Giustra shell joins rush for West African iron ore (April 25, 2011)

Investors have come to expect share-dilutive deals from Frank Giustra, one of Howe Street’s best known and most followed penny stock promoters. This does not seem to make the deals any less appealing, however, given the promoter’s past successes and the premium at which his deals often trade. 

In early April, Westward Explorations became Giustra’s latest shell to join the many juniors listed on the TSX Venture Exchange. Along with new management, Westward has acquired the rights to the Forécariah iron ore project in Guinea, which has seen minimal exploration work and no drilling. 

Such are the marvels of Giustra that after renaming the company West African Iron Ore (WAI-V), it now boasts a $100-million market cap with 174.6 million shares outstanding (237 million fully diluted). 

If exploration goes well, West African Iron will have to issue up to 226 million more shares to the project’s former owner, Skye Alliance Ressources Guinée, providing certain National Instrument 43-101 compliant resource milestones are met (such as an establishment of a multi-billion-tonne iron ore indicated resource grading at least 63% iron). Guy Duport, West African Iron’s new CEO, owns 49.8% of Skye Alliance. He and his partners have already received US$1 million and 24.5 million shares for vending the project, as well as the repayment of loans totaling about $2.87 million.

The Forécariah property is a contiguous series of exploration permits totaling 1,468 sq. km., about 90 km southeast of Guinea’s capital, Conakry. According to a recent technical report, exploration at the project is at an early stage: in the 1970s, limited mapping, sampling and trenching confirmed the presence of magnetite quartzite (metamorphosed banded iron formation) and magnetite schist in four separate areas. Thicknesses of the formations ranged from 30 metres to 400 metres, with strike lengths between 3 km and
11 km. 

Sky Alliance recently collected 227 surface samples from the project, of which 186 contained iron contents up to 68% with an average of 36%.

It also completed a helicopter-borne magnetic survey over the northeastern half of the tenement, which when combined with reconnaissance mapping led to the identification of 10 drill targets.

The main three – Kalyadi, Sitafaya and Sambalama – form a semi-continuous north-northwest-oriented zone of prospective iron mineralization with a strike length of about 16 km.

In all, Sky Alliance spent US$966,029 directly on exploration, excluding employees’ salaries and transportation. SRK Consulting has recommended a US$3.5-million initial drill program for Forécariah, including 22 diamond holes for 4,700 metres and 29 reverse-circulation (RC) holes for 5,800 metres on the largest target, Kalyadi. An additional 16 diamond drill holes totaling 3,200 metres are planned to provide first-pass information on eight additional targets.

Most importantly, the project is in a prospective territory. According to Reuters, major mining companies such as Rio Tinto (RIO-N, RIO-L), Vale (VALE-N), BHP Billiton (BHP-N, BLT-L) and ArcelorMittal (MT-N) plan to spend US$14 billion to develop iron ore projects throughout West Africa, deemed by many to be iron ore’s new frontier. 

Sierra Leone, Liberia, Cameroon, Gabon and Côte d’Ivoire are all home to significant iron deposits, with Guinea widely considered to be the centre of the action. “The reserves are a pretty good size, a quarter of a billion to half a billion tonnes, and some of the grade is 65% iron, which fits in the range of Australian and Brazilian deposits,” said John Jorgenson, an iron ore specialist at the United States Geological Survey, referring to the high grades found in two of the world’s biggest producing nations.

Smaller players such as Bellzone Mining (BZM-L) have also made waves in the area. Last summer a Chinese company agreed to invest US$2.7 billion in a 286-km railway and port facilities for Bellzone’s Kalia iron ore project in Guinea, in return for the right to buy 100% of the offtake (estimated at an eventual 50 million tonnes a year). 

In February, African Aura Mining (AUR-T, AAAM-L) released a first resource estimate for its Nkout iron ore project in Cameroon with an inferred resource of 1.04 billion tonnes grading 34.2% iron in a magnetite banded iron formation. Nkout is 30 km from a rail line proposed by Australia’s Sundance Resources (SDL-A), which wants to link its 2.3-billion-tonne Mbalam iron project 160 km to the east with a proposed deepwater Atlantic port 310 km to the west.

West African countries such as Guinea have their downsides, however. The dictatorial government there was overthrown in a military coup in late 2008 and, after four different interim leaders, Alpha Condé was named president in November 2010.

This February, Condé announced that the military leaders had bankrupted the country in just two years by overspending, leaving the former French colony’s economy in tatters.

Condé’s government has since stated the current mining code will be reviewed and updated, and has indicated its intention to ensure that a one-third interest in profits from mining projects be allocated to the state. 

West African Iron also notes in its filing statement dated March 21 that “certain third parties have made various statements and announcements which suggest that they hold the mining rights on several permits in the prefecture of Forécariah including the area covered by the Forécariah permits held by (the company).”

West African Iron denies the claims, however, saying it has sought and obtained confirmation of its rights from Guinean public officials. It says it has a letter dated Oct. 6, 2010, from Guinea’s Prime Minister confirming that West African Iron is the only company recognized by the government as the legal holder of the Forécariah permits.

Duport’s Sky Alliance is the company’s largest shareholder controlling 24.5 million shares for a 14% interest. Sam Magid’s Peninsula Merchant Syndications, a Vancouver investment company, is the second largest with 19.9 million shares, or an 11% interest. Peninsula bought the shares at 11¢ at a rather fortunate time, just one trading day before the exchange halted the stock on Dec. 21, 2010. It resumed trading on April 1, 2011, and closed at 59¢, with 18.1 million shares traded.

Although Frank Giustra has no formal role with the resulting company, three of its directors, Paul Matysek, Harald Ludwig and Craig Angus, were nominated by his shell company. He is now West African Iron’s third-largest shareholder controlling 16.2 million shares through one of his many charities, the Radcliffe Foundation. (He acquired 11.8 million of the shares at 10¢ each in 2010 by exercising warrants.) Radcliffe found itself the subject of headlines last year after the Canada Revenue Agency fined it $147,000 for holding too much stock in Sky Ridge Resources (SYR-V), another of Giustra’s shells.

Insider trading reports show the promoter sold 2.3 million of his West African shares through Radcliffe on the stock’s first day of trading, at the very charitable price of 56¢ each.