Cliffs Buys Into KWG On ‘Ring Of Fire’ Chrome Discovery

Coking coal and iron ore heavyweight Cliffs Natural Resources (CLF-N) is investing US$3.5 million in a private placement for a 19.9% stake in KWG Resources (KWG-V, KWGBF-O) to gain a foothold in what may prove to be a sizable chromite discovery.

Initially, Cliffs will pay about US$2.6 million for a 14.9% equity stake and about US$900,000 for a convertible debenture. The debenture can then be converted into a further 5% stake in KWG, subject to a vote by KWG shareholders. If the debenture is converted, Cliffs will own 19.9% of KWG. Cliffs is paying about US4.9¢ per KWG share. Prior to the deal, KWG had 288 million shares outstanding.

KWG also has 110 million warrants and options outstanding, and Cliffs has an option to buy one share at about US4.9¢ for every four shares issued as a result of the exercise of warrants or options. KWG shares recently traded at around 3¢ a piece. The deal is slated to close on March 15, subject to due diligence by Cliffs.

KWG owns a 25% stake in the Big Daddy chromite project, in the “Ring of Fire” near McFaulds Lake, in the James Bay lowlands of northern Ontario. The area has attracted considerable attention since the 2007 discovery of the Eagle One high-grade nickel deposit by Noront Resources (NOT-V, NOSOF-O).

The early-stage exploration project consists of about 2.5 sq. km. Freewest Resources Canada (FWR-V, FWERF-O) owns 50% of the Big Daddy project, while KWG and Spider Resources (SPQ-V, SDERF-O) hold 25% each. KWG and Spider have an option to increase their combined stake to 60% from 50% by completing a feasibility study within 18 months. They also have an option to increase their combined stake by another 5% by arranging financing for the project. However, given the early-stage nature of the exploration, it is hard to see how the two companies could meet such a tight deadline.

After a 19-hole drill program, the joint-venture partners have traced the mineralized zone along 400 metres of strike, but a geophysics survey suggests the potential for a strike length of 2 km. The chromitite mineralization at Big Daddy forms a layered body that dips steeply to the northwest. The deposit remains open in all directions.

“While everybody was focused on nickel, KWG Resources, Spider Resources and Freewest Resources were drilling off early holes that discovered very wide intersections of chrome with PGMs (platinum group metals),” says Frank Smeenk, KWG’s president and CEO. “Initially, there wasn’t much of a reaction. We didn’t (realize) that chrome might be economic. We were more concerned with the PGMs.”

Smeenk says KWG recently commissioned some studies on the deposit, which have shown its chemistry to be “ideal for the manufacture of ferrochrome.”

Ferrochrome is a principal ingredient in stainless steel production. Steelmakers source most ferrochrome from South Africa, the world’s largest supplier.

“This is very reminiscent of 1991, when there wasn’t anybody in the Western Hemisphere who knew anything about diamonds,” Smeenk says. “And then (Charles) Fipke made a discovery and we all had to go up a very steep learning curve. Now the same thing is occurring with the earth scientists and the investing community about chrome.”

Smeenk says the mineralization here is an ultramafic intrusion, probably a sill or a gabbro, while the Bushveld deposit in South Africa is a reef, which is only a few centimetres thick where the chrome occurs. In the Bushveld, chrome is a byproduct of PGM mining.

Acknowledging that the exploration is at an early stage, and that it would be premature to draw conclusions as to the size of the resource, Smeenk nevertheless says that it shows considerable potential. Big Daddy itself may have up to a 2-km strike length, but the mineralization continues into two adjacent projects controlled by Freewest and Noront. With the limited drilling completed so far, the grade and width of the mineralization seem fairly consistent.

“Here we have a primary chromitite deposit which is very high grade, 40 per cent or more chrome, and (with) very thick widths,” he says. “This could be the biggest deposit of its kind on the globe.”

Smeenk says the in-situ value of an open-pittable resource of this magnitude could be in the billions of dollars and, if proven, such a large deposit could have the potential to supply the entire North American market.

He believes that Cliffs is the perfect partner, since it is the principal supplier to the North American steelmaking industry.

“In that context, they thought that if there was ever an opportunity to get a source of chrome, they should seize it.”

A call seeking comment from Steve Baisden, Cliffs’ director of investor relations and corporate communications, had not been returned at presstime.

Smeenk says the size of the Ring of Fire is not generally appreciated.

“In the greenstone belt that constitutes the Ring of Fire, there is enough room to have everything that we find in the Abitibi greenstone belt. It is very significant,” he says.

On Big Daddy, the chromitite mineralization is shallow, often starting near surface, and no deeper than a few tens of metres. The vertical thickness of the mineralization is not yet known. PGM grades are inconsistent, but can reach 2 grams combined platinum plus palladium per tonne and higher.

In January, the joint-venture partners released a number of assays from the project. Hole 22 cut 35 metres grading 42% Cr₂O₃ (equivalent to 29% chrome), and 16% iron from 264 metres depth, with combined PGMs of 0.4 gram per tonne. The hole also intersected mineralization in two other sections totalling 74 metres with lower grades of chrome.

Hole 23 hit three mineralized intersections, including: 42 metres grading 35% Cr₂O₃ (equivalent to 24% chrome), and 14% iron from 334 metres below surface, with combined PGMs of 0.3 gram; and 4 metres of 41% Cr₂O₃ (equivalent to 28% chrome), 17% iron and combined PGMs of 2.7 grams per tonne starting at 378 metres.

Hole 15 hit 93 metres of 12.2% Cr₂O₃ (equivalent to 8.3% chrome), and 10.6% iron with combined PGMs of 0.3 gram from 81 metres. This intersection contained a 12- metre section of 32% Cr₂O₃ (equivalent to 22% chrome), and 19% iron, starting at 159 metres.

And hole 18 returned 25% Cr₂O₃ (equivalent to 17% chrome), 13% iron and combined PGMs of 0.2 gram over 71 metres, starting 68 metres down-hole. This intercept contained 32 metres of 37% Cr₂O₃ (equivalent to 26% chrome) and 16% iron starting at 106 metres.

For 2009, the Big Daddy partners are planning to re-log historical core, conduct ground geophysical surveys and infill sampling, and complete a technical report. The group would also like to complete more diamond drilling, but a joint-venture committee has not yet approved these plans. The project is subject to a 2% net smelter return (NSR) royalty, half of which can be bought for $1 million.

Black Thor, Blackbird

Freewest controls another chromite project, the Black Thor property, 4 km northeast, and 5 km northeast of Noront’s Blackbird chromite project. The three projects lie along a 12-to 14-km-long northeast-southwest structural trend and all sit within the same peridotite body. While all of the projects still require much more drilling, results to date indicate that together, they form one of the most significant chromite discoveries made in North America.

At the Blackbird project at the southwest end of the corridor, Noront released results from 20 drill holes in January, several of which returned widespread chromite mineralization.

Hole 74 cut 36 metres grading 39% Cr₂O₃ (equivalent to 27% chrome), and 12% iron, starting 640 metres down-hole. Hole 64 returned 44% Cr₂O₃ (equivalent to 30% chrome), a
nd 15% iron over 17 metres, from 510 metres depth. A 24-metre intercept graded 36% Cr₂O₃ (equivalent to 24% chrome), and 12% iron starting at 502 metres in hole 61. And a 10-metre section of hole 59 returned 37% Cr₂O₃ (equivalent to 25% chrome), and 17% iron from 273 metres depth.

The chromite zones at Blackbird comprise massive chromite of varying thickness layered within the peridotite sill. The chromitite layers dip steeply to the west, par- alleling the contact between the peridotite sill and the adjacent granodiorite.

Noront’s exploration at Blackbird has traced the layered chromitite body along 1 km of strike and to a 500-metre vertical depth, with wide but variable core widths. The body remains open to depth and along strike in both directions.

Noront’s exploration team is currently onsite at the main base camp near Eagle One. Chromitite exploration at Blackbird is one of the focal points of the upcoming season, and Noront is also planning to fly an airborne gravity survey. In November and December, Noront raised $18.9 million in flow-through financing.

Freewest is also exploring the nearby Black Thor chromite zone. Its results there fall in line with those at Blackbird, with assays such as 110 metres grading 21% Cr₂O₃ from 226 metres depth in hole 3, and 92 metres grading 21% Cr₂O₃ from 386 metres in hole 5.

Freewest has traced the chromite zone at Black Thor over an intermittent 1.7-km strike length, with an average true width of 60 metres. It remains open in all directions. The company plans to probe the zone and its extensions with two drill rigs in 2009.

McFauld’s Lake is remote. Distance to the nearest railroad at Nakina, Ont., is 230 km. There is no electric power line in the area.

Recent U. S. ferrochrome prices were in the US64¢-to US72¢- per-lb. range for ferrochrome grading 50-55% chrome, down sharply from US$2.05 per lb. last August.

By far, South Africa has the largest chromite reserves and is the largest producer, with a 43% market share in 2005. In 2006, world production was 19 million tonnes chromite.

On Sept. 30, KWG had $2.1 million in working capital. At press-time, KWG shares were trading at 3¢ in a 12-month range of 1-11.5¢.

KWG has a number of other early-stage exploration projects, including an option on East West Resource’s (EWR-V, ESWSF-O)Feeder Claims south of the Ring of Fire, and several diamond, nickel and copper joint ventures (mostly with Spider Resources) in the James Bay lowlands, and elsewhere in Ontario. The company is planning to spin off its diamond interests into a new company called Debuts Diamonds.