Klondex and Paramount dig in their heels

The friendly days are long over between Klondex Mines (KDX-T) and Paramount Gold and Silver (PZG-T, PZG-N).

The two companies had been set to for an $80-million merger until Klondex performed due diligence on Paramount’s San Miguel project in Mexico’s Chihuahua State.

Klondex says that while visiting the project it learned that a portion of the deposit actually fell on land not held by Paramount.

Crying foul, Klondex says the omission of such a fact in any public disclosure meant that it could cancel the planned merger and that Paramount would be libel to pay the US$2.85 million reverse break fee and additional damages.

For its part, Paramount says that any inaccuracies on its resource estimate fall within a reasonable margin of error, and that therefore Klondex was cancelling the merger without just cause, making it libel to pay the break fee and damages.

That some of the deposit lies on grounds not held by Paramount, however, was not disputed by the company.

In fact, Paramount had its technical report updated and released it on SEDAR on Sept. 18 – just five days after Klondex had informed it of the information it turned up on its due diligence.

The new technical report admits that some of the San Miguel and the La Union deposits fall outside of its boundaries, but says that the amount only makes up between 3% and 5% of the total inferred resource.

The total inferred resource for the two areas is 6.7 million tons with an average grade of 2.24 grams gold at San Miguel and 1.43 grams gold at La Union for a combined total of 406,001 oz of gold. The average silver grade at San Miguel is 98.8 grams silver, while La Union has an average grade of 60.4 grams silver for a combined total of 17 million oz. of silver. The two areas also contain a total of 23,907 tons of lead and 53,086 tons of zinc.

But Klondex suspects that much of the higher-grade mineralization is located on the neighboring property not owned by Paramount, but says Paramount has refused to provide it with the data it used to calculate the San Miguel resource.

Klondex also argues that the portion of the resource that is open to depth is actually located on the neighbouring property and that this fact “materially limits the prospects for the San Miguel Project.”

For its part, Paramount calls the issues raised by Klondex “minor, not material” and says they have no adverse impact on the valuation of Paramount.

“This is a frivolous claim designed to entrench Klondex management without having to pay the break fee that would otherwise be due on termination of Paramount’s letter agreement with Klondex,” Chris Crupi, Paramount’s president and chief executive said in a statement.

The Ottawa-based company says it updated the technical report as a show of good faith, and that the authors of the report concluded that Paramount’s mineral resource did not require restatement because the issues raised by Klondex were of “little practical consequence.”