Analyst Urges Caution After Aquiline Decision
By Peter Caulfield and Jon A. Nones
18 Jul 2006 at 04:15 PM EDT
VANCOUVER (ResourceInvestor.com) -- Aquiline Resources [TSX:AQI] may have won the case against IMA Exploration [AMEX:IMR; TSXv:IMR] for ownership of Navidad in Argentina, but this story is far from over, according to Alex Turkeltaub, managing director of the Frontier Strategy Group.
Turkeltaub made his remarks to Resource Investor following the decision on 14 July 2006 in British Columbia Supreme Court to award the silver- and lead-rich Navidad deposit property to Aquiline, seemingly ending a dispute with IMA Exploration that began in March 2004.
?While the decision is obviously highly beneficial to AQI and has resulted in a large boost to the stock price, the long-term value of the company depends not on this decision but on its success in either selling or developing the Navidad deposit in Argentina,? said Turkeltaub.
Turkeltaub noted that while the deposit appears to be quite valuable (IMA has defined an indicated resource of 305.7 million ounces of silver and 2.9 billion pounds of lead), there are large number of above-ground risks in Argentina and Latin America with respect to permitting, anti-mining attitudes, community issues and others.
Investors ?will have to look carefully at how the company handles these,? he added.
Assuming the decision is upheld on appeal, this certainly causes a lot of problems for IMA, according to Turkeltaub.
?Even if the company pursues other ventures, investors will be sceptical of its management team and capital markets are likely to place their bets on other companies. With so many juniors out there looking at interesting properties, investors are not constrained in terms of options,? he added.
The Ruling
The decision, by Madam Justice Marvyn Koenigsberg, came after seven months of deliberation.
In the trial, Aquiline?s lawyers argued that Navidad was discovered largely due to regional data (?BLEG A? data) that IMA acquired when it was conducting due diligence on the Calcatreu property that was then being offered for sale by Newmont [NYSE:NEM].
After IMA decided not to purchase Calcatreu, Aquiline bought it. A little while later, Aquiline found out that IMA had staked the nearby Navidad property.
Aquiline sought a constructive trust over the Navidad claims or compensation of some amount.
IMA, in its defense, said there were no lawful restrictions on the use of the data in question.
In her written judgment, Madam Justice Koenigsberg held that all information provided by Newmont's personnel was covered by the confidentiality agreement and that, accordingly, IMA's geologists were not permitted to make use of the information in directing their exploration activities.
Madam Justice Koenigsberg took IMA management to task for the way in which it treated the confidential information. In her judgment, she wrote:
?The plaintiff [Aquiline] has urged the court to find that the conduct of the defendants was dishonest. There is no question that senior management of IMA ? after Mr. Lhotka [IMA contract geologist Paul Lhotka] made what I find to be essentially an honest mistake in deciding he could open the BLEG A data ? was far from honestly mistaken about the use that could be made of the data. Mr. Patterson [IMA exploration manager Keith Patterson] should have known that Mr. Lhotka?s query about the use of confidential information required a response. He made no response.
?Once the ?discovery? was made using the BLEG A data, I find that IMA?s corporate management engaged in providing misinformation regarding how the discovery was made. This misinformation, if not deliberate lies, was at least willful blindness to the truth. Nevertheless, there is no basis for any finding that the conduct of IMA was vicious and no need to make such a finding before imposing a constructive trust.?
IMA president and CEO Joseph Grosso told Resource Investor the judge?s written remarks showed that she is ?not conversant? with how mining discoveries are made.
?The BLEG A data was only one of many elements that led to the Navidad discovery,? Grosso said.
Grosso said IMA intends to appeal the decision although he didn?t indicate when the appeal will be filed.
?I?m terribly disappointed, shocked, crushed,? he said. ?This was a misjustice [sic], the facts of the case were not addressed.?
In a press release on Monday, IMA reaffirmed its intent to appeal this judgment, claiming ?the trial judge's interpretation of the confidentiality agreement in question is contrary to the terms of the agreement itself, industry practice and understanding and the facts made known at trial.?
According to the release, the company will ask the Court of Appeal that the judgment be set aside in its entirety.
Unlike Grosso, Aquiline president and CEO Marc Henderson is delighted with the decision. Henderson told Resource Investor his company had ?a wee celebration? when the judgment was announced but that he was also relieved.
?Obviously, [the judgment is] unequivocally bullish for Aquiline,? Henderson said. ?After some initial selling - probably by IMA hedgers unwinding positions - we should start to find out how the market will really value this great asset now there is clarity on ownership.?
Henderson credited his lawyers with winning the case.
?We had the legal A Team and they did everything well, including the way they let the evidence unfold. As they say, a lot of cases are won in discovery and this certainly qualifies on that score. If you read the judgment, that is where they ultimately got caught. The real ?gotcha? was Lhotka admitting he got the data for due diligence purposes. That ties it to the contract and to Relating to the Project clause.?
Henderson said he liked the judgment ?because common sense says you not should be able to end-run Newmont's global confidentiality agreement on a technicality.?
Implications
According to Turkeltaub, due diligence is too often focused entirely on whether the prospective property has geological potential and on the broad political risks in the geography where the company in question operates, and not on the structure of agreements and their potential consequences.
?I think the single most important lesson for investors with respect to the dispute between AQI and IMA is that it pays to do extensive diligence on the nature and enforcement of various agreements juniors have signed with other companies,? said Turkeltaub.
Turkeltaub added that investors are starting to realize this, and we will start to see ?a bit more legal due diligence done by the mining companies themselves with respect to confidentiality and other agreements with juniors.?
?Most majors already do extensive vetting internally - they have large legal departments and sophisticated outside counsel. Smaller companies will start doing so as well, at least in the near-term,? he concluded.
Share Price Activity
Although shares in AQI have lost 5% today, the company?s stock nearly doubled yesterday, jumping C$2.62 to C$5.11 in trading of more than three million shares on TSX. IMR stock, on the other hand, plummeted 80%, or $2.43, to 60 cents on AMEX.
Back in March 2004, when Aquiline originally launched the suit, its shares were trading in the C$1.20 range. AQI stock fell a low of 69 cents shortly thereafter in May, and traded under a dollar until October. In January, no doubt with help from the soaring silver price, the AQI broke C$2 and never looked back, hitting a high of $4.50 on May 1 shortly after the release of positive drill results from its New Calcatreu gold-silver project.
Yesterday, shares hit a new 52-week high of C$6.40 before falling back a bit. Therefore, AQI has seen its share price jump by almost 550% since the beginning of the trial, now trading up about 400% from March 2004.
When IMA announced the lawsuit on March 8, its shares immediately dropped from $2.14 to $1.95 on AMEX. However, later in March the company?s stock hit highs of $2.70 in conjunction with the results from the first drill holes between Navidad and Galena Hills. The share price stumbled a bit throughout the year, but closed above $3 in October and $4 in November.
IMR stock traded mostly in the mid-$2 range for the 2005, and averaging around $3 in 2006. The company has never traded at today?s lows on AMEX since listing in mid-2003. The company hasn?t seen corresponding lows on TSX-V since January 2003.
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