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Sep 2015 - Bun Fight

Bun Fight at the OK (Old Kalgoorlie) Corral (Goldfields)

A delegate remarked at Diggers 2015, "what we need is some action, to liven things up a bit. That banter between you and Cooky was great, it woke everyone up!". Just like Diggers, a "bit of action" has livened up the market being an emerging bun fight over Phoenix Gold Limited (PXG.ax), between the ~27.4% China SOE Zijin (with its ~$20bn market cap, 21.6bn shares and ~1.0mozpa annual gold production, plus copper, silver and gold refineries and other metals etc) and 0% Australia SOE Evolution (with its  ~$1.5bn market cap, 1.4bn shares and ~ 0.85mozpa annual gold production).

 And who will get to win the Phoenix cap shown in the Figure, along with the gold nuggets from south of the old Premier pit near the junction of the Kunanalling and Telegraph shears, that were on display in the Phoenix booth at Diggers.

PXG had been trundling along fairly happily and reported its initial mined production from Kintore West in DQ2014 as identical even to the second decimal place at 1.54g/t of the grade being toll treated at the Greenfields plant. PXG made a placement and SPP at 10cps in early Feb 2015, but did not tell the market that then current grades at the plant were lower than expected, (as in the MQ 2015 results were 1.89g/t at the mine and 0.72g/t lower or 1.17g/t at the plant).

PXG probably thought or hoped that the falling grades at the plant would recover, especially with the expected higher grades at depth, however, the grades clearly continued to deteriorate, such that when PXG stated on 14 April that grades were lower than anticipated and mining at Kintore West would cease, that caused the PXG share price to collapse from ~9c on 13 April to ~6.2c on 21 April, which triggered interest in the camps of Zijin and Evolution and put PXG into "play".

Evolution appeared to be the first cab off the rank, striking a strategic alliance with PXG on 1 May that involved a placement to itself of 44m shares at 7.5c for exploration along PXG's poorly explored tenement holdings of the Zuleika Shear Zone (the one that contains NST's Kundana and EVN's [previously La Mancha's] Frog's Leg operations), and had a second tranche lined up for approval at 9.2c on 23 June 2015, that if successful would have taken EVN's holding to 19.9% of PXG.

However, Zijin were not going to be outdone, they had already acquired an earlier holding in December 2014 of 39.9m (10.8%) PXG shares at 8.3c from CBA/Colonial selling out (apparently completely without the knowledge of PXG). And they had a hidden pre-bid arrangement with Geologic who had participated in placements at 10c and 13c in PXG, such that on 8 May 2015, 42.4m PXG shares transferred increased Zijin's holding in PXG to 17.9% and they launched a takeover offer on 22 June of 10c in cash from 20 August subject to acquiring at least 50.1% of PXG and stated that they would be voting against EVN's 9.2c second tranche, (and that resolution was subsequently withdrawn on 23 June).

While Evolution were thwarted in acquiring a significant stake at 9.2c, they moved on 27 July and bought 49m PXG shares off market at 12c (reputedly scaling back the offers for shares) because that 49m increased EVN's holding to 19.8% of PXG.  And all seemed to be quiet until the 20 August, when EVN made its offer of 6c in cash and 0.06 of an EVN share or an equivalent ~12c per PXG share, with no minimum acceptance level.

PXG employees must have breathed a huge sigh of relief at the EVN offer, because if successful it could mean possible employment. As one PXG employee said to me "mate we are (now were) facing the apocalypse, because none of us are fluent in Mandarin/Chinese."

The reference was based on what has recently happened to NGF (Norton Gold Fields) employees with Zijin acquiring the remainder of NGF for 100% control and moving its Perth office to Kalgoorlie. Potential office employees were told that they could only apply for positions in Kalgoorlie if they are fluent in Mandarin. And to give an indication, a secretarial position advertised in Kalgoorlie required a Masters degree in mining or geology in addition to being fluent in Mandarin - which has to eliminate almost anyone not from China, especially to be located in Kalgoorlie.

That technical requirement of the secretary is probably to eliminate some of those early translation faux pas that occurred. A "classic" one that we can recall was the regular appearance of "geese flying in a line brothers are united" in a translated text. What had happened was that "rock formation" in Mandarin had been translated to become "rock geese flying in a line brothers are united", and it appeared more than once in the translation.

Non-fluent Mandarin speaking NGF employees at Paddington's operations are reputedly wondering just how long they have got before having to find employment elsewhere.

Zijin appear to have a clear field when it comes to bidding for PXG (apart from Evolution). As a PXG employee stated, we approached Shandong Gold (who control Focus Minerals) and asked them if they would be interested and they said no, they could not go against Zijin. It seems that a smaller Chinese company has to defer in favour of a larger Chinese company trying to acquire a target. It may also explain that when Shandong took over FML, that ~15% stake being held in Crescent by a smaller Chinese company (that prevented FML consolidating Crescent's ~$200m tax loss) was almost instantly transferred, whereas FML had been unable to acquire it.

Also, whatever the offer is shareholders should not want to only receive cash because cash means no participation in any future potential upside in their company's (in this case PXG's) holdings (whereas bids involving scrip mean participation). In much the same way that NGF shareholders have probably now realised that they gave their NGF shares to Zijin for 25c in cash, in a company that potentially could produce up to ~450kozpa or so.

 (As indicated in Zijin/NGF's Diggers presentation with its rated mill expansion to 4.6mtpa [though 5mtpa may be achievable], and game changing additional 1mtpa refractory plant [on which work is already in progress] within 3 years to probably treat Racetrack, re-open Ora Banda [Gimlet etc] for the Victorious Basalt hosted mineralisation and possibly treat Aphrodite, etc. Plus an expected >8 year life operation at Mt Morgan [QLD - see ERA's 2003 Lodestone Exploration report on www.eagleres.com.au], and Bullabulling as a potential ~7.5mtpa [heap or dump leach?] operation).

However the original 20c offer by Zijin for NGF was deemed "fair and reasonable" by the independent expert. Zijin started its offer for NGF at 20c on 17 April 2015, increasing it to 23c on 30 April and then 25c on 26 May ( being the same as it offered for NGF in 2012).

But how did PXG get itself into this position?. I visited PXG's prospects post Diggers on 7 August 2015 and discussed what happened and why at Castle Hill, Kintore and the exploration, and concluded that theoretically PXG's assets appeared to have the potential to produce ~100kozpa to ~200kozpa for more than 10 years, including the fact that Castle Hill's Mick Adams alone could potentially be comparable to Gold Road (GOR ~$265m market cap)'s Gruyere.

Two major incidents had occurred:

The first was obviously the early 2015 grade issue at Kintore West, where on checking I found that the resource/reserve grade appeared to be correct as did the 0.7g/t lower grade being treated at the plant.  The flaw was that standard practice of assaying the ore being sent from the mine to a toll treatment plant was not followed and hence not being done.

What occurred was that as Kintore West was being mined, it was marked according to expected grade areas and taken to the various stockpiles as in high grade (per the resource/reserve model), low grade (~0.5g/t) and waste (to the waste dump). What that practice did (in hindsight) was to send ore grade to the low grade stockpile and probably some to the waste dump, since the low grade at ~0.54g/t currently being treated at Greenfields has been realising between 0.75g/t and 0.90g/t, ie 40% to 67%, or 0.21g/t to 0.36g/t higher than it should be.

Hence the ~1.3g/t Kintore resource still appears to be intact, provided that it is not attempted to be high graded by selective mining.

The second incident was that on 20 November 2012, PXG started its planned ~$20m exploration programme over all its targets on the different shears and structures, but within 2 weeks on 5 December 2012, PXG reported a 94m @ 2.6g/t intersection from 88m at Castle Hill.

That intersection caused PXG to shelve its planned exploration programme along the Zuleika Shear, Ora Banda structure, and remaining parts of the Kununalling Shear, to focus on Castle Hill and Kintore (which it had acquired in Aug 2012), in the belief that NGF would probably exercise its option and mine at Castle Hill.

The option was a historic "gentleman's" agreement made originally between Placer Dome and Cazaly in 2005 that stipulated that after a feasibility study had been made on a specified pit, Paddington had 6 months' to accept the option, and on accepting the option had to start mining within 3 months at their expense, with the resulting profits split 50/50. 

The study was completed in February 2014, Zijin accepted it 6 months later, announcing during PXG's 2014 Diggers presentation in August 2014, and should have started mining by November 2014. However, instead Zijin bought a chunk of stock from CBA/Colonial in December 2014, as apparently part of a planned takeover. Zijin had possibly decided it did not want to share 50/50, it either wanted 100% of the project or decided it was illogical to pay an expected >$75m to a company trading with a market cap of about half of that.

PXG's mistake or folly was to stop exploration on its other prospects and focus on Castle Hill because it believed an agreement was going to be honoured, in the same way it had been honoured by the NGF management on Catherwood in late 2012 (just after the Zijin takeover). Whereas the option was accepted in August 2014 and mining has still yet to start (over 12 months' later). Being a "gentleman's agreement" it did not have any penalties for failing to comply, because it was expected to happen.

For more detail see ERA's August 2015 Phoenix Gold Site Visit report on the ERA website www.eagleres.com.au or on Phoenix Gold's website.

It is going to be interesting to see what happens, will Zijin sell out - probably not,  because the prize land holding assets that include Castle Hill appears to have significant good long-term upside potential. Castle Hill's Mick Adams alone has a resource of 47mt @ 1.2g/t to ~200m at a 0.55g/t COG (cut-off grade), compared to GOR's maiden August 2014 Gruyere resource of ~40mt @ 1.2g/t to ~150m at a 0.7g/t COG. And the Castle Hill tonalite widens to ~2km across and extends ~6 or 7km NW on strike to a dome like plunge at Kintore.

Beyond the tonalite dome to the north of Kintore is of course the pressure shadow that still has to be explored, in case it resembles Gryphon's Nogbele gold deposit in Burkina Faso, and other gold orebodies/prospects in the region that exist within pressure shadows.

But what will Zijin do with its initial ~$2.2bn (Rmb10bn) war-chest for acquisitions that it revealed at Diggers 2015. Will it then try and take over Evolution (~$1.4bn market cap) and/or Northern Star (~$1.2bn market cap) for cash ? And then will the loyal institutions/funds just take the cash and say "next one" or will the loyal shareholders, be able to hold off against Zijin and try and eke out a white knight scrip offer somewhere else?.

Disclosure and Disclaimer : This article has been written by Keith Goode, the Managing Director of Eagle Research Advisory Pty Ltd, (an independent research company) who is a Financial Services Representative with Taylor Collison Ltd.



  • Written by: Keith Goode
  • Tuesday, 01 September 2015