Chromite's Accidental Gold Rush

Chromite is a mineral that gives stainless steel its shine. It's also become the latest example of a phenomenon well-known to anyone who plays in the sketchy world of Canadian mining stocks: the accidental gold rush.

Cliffs Natural Resources, the largest North American iron-ore producer, is locked in a takeover battle with tiny Noront Resources Ltd. over Freewest Resources Canada, an equally tiny penny stock that just happened to stumble across what might be the biggest chromite deposit in North America.

Freewest has agreed to sell those chromite deposits to Cliffs for $100 million in Cliffs stock, or about 50 cents a share. The Montreal-based mining firm dismisses the offer from its sometime partner Noront of 81 cents a share in Noront stock and warrants as laughable. The offer would dilute Noront's existing shareholders by at least 30%.

"They're out to make money," says Mackenzie Watson, geologist and longtime chief executive of Freewest, whose shares have ping-ponged between 15 cents and 40 cents over most of this decade as the company racked up millions of dollars in losses.

How Freewest came to control an estimated 100-million-ton chromite deposit in Northern Ontario--a 50-year supply of the mineral, at current production rates--is a tale as old as Canada itself. The deposits, in an area now grandly dubbed the "Ring of Fire," were discovered in 2003 after another tiny Canadian mining company, KWG Resources, drilled its second test hole looking for diamonds.

Back then the area, in the James Bay Lowlands, 400 miles north of Toronto, was called McFauld's Lake and it drew the attention of the penny-stock operators because De Beers Group had earlier discovered signs of "pipes," or vertical volcanic deposits of the mineral kimberlite that often hold diamonds.

"We knew this was an area that had never been explored before," he said of McFauld's, which lies 200 miles from the nearest railroad line and is infested with mosquitoes and flies in the summer months. "If it's a new area, a new discovery, you want to be there."

Freewest, along with KWG, Spider Resources ( SDERF.PK - news - people ) and Probe Mines ( PROBF.PK - news - people ), began staking claims all around the KWG drill hole in a game stock speculators call "closeology." Chromite wasn't even an issue; the word doesn't rate a mention in Freewest's annual report until 2006.

Then in 2007 Noront drilled another hole and found high-grade nickel with copper and palladium. "That blew the whole thing wide open," says Watson, and the mine operators quickly came up with the catchy "Ring of Fire" moniker and began issuing press releases. Noront discovered chromite a little while later in an area it was working in partnership with Freewest, and then in August of 2008 Freewest found massive deposits of chromite on its own land.

Subsequent drilling has uncovered 100 meters or more of 30% chromite, easily mined by removing the top layers of soil and rock. Since four countries--South Africa, Kazakhstan, Finland and Turkey--now control 80% of the world's chromite supplies, Cliffs says the Ontario mines will have "a distinct competitive freight advantage over producers in other parts of the world."

By jumping in to take control of these reserves from thinly capitalized exploratory miners, Cliffs is following a time-honored tradition in Canada. Forbes 400 billionaire Robert Friedland, after suffering defeat in the U.S. gold-mining business, journeyed to Canada in search of diamonds and at Voisey's Bay stumbled across one of the richest nickel deposits instead. He sold it to Inco for $3.1 billion in 1996.

Earlier in the decade, a Northwest Territories pasture surged to a value of $1 billion after Dia Met Minerals, then a 20-cent stock, discovered diamonds. It sold out to Rio Tinto ( RTP - news - people ) for $430 million in 2001.

Cliffs says it expects to begin producing 1 million to 2 million tons of high-grade chromite from its Ontario mines by 2015, assuming it can overcome the rival takeover offer from pipsqueak Noront. Cliffs also owns a 15% stake in KWG.

In the meantime Watson, whose stock hasn't budged above $1 over the past 20 years, is already thinking about his next big score. Under the terms of the Cliffs agreement, Freewest shareholders will receive stock in the U.S. mining giant as well as the remaining operations of Freewest, consisting mostly of hopeful gold prospects scattered across Canada. In recent years, Freewest has earned almost nothing from mining and generated most of its cash--$26 million since 2003--from selling stock.

Freewest shareholders got a similar gift in 2007 when the company spun out its uranium properties into Quest Uranium Corp. The stock surged from a nickel to $2.80 a share on yet another accidental discovery: rare earths, minerals used in the production of superconducting materials and green-energy technology.

"The uranium's not economic, but it looks like a world-class rare earth prospect," Watson says.