A $750m question, a mystery buyer and a seller called WHY

(Bloomberg News) — A neon pink plastic marker wrapped around the trunk of a fir tree and some felled logs in the mountains of western Canada are the only visible signs of one of this year’s biggest mining deals.

The seller, an obscure Canadian explorer going by the acronym WHY, agreed to a $750 million deal for the magnesium deposit, which is in heightened demand for potential use in everything from automobiles to electric batteries. The price tag, at 46 times WHY’s market value, sparked a stock market frenzy — and drew the attention of regulators.

Few had heard of the Record Ridge deposit in a remote forest next to the Washington state border or Calgary-based West High Yield (W.H.Y.) Resources Ltd., until an Oct. 5 announcement that the rights were to be sold to an equally mysterious buyer, Gryphon Enterprises LLC.

As the news spread, WHY rose as much as 955 percent in one day, an extraordinary surge even on the TSX Venture Exchange, sometimes referred to as the "wild west" of unproven penny stocks. The Alberta Securities Commission launched an inquiry into the stock move, citing "the magnitude of this transaction." Trading in the shares, which rose to C$2 for a market value of C$114.5 million ($89 million), have been halted since Oct. 6. The commission had no further comment.

If a motherlode of metal is to be extracted from an open-pit mine in those hills, it comes as a surprise to the 3,500 residents of the closest town, Rossland, British Columbia. While plucky prospectors are no strangers to the region — murmurs persist of undiscovered riches near the 19th-century gold-rush town better known today as a ski mecca — the price tag dwarfs any other investment in recent memory.

“They came and met with a few of us at the city a couple of years ago and laid out their plans at the time — it was all very speculative,” says Kathy Moore, Rossland’s mayor. "I don’t know anymore than that."

The deal ranks No. 4 by transaction value among the year’s biggest mining-asset sales globally, according to data compiled by Bloomberg, vying with those like Barrick Gold Corp.’s $960 million sale of half an Argentine mine, that churned out 544,000 ounces of gold last year. In contrast, WHY’s project has yet to apply for development permits and may be years away from breaking ground, according to its filings and a technical report describing the environmental assessment process the project faces.

3,000 Years

According to the sale and purchase agreement, Gryphon is supposed to pay a $500,000 deposit by Nov. 4. It also commits WHY to deliver share certificates representing 100 percent of its issued and outstanding shares to Gryphon — a feat difficult to accomplish given that 2.36 million shares traded hands in the market on Oct. 5 and would also make the deal an acquisition, not an asset sale as described.

The Canada unit of U.K.-registered SRK Consulting (Global) Ltd. audited WHY’s exploration work in a 2013 technical study of the project, backing the theory that a deposit rich in magnesium lay underground. It confirmed in an email that it has been working with WHY since the spring of 2016 to collect data and complete the studies necessary to support the submission of an environmental assessment application.

Strip Malls

In an Oct. 5 phone interview, WHY Chief Executive Officer Frank Marasco said he got the price he deserved for assets that hold about 3,000 years of supply of magnesium. His family company Big Mountain Development Corp. Ltd. and its unit control about 43 percent of WHY’s shares, the bulk of which were acquired for only C$10 ($7.80) in 2006, according to WHY’s initial public offering prospectus that year. News of the Gryphon sale drove their worth up to about C$40 million. Marasco declined a request to visit the site or to be interviewed again, saying all project details were available in public documents.

According to the purchase and sale agreement, Gryphon is based in Swanton, Maryland. Chief Executive Officer Stephen Cummins uses an AOL email address and had a previous run in with the Colorado state regulator over allegations of selling securities without a license. The legal firm listed as representing Gryphon, Baker McKenzie, says it has no such client. Cummins, who in an Oct. 5 LinkedIn message said the sale is “absolutely a legitimate transaction,” didn’t respond to subsequent queries sent by email and LinkedIn.

Marasco built a career buying and selling motels, strip malls and nightclubs before he turned to mining, according to a company biography. As early as 2001, he was prospecting for gold near Rossland when he stumbled upon magnesium, subsequently spending at least C$12 million and drilling 77 holes over the next decade. By 2012, Marasco was telling a local newspaper, "The raw material is here. All we have to do now is mine and process it."

Nitric Acid

It may not be quite so straightforward.

Magnesium is so abundant that the U.S. Geological Survey describes potential recoverable resources as "virtually unlimited." For decades, Dow Chemical Co. extracted magnesium from seawater. The metal occurs naturally in the salt of the Dead Sea. Hundreds of millions of tons lurk in massive heaps of waste left behind by decades of asbestos mining in Quebec.

"There has to be something pretty special about a magnesium deposit to differentiate it from other deposits," says Alan Clark, managing director of CM Group, an Adelaide-based commodity researcher. That’s because assessing a magnesium resource is very different from dealing with aluminum or copper or zinc. "It’s much more about what technology solution you have to treat the resource that you’ve got, rather than how much raw material there is in any particular deposit."

Previous Flops

WHY announced test results in July that it said points to a simpler, cheaper way to process magnesium, using nitric acid, developed by Drinkard Metalox Inc. Charlotte, North Carolina-based Drinkard confirmed it has been working with WHY.

Never mind that such technological hurdles have doomed earlier efforts backed by deep-pocketed investors and government cash. In the early 2000s, Noranda Inc. in Quebec and Australian Magnesium Corp. were forced to shutter smelter projects, wiping out hundreds of millions of dollars invested — spectacular busts that continue to cast a pall over the sector. "I can still walk into some investment banks here in Australia today, just utter the word magnesium, and I’ll be frog-marched out of the building,’ says Clark.

Still, a long-awaited surge in magnesium demand from the automotive sector — as a way to make cars lighter — may be starting to kick in. Toyota Motor Corp. also believes magnesium-based batteries could displace lithium-ion ones in everything from cars to cell phones.

The bigger challenge is where’s the money to develop a mine?

Any new project is likely to cost around $1 billion to target a roughly $2.5 billion niche market — not much of an incentive, says Todd Olson, president of the International Magnesium Association. "It’s pretty hard to get them funded because of the scale of them," he says. "I’d expect to see some within the next decade but supported by someone with pretty deep pockets — like a Dow Chemical."

(Story by Nathalie Obiko Pearson, with assistance from Joe Deaux and Danielle Bochove).

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