Photographer: Ty Wright/Bloomberg

Penny Stock That Surged 1,000% Says Canada Mining Deal May Fail

Updated on
  • West High Yield says buyer hasn’t arranged financing
  • Canada company had soared on sale of magnesium deposit

West High Yield (W.H.Y.) Resources Ltd., the tiny Canadian miner that last month announced it was selling its main assets for $750 million, said the deal may fall through because the buyer doesn’t yet have financing.

West High Yield surged almost 1,000 percent last month, after the company -- which has no revenue -- announced it had sold a magnesium deposit in British Columbia for 46 times its market value. The shares have been halted since Oct. 6 and the Alberta Securities Commission launched an inquiry, citing "the magnitude of this transaction."

“There is substantial risk that the purchaser may not be able to obtain financing necessary to complete the proposed transaction,” the Calgary-based company said Friday in a statement. “The purchaser does not have the financial resources” to complete the deal without third-party funding.

The West High Yield purchase and stock surge raised eyebrows among some investors in Canada, where the junior stock exchange has been dubbed the “wild west” for its volatile penny stocks. West High Yield traded for just 36 cents before the $750 million cash deal was announced on Oct. 5.

The statement Friday raises several questions about the transaction and the buyer. The company and purchaser Gryphon Enterprises LLC haven’t agreed on how liabilities will be settled if assets “fail to produce sufficient quantities and grade of materials in the time required’’ to satisfy agreements, West High Yield said. These so-called take or pay agreements must be negotiated for the deal to take place, according to the statement. The company has the right to terminate the deal if $500,000 isn’t paid by Gryphon by Nov. 4. It said it hasn’t yet received the payment.

Legal Advice

West High Yield also clarified the buyer’s legal advisers. In the filing last month, the law firm of Baker McKenzie was listed as representing the purchaser. The law firm said at the time it had no knowledge of the transaction.

“The purchaser advised the company that Baker McKenzie LLP was identified in the agreement in error, that it has not engaged Baker McKenzie LLP as legal counsel for the transaction and that Baker McKenzie LLP has no relationship with the purchaser,” according to Friday’s statement.

West High Yield Chief Executive Officer Frank Marasco declined to comment when reached by phone late Friday.

Meanwhile, in the mountains of British Columbia, there is little evidence of a major development on the site of the magnesium mine that West High Yield agreed to sell, in what would be one the world’s biggest mining deals this year.

A neon pink plastic marker wrapped around the trunk of a fir tree and some felled logs are the only signs of mining activity on the site. Few had heard of the Record Ridge deposit in a remote forest next to the Washington state border or Calgary-based West High until the Oct. 5 announcement.

A marked tree is pictured near a West High Yield GPS survey coordinate outside of Rossland, British Columbia, Canada.

Photographer: Ben Nelms/Bloomberg

As the news spread, WHY rose as much as 955 percent in one day, an extraordinary surge even on the TSX Venture Exchange. The shares, which rose to C$2 for a market value of C$114.5 million ($90 million), have been halted since Oct. 6. The Alberta securities commission had no immediate comment Friday.

West High Yield is co-operating with regulators and is in discussions about resuming trading in the stock, according to the statement Friday.

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."

Read More: In Bre-X Country, Junior Miners Crash or Post 1,000% Gains

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

Rossland, British Columbia

Photographer: Ben Nelms/Bloomberg

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, Marasco said he got the price he deserved for assets that hold about 3,000 years of supply of magnesium. The company retracted that claim Friday, saying the supply estimate “should not be relied upon.”

Marasco’s 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 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.

Tracks from heavy machinery near a West High Yield GPS survey coordinate outside of Rossland.

Photographer: Ben Nelms/Bloomberg

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.
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.

— With assistance by Joe Deaux

    Before it's here, it's on the Bloomberg Terminal.