Paramount to get X-Cal, drops Klondex lawsuit

VANCOUVER — Paramount Gold and Silver (PZG-T, PZG-N) has agreed to acquire X-Cal Resources (XCL-T) just as the company settles a lawsuit surrounding the failed acquisition of Klondex Mines (KDX-T).

“We decided to walk from (the lawsuit) because we wanted to do this other deal,” says Paramount’s president Christopher Crupi in a phone interview. “We are not in the business of litigation, we are in the business of developing properties into mines.”

The new agreement has Paramount issuing one share for every eight X-Cal shares in a transaction valued at $31.8 million. The deal implies a price of 18¢ per X-Cal share, representing a 73% premium over X-Cal’s June 21 closing price.

The Klondex deal, which was proposed last July and fell through in September, had each Klondex share being exchanged for 1.45 Paramount shares in a deal valued at $80 million.

Klondex withdrew from the deal, claiming Paramount had misstated facts in a technical report on its San Miguel gold project in Mexico. Paramount had the report re-assessed, factoring in the allegations and concluded that the discrepancy, which involved property boundaries, were of “little practical consequence” and affected the inferred resource estimate by no more than 5%.

Crupi, at the time, alleged that Klondex had simply used Paramount to deflect a hostile bid by Silvercorp Metals (SVM-T). Silvercorp withdrew its takeover bid after Paramount offered a 30% premium on Silvercorp’s offer for Klondex.

Paramount sued Klondex in the British Columbia Supreme Court for the US$2.85-million break fee, with Crupi stating in a press release that Klondex’s argument was “a frivolous claim designed to entrench Klondex management without having to pay the break fee.”

Klondex, then, threatened a counter-suit as tensions escalated and both sides claimed the right. William Solloway, president of Klondex, stated in a counter-press release: “Paramount is waging a very aggressive campaign to defame Klondex, to further misinform investors and steer them away from the hard facts at the base of our very difficult decision to terminate the Paramount merger.”

On June 22, the two companies issued terse statements announcing that a settlement was reached without providing any details. Part of the settlement included not divulging any details, but it seems both parties simply agreed to drop the matter.

“We just both agreed to shake hands and walk away and call it a day,” says Crupi.

With the legal issue behind them, Paramount can now concentrate on its current merger plans with X-Cal. Like Klondex, X-Cal’s assets are in Nevada, where Crupi says he has targeted for some time.

“Our goal was always to move into Nevada. We really like Nevada; it’s a wonderful place to mine,” says Crupi.

X-Cal’s main asset is the historic Sleeper open-pit gold mine in Nevada, which between 1986 and 1996 produced 1.7 million oz. gold and 2.3 million oz. silver. Crupi noted that Paramount has some good inside knowledge of the project, as one of its directors, Eliseo Gonzalez- Urien, was president of exploration of Placer Dome, when it optioned the property.

Last year, X-Cal filed a preliminary economic assessment on the Sleeper project that outlined a mine life of 6.5 years, producing 590,000 oz. gold at an average cast cost of US$324 per oz. after silver credit. The pretax net present value was $70 million using a 5% discount and the pretax internal rate of return was 25% with a 3.3-year payback.

Paramount plans to test the heap piles from historic mining as well as explore the rest of the 78-sq.-km property. The company expects to spend anywhere from $4 million to $10 million, in the next 18 months, developing the project.

X-Cal will put the deal to a shareholder vote in August, while Paramount does not need to put it to a vote because of the size of the deal. There is a $1-million break fee, should the unexpected occur.

Once the deal goes through, Paramount will have roughly 135.7 million shares outstanding, with X-Cal shareholders holding roughly 14% of the combined company.

Meanwhile, Paramount continues to make progress at its own gold project in Mexico’s Chihuahua state. The company is resource drilling three targets on its 1,890-sq.- km land package.

The most recent results from the South San Francisco area include 28.9 metres grading 1.74 grams gold per tonne and 29.8 grams silver per tonne, 42.7 metres carrying 1.48 grams gold and 7.4 grams silver, 28.1 metres of 1.26 grams gold and 7 grams silver, and 27.5 metres of 1.73 grams gold and 10.9 grams silver, with all intersections between 73 and 183 metres depth.

Paramount’s share price closed up a penny on the X-Cal bid news to close at $1.46. The company has a 52-week trading range between $1.18 and $2.08.