UPDATE: Cardero sells Pampa de Pongo for half price

Vancouver – With a bleak outlook for iron ore markets Cardero Resource (CDU-T, CDY-X) president and CEO Henk van Alphen announced in a prepared statement that it would accept half as much – US$100 million – for its Pampa de Pongo iron ore property in Peru from Nanjianzhou Group.

In essence saying it is better to deal with the devil you know than you don’t know, he told shareholders that “given the long term projections of the global iron ore markets” taking US$100 million now was in the company’s best interest rather than “waiting an indeterminate amount of time for commodity prices to improve and hope to sell for (a) higher price in the future.”

He noted the deal provides near term capital to fund new and strategic opportunities whereas advancing Pampa de Pongo on its own would require “massive dilution” in a “challenging market” and that even then Cardero might not get a better price.

In a strong sign that this time Nanjianzhou intends to stick by the new price, Cardero has received US$10 million and a promise that within 90 days Nanjianzhou will show an irrevocable letter of guarantee from a senior Chinese bank backing up the balance of the payment, or US$88 million. Nanjianzhou had previously paid US$2 million.

The US$88 million is due on Dec. 17 or within ten days of the Chinese government’s approval of the transaction, whichever comes first.

The new sale agreement also once again sets off Rio Tinto‘s (RTP-N) 45-day right of first offer. Rio passed on Pampa de Pongo at US$200 million.

The original agreement fell apart suddenly after Nanjianzhou missed a US$10 million payment, under the previous sale terms, May 17 and then informed Cardero that it was no longer willing to pay US$200 million for the project.

As news of the demand hammered Cardero’s share price which fell 32¢ to close at $1.02, a disappointed van Alphen told The Northern Miner that “you hope you’re not the guy in that story.”

According to Cardero, Nanjinzhao cited tight credit markets for being unable to muster necessary funds to meet the sale price.

The Oct. 24, 2008, agreement, initially had Nanjinzhao making two payments to Cardero: US$10 million was due Mar. 17, 2008, and US$190 million, Sept. 17, 2009.

Payment appeared to be on track, and in fact ahead of schedule, as recently as Feb. 11 when Nanjinzhao made a US$2-million advance payment in return for being allowed to start geotechnical drilling even before Cardero transferred ownership of the project to it.

But then on Mar. 18 Nanjinzhao requested an extension of the US$10 million payment.

Nanjinzhao chairman Duan Lianwen said in a Cardero press release that while the company was “fully committed to completing the purchase” of Pampa de Pongo, it needed the extension while it waited for approval of the Chinese central government.

At the time Nanjinzhao reported it had received approval from city, district and provincial governments. Cardero agreed with the request and gave Nanjinzhao until May 17 to make the US$10 million payment.

Once Nanjianzhao’s refused to make the US$10 million payment and demanded a lower price for Pampa de Pongo, however, Cardero found itself in a tough situation: The seller of an iron-ore project in a depressed iron-ore market with few buyers and therefore no competition for its project.

Nanjianzhou had “become much more aware, if you look at what’s been happening in the iron-ore business, of the fact that iron-ore prices are much more under pressure,” van Alphen said.

He also said negotiations with Nanjianzhao would be quick and were not a long term negotiating ploy on the Chinese company’s part. “Basically everybody knows where everybody is standing,” he said. “Now it is a matter of the final arm twisting.”

With a new agreement in hand, and US$10 million in the bank, Cardero’s share price got a significant boost, climbing 26¢ to close at $1.27.

As outlined in a scoping study Pampa de Pongo, 38 km away from San Juan, Peru, is to annually produce 15 million tonnes of iron ore pellets over a 24-year mine life from an inferred mineral resource of 863 million tonnes grading 41.3% iron, 0.07 gram gold per tonne and 0.1% copper.