Former Rosemont Owner poised to gross $400 million on Arizona Mining Inc. sale

The following is reposted from Rosemont Mine Truth

Richard Warke, the former top executive of Augusta Resource Corp. which sold the proposed Rosemont copper project to Hudbay Minerals in 2014, stands to gross US$409 million in connection with the sale of another company with a proposed mining project in southeastern Arizona.

Australia-based South32 has offered US$1.3 billion cash to purchase Arizona Mining Inc.’s Hermosa mine project six miles south of Patagonia. The Hermosa Project comprises the zinc-lead-silver Taylor deposit and the zinc-manganese-silver Central deposit.

South32 is Australia’s third-largest mining company and already held a 17 percent share in Arizona Mining prior to making the June 15 offer. Arizona Mining’s board of directors unanimously recommended shareholders approve the sale. Warke is Arizona Mining’s executive chairman.

South32’s offer of C$6.20 a share was about 50 percent higher than Arizona Mining’s June 15 closing price on the Toronto Stock Exchange. South32’s shareholders’ approval is not required and the deal is expected to close in September, according to at a joint press release issued by the two companies.

Warke controls 88 million shares of Arizona Mining according to the company’s most recent Management Information Circular filed with Canadian securities regulators. The huge windfall comes 20 years after Warke filed for personal bankruptcy in Vancouver, British Colombia during a period in which he was engulfed in financial problems including a corporate bankruptcy and several cease trade orders issued by Canadian regulators.

Warke failed to disclose the personal and corporate bankruptcies and cease trade orders in subsequent regulatory filings spanning nearly a decade, according to a complaint filed by Save the Scenic Santa Ritas, a Tucson-based conservation group, with the British Columbia Securities Commission (BCSC) and the U.S. Securities and Exchange Commission.

Warke’s personal bankruptcy filing came 9 years after he signed a settlement agreement with the BCSC on an insider trading violation. As a result of the settlement agreement, Warke remains on the BCSC website under the warning “Disciplined Persons and Investment Caution.”

Former U.S. Speaker of the House John Boehner will also receive a big payday from the sale. Boehner was appointed to Arizona Mining’s board of directors in June 2017. Boehner has options for 250,000 shares of Arizona Mining worth C$1.02 million, or about US$765,000, according to the Management Information Circular. He was also paid C$14,602 to participate in two board meetings in 2017.

The Arizona Mining sale marks the third time this decade that Warke has executed sales of Canadian junior mining companies to major mining companies. Warke’s companies specialize in acquiring speculative sites and obtaining required permits. In all three cases Warke was a major shareholder and executive chairman of the board.

In February 2011, Brazilian billionaire Eike Batista purchased Ventana Gold Corp., a speculative Colombian mining venture, for C$1.43 billion, or C$13.06 share, according to a Ventana regulatory filing. Warke’s 7.3 million Ventana shares were worth C$95 million.

The Ventana project has never been developed. Batista’s financial empire collapsed amid a corruption scandal and the Ventana property ended up under the control of an Abu Dhabi sovereign wealth fund. The project has since been stalled by a political struggle between the mining company and local subsistence miners, environmentalists and the Colombian government.

In July 2014, Warke engineered the sale of Augusta Resource — which controlled the proposed Rosemont mine property in the Santa Rita Mountains on the Coronado National Forest southeast of Tucson — to Toronto-based Hudbay Minerals Inc. for C$555 million. Warke earned an estimated $22 million on the deal. During the negotiations leading up to the sale, Hudbay accused Augusta of misleading its shareholders related to federal permitting.

The $1.9 billion Rosemont project has not begun construction and still needs a Clean Water Act permit from the U.S. Army Corps of Engineers which has expressed serious concerns over the environmental impact of the proposed open-pit mine. The project also faces three legal challenges in federal court from environmental and conservation groups and three Native American tribes.

South32 also faces legal challenges to a nickel mine it operates in Colombia. The Colombian Constitutional Court ordered the company to pay an unspecified amount in damages resulting from environmental and health impacts on local communities. The court ordered South32 to apply for a new license to operate, following a period of consultation with the local communities, according to press reports. The company said it would appeal the ruling. South32 faces other financial and operating challenges at several of its coal mines, according to the Financial Review.

South32’s Arizona offer was based in part on Arizona Mining’s January technical report that provided a preliminary economic assessment valuing the Taylor zinc deposit at $2 billion. The Taylor deposit is the primary focus for development and would be accessed through an underground mine.

Arizona Mining claims that the Taylor deposit ranks first globally in profitability based on its $2 billion economic assessment and pre-production capital expenditures, according at June 2018 company report. (See page 19 of a corporate presentation from Arizona Mining.) The Arizona Mining Chief Operating Officer and board members are claiming the Taylor deposit will become one of the world’s largest lead and zinc mines.

Arizona Mining’s economic assessment is based on projected mineral resources at the Taylor deposit rather than a more rigorous analysis that determines actual mineral reserves. The difference between mineral resources and mineral reserves is crucial.

According to Canadian mining definitions, mineral resources are not economic mineral reserves and it should not be assumed that further work on the stated resources will lead to mineral reserves that can be mined economically. Arizona Mining was planning to release a feasibility study with updated resource estimates later this year.

South32’s CEO Graham Kerr told the Financial Times that South32’s $1.3 billion cash offer for the 83 percent of Arizona Mining it does not already own would be justified by further drilling.

“We think they have only scratched the surface [of the deposit],” Kerr told the Financial Times. “There is lots of upside in terms of the resource . . . and outside of that, there’s an incredibly large land position that is absolutely in the sweet spot of some of the base metals people are looking for.”

Most of the land position, however, includes unpatented mining claims on 19,000 acres in the Coronado National Forest. Patagonia area residents opposed Arizona Mining’s plan to conduct exploratory drilling on the national forest and the company withdrew its application to drill on federal lands in late 2016, according to the Arizona Daily Star.

The Arizona Mining/South32 deal comes as the prices of zinc, silver, and lead have been sliding, while trade tensions mount, casting doubt on global economic growth, according to the Vancouver Sun.

“It’s always a tough call,” Warke told the Sun about the decision to sell the property. “This project has grown and is going to be one of the top five base metal mines in the world, so it’s not an easy decision.”

The Taylor project is located on about 532 acres of private land which makes it much easier to permit compared to the proposed Rosemont project that will impact thousands of acres of Coronado National Forest. Warke told the Sun that was the key that made the project attractive.

“We can put the mines into production on the private lands and not go through the whole federal process for eight to nine years minimum,” he told the paper. Arizona Mining received three state permits earlier this year and has begun construction on a tailings retention pond, water treatment plant and an underground water collection system.

The sale came less than a month after Arizona Mining issued a press release stating that the company had found “significant high-grade drill results in a new copper-rich zone” at the Taylor site.

The quality of the Taylor zinc deposit, however, has come under scrutiny concerning manganese impurities that could impact the smelting process, according to a January 2017 story in the Global Mining Observer. The mining blog reported that manganese levels above .5% in zinc concentrate can be “complex and problematic” for smelter operators.

Arizona Mining’s January 2018 technical report states on page V that “the manganese content of the final zinc concentrate was 1.35%.” The report noted that “zinc smelters, in particular, could start with penalty rates as low as .5% (manganese).”

“Zinc and high manganese is a combination that no smelter wants,” a Germany-based smelter restructuring specialist, who sits on the board of one of Switzerland’s largest banks, is quoted as telling the Global Mining Observer. “It’s not good,” says the managing director of the largest concentrates trader in Australia.

Arizona Mining said in a statement that the traces of manganese in the Taylor deposit zinc concentrate is not a significant issue for smelters. “The penalties for a zinc concentrate containing 1.3% manganese are estimated to be $12 per dry metric tonne versus the zinc concentrate value of over $1,100 per dry metric tonne at a $1.00 per pound zinc price. This equates to approximately 1% of the concentrate value and is therefore immaterial,” the company stated.

The debate over zinc impurities in the Taylor deposit is reminiscent of another Warke led business venture called Sargold Resource Corp. that purchased a closed gold mine in Furtei, Sardinia in 2003.

In a March 28, 2007 press release, Sargold reported “significant breakthroughs” in developing a method to extract gold from rock formations that had limited Furtei gold production. Sargold never tested the method through actual mining at the site and instead extracted small amounts of gold by processing historic mine tailings.

Sargold, while operating under its previous name of Canley Developments Inc., also came under fire from a Canadian stock exchange for issuing a misleading press release. On March 26, 2003, Canley issued a news release stating it had reached an agreement with Gold Mines of Sardinia for a joint venture to operate the Furtei gold mine. The release stated in part:

“This open pit operation consists of a full production facility capable of processing 1,000,000 tons of ore annually, a 600,000 oz gold resource, freehold land and buildings and over 10 sq. km’s of exploration property.”

On June 12, 2003, the Toronto Venture Stock Exchange forced Canley to retract key statements including its claim of a 600,000-ounce gold resource. Records also show Sargold grossly overstated the size of the gold processing plant. In 2006, Sargold revised that number downward 66 percent, from 1 million tons annually to 365,000 tons, according to an August 2006 company press release.

Sargold’s investment in Sardinia was the focus of the award-winning 2012 documentary Cyanide Beach.