Khan bids for Western Prospector

Khan Resources (KRI-T, KHRIF-O) has made an unsolicited bid for Western Prospector Group (WNP-V, WEPGF-O) to consolidate its position in the Saddle Hills district of Mongolia and to cut costs.

Western Prospector’s Gurvanbulag deposit and Khan Resources’ Dornod project are about 40 km apart in the Saddle Hills-Mardai area of northeastern Mongolia’s Dornod province.

Under the all-share offer, Western Prospector shareholders would receive 0.685 of a Khan Resources share for each Western Prospector share, representing a 34% premium over Western Prospector’s weighted average closing price for the last 20 days prior to the offer.

In Toronto, news of the proposed deal sent Western Prospector’s shares up 24%, or 12 each, to close at 62 on a trading volume of 588,500. Western Prospector’s 52- week trading range is 47.5-$6.

Khan’s shares remained unchanged at 95 apiece with 117,000 shares changing hands. The company has a 52-week trading window of 85-$5.01.

Martin Quick, chief executive of Khan Resources, argues that the acquisition will lead to combined capital cost savings of more than US$100 million because only one mill would have to be built rather than two. The tie-up would also generate operating cost savings of between US$2-4 million due to the consolidation of head office and management and administrative teams.

Eric Bohren, the Vancouverbased president and chief executive of Western Prospector, told The Northern Miner that he was not permitted by his lawyers to comment on the unsolicited bid due to dis closure and compliance protocols.

Khan Resources contests that the offer is good for Western Prospector shareholders as it gives them access to an advanced uranium deposit that can be brought into production quickly. Khan says it can bring its Dornod main deposit into production by late 2011 or early 2012.

For its part, the acquisition would give Khan shareholders greater exploration potential in a vastly underexplored country and make the company more attractive to the Mongolian government as a mid-tier, near-term producer.

“It is a very generous offer,” Quick said in an interview. “We have the premium property, they have a good prospective land package. . . It’s a great deal for both (companies’) shareholders.”

Quick added that for Western Prospector it would also mean tripling its uranium resource to 67 million lbs. U3O8 from 22 million lbs. and more than doubling cash reserves to US$54 million from about US$23 million.

In October, management of both companies met in Ulaanbaatar to discuss government-related issues and the mutual benefits of closer co-operation.

At that time, Western and Khan started to assess the potential economic benefits of infrastructure sharing at the Saddle Hills uranium camp and the viability of shared production infrastructure and support facilities.

“We have had many discussions over the last two years or so with Western Prospector,” Quick says. “I think both companies probably agree that a merger of the two at some point was inevitable and it was just a question really of price. That was something we didn’t agree on.”

Khan Resources’ Dornod is an advanced project that was initially developed by Russian owners between 1988 and 1995. The Russians abandoned it when uranium prices slipped to levels that made the deposit uneconomic. By the time they left, they had invested roughly US$150 million into the project.

Khan has been drilling on the property since November 2006 and substantiated the Russian data with a 20-hole confirmation drill program. The uranium resource was then upgraded to indicated from inferred.

Indicated resources were pegged last year at 25.3 million tonnes grading 0.116% for 64.3 million lbs. U3O8, but a significant portion of the resource has been upgraded to the probable reserves category. Probable reserves stand at 18.2 million tonnes grading 0.122% U3O8 for 49.1 million lbs. U3O8.

The Dornod project consists of four mineral deposits. Of those, the most advanced are the No 2 and No 7 deposits. The No. 2 deposit was previously mined as an open-pit operation, while the larger No. 7 deposit was partially developed for underground exploration.

Khan Resources has a 58% joint-venture interest in the No. 2 deposit and a majority interest in the No. 7 deposit. That gives the Toronto- based exploration and development company an overall interest of 69% in the deposits. Western Prospector owns 100% of the Gurvanbulag uranium deposit.

A prefeasibility study of the Dornod project assumed a uranium price of US$55 per lb. U3O8 and a throughput of 3,500 tonnes per day over a 15.5-year mine life.

Completed last year, the study indicated an average annual production rate of 2.9 million lbs. U3O8 at a cost of US$19.99 per lb. U3O8, or US$49.21 per tonne of ore. That would give the project an internal rate of return of 37.1% and a net present value of US$288 million, using a 10% discount rate.

In November, Khan launched a definitive feasibility study that should be completed this fall.

As for Western Prospector, it launched a feasibility study for its Gurvanbulag deposit in February. That study should be completed by the third quarter of this year.

The Gurvanbulag central deposit is one of seven within Western Prospector’s Saddle Hills project and was previously reported to host a historic Russian C1 resource.

SRK modelled the Gurvanbulag central deposit from 1,598 drill holes, of which 692 were drilled from underground. SRK then provided a National Instrument 43-101 preliminary resource report.

Using a 0.07% U3O8 cutoff grade, SRK confirmed an indicated resource of 2.83 million tonnes grading 0.22% U3O8 containing 13.6 million lbs. U3O8 and an additional inferred resource of 2.67 million tonnes grading 0.15% U3O8 containing 8.6 million lbs.

Khan says its share price is undervalued and that investor confidence in Mongolia was deeply affected when the government slapped a windfall profits tax on copper and gold producers in 2006. It has yet to conclude an investment agreement on Dornod with the Mongolian government, which would give it certainty on tax rates to be paid for a negotiated number of years and security of tenure.