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TABLE OF CONTENTS Jul 14 - 20, 2014 Volume 100 Number 22 - 0 comments

Kaizen Discovery to meet Japanese demand for metals

Friedland-linked junior eyes Pacific Rim

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By: Alisha Hiyate
2014-07-09

After first listing in December, it’s no surprise that junior Kaizen Discovery (TSXV: KZD; US-OTC: CCNCF) has started out with a strong sense of purpose. After all, Kaizen means “continuous improvement” in Japanese.

In July it closed its first acquisition — an all-share deal to buy B.C.-focused West Cirque Resources (TSXV: WCQ) — and the company is eyeing more acquisitions in mining-friendly jurisdictions in the Pacific Rim.

That’s because the junior’s strategy is closely tied to Japanese industrial demand for metals.

“The Pacific Rim is interesting for us because it’s interesting for Japan, the industrial complex of Japan and the trading houses of Japan,” Kaizen president and CEO Matthew Hornor said in an interview in late June. Kaizen is especially interested in Chile, Argentina, Peru and some areas in the southwestern U.S.

“We’re evaluating acquisition targets every day,” Hornor said. “We’re not stopping with West Cirque because the appetite of the Japanese is very large. They are insensitive to price fluctuations because of course they are an island nation that’s constantly in need of natural resources.”

Although it may seem a high-aiming strategy for a junior, Kaizen is in an ideal position to gauge Japanese demand. The junior signed a strategic alliance agreement in January with Japanese trading and investment house Itochu.

The companies agreed to identify and pursue projects to work together on, potentially in joint-venture structures. In return for getting first crack at earning in on Kaizen projects, Itochu invested $5.1 million in the company, buying 8.5 million shares at 60¢ each for a 6.35% stake in Kaizen. (After the merger with West Cirque, Itochu’s interest has been reduced to 5.7%).

So how did a newly listed junior miner land such a deal?

That has to do with Kaizen’s origins and connection to famed mining entrepreneur Robert Friedland.

Kaizen’s biggest shareholder is HPX TechCo, a subsidiary of High Power Exploration. High Power Exploration is a private company indirectly owned and controlled by Friedland. Kaizen was born through a reverse takeover of Concordia Resources by HPX TechCo. The transaction in December 2013 gave HPX TechCo an 85% stake in Kaizen.

As part of Friedland’s Ivanhoe group of companies, Kaizen’s management team and board includes some familiar names from the original Ivanhoe Mines (now Turquoise Hill Resources [TSX: TRQ; NYSE: TRQ]) era in Mongolia, which saw the discovery and construction of the Oyu Tolgoi copper–gold mine. Also represented are names from the former Ivanplats, which adopted the vacated Ivanhoe Mines (TSX: IVN; US-OTC: IVPAF) name in 2013, and is developing three large projects in Africa.

Itochu has done deals with other Friedland ventures, including with Ivanhoe Mines (the former Ivanplats). In 2010–2011, a consortium of Japanese investors, led by Itochu, invested US$290 million for a 10% interest in Ivanhoe’s Platreef platinum group metal (PGM) project in South Africa.

Hornor — who is fluent in Japanese and previously worked for a U.S. firm as a lawyer in Tokyo — was executive vice-president of Ivanhoe at the time, and proved instrumental in that investment.

“It’s difficult to imagine any junior mining company finding a deal or partnership like this with major Japanese companies, unless there is a long history of working together,” he said.

Japanese groups such as Itochu — which help supply commodities to their industrial partners in Japan — are looking mostly for base metals, but as the Ivanhoe deal demonstrates, also for PGMs.

Kaizen has compiled a list of opportunities based on geology, political risk, commodity, development stage and other factors, and is entertaining enquiries from people who have properties to sell. But before it makes any final decisions on which companies and projects to pursue, it consults with Itochu.

Kaizen’s portfolio consists of an option to earn up to 95% of the exploration-stage Fairholme copper–gold–molybdenum project in New South Wales, Australia, which HPX TechCo contributed to the merged entity, and 100% of the early stage Ebende nickel–copper–PGM project in the Democratic Republic of the Congo, which Concordia brought to the table.

(In addition, it has the Kerboule gold project in Burkina Faso, a Concordia Resources project that will not see any work this year.)

The West Cirque acquisition, which closed on July 8, has added seven porphyry copper projects in B.C. to Kaizen’s portfolio. Three of these — Castle, Tanzilla and Pliny in the province’s northwest — are under option to Freeport-McMoRan Copper & Gold (NYSE: FCX), which can earn a 51% interest by funding $8 million in exploration over four years. The first hole at Tanzilla, to test a large lithocap-associated porphyry target, is expected before August.

West Cirque shareholders received half a Kaizen share for each West Cirque share held. West Cirque shareholders now own 14.7 million Kaizen shares, or 9.9% of the 148.6 million shares outstanding.

Hornor says West Cirque had been on HPX TechCo’s radar before, but the junior’s management team only became interested once it went public as Kaizen, and landed its strategic alliance with Itochu.

“We had done a lot of work on the geology through our technical team and we felt that the location of the different projects, particularly Aspen Grove and Tanzilla, had very high prospectivity,” he added.

Aspen Grove is close to the Copper Mountain and Highland Valley mines in southern B.C., while Tanzilla is in the north.

Kaizen and Itochu have just signed a preliminary agreement for joint ventures at Aspen Grove and Tanzilla. In return for a cash payment of $4 million, Itochu will receive a 40% interest in Aspen Grove. The trading house will also get a 15% stake in Tanzilla, in the northern Stikine terrane, and an option to buy another 10% interest for $250,000 in cash. The Tanzilla transaction is subject to the consent of Freeport, which is due to start drilling there this month.

In addition to a direct ownerships stake, Itochu has the right to offtake from both projects in proportion to its interest. It will also help Kaizen arrange project financing from Japanese financial institutions. Work at Aspen Grove, located in the southern Quesnel terrane in the Aspen Grove copper belt, will begin later this year under the management of Kaizen.

Whether B.C. will move down the list of desirable jurisdictions after the recent Tsilhqot’in decision on aboriginal title is yet to be seen.

Asked in early July about the decision, Hornor responded by email that the company has no comment on the court case, adding: “We respect the rights and concerns of First Nations and will be reviewing the court’s conclusions with our West Cirque colleagues to obtain their assessments of any implications for West Cirque projects.”

Advanced technology

Another key part of Kaizen’s story is its access to exploration technology developed by High Power Exploration.

In fact, whether it can employ the technology to its competitive advantage is one of the factors it looks at when making acquisitions.

High Power’s proprietary technology — the Typhoon data-acquisition system — was developed to evaluate buried targets.

“Essentially the technology is conventional induced-polarization (IP) technology, but super-charged, I like to say. It allows conventional IP to look deeper, faster and better than conventional IP, which is up to five times deeper than conventional IP,” Hornor says.

In IP surveys, an electrical charge is sent into the ground via a widely spaced transmitter and receiver. Rock bodies that can hold a charge or are conductive with low resistivity can show up as anomalies in the survey, and offer up drill targets.

Hornor says the depth IP surveys can reach is limited by the space that can be achieved between the transmitter and receiver. As opposed to conventional IP systems, the more powerful Typhoon system allows for wider spacing between the transmitter and receiver, and therefore provides surveys that can penetrate deeper.

“The technology enables us to ‘supercharge’ the transmitter, thereby widening the allowed spacing between the receiver and transmitter,” Hornor says. “In doing so, we then can test chargeability and resistivity of mineralization at depths up to five times greater than conventional IP, with much clearer data sets.”

The system also has advantages in terms of speed of accuracy.

“We’re able to dramatically increase the pace of exploration in the field because we can cover larger areas of ground in a shorter period of time,” Hornor explains. “The better signals allow better sampling and therefore, much more accurate imaging than conventional technology.”

The technology has also been used in areas such as the Caliche in Chile, where resistive layers impede traditional IP.

“Conventional IP is not able to penetrate these resistive layers, whereas our technology can and is proven to penetrate the resistive layer and see far deeper, down below 1,000 metres,” Hornor says. “We think that is an extreme competitive advantage, to start looking in areas in Chile that no one to date has been able to even explore.”

The technology has also been used in Namibia and Australia.

Kaizen has a service agreement with HPX TechCo that gives the company access to technology basically at cost, plus a small fee.

So far, outside of Kaizen, only one other company has access to the technology: High Power Exploration has done a deal with Australian company Apollo Minerals to earn an 80% interest in its Commonwealth Hill iron oxide copper–gold project in South Australia. But there could be more in future, with High Power using the technology to find earn-in and acquisition opportunities around the world.

“To the extent that a father competes with a son, I guess we compete with them, but it’s a friendly relationship because to the extent we do well, they do well,” Hornor said.

2014 work program

Kaizen hasn’t yet released its exploration budget for the year, but it has $13 million in working capital and another $5-million line of credit from HPX TechCo.

It plans to do work on Fairholme, where it has so far earned a 49% interest from Clancy Exploration, and on Ebende.

At Fairholme, the partners will continue geophysical work, including an airborne magnetic survey over the property and a 3-D IP survey to follow up on gradient-array IP anomalies defined last year. The detailed IP survey will cover the 33 sq. km area encompassing the Boundary, Dungarvan and Gateway prospects. A drill program will follow.

Kaizen can earn 65% of the copper–gold–moly project — where drilling has confirmed porphyry-style copper and gold mineralization — by spending $4 million over the next two years to complete a scoping study.

In the DRC at the Ebende nickel–copper–PGM project, which has seen stream-sediment sampling, work this year will consist of a gradient-array IP survey and soil geochemistry survey. Ebende is a conceptual project based on geological similarities to the Norilsk PGM–nickel–copper megadeposit in Russia.

Both Fairholme and Ebende should benefit from High Power Exploration’s technology: the Fairholme project area is covered by a thick, highly conductive lake sediment, and Ebende has highly resistive cover. Both render conventional IP ineffective.

At press time, Kaizen shares traded at 54¢. The shares have traded between 45¢ and $1.05 since December.



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Photos

West Cirque Resources' Tanzilla copper-gold project in northern B.C., 20 km southeast of Dease Lake. Credit: West Cirque Resources
West Cirque Resources' Tanzilla copper-gold project in ...
Trucks at Kaizen Discovery's Ebende nickel-copper-PGM project in the Democratic Republic of the Congo. Credit: Kaizen Discovery
Trucks at Kaizen Discovery's Ebende nickel-copper-PGM p...


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