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Spider Resources takeover battle ends as Cliffs seizes control of Big Daddy Chromite Project

In May this year Spider and KWG put forward a merger document to marry a potential 60% interest and majority control of Big Daddy into a new entity. Cliffs Natural Resources had other ideas however...

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Exploration company Spider Resources (TSX.V:SPQ) - run by veteran geologist Neil Novak - has long been a bull on the potential of the James Bay Region of Northern Ontario. Since inception, the company concentrated all of its exploration efforts around a massive structure called the ‘Ring of Fire’, which is an area covered by muskeg swamps. Last week the final chapter in Spider Resources history as an independent exploration company came closer to ending, vindicating the company’s un-waivered focus on James Bay.

SPQ was floated in 1991 to initially search for diamonds, discovering eight kimberlite occurrences in the general area of the nearby DeBeers Victor Diamond Mine. The Victor mine was established at a cost of 1 billion dollars to mine diamondiferous kilmberlite from an open pit that produces 2.7 million tonnes of ore that recovers 600,000 carats each year.

Spider Resources partnered with KWG Resources (TSX.V:KWG) with substantial financial and joint venture support during this tantalizing search that refused to replicate the good fortune that fell upon DeBeers. In 2002, while drilling into a kimberlite target, SPQ hit 6 meters of massive sulphides that established the area as potentially hosting volcanogenic-associated massive sulphide “VMS” deposits.

Canada has about 350 of these deposits that produce very substantial quantities of base metals, silver and some gold. The discovery at McFauld’s Lake established the James Bay Lowlands as prospective for base metals, but the market remained unimpressed while the partners continued their exploratory efforts.

By 2005, the partners continued searching for VMS deposits, southwards along the Sachigo Greenstone Belt, but only found low values. In the same year SPQ and KWG joint ventured with Freewest on a claim block west of McFauld’s Lake. They each took a 26.5% interest and agreed to spend CDN$3 million. In March of 2006, drilling hit two zones of chromite and platinum group elements in a peridotite assaying around 23% chromite. The market considered the result low grade and remained disinterested. This type of geology was not understood in Canada, but was quite common in South Africa’s Bushveld, which is the world’s premier producer of platinum group metals and chromite. 

In early 2007, Noront Resources (TSX.V:NOT) struck 1.1% nickel, copper and platinum group metals over 71.5 meters, with a later hole hitting 117 meters of nickel at 4.4%, copper of 2.2%, along with platinum group metals. These holes had intersected Magmatic Massive Sulphides set in a peridotite intrusion that started a major pegging rush in the area and a massive boom in Noront Resources share price. One of the later holes assayed for chromites in the same geologic setting as Spider Resources original chromite find on the Freewest Joint Venture claims. The two drill holes were only six kilometers apart…

Both Freewest and Spider realized that the ring of fire “magnetics” that ran through their tenements may carry significant chromite values. Freewest set up a drill program in early 2008, and discovered two substantial chromite deposits at Black Thor with 4 kilometers of strike, and a parallel system called Black Label, over a 2.7 kilometer strike.  Freewest commissioned a NI 43-101 for Black Thor, which inferred 69.5 million tonnes of chromite at a grade of 31.9% chromite at a cut off grade of 25%. The resource remains open ended along both directions of strike and at depth. Spider then drilled on Big Daddy a much richer chromite resource over 1.2 kilometers of strike. The market sat up and noticed, and so did Cliffs Natural Resources (NYSE:CLF), a mid-tier iron ore and coking coal producer with operations in North America and Australia.

Cliffs first turned its attention to Freewest, trumping a competing bid from Noront Resources, in a CDN$240 million deal. The takeover gave Cliffs total control of Black Thor, Black Label and 40% of the much richer Big Daddy chromite deposit.

Spider Resources went on to complete an NI 43-101 for Big Daddy, which indicated that the resource hosted 23.2 million tonnes of ore carrying a chromite grade of 40.66%, plus an additional 16.3 million tonnes at 39.09%. These grades were much higher than those at Black Thor or Black Label and would be much cheaper to process and attract a higher premium.

A broader scenario envisaged an open cut mine using a cutoff grade of 15% for an indicated 26.4 million tonnes with a chromite grade of 39.37%, and an additional 20.5 million tonnes at 37.47%. Big Daddy did not narrow, and had only been drilled to a depth of 375 meters where studies indicated that the ultramafic host rock extended vertically to at least 1,700 meters, which could increase the conceptual tonnage by at least four hundred percent. The continuity and grades of the indicated resource were so consistent that the study found that a small number of strategically placed drill holes could upgrade the status of the deposit to an inferred resource.

In May this year Spider and KWG put forward a merger document to marry a potential 60% interest and majority control of Big Daddy into a new entity. Cliffs had other ideas however, and once again, as the big fish on the scene, outgunned the merger proposal by making a cash offer of 19 cents per share, valuing Spider’s current 26.5% interest in Big Daddy at C$125.38 million. It now seems likely that Cliffs will seize control of Spider, ending two decades of exploration efforts by the company. 

Looking ahead, while Cliffs will take a majority stake in the project, one has to wonder if it fancies its chances of acquiring the remaining stake in Big Daddy from KWG. Only time will tell, but further M&A activity seems a real possibility.

Quick facts: Cliffs Natural Resources Inc

Price: 8.62 USD

NYSE:CLF
Market: NYSE
Market Cap: $2.33 billion
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