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Callinan Mines Cash Flow Fuels Asset Search

By James West
MidasLetter.com
Thursday, April 30, 2009

There really aren’t a lot of mining companies on the TSX Venture who can say they’ve been in business for over eighty years. But that is indeed a feather in the hat of Callinan Mines [TSX.V:CAA]. Over such a long time span, the company has seen ups and downs, but has demonstrated a knack for reincarnation at a profit.

Callinan has enjoyed flexibility in evaluating its options thanks in large part to a 6.6% royalty it owns on HudBay Minerals’[TSX:HBM] 777 mine, that company’s flagship operation that began production in 2004. For the fourth quarter of 2008, Callinan received an interim payment of $1,282,276 from HudBay Minerals Inc. This payment represents 75% of an estimate of 6.66% of the net profits from the 777 Mine in Flin Flon, Manitoba for the quarter ended December 31st, 2008.

In August last year, Callinan’s quarterly payment totaled $3,313,723, thanks in large part to copper prices which were still relatively high during Q308.

For fiscal 2008, Callinan realized $0.06 a share in earnings – a fact that appears lost on a market whose blue chip companies in 2008 almost uniformly declared heavy losses for the year. It is that indiscretion that could be an opportunity for investors.

The payments from HudBay Minerals have been a bone of contention between the two companies for several years now, with Callinan’s position being that HudBay has not properly remitted Callinan’s share of the revenue from the 777 and Callinan mines to which the royalty agreement pertains, and is in violation of the agreement for not providing access to the production records and financially statements pertaining to the two mines.

The Court of Queens Bench concurred with Callinan’s lawyers in March 2008, and ordered access be granted to Callinan. Other aspects of the ongoing action filed in the Province of Manitoba in 2007 has Callinan seeking:

• A declaration that Callinan has the right to conduct an audit of the books and records of the operations of HudBay in relation to the Callinan Mine and the recently developed 777 Mine;
• A declaration that HudBay must keep and maintain separate records and accounts for each of the Callinan Mine and the 777 Mine;
• A declaration that the Cumulative Cash Flow defined in the NPI Agreement and accumulated for the Callinan Mine should not be used in calculating the Net Profits interest from the 777Mine;
• An order compelling HudBay to make available to Callinan the books and records of both the Callinan Mine and the 777 Mine;
• An order for an accounting of all sums improperly included or excluded in calculating the Net Profits Interest;
• General damages for breach of contract and breach of fiduciary duty; and
• Aggravated and punitive damages, interest and costs.

Though pointless to speculate as to the likely outcome of the case, it potentially represents a potential windfall for Callinan shareholders should the court find in its favour. A favorable judgment could be worth in excess of $50 million.

While the case wends its way through the court, Callinan continues to explore a collection of primarily base metals projects in which it has 100% interest.

It recently completed three holes on its Phillips Lake property in theThomson Nickel Belt in northern Manitoba that are designed to test anomalies located by pulse EM in the vicinity of mineralization located in previous drill programs.

The drilling equipment and crews from that program have now been moved to the Berry Creek and Herblet claims near Snow Lake, Manitoba. A drill program of approximately 1000 meters is underway where anomalous uranium values were recently discovered.

At its Coles Creek project, slver assays previously reported as > 300 g/mt ( > 9 oz/t) have been confirmed to contain values of up to 1734 g/mt (50.6 oz/t), and late last year metallurgical testing of its CAL claims, located between Snow Lake and Thompson, Manitoba.

Currently, Callinan is focused on asset acquisition though.

According to company spokesman Braden Maccke, “We’re presently conducting due diligence on two candidate projects in the United States. Our goal is to acquire near term producing gold and/or polymetallic projects.”

War Baby

Callinan sees its future bolstered largely by its War Baby claim, which hosts an extension of the mineralized system currently being mined at the 777 claims.

The War Baby Claim sits adjacent to the 777 mine and is owned entirely by Callinan Mines (subject to a 10% back-in right by the vendor).

The last wedged hole of the drill program in 2000 was drilled to explore the down plunge extension of the 777 orebody below the 1560 metre level. To date, the most significant intercepts include:

• Hole #1 intersected 23.9m of 0.58% Cu including 5.0m of 1.20% Cu;
• Hole #2 intersected 9.9 meters, 3.64% Cu , including: 5 meters of 6.67% Cu;
• Hole #3 intersected 9.35m of 2.08% Cu including 5.85m of 3.00% Cu;
• Hole #4 intersected 12.3m of 0.60% Cu including 2.16m of 1.52% Cu.

Callinan is in the enviable position of having a no-cost revenue stream sufficient to offset operations and provide funding for ongoing exploration and acquisition activity. It is conceivable that the announcement of additional assets could give the company the impetus it needs to achieve yet another production success.

Learn more at the company's web site at www.callinan.com.

DISCLOSURE: No stock held in Callinan Mines or HudBay Minerals by the author or any employee or affiliate of MidasLetter.com or Midas Publishing LLC.