Mt. Milligan focus of lawsuit betweeen PB and Continental

BP Resources has already filed a writ and statement of claim in the Supreme Court of British Columbia against Continental Gold for breach of contract.

The company said the breach arose as a result of the transfer of the interest in Lincoln Resources in certain mineral claims in the Mt. Milligan area to a numbered company which has since changed its name to Continental Gold.

Continental’s amalgamation with United Lincoln, its 69%-owned subsidiary, took place in March. The key asset of the resulting company is a 70% interest in a porphyry gold- copper deposit that is currently estimated to contain a probable reserve of 200 million tons grading 0.3% copper and 0.02 oz gold per ton. BP Resources has a 30% interest.

Continental is about 40% through an infill drill program to prove up the main Mt. Milligan deposit. However, ongoing exploration has resulted in the recent discovery of three new deposits. On the basis of wide-spaced drilling, Continental estimates these new deposits contain a mineral inventory of an additional 100 million tons of similar grade material.

Having advanced the project to this stage, officials of Continental reacted immediately to BP’s notice of legal action.

According to Continental, BP’s allegation is that a “simple corporate procedural step” which was part of its amalgamation with subsidiary United Lincoln “somehow gave rise to a first right of refusal in favor of BP to acquire an additional interest in the Mt. Milligan property.”

After conferring with legal advisers, Robert Hunter, chairman of Continental, said BP’s position is “wholly without merit on the basis that it is clearly contrary to the intent of the agreement and relies on taking a word out of context within the agreement and unreasonably applying it to the procedural step.”

Hunter said BP was supplied with all documentation relating to the amalgamation six weeks before it took place. During this period, and for six months afterward, Hunter said BP raised no objections and continued to act in accordance with the joint venture terms before raising a complaint.

He also stated that the “complaint of procedure” did not in any way “reduce or adversely affect” BP’s continuing rights under the agreement. But BP is insisting that the contract between it and Lincoln Resources “prohibite d sales, transfers and other dispositions by a party without the consent of the other party and without giving the other party the right of first refusal.”

The company claims the transfer was made “in complete disregard for its rights, without its consent, and that the transfer gave rise to the right of first refusal.”

In recent months Continental has made no secret of its intent to sell its stake in the project through the sale of its shares, rather than by selling its interest in the property directly.

Earlier this year Rio Algom (TSE) acquired an 8.6% toehold equity interest in Continental from open market purchases and by acquiring shares held by Homestake Mining. Rio Algom already has one representative on Continental’s board and it can acquire an additional 8% of future share issuances.

In a Sept 18, 1989, research report on Continental Gold, G.T. Komlos of ScotiaMcLeod wrote: “The company is considered to be an attractive takeover candidate for several mining companies.”

The report said a reasonable takeout value would be “in the range of $12-16 (per share) and possibly higher depending upon the results of future drilling activity.”

Continental has 8.2 million fully diluted shares outstanding and is currently trading at about $10 in a 52-week range of $3.65-11.

An earlier report by Scotia- McLeod dated August 22 mentioned a number of possible contenders aside from Rio Algom; notably Noranda with its large, nearby Bell mine closing down operations in 1992. Cash-rich Placer Dome was also mentioned because of its presence in British Columbia and its expertise in large-scale mining operations.

But because Continental directors collectively hold a 40% fully diluted control position, they are in the driver’s seat with respect to negotiating a deal for shareholders.

According to Hunter, the BP position caused a major Canadian mining company to suspend discussions with senior officers of Continental “relating to a proposed offer for all the outstanding shares at a substantial premium over current market price.”

Hunter said a multimillion dollar counter-suit would be prepared “in the event that BP’s actions cause damage to the company’s shareholders.”

Despite the legal problems looming on its corporate horizon, Continental is continuing what must rank as the largest development project currently under way in Canada.

The company has six drill rigs on the Mt. Milligan property turning out 35,000 ft of core a month; a sizeable contract for Vancouver- based Quest Canada Drilling. So far, 300 holes have been drilled for a total of 210,000 ft.

The main Mt. Milligan deposit was drilled on 100-m centres and is being infill drilled on 50-m centres. The open-pittable deposit is estimated to be 4,500 ft long, 3,500 ft wide and 600-800 ft thick. Based on the geometry of the deposit, Continental expects the overall strip ratio will be about 1:1.

Continental’s engineering work is currently modelled on a 50,000- ton-per-day mining scenario that would require capital costs in the order of $300 million. Environmental and socio-economic studies to support permitting requirements are already in progress.

The company anticipates better than average recoveries because of the simple metallurgy and the presence of free gold in the deposit. Gold recoveries are estimated to be 80% for gold and 90% for copper.

If Continental’s prefeasibility projections on mineable tonnage, grade and recoveries hold up, a potential buyer would be acquiring a deposit with sufficient reserves to produce about 290,000 oz gold and 98 million lb copper annually for at least 11 years of mine life.

“The potential here is for a Bougainville-size deposit,” said Continental President Robert Dickinson, who also stressed the property’s moderate topography and favorable logistics.

To ensure rapid payback, Continental is also working to prove up a “starter pit” of some 35 million tonnes grading 0.35% copper and 0.027 oz gold per ton in the centre of the deposit where a higher grade gold zone and a higher grade copper zone converge.

The company also has several drill rigs systematically working to outline three new deposits that were recently discovered to the south and west of the main Mt. Milligan deposit; Southern Star, Atlas and Goldmark.

Dickinson also noted that numerous other exploration projects remain to be tested in other areas of the 42-sq-mi property, including seven gold-bearing veins that radiate from the main Mt. Milligan deposit.

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