Khan Resources bids for Western Prospector

Khan Resources (KRI-T) is making an unsolicited bid for Western Prospector Group (WNP-V) to consolidate its position in the Saddle Hills district of Mongolia and cut costs.

Western Prospector’s Gurvanbulag deposit and Khan Resources’ Dornod deposit 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.

In Toronto, news of the proposed deal sent Western Prospector’s shares up 24% or 12 apiece to close at 62 on a trading volume of 588,485. Shares of Khan Resources remained unchanged at 95 per share with 117,080 shares changing hands.

Martin Quick, chief executive of Khan Resources, argues that the acquisition will lead to combined capital cost savings of more than US$100 million, due to the construction of one mill rather than two separate mills. It 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 Vancouver-based president and chief executive of Western Prospector, told The Northern Miner at press-time that he was not permitted by his lawyers to comment on the unsolicited bid due to disclosure and compliance protocols.

Khan Resources, however, 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 Resources says it can bring its its Dornod main deposit into production by late 2011 or early 2012.

For its part, the acquisition would give shareholders of Khan Resources 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 packageIt’s a great deal for both shareholders.”

Quick noted that for Western Prospector it would also mean moving from a uranium resource of 22 million lbs uranium oxide to 67 million lbs and from cash reserves of about US$23 million to US$54 million.

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

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 said. “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’ main Dornod deposit 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 rendered the project 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 confirmed the Russian data with a 20-hole confirmation drill program. The uranium resource was then upgraded from inferred to indicated.

The indicated mineral resource is currently calculated at 25.3 million tonnes at an average grade of 0.116% for 64.3 million lbs uranium oxide, of which a significant portion lies in the probable category. The probable mineral reserve is 18.2 million tonnes at an average grade of 0.122% U3O8 for 49.1 million lbs uranium oxide.

Khan has a 58% joint-venture interest in the Number 2 deposit, 58% of a two-thirds interest in the Number 7 deposit, and a 100% interest in the remaining third. That gives Khan an overall interest of 69% in the deposits. Western Prospector owns 100% of the Gurvanbulag uranium deposit.

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

The study indicated an average annual production rate of 2.9 million lbs uranium oxide at a cost of US$19.99 per lb uranium oxide, 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, the Toronto-based exploration and development company launched a definitive feasibility study that is anticipated to 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 deposits within Western Prospector’s Saddle Hills project and was previously reported to host a historic Russian C1 resource.

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

Utilizing a 0.07% uranium oxide cut-off grade, SRK confirmed an indicated resource of 2.83 million tonnes grading 0.22% uranium oxide containing 13.6 million lbs uranium oxide and an additional inferred resource of 2.67 million tonnes grading 0.15% uranium oxide containing 8.6 million lbs.

Khan Resources says its share price is undervalued and that investor confidence in Mongolia was deeply undermined when the government slapped a windfall profits tax on copper and gold producers in 2006.

Khan Resources 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.

Mongolia won its independence from China in 1921 with support from the former Soviet Union. After many decades of communist rule, Mongolia established its first democratic government in 1991.

Uranium prices have moved from a low of US$7 per lb in 2001 to about US$65 per lb today.