got lucky - got the whole darn thing from HRA - read and buy - both CHL + HRA - this stock and this project have been a no brainer for some time - still is cheap to what should be a final takeout offer. CHL does not want to be a producer - they have just set up the whole deal so that a buyer can come in and say thanks - here's the cheque!
We originally reviewed Champion due to its precious metals projects in Central and South America. Champion's focus,
and ours, changed in 1997 when CHL acquired a two year option to undertake reconnaissance work in the small West
African country of Guinea-Bissau. Aside from the sheer novelty of having an option agreement on an entire country,
CHL's agreement gave them access to historical records on exploration work done by third parties, mainly European
government and aid agencies. Review of this database lead Champion to focus on the Fairm phosphate deposit, which
had been partially defined by the French government agency Bureau des Reserche Geologiques et Minieres (BRGM).
>Champion has just begun this year's program, which should culminate in technical sign-off for the project to finalize
approval of a loan large enough to put Farim into production. There may not be a string of "exciting" news releases from
Champion, but the Farim project looks robust enough to support a share price several times higher than the current
trading range. Champion has been one of our most consistent buy recommendations in the newsletter in that past year for
just this reason. The stock has moved up recently but still remains a good buy on the fundamentals.
Champion received a favorable response from the market when it announced the Guinea-Bissau option in 1997. The
stock recovered to previous trading levels but the price faded through late 1997 and 1998 due to a lack of news and
political turmoil in Guinea-Bissau that made it impossible for CHL to further advance the Farim project until recently.
Guinea-Bissau recently returned to a state approaching political normalcy. A military coup, aided by neighboring Senegal
and Sierra Leone, deposed the corrupt government of president Viera who has been offered asylum by Portugal. A
number of highly educated, pro-democracy figures have been elevated to positions of power and new elections are slated
for later this year. All this is backed by the head of Guinea-Bissau's armed forces who, unusually for Africa, appears to
be both incorruptible and completely disinterested in gaining political power for himself.
Political problems held up progress in Guinea-Bissau for a year but appear to have left the country with a less corrupt and
more competent leadership that has better acceptance by both the local population and foreign investors. CHL has seen
evidence for this increased comfort by its rapid arrangement and completion of a private placement of 3 million unit (1
share + ½ wt.) at $0.50 soon after management met with the new government. A more recent placement of 300,000
shares at $0.70 has underlined the change in attitude.
Champion will begin a drill program in June that will include in-fill holes to bring parts of the current resource up to reserve
status. This program will also include some testing of areas where phosphate was encountered in last year's drill program
where CHL believes the deposit may have a lower strip ratio.
Champion signed its original two-year exploration agreement in March of 1997. When the political situation worsened last
year the company declared force majeur to put the agreement on hold. When drilling starts this month the
agreement will revert to its previous status. Champion will then have nine months to complete its reconnaissance and
select areas of interest to be held as renewable Exploration Concessions. The company has already received an
Exploration Concession for the area surrounding the Farim deposit that can, at Champion's sole option, be converted into
a Mining Lease in August 1999. Champion's concession gives it a 100% interest in the project with no retained interest or
royalties payable to the government.
Phosphate was noted in the Farim area in the 1950s and ‘60s when it was intersected in drill holes in the area during
geotechnical and oil & gas drilling programs. The UN Development Program drill tested the phosphate in the 1970's,
but the bulk of the past work was carried out by French agencies BRGM and Sofremines in the early 1980's. The
BRGM drilled 5,600 meters in 102 holes that identified a large, near surface phosphate resource. Sofremines conducted a
pre-feasibility study in 1986. The results of the study were positive but market and political conditions precluded
immediate development so they were never followed-up on. Sofrimines calculated a reserve of 105 million tonnes at a
grade of 29.8% phosphate. This is found within a geologic resource of some 350 million tonnes.
Phosphate is a sedimentary rock that is formed of the solids deposited by the evaporation of phosphorous rich brine in
shallow saltwater basins. It is an "evaporite", the class of rocks/deposits including rock salt, potash, and gypsum. The
Farim deposit, as well as large phosphate deposits in Senegal and Morocco (which is a major phosphate producer) are all
found in a sequence of Tertiary aged sediments that were laid down in a large basin that covered most of western Africa
50 million years ago. At Farim, phosphate is hosted by the middle Eocene aged Lutetien Formation and is confined to a
3-4 meter thick "decalcified ore horizon" which is overlain by a clay rich phosphate layer and 20 to 60 meters of sandy
argillaceous overburden.
The average grade of almost 30% phosphate is fairly high. Acid-grade phosphate rock is saleable with a grade of 32% .
Champion should be able to increase the grade to this level using a relatively simple washing and screening operation.
Tests done by both BRGM and Champion have shown that the ore at Farim is low in cadmium and magnesium. Cadmium
is undesirable because of its toxic nature, while magnesium increases processing costs for on-stream producers. Initial
studies indicate that phosphate rock from the Farim site should be a highly saleable product.
After Champion acquired the project it hired Fertecon Research Centre Ltd. and Jacobs Engineering (specialists in the
mining and marketing of phosphate) to review and update the 1986 study. The Fertecon-Jacobs report found that the
Sofrimines study was valid and that the phosphate market had strengthened considerably since the 1980's. The report laid
out further work, including drilling, processing and transport studies that would be necessary to bring the project to full
feasibility.
In 1998, Champion completed a small drill program that included in-fill holes in the area drilled by BRGM and step out
holes to test the outlying areas of the basin for phosphate. The in-fill holes returned grades and widths similar to the
BRGM drilling. One step-out hole located 2.5 kilometers west of the known resource cut 4.3 meters of phosphate. Part
of this year's drill program will focus on this new area. The sedimentary units that host the phosphate have a gentle
eastward dip and this new area may prove to have less overburden and a lower strip ratio than the existing resource.
Last December Champion arranged the terms of a $US88 million non-recourse project financing from a group of South
African lenders that is governed by the South African Export Credit Scheme. This government-sponsored program
insures and underwrites loans used to purchase South African goods and services. To fulfill the terms of the loan, CHL
will have to source the majority of the goods and services needed for mine construction in South Africa, the home to some
of the world's larger mine engineering service groups and equipment manufacturers. To draw down the loan Champion
will have to meet several pre-conditions including due diligence by the lenders, technical sign-off on the project by
independent consultants, acquisition of off-take (sales) contracts for a minimum of 750,000 tonnes of phosphate per year,
and approval of project and political risk insurance.
Champion's 1999 program is geared to meeting these pre-conditions. Drilling will in-fill the known resource and test the
new areas to the west. This will allow CHL to determine where mining will start and provide further drill samples for
processing studies. This year's work will also include hydrological studies of the Casheu River, adjacent to the Farim site.
The Casheu is a large navigable river that is the likely shipping route for product from a mining operation. Talks are
ongoing with several mining contractors to get formal bids for contract mining. Once the field program is complete in third
quarter 1999, CHL should be able to get technical sign-off and final approval for the loan. This loan is large enough to
fund completion of final feasibility work and construct a 750,000 tpy operation. CHL expects that there will be little
further equity dilution once the loan has been approved.
Earlier this year, Champion hired the Canadian Imperial Bank of Commerce to approach potential buyers of phosphate
and solicit letters of interest to purchase phosphate from Farim on a long-term basis. The response has been better than
expected. Several buyers contacted by CIBC have indicated they wish to purchase over 1 million tonnes per year and
there are still several buyers to contact. Champion expects to have off-take contracts exceeding the loan requirements by
the end of the second quarter.
One of the main attractions of this project is that the commodity being sought is one of the few that has had a fairly
consistent and relatively strong market in the past two years. Over 90% of phosphate is used to produce fertilizer. In
recent years producers have been upgrading phosphate rock on-site to mono-ammonium phosphate (MAP) or
di-ammonium phosphate (DAP), which are the main feedstock for fertilizer production. Processing on-site yields a higher
margin product and reduces transportation costs. These improvements come at the expense of capital since a MAP/DAP
plant is much more expensive to construct than a facility for upgrading phosphate rock.
The increased use of on-site processing by vertically integrated producers has removed phosphate rock from the open
market. The supply situation has been exacerbated by the fact that many large producers, especially those based in the
US, are close to exhausting their reserves on existing projects in the US Gulf States. Many of these producers have other
reserves but it is getting difficult to permit operations in the environmentally sensitive wetland and everglade areas that
usually host them. Many companies are withdrawing from the phosphate rock market to conserve mine production for
their own downstream plants.
These developments have lead to a tighter rock market in the past two years. Prices for phosphate rock increased $4-6
per tonne to the $48/tonne level, f.o.b. mine site, in 1998 and remained at that level this year. The current tightness in the
phosphate rock market may also explain the speed with which CHL was able to get a favorable response to its request
for off-take contracts. Although Champion would ultimately like to develop a MAP/DAP plant on-site itself, the simplest
route is to develop a phosphate rock operation and add on-site capabilities to produce MAP/DAP later.This year's work
program should allow the company to nail down more of the numbers needed to formally value the Farim project. Based
on an US$85 million capital cost, $47/tonne selling price and production costs in the $20/tonne range, there is clearly
room here for a strong valuation on the project. The above parameters should yield a Net Present Value for Farim in the
range of US$100 million, versus a fully diluted current market value of about US$15 million for the company. There is
clearly some upside here for investors willing to bet that Champion can complete the process of pre-feasibility and project
financing approval.
As well as the Farim project, Champion has an interest in the Takatu gold project in Guyana, the El Rubi base metal
project in Mexico and the reconnaissance agreement on the remainder of Guinea-Bissau. CHL has done some limited
work in Guyana and Mexico. We do not expect to see much more exploration on either of these projects unless they are
optioned since CHL will have to focus on West Africa for the time being.
In 1998 CHL completed some reconnaissance sampling in other parts of Guinea-Bissau for gold and base metals. The
gold sampling was unsuccessful but regional sampling for base metals did turn up several large areas with anomalous
results, mainly in the southeastern part of the country. Rocks that would be permissive of SEDEX style or VMS deposits
underlie these areas. Little or no work has been done in these areas and there are no known showings. Champion plans to
do follow-up sampling in the fall and then decide if it will pursue these targets itself or seek a partner. Champion will also
do some sampling for diamond indicator minerals around "salt pans" (local topographic depressions) in the eastern part of
the country that are related to a major structural lineament that is probably a deep-seated fault. There are references to
BRGM getting anomalous indicator results from some of these areas but no records relating to actual results or sample
sites can be found. Kimberlite bodies underlie similar local depressions that have been explored in neighbouring countries.
THE HARD ROCK ANALYST is an independent publication committed to providing timely and factual analysis of
junior mining companies. Companies are chosen on the basis of financial and project strength in order to provide the
potential for significant upside gains. These are generally high-risk securities, and opinions are time and market sensitive.
No statement or expression of opinion, or any other matter herein, directly or indirectly, is an offer, solicitation or
recommendation to buy or sell any securities mentioned. While we believe all sources of information to be factual and
reliable we in no way represent or guarantee the accuracy thereof, nor of the statements made herein. We do not receive
or request compensation in any form in order to feature companies in this publication. We may, or may not, own securities
of the companies mentioned herein. This document is protected by the copyright laws of Canada and the U.S. and may
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