Feature Story Date: November 25, 2005 The Cazaly Argument With...

Feature Story Date: November 25, 2005

The Cazaly Argument With Rio Tinto Could Bring Christmas Early For Legal Profession.

By Our Man In Oz

Follow the cash is a small piece of advice that has served investors well for centuries and might yet save a few overly enthusiastic speculators who are playing games with a small Australian explorer which thinks it has Rio Tinto on the ropes. Cazaly Resources, named after a legendary Aussie Rules footballer from the 1920s, Roy Cazaly, has laid claim to the 40 square kilometre Shovelanna iron ore prospect east of Mt Newman in the remote East Pilbara region of Western Australia. In theory, Cazaly is on a winner to rival any scored by its high-flying namesake, who gained fame in World War Two when Australian troops took with them into battle a cry of encouragement used by supporters of the South Melbourne Football Club (now the Sydney Swans) in pre-war games; “up there, Cazaly”, when the great man was attempting to mark the football. In the 1980s the cry even formed the basis of a working class hit song that began:

“Well you work hard to earn a living
But on weekends comes the time
You can do what ever turns you on
Get out and clear your mind
Me, I like football
And there’s a lot of things around
But when you line them up together
The footy wins hands down … leading into a chorus of:

“Up there Cazaly, in there and fight
Out there and at ‘em, show ‘em your might … etc etc”

The words, as much as anything, help paint the picture of the small man off to a weekend treat on the terraces, rather than joining Roman Abramovich in the chairman’s box at Chelsea. Cazaly (the company) is very much playing the role of the underdog which spotted an opportunity and took it. In this case it discovered a paperwork error by Rio Tinto which thought it had renewed claim to the Shovelanna tenement, but failed to lodge its paperwork in time. A complicating factor is that Shovelanna was only 50 per cent held by Rio Tinto with the royalty heiress, Gina Rinehart, owning 25 per cent, and the Wright family another 25 per cent – but more of that later.

The Cazaly version of events is that an opportunity came up, it seized the day, and can demonstrate (a) that the tenement had lapsed, (b) that it contains a whopping resource of between 100 million and 200 million tonnes of high-grade haematite ore potentially worth more than A$10 billion, (c) BHP Billiton wants to join in its development (d) the BHP deal will overcome a high impurities level in the ore because BHP can blend Shovelanna material with its adjacent Orebody 18 ore, (c) Investec has provided funds for a A$6 million drilling program, (d) an alleged side deal with Andrew Forrest’s Fortescue Metals Group does not apply, and (e) a mine can be quickly developed because of high levels of Asian demand for iron ore.

Said quickly, and all this falls beautifully into place, and that is certainly the view of some speculators who have bid Cazaly shares up from around A30 cents in early September to A$1.50 when the stock entered a period of self-suspension on Thursday pending an announcement which is expected early next week. The share price rise has catapulted Cazaly from a business capitalised at A$12.7 million to one worth A$64 million, and made millionaires of Cazaly chairman, Clive Jones, and managing director, Nathan McMahon, who are now sitting on scrip parcels worth around A$9 million each.

Now come the tricky bits (and a request that you pay attention because it is complex) – but, the tricky bits cannot be ignored. First, Rio Tinto will fight, and has already lodged an appeal with WA Mines Minister, Alan Carpenter, pleading “special interest”, that its paperwork error be overlooked, and Shovelanna be returned. If Carpenter agrees, Cazaly will have the job of fighting through the courts, an expensive and very time consuming exercise with the famous Bronzewing South tenement pegging dispute taking 10 years to resolve. If Rio Tinto loses, it is also off to court – so that 10-year time frame suddenly becomes an investment factor.

Ahh, say Cazaly supporters, Rio Tinto hasn’t a chance of winning because it failed to lodge the paperwork in time. True, but this is where the cash factor comes in because, as far as can be ascertained, Rio Tinto did two things early in August. It filled out a form to renew Shovelanna a week before its expiry and trusted a courier to deliver the documents to the Marble Bar mining registrar about 1,500km north of Perth, only to discover that the courier took 10 days to do the job. But (a very big but) sometime before the paperwork was sent off, Rio Tinto paid the Shovelanna renewal fee into the WA Mines Department in Plain Street, East Perth. Now the penny should be dropping, even though it’s not one that Cazaly spruikers are talking much about.

If the word out the back door at Rio Tinto is correct, and it would be most unwise to be gilding the lily on this one, a cash trail as well as a paper trail exists. The question for Carpenter is whether his department accepted Rio Tinto’s cash at one office and demonstrably recognised the company’s desire to renew the Shovelanna tenement, while the paperwork made its lazy way north.

Legal action, which appears to be a certainty in this matter, becomes almost intolerably complex when another factor is layered over, and that is the question of what will the Rinehart and Wright families do in regard to their 50 per cent of the tenement which was under Rio Tinto’s management – seek redress, presumably, of Rio Tinto, which will, if it loses its initial appeal, be suing the WA Government for taking the renewal cash, even if the paperwork was missing.

No-one, not even Minesite’s man in Oz, has the faintest idea as to how the great Cazaly caper will play out. But, given the 10 years in took to resolves Bronzewing South, and the fact that Rio Tinto has very deep pockets, and so do the Rineharts and Wrights, and that BHP Billiton is now a player, and Andrew Forrest is circling, and that the prize is so big, and this is a case that could run for decades because there will almost certainly be avenues opened up during the early hearings in the Warden’s Court, to the WA Supreme Court, to the State Full Court, and up to Australian High Court – just like Bronzewing.

It is with this background, and with the legal battles yet to be fought, that speculators would be well advised to consider the time factor when playing the Cazaly game.