Rye Patch locks horns with Coeur d’Alene

Shares of Rye Patch Gold (RPM-V) surged 84.4% to close at 71¢ yesterday on news that the junior had scooped lapsed mining claims from a subsidiary of major Coeur d’Alene Mines (CDM-T, CDE-N) in the Rochester mining district of Nevada.

The 400 unpatented claims cover a portion of Coeur d’Alene’s Rochester silver project and Coeur d’Alene has filed a legal complaint arguing that its unpatented claims are valid and that it has a “valid possessory interest in such claims.”

Rye Patch has launched a lawsuit of its own, claiming “relief for quiet title, trespass, slander of title and injunctive relief” and already has its geologists on the ground sampling, mapping and permitting drill targets on the new claims.

Coeur d’Alene estimates that the disputed claims “may involve up to 20% of the Rochester property’s mineral reserves and a substantial amount of the property’s mineralized material.”

“For reasons yet to be explained, Coeur d’Alene failed to pay the annual claim maintenance fee to the Bureau of Land Management by the August 31 2011 deadline,” newsletter writer John Kaiser wrote in a note. “Not only did the claims sit open for a month without Nevada’s packrats noticing, but when Rye Patch’s crew wandered around on the open Rochester ground staking claims, nobody seemed to take notice.”

“Presumably Coeur d’Alene will plead that it is unfair that shareholders should be punished for the failure of its title division to make payments every other Nevada mineral rights owner loses sleep about making every year,” Kaiser continues. “Bottom fishers should hang on for what will be quite a ride.”

Chris Lichtenheldt, a mining analyst at UBS Investment Research, estimates that Rochester accounts for 9.2% of Coeur d’Alene’s net asset value. “Since we currently carry value only for Rochester’s reserves, we view the worst-case impact as roughly -1.8% to NAV (20% x 9.2%) based on today’s information,” Lichtenheldt wrote in a note to clients on Dec. 6. The analyst maintains his buy on Coeur d’Alene with an unchanged 12 month target price on the stock of US$35 per share. (At presstime in New York Coeur d’Alene was trading at US$28.05 per share.)

William Howald, Rye Patch’s president and chief executive, noted in a prepared statement that the process of maintaining unpatented mining claims is “clear and unambiguous” and the effect of the law’s forfeiture provisions is “well-established.”

“Coeur d’Alene Mines failed to pay the annual mining claim maintenance fee on time and the ground became open for mineral location,” he stated. “Rye Patch investors now have under their control mining claims located on additional gold and silver resources and a portion of the lands formerly part of an active mine.”

Kaiser offers several scenarios that could unfold in the coming weeks, including an offer from Coeur d’Alene to buy Rye Patch’s Oreana Trend properties like Lincoln Hill and the recently staked claims covering part of Rochester’s project, and or trying to “hang the blame” on the Bureau of Land Management.

“But most likely Coeur d’Alene will try to fend off class action lawsuits alleging gross negligence through legal channels first,” he reasons, “giving the market a better chance to appreciate that Rye Patch needs to trade a lot higher than the current $0.70 price, and giving both sides time to work out a deal that fixes this problem.”

Since 1986, the Rochester mine in northern Nevada has produced more than 125 million ounces of silver and about 1.2 million ounces of gold. In the first nine months of 2011, Rochester produced about 1 million ounces of silver and 4,283 ounces of gold. The company notes on its website that construction of a new leach pad at Rochester will boost total average annual production to more than 2.4 million ounces of silver and 35,000 ounces of gold a year for at least the next eight years.

At presstime Rye Patch was trading at 68¢ within a 52-week trading range of 23¢-75¢. The junior has about 125.6 million shares, fully diluted.