Cliffs buys into KWG on ‘Ring of Fire’ chrome discovery

Coking coal and iron ore heavyweight Cliffs Natural Resources (CLF-N) is investing US$3.5 million in a private placement for a 19.9% stake in KWG Resources (KWG-V) to gain a foothold in what may prove to be a sizable chromite discovery.

Initially, Cliffs will pay about US$2.6 million for a 14.9% equity stake and about US$900,000 for a convertible debenture. The debenture can then be converted into a further 5% stake in KWG, subject to a vote by KWG shareholders. If the debenture is converted, Cliffs will own 19.9% of KWG. Cliffs is paying about US4.9¢ per KWG share. Prior to the deal, KWG had 288 million shares outstanding.

KWG also has 110 million warrants and options outstanding, and Cliffs has an option to buy one share at about US4.9¢ for every four shares issued as a result of the exercise of warrants or options. The deal is slated to close on March 15, subject to due diligence by Cliffs.

KWG’s early-stage exploration project, named Big Daddy, is in the “Ring of Fire” near McFauld’s Lake in the James Bay lowlands of northern Ontario. The area has attracted considerable attention since the Eagle One high-grade nickel discovery by Noront (NOT-V).

The claims holding chromitite mineralization cover about 2.5 sq. km. Freewest Resources (FWR-V) owns 50% of the Big Daddy project, while KWG and Spider Resources (SPQ-V) own 25% each. KWG and Spider have an option to increase their combined stake to 60% from 50% by completing a feasibility study within 18 months. They also have an option to increase their combined stake by another 5% by arranging financing for the project. However, given the early-stage nature of the exploration, it is hard to see how the two companies could meet such a tight deadline.

After a 19-hole drill program, the joint-venture partners have traced the mineralized zone along a 400 metre strike, but a geophysics survey suggests the potential for a 2 km strike. The chromitite mineralization at Big Daddy forms a layered body that dips steeply to the northwest. The deposit remains open in all directions.

“While everybody was focused on nickel, KWG Resources, Spider Resources and Freewest Resources were drilling off early holes that discovered very wide intersections of chrome with PGMs (platinum group metals),” says Frank Smeenk, KWG’s president and CEO. “Initially there wasn’t much of a reaction. We didn’t (realize) that chrome might be economic. We were more concerned with the PGMs.”

“But recently KWG commissioned some studies, and as those studies were being completed, additional drilling was occurring. From the studies we have learned that the chemistry of this deposit is ideal for the manufacture of ferrochrome,” he says.

Ferrochrome is a principal ingredient in stainless steel production. Steelmakers source most ferrochrome from South Africa, the world’s largest supplier.

“This is very reminiscent of 1991 when there wasn’t anybody in the western hemisphere who knew anything about diamonds. And then (Charles) Fipke made a discovery and we all had to go up a very steep learning curve. Now the same thing is occurring with the earth scientists and the investing community about chrome,” Smeenk says.

He says that the mineralization here is an ultramafic intrusion, probably a sill or a gabbro, while the Bushveld deposit in South Africa is a reef, which is only a few centimeters thick where the chrome occurs. In the Bushveld, chrome is a byproduct of PGM mining.

Acknowledging that the exploration is at an early stage, and that it would be premature to draw conclusions as to the size of the resource, Smeenk nevertheless says that it shows considerable potential. Big Daddy itself may have up to a 2 km strike length, but the mineralization continues into two adjacent projects controlled by Freewest and Noront. With the limited drilling completed so far, the grade and width of the mineralization seem fairly consistent.

“Here we have a primary chromitite deposit which is very high grade, 40% or more chrome, and (with) very thick widths,” he says. “This could be the biggest deposit of its kind on the globe.”

Smeenk says that the in-situ value of a pittable resource of this magnitude could be in the many billions of dollars. If proven, such a large deposit may have the potential to supply the entire North American market.

He believes that Cliffs is the perfect partner, since it is the principal supplier to the North American steelmaking industry. “In that context they thought that if there was ever an opportunity to get a source of chrome, they should seize it.”

“It is not appreciated how big the Ring of Fire is,” Smeenk says. “In the greenstone belt that constitutes the Ring of Fire there is enough room to have everything that we find in the Abitibi greenstone belt. It is very significant.”

On Big Daddy, the chromitite mineralization is shallow, often starting near surface, and no deeper than a few tens of metres. The vertical thickness of the mineralization is not known yet. PGM grades are inconsistent, but can reach a combined (platinum + palladium) 2 grams per tonne or more in places.

The three joint-venture partners highlight a number of assays. Hole 22 cut 35 metres grading 42% Cr2O3 (equivalent to 29% chrome), and 16% iron from 264 metres depth, with combined PGMs of 0.4 gram per tonne. The hole also intersected mineralization in two other sections totaling 74 metres, mostly starting at a 192 metres depth, with lower grades of chrome.

Hole 23 hit 42 metres grading 35% Cr2O3 (equivalent to 24% chrome), and 14% iron from 334 metres below surface, with combined PGMs of 0.3 gram. Another intersection measured 4 metres starting at a 378 metres depth, and grading 41% Cr2O3 (equivalent to 28% chrome), 17% iron and combined PGMs of 2.7 grams per tonne. Another intersection, measuring 71 metres and starting at a 263 metres depth, had lower chrome grades.

Hole 15 hit 93 metres grading 12.2% Cr2O3 (equivalent to 8.3% chrome), and 10.6% iron with combined PGMs of 0.3 gram from 81 metres depth. This intersection contained a higher-grade 12-metre layer of 32% Cr2O3 (equivalent to 22% chrome), and 19% iron, starting at a depth of 159 metres.

And hole 18 returned 25% Cr2O3 (equivalent to 17% chrome), 13% iron and combined PGMs of 0.2 gram over 71 metres, starting 68 metres downhole. This intercept contained a richer 32-metre layer of 37% Cr2O3 (equivalent to 26% chrome) and 16% iron starting at a depth of 106 metres.

For 2009 the Big Daddy partners have planned to complete ground geophysical surveys, relogging of historical core, infill sampling, and a technical report on the property. The group would also like to complete more diamond drilling, but the joint venture committee has not yet approved these plans. The project is subject to a 2% net smelter return (NSR) royalty, half of which can be bought for $1 million.

Freewest itself controls another chromite project, the Black Thor property, 4 km to the northeast. And Noront’s Blackbird chromite project is 5 km to the southwest. The three chromite projects lie along a 12-14 km-long northeast-southwest structural trend and all sit within the same peridotite body. While all of the projects still require much more drilling, results to date indicate that together, they form one of the most significant chromite discoveries ever made in North America.

Turning to Noront’s Blackbird project at the southwest end of the corridor, the company has just released results from 20 drill holes, several of which returned widespread chromite mineralization.

Hole 74 cut 36 metres grading 39% Cr2O3 (equivalent to 27% chrome), and 12% iron starting 640 metres downhole. Hole 64 returned 44% Cr2O3 (equivalent to 30% chrome), and 15% iron over 17 metres, from 510 metres depth. A 24-metre intercept from 502 metres down hole 61 graded 36% Cr2O3 (equivalent to 24% chrome), and 12% iron. And a 10-metre section of hole 59 returned 37% Cr2O3 (equivalent to 25% chrome), and 17% iron from 273 metres depth.

The chromite zones at Blackbird comprise massive chromite of varying thickness layered within the peridotite sill. The chromitite layers dip steeply to the west, paralleling the contact between the peridotite sill and the adjacent granodiorite.

Noront’s exploration at Blackbird has traced the layered chromitite body along a 1 km strike and to a 500-metre vertical depth, with wide but variable core widths. The body remains open to depth and along strike in both directions.

Noront’s exploration team is currently on site at the main base camp near the Eagle One project. Chromitite exploration at Blackbird is one of the foci of the upcoming season, and Noront is also planning to fly an airborne gravity survey. In November and December Noront raised $18.9 million in flow-through financing.

And, finally, Freewest is also exploring the nearby Black Thor chromite zone. Its results there fall in line with those reported above, such as 110 metres grading 21% Cr2O3 from 226 metres down hole 3, and 92 metres grading 21% Cr2O3 from 386 metres down hole 5.

Freewest has traced the chromite zone at Black Thor over an intermittent 1.7 km strike length, with an average true width of 60 metres. It remains open in all directions. The company plans to probe the zone and its extensions with two drill rigs in 2009.

McFauld’s Lake is remote. The distance to the nearest railroad at Nakina, Ont., is 230 km. There is no electric power line in the area.

It will be intriguing to see whether Cliffs decides to buy even more of the prospect. If so, the company may try to increase its KWG stake, or buy stakes in Spider, Freewest or Noront. A call seeking comment from Steve Baisden, Cliffs’ director of investor relations and corporate communications, was not returned at presstime.

Another North American chromite deposit is the Stillwater project near Nye, Montana, explored by Nevoro (NVR-T). The project, which includes the past-producing Benbow mine (leased by Nevoro), has a historic resource estimate of 50 million short tons grading an average of 22% Cr2O3, equivalent to 22 billion lbs. Cr2O3. According to Nevoro, this is the largest chromite resource in the western hemisphere and the seventh largest in the world (T.N.M Aug. 25-31/08).

According to metal market information service Platts, recent U.S. ferrochrome prices were in the US64-72¢ per lb. range for ferrochrome grading 50-55% chrome. Prices are down sharply from last year. For example, the price of ferrochrome in August was US$2.05 per lb.

The U.S. Geological Survey estimates that world resources of chromite ore are in excess of 11 billion tonnes, sufficient to meet world demand for many centuries. By far, South Africa has the largest chromite reserves and is the largest producer, with a 43% market share in 2005. In 2006, world production was 19 million tonnes chromite.

On Sept. 30 KWG had $2.1 million in working capital. At presstime KWG shares were trading at 3¢. The shares have been trading in a 1-11.5¢ range in a 12-month window.