KWG - KWG Resources (CVE:KWG)

[ItsAValueTrap]

I own KWG Resources and am wondering if other people on this board look at junior explorers and might have insight into this stock.

 

This trades at 5 cents/share, may be bought out at ~13-19+ cents/share.

 

THESIS:

Cliffs Resources (CLF) has made a decision to go forward with trying to build a mine to exploit its Black Thor deposit.  I believe that Cliffs will eventually be interested in purchasing KWG Resources to gain full control of the nearby Big Daddy deposit.  Here's why: when the Black Thor deposit is exhausted (or close to it), it will make a lot of sense for Cliffs to use its mine infrastructure to mine Big Daddy.  This is pretty obvious.

 

Cliffs already controls both deposits (but doesn't own 100% of Big Daddy).  It will mine Black Thor first (presumably it is the more economic of the two deposits).  Eventually the strip ratio of the Black Thor will increase to the point where it makes sense to start exploiting Big Daddy too.  I'm not sure when the cross-over point will be... but it would likely be at least several years after mining at Black Thor commences. 

 

Cliffs gained ownership of its deposits by buying Freewest.  After that, it announced a takeover of either KWG or Spider Resources at 13 cents a share (CAD).  KWG and Spider struck a deal to merge instead.  Cliffs made an even better offer for Spider at 19 cents a share (CAD).  This deal went through, Cliffs bought Spider, and KWG Resources received a break fee.  Cliffs could conceivably pay 13-19+ cents/share for KWG Resources (plus it might have to pay extra for KWG's cash hoard).  Because the deposit is at a more advanced stage now (more money has been sunk into advancing it, the feasibility study didn't fail so the project has less risk), it should be worth more than when Cliffs was bidding for Spider.  I haven't checked chromite prices between then and now.

 

KWG is trading at about $0.05/share right now.  It is using its cash hoard to buy back shares, although KWG shares aren't very liquid.  There is insider buying by the CEO, and it is at levels slightly above token buying ($50,000).

http://www.canadianinsider.com/node/7?menu_tickersearch=kwg

 

RISKS:

-Cliffs doesn't have to buy out KWG.  In ~10-20 years from now, Cliffs can go ahead and start mining Big Daddy.  KWG will have to put up its share of capital, otherwise its stake will be diluted.  KWG may be unable to get financing or to sell itself to another company.

 

-Relations with First Nations is terrible.  Some were trying to sabotage exploration drilling.  Currently, one of the chiefs vows to lay down his life before letting the project proceed.  Historically, the various levels of Canadian government have been pretty insensitive and racist towards First Nations... police killed Dudley George, in the Attawapiskat housing crisis the federal government basically accused the community of financial incompetence and/or corruption (and had no grounds to do so), etc. etc.

This could end up being similar to Voisey's Bay which was delayed several years.

 

-Mine development risk.  Not all (promising) projects become economic mines.  Cliffs has already finished its feasibility study and has decided to go ahead with the mine.

 

 

Some other notes here:

http://glennchan.wordpress.com/2012/06/27/kwg-resources-revisited/