Klondex And Paramount Dig In Their Heels

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

Only a few months ago, Paramount was playing the white knight to Klondex, after that company was the target of a hostile bid from Silvercorp Metals (SVM-T, SVM-X) in June.

While Silvercorp’s all-share offer represented a 60% premium to Klondex’s share price at the time, the company believed it could get more and set out to find a rival bid.

Paramount obliged, and when it tabled an all-share bid of its own, which offered a 30% premium to the Silvercorp bid, Klondex management endorsed the $80-million deal.

Everything appeared to be sunshine and puppy dogs.

But things turned when Klondex went down to have a look at the main project of the company whose shares it would be receiving.

Klondex claims that the three geologists sent down to do due diligence on Paramount’s San Miguel project in Mexico’s Chihuahua state quickly learned that two mineralized shoots within the San Miguel mineralized area trended towards a neighbouring property owned by Fresnillo (FNLPF-O, FRES-L), meaning that some of the resource defined at the site is not on Paramount’s property.

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

But Paramount’s president, Chris Crupi, says the area in question deals only with projections of where mineralization is trending and has no real relevance to the resource already outlined at the project.

“We’ve drilled 2.64 million gold-equivalent ounces. That’s what we have,” Crupi says. “Whether or not there are two, three, or six million ounces on someone else’s property doesn’t matter.”

Still, Paramount went back and issued a revised technical report that took into consideration Klondex’s charges.

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

The total inferred resource for the two areas is 6.7 million tonnes 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 406,000 oz. 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. silver. The two areas also contain a total of 23,907 tonnes of lead and 53,086 tons of zinc.

Paramount has been the first to fire off a legal salvo. The company announced on Oct. 2 that it would take its grievance with Klondex to the Supreme Court of British Columbia.

Paramount will argue that Klondex’s attempt to get out of the proposed merger had more to do with management’s desire to entrench itself than any qualms about the potential of San Miguel. The company says it was merely used to fend off Silvercorp’s hostile bid, and that once Silvercorp backed off, Paramount too, was dropped.

Paramount claims it is now entitled to the break fee of US$2.85 million along with damages for breach of contract and “damages for malicious falsehood and defamation.”

But Klondex insists that it only acted as any responsible company would once it realized that the resources of the company it had offered to buy were misrepresented. It says the most gold-rich parts of the mineralized zone appear to be trending off of Paramount’s ground, thus limiting the future mineral potential of the project.

To better understand just how much the gold potential is limited by the property boundary, Klondex says it needs to look at the data that was used in the resource calculation, which it claims Paramount refused to disclose.

Crupi denies the charge and points out that during Klondex’s due-diligence site visit, it was given access to all of the drill core and geological information Paramount has.

Klondex had garnered the interest of Silvercorp and Paramount thanks to its flagship Fire Creek project in Nevada. An estimate from earlier this year put indicated resources at 5.04 million tonnes averaging 10.11 grams gold for 1.6 million oz. of gold equivalent, and inferred resources at 1.8 million tonnes grading 8.63 grams gold for 508,799 oz. of gold equivalent.