Old deals in risky countries continue to haunt junior resource sector – by Peter Koven (National Post – May 9, 2015)

The National Post is Canada’s second largest national paper.

Given recent headlines, it is hard to imagine that Khan Resources Inc. was ever in an enviable position. But in early 2010, it really was.

The tiny Toronto-based exploration company, which owned a uranium deposit in Mongolia, was the target of a bidding war between massive, state-owned entities from China and Russia that were chasing foreign uranium reserves. It was exactly the sort of scenario that shareholders dreamed of when Khan went public in 2006. The company appeared to have overcome nationalization concerns in Mongolia and set up a decent outcome for shareholders.

“I don’t know if they’ll be fighting over us. But it has the makings of one trying to outbid the other,” then-chief executive Martin Quick predicted. Of course, that isn’t what happened. Instead of engaging in a market-driven takeover battle, the Russians appeared to apply political pressure behind the scenes, forcing Khan off the uranium project without paying its investors a dime.

The case ended up in international arbitration, with Khan actually winning a US$100-million award. Mongolia, an extremely poor country, signaled it would challenge the decision. The situation turned tragic when Khan chairman Jim Doak travelled to Ulanbaataar last month to negotiate a settlement and died of what is believed to be natural causes.

The Khan situation highlights the extreme risks junior resource companies take when they venture into emerging and volatile markets, where business is not conducted in the ways Westerners are familiar with.

Or rather, that they used to take. These sorts of investments have largely vanished in recent years, because capital has become scarce for junior companies. They are lucky if they can raise a million dollars to explore in Canada, never mind Mongolia or Kyrgyzstan.

But last decade, it was a completely different story. Commodity prices were soaring, investors were piling cash into start-up resource plays, and the companies themselves were scouring the globe for new places to explore. Quite naturally, they got interested in developing countries that were under-explored because of turbulent political situations.

The results of these investments were mixed, to say the least. A handful of companies made a fortune, most lost money, and some experienced a bit of both worlds. Take Vancouver-based First Quantum Minerals Ltd., which built a big copper business in the Democratic Republic of Congo, had it wrongly expropriated, and was later paid US$1.25 billion to drop its lawsuits and walk away.

For the rest of this article, click here: http://business.financialpost.com/news/mining/old-deals-in-risky-countries-continue-to-haunt-junior-resource-sector

Comments are closed.