million shares are held by strong supporters. Exploration work to date has turned up lots of sniffs and the sort of geology that gets geologists excited, but it has not yet produced a target into which investors can sink their teeth. In the July-August 1997 issue of Kaiser Bottom-Fishing Report I suggested that bottom-fishers sell into a September rally. At this stage Kenrich is a one-property junior, whose property is vulnerable to a seasonal shutdown coinciding with the annual bottom-fishing season for Canadian juniors. Although Prime now has its crew on site, this season's work program is late getting underway, and any good news in the form of drill results is doomed to collide with the market's antipathy toward holding seasonal plays over winter. Prime, which is operator of the PRU block, is not the sort which will engage in Pezim style heroics to keep the information flowing throughout winter if good results come out in September or October. At current price levels Kenrich is stable, and is not pricing any great expectations for this season's exploration work. Kenrich still has to fund its own program, and when I hear the promoter talking about raising $1 million at a buck when his stock is drifting sideways at $0.60-$0.70, my cup doth not runneth over with optimism. While Trociuk's chest thumping style may not impress anybody in this current bear market climate, one should keep in mind that when highly motivated individuals like Trociuk get some traction in the form of encouraging results and a shifting market mood, they can really lay down rubber. I don't think the time is right yet for Kenrich in terms of data flow and market mood, so if the stock does bubble up with a September rally, I would be inclined to sell into what most likely will be temporary strength. Afterwards I would watch for a winter pullback and an opportunity to reposition. The deal with Prime has been designed to ensure that the Corey property benefits from Prime's technical expertise regarding Eskay Creek style deposits for at least a couple years. The deal includes an information sharing arrangement, so if Kenrich does come up with something interesting on its block, there will be no shortage of helpful feedback from Prime. Kenrich itself draws on the expertise of its exploration VP, John Kowalchuk, who was involved with the discovery of the nearby Kerr deposit now owned by Placer Dome. Provided Kenrich can raise additional capital, the junior will also be in control of information flow from the remaining two-thirds of the Corey property. The wild card which could disrupt my analysis of the stock's seasonal destiny is the possibility that Kenrich may acquire a project somewhere else in the world where seasonality is not an issue. Such a project is not likely to be acquired without the financial blessing of Kenrich's Euorpean backers, so if it does happen and the new project is not a grassroots sort like Corey, the market could respond positively. News of a major new acquisition would require me to reassess my short term outlook for Kenrich. As far as the medium term is concerned, by which I mean 1998, I think the outlook for Kenrich relative to current prices is quite good. Kenrich maintains detailed geological information as well as financials on a web site at www.kenrichmining.com.
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