Background In Jul 06 SRK entered into a an agreement with...

Background

In Jul 06 SRK entered into a an agreement with Peruvian privately owned companies, Apurimac Ferrum S.A (AF), Minera los Andes y el Pacifico S.A. (MAPSA) and D&C Group S.A.C. (D&C) to earn a 51% equity interest in the Apurimac and Cuzco iron ore projects (See below). Transaction consideration includes:

Initially a US$6.5M on exploration to earn a 12.5% interest in AF. This was completed in Feb 08.
A bullet payment within 4 years of US$34.5M to exercise options in AF shares owned by D&C and MAPSA delivering SRK an additional 38.5% of AF. Post this transaction D&C and MAPSA each control 24.5% of AF.
In Feb 07 an agreement with MAPSA was signed to acquire 70% of MAPSA’s residual 24.5% interest in AF for a consideration including:

US$10M, US$6M cash and issue of 3M SRK shares already fulfilled.
US$10M when production exceeds 20Mtpa. On completion of these transactions SRK will control 68.2% of AF which owns the titles over the Apurimac and Cuzco projects.
In May 07 SRK earned the right to acquire a further three mineral concessions in the Apurimac district for an initial US$0.2M and bullet payment of US$3.0M.

Strike Resources (SRK) - exercises options to gain an additional 38.5% interest in the issued capital of Apurimac Ferrum (AF).

Ownership - Prior to exercise of options Strike Resources (SRK) held a 29.65% interest in AF comprising 12.5% directly and 17.15% indirectly (through the IAC transaction which was concluded last year).

Investor - D&C Group and private investment group based in Melbourne control 24.5% of Apurimac Ferrum (AF). A private investment group based in Melbourne last year acquired through D&C Pesca an effective 10% interest in AF.

Injunction - D&C is attempting to block Strike Resources (SRK) right to exercise its option to earn a 51% interest in AF under the AF Shareholders Agreement signed 10 November 2006.

D&C's claim - relates to a transaction entered into between MAPSA and SRK in February 2007 whereby SRK acquired a 70% share in Iron Associates Corporation (IAC) which controls 24.5% of AF. D&C Group allegation is that this transaction was not consistent with the terms negotiated under the original AF Shareholders Agreement.

Legal advice - SRK has received from a highly respected Peruvian Counsel that D&C's claim has no basis.
Why - The IAC transaction was executed over 12 months ago and furthermore D&C entered into a similar agreement last year with a private Melbourne based investment group. SRK is of the view that this is an opportunistic claim designed to secure a windfall gain from the appreciation in the value of AF as the underlying value of the assets have increased significantly.

Response - SRK will vigorously defend the D&C claims and may seek damages against the D&C Group.

Project updates
Paulsens - a recent rock chip sampling programme identified high grade >64%Fe average grade rock chips from 55 samples.

RC drilling - 3,000m drilling programme commenced.
Production - If sufficient resources are identified the company plans to commence a small mining operation in 2009 producing 1Mtpa. The project is located 340km from the port of Dampier.

Apurimac/Cuzco
Heli-mag - survey commenced over the Auprimac concessions.
Drill results - significant drill results awaited from the Cuzco project.
Pre – feasibility- draft study results have been received which are being reviewed prior to final Board approval and release to the market.

We are of the view the decision by the company to exercise its option over the Peruvian iron ore assets is a positive development, as it highlights SRK's commitment and positive outlook for project developments in this new iron ore province.

Even though we are not in position to comment on legal matters the company has provided us with sufficient confidence that the claim made by D&C will not stop the progress made towards developing these projects. We maintain our BUY recommendation and valuation of A$10.65/sh.