Hounded by shortsellers, Chase offers legal opinions to dispel

Recent trading activity in Chase Resources (VSE) suggests shortsellers have been betting the company will fall from grace over its promotion of a copper-gold property in the Philippines. Late last year, Chase obtained an option to purchase 52.9% of the outstanding shares of Taysan Copper. Taysan is a Philippine mining company which owns the Taysan copper-gold deposit about 50 miles south of Manila.

Chase paid the owner of the shares, Namangan Investments, 1.8 million of its common shares in return for the purchase option.

Under the terms of the option, Chase can purchase the shares for US$1 million anytime prior to Jan. 15, 1992. The price increases to US$2 million Jan. 15, 1993, and US$2.75 million thereafter.

To date, the shortsellers do not appear to have been particularly successful.

In early December, on news the company had acquired the option, Chase jumped to the $1.30 level from under $1. One week later the shares were over $5 and the short position had jumped from nil to over 300,000. The ensuing short squeeze pushed the stock to a high of $8 before it pulled back to its current price of about $4. The latest recorded short position (as of Jan. 11) was 183,100 shares.

A rumor — supposedly initiated by shortsellers — held that the company did not in fact have a legally enforceable agreement to acquire the interest in the Philippine company.

Ian Rozier, a director of Chase, said the rumor was completely untrue and the company has obtained two legal opinions supporting the existence of a binding agreement. More importantly, Rozier said none of the parties to the option deal are in disagreement.

He said the company is now concentrating on bringing the property to final feasibility which will include further drilling to prove up the preliminary reserve estimate of about 400 million tons grading 0.01 oz. gold per ton and 0.3% copper.

The Taysan deposit was discovered in the mid-1970s and consultants Pincock Allen and Holt calculated a proven minable reserve on the deposit in 1981 from over 88,000 ft. of drilling.

Development of the deposit was subsequently held up by low metal prices and financial difficulties with the Philippine company.

At a cutoff grade of 0.2% copper, proven minable reserves were estimated at 154 million tons grading 0.011 oz. and 0.38% copper with a strip ratio of 1.2-to-1.

At a cutoff grade of 0.3% copper, proven minable reserves drop to 97 million tons grading 0.42% copper and 0.011 oz. with a strip ratio of 2.5-to-1.

The deposit has an oxide cap which, at the time of the reserve calculations, was viewed as waste material. Pincock calculated proven oxide reserves at 11 million tons grading 0.03 oz. This reserve is contained in a larger reserve of 23 million tons grading 0.016 oz. which Chase believes may be economically heap leachable.

Rozier noted the oxide cap has a very well defined horizon and does not extend into the sulphide material below. This is important since the presence of oxide material in sulphide ore can seriously harm recoveries. Metallurgical work prior to 1981 indicates recoveries for sulphide material will be more than 80% for both gold and copper.

Chase has been comparing the Taysan deposit to the Mount Milligan deposit in British Columbia which Placer Dome recently purchased for a total of about $250 million.

Mount Milligan has preliminary reserves of about 440 million tons grading 0.014 oz. plus 0.2% copper with an average stripping ratio of about 1.2-to-1.

A comparison indicates the two deposits are similar in scope with Taysan having some notable advantages. Power is within 2.5 miles of Taysan and the deep water port at Batangas City is less than 10 miles away.

This compares with Mount Milligan which is more than 30 miles from power and rail, and more than 500 miles from the port in Prince Rupert where concentrates would likely be shipped.

However, the Taysan’s location in the Philippines is viewed by many as a major disadvantage because the country is perceived as having an unstable political environment.

Chase plays down this factor. Instead, it makes note of the country’s active mining industry and its new investment policies and tax incentives aimed at attracting foreign investment.

Rozier said a few majors have already shown an interest in the project but the company plans to develop the property further before considering any deals.

The company’s next step is to begin a drilling program to prove up the preliminary reserve estimate which will be followed by a detailed feasibility study. A private placement is now being negotiated to fund the drilling program.

Chase has about 4.6 million shares outstanding, including the shares to be issued in return for the option.