Expatriate inks deal to acquire Kudz Ze Kayah

Junior Expatriate Resources (EXR-V) has a struck a deal with Cominco (CLT-T) to buy certain interests in the Finlayson Lake district of southeastern Yukon, including the Kudz Ze Kayah polymetallic deposit and a smaller, satellite deposit.

The move consolidates the district, combining, under one umbrella, Kudz Ze Kayah and Expatriate’s 60% interest in the higher-grade Wolverine deposit. Expatriate will pay Cominco $11 million, including $1 million on closing, plus a $10-million convertible debenture. The debenture is to be repaid over a 4-year term, with $1 million payable on each of the first, second and third anniversaries, and the balance on the fourth anniversary.

Cominco will also receive an additional $2-million payment at production and retain a sliding-scale net smelter return royalty (NSR) ranging from 1% during the first four years of production to between 2% and 3.5% in the following years, depending on the price of zinc. The major will have the right of first offer to buy concentrate from the project. Expatriate will also grant Cominco a warrant to buy up to 2.5 million of its shares at a price of $1 each; the warrant expires March 1, 2007.

“We see this agreement as way to advance the project and realize value for Cominco,” says Douglas Horswill, that company’s vice-president for environment and corporate affairs. “A consolidation of properties in the area makes sense.”

Expatriate has offered the Finlayson assets for inclusion in the Wolverine joint venture. Atna Resources (ATN-T), which holds a 40% stake in Wolverine, will have 60 days to elect to have them included in the joint venture and assume 40% of acquisition costs and obligations.

Expatriate President Harlan Meade says the acquisition of Kudz Ze Kayah complements the Wolverine project and creates a much larger resource base, enabling high-grade underground ore to be blended with lower-cost, moderate-grade open-pit ore. “When you put these two things together, you get economies-of-scale,” says Meade. “The two deposits are only 25 km apart; their metallurgies are very similar; and it’s a bigger project to amortize the capital over if we’re going to add some secondary treatment on-site, which is the plan.”

Says Atna President Peter DeLancey: “We have 60 days to decide whether we want to participate, and we’re going to be considering our options. I consider it a positive situation for Atna, no matter what. If, for various reasons, we decide not to participate, the camp will advance at no risk to us, and our 40% of Wolverine will be worth a lot more. Our [65%-owned] Wolf deposit would also have greater value.”

The Wolf deposit is 45 km east of Kudz Ze Kayah and hosts an inferred resource of 4.1 million tonnes grading 6.2% zinc, 1.8% lead and 84 grams silver. “Obviously, if we do participate, we’re participating in 40% of a much larger picture,” continues DeLancey, “and, at least for the initial funding, there would be little shareholder dilution.”

Discovered in 1995, the Wolverine deposit hosts a 6.2-million-tonne resource grading 12.7% zinc, 1.6% lead and 1.3% copper, plus 1.76 grams gold and 371 grams silver. The deposit contains high levels of selenium — a contaminant that has stalled development because of concerns about the marketability of the metal concentrates.

Kudz Ze Kayah hosts an indicated resource of 11.3 million tonnes grading 5.9% zinc, 1.5% lead, 0.9% copper, 1.3 grams gold and 133 grams silver. Discovered in 1993, the deposit is a gentle-to-flat-dipping, tabular, massive sulphide body. Mineralogically, it shares many similarities with the Wolverine deposit, including a high selenium content. In its water licence application, Cominco proposed to mine the deposit by open-pit methods at the daily rate of 3,000 tonnes.

Kudz Ze Kayah comes with a water licence in place, as well as access road surface rights and a socioeconomic agreement with Ross River Kaska Dena first nations.

In 1998, Cominco discovered the smaller GP4F deposit, 6 km to the southeast. It consists of two moderately north-dipping massive sulphide lenses and contains an inferred resource of 1.5 million tonnes grading 6.4% zinc, 3.1% lead, 0.1% copper, 2 grams gold and 90 grams silver. The discovery was made by drilling a coincident magnetometer-electromagnetic anomaly.

The mineralization is different from Kudz Ze Kayah and Wolverine in that it appears not to have any selenium and is copper-poor. Also, it appears to be slightly lower in the stratigraphy.

Meade says Expatriate has made significant advances in understanding the metallurgy. Studies indicate that a selenium-free product can be achieved by roasting the zinc concentrate and recovering the sulphur and selenium in the off-gas, leaving a clean zinc-oxide product. Secondly, a bio-leach would be performed on the copper-lead-precious metal concentrate to remove much of the selenium, arsenic and antimony, producing a copper concentrate that is clean and rich in precious metals.

Based on the proposed 3,000-tonne-per-day open-pit mine plan for Kudz Ze Kayah, Expatriate estimates that an underground Wolverine mine could supply an additional 1,250 tonnes of ore per day to support a 13-year mine life. Yearly production would average 106,000 tonnes of zinc concentrate, 14,000 tonnes of copper concentrate and 18,000 tonnes of lead concentrate, plus 32,000 oz. gold and 4.5 million oz. silver.

Boliden (BOL-T) owns 42% of Expatriate, though Meade says Expatriate is not intending to seek the technical expertise of that company. Rather, the company intends to build its own team to develop the Finlayson project. The objective for this year is to complete a prefeasibility study by December. A minimum $2.2-million work program has been proposed, including $1.5 million for exploration and drilling, $300,000 for metallurgical work, $150,000 for environmental assessment work and $250,000 for a prefeasibility-level engineering study.

In addition, Expatriate has budgeted $400,000 for initial drilling on four of its wholly owned properties in the Finlayson district. The acquisition of the Finlayson assets, in effect, gives Expatriate control over 1,700 sq. km is a potentially significant massive sulphide district.

“The three parties found in excess of 20 million tonnes in three short years of exploration,” says Meade. “The finding cost was about $1 per tonne. If we turn on the exploration, I think we will make additional discoveries.”

Expatriate has $2.2 million and intends to raise a further $2 million. In the longer term, the company plans to arrange a $2-million flow-through financing and complete a $10-million equity financing — all aimed at advancing the Finlayson project to final feasibility.