Investors roll dice on silver feud

Now that you've made a few bucks on Falconbridge, thanks to Inco $34-a-share takeover offer, it's time to have some real fun with Canadian mining companies. How about using your winnings to gamble on the ugly little spat between Aquiline Resources and IMA Exploration?

A warning: This one's not for the faint-hearted. Bet right and you own a yacht. Bet wrong and your kids will never see a private school again. The B.C. Supreme Court will determine the winner in a four- to six-week trial that started on Tuesday in Vancouver. The case has received remarkably little attention, given the prize at stake. It is certainly the biggest mining trial of recent years, perhaps the biggest since the 1980s gold property war between Lac Minerals and International Corona.

Aquiline and IMA are junior mining companies you've never heard of. They have little going for them other than passionate CEOs and competing claims on Argentina's Navidad silver play. Navidad is not just another overhyped deposit used by promoters to hose investors. It's real and it's big.

IMA has punched 150 holes into the barren property since 2003. The drilling results indicate a resource of more than 300 million ounces. At today's price of $7.90 (U.S.) an ounce, up about 60 per cent in two years, the silver in the ground is worth $2.4-billion. Aquiline's market value is a mere $62-million (Canadian); IMA's is $150-million. Either has the potential to gain hundreds of millions of instant value depending on the trial's outcome.

Analysts think more drilling will reveal an even bigger resource, since less than half of the property has been drilled. IMA talks about "bonanza-grade" boulders, with silver running through them like fat on a well-marbled steak. No wonder investors ranging from little mining shops to well-known Toronto investors, including Sprott Asset Management and Rosseau Asset Management, are placing their bets.

The bet is simple. In essence, it boils down to two questions. Did IMA use confidential information to stake the Navidad property in late 2002? If so, did IMA breach a confidentiality agreement?

IMA, led by an Italian tailor turned mining promoter called Joseph Grosso, 67, will likely answer No to both questions. Aquiline, led by the hyperkinetic 44-year-old Marc Henderson, will argue the opposite is true.

It appears that more investors than not, Rosseau among them, are gambling Mr. Henderson is right. Aquiline's shares have been rising. IMA's have been falling (though IMA's value is still more than double Aquiline's, suggesting a strong core of IMA supporters). In September, IMA tried to settle the dispute by offering Aquiline a $21-million package of cash and shares. Mr. Henderson said forget it and unleashed the litigators.

The background to the Aquiline-IMA slugfest is messy. One analyst says the story "is like peeling an onion -- there are layers upon layers." In essence, Aquiline contends IMA gained access to the data that led to the Navidad discovery when IMA was conducting due diligence on a Newmont Mining property in Argentina called Calcatreau, which was for sale. Aquiline ended up buying the property and soon discovered IMA had staked the nearby Navidad site.

Mr. Grosso has admitted he used the data, but has suggested the information was neither confidential nor considered valuable by Newmont, because Newmont didn't nab the silver play itself. In an interview with The Globe and Mail in June, Mr. Grosso said the information was given to him as a "gift."

Some investors are hedging the outcome of the trial by buying equal amounts of equity in both companies. The theory is that the gains made on the company that emerges victorious will greatly exceed the losses on the company that does not.

That, of course, assumes there will be a winner and a loser, with the winner taking all. But judgment and remedy risks are hard to quantify. It's possible the winner will receive only part of the silver property or a cash payment that does not reflect the property's true potential. Or the judge may decide the case is muddled to the point a draw has to be declared, in which case Navidad might be cut down the middle.

That's just the start. Whoever gets control of Navidad will have to obtain mining permits from the Argentine regulators, who have stopped resource developments in that region in the past. With no permits, the property would be hard, perhaps impossible, to sell to a company with the financial might to build a mine and sell the silver.

This much is certain: After years in the dead zone, Vancouver's Howe Street, the home of the mining promoters, is thrilled to see some action. The Aquiline-IMA case brings back the buzz with a bang. Place your bets.

ereguly@globeandmail.ca