Guys,Got this sent through from a broker on the legal...

Guys,
Got this sent through from a broker on the legal proceedings and thought it might be of interest for all.

Strike Resources Ltd (SRK) $2.35

Recommendation: BUY
Event

SRK has exercised its two Options to purchase the remaining 38.5% interest in Apurimac Ferrum S.A (AF) for US$34.5m cash.

The Company has also advised that its ownership in AF is being challenged by way a 'judicial precautionary measure' from one of its partners, being D&C Pesca S.A.C. (D&C).

Impact
Since the 1960’s a Peruvian family has held title to the concessions in the Apurimac and Cuzco projects. SRK entered into two agreements that secured the Company the right to progressively earn a 68.15% interest in these projects.

SRK's ownership in these two Peruvian iron ore projects will occur through it’s investment in Apurimac Ferrum S.A. (AF), a Peruvian company that now holds title to the concessions in the two projects.

The bullet payment of US$34.5m, being the cost to exercise Options to acquire shares in AF, has delivered SRK a further 38.5% in AF. SRK’s direct stake in AF now stands at 51% as specified under the AF Agreement.

The remaining of SRK’s 68.15% interest in AF has been acquired under the MAPSA Agreement. SRK has already paid a US$10m bullet payment in cash and shares and is required to pay a further US$10m when production and sales from Apurimac and Cuzco first exceed 20Mtpa.

Legal Dispute:

By way of background, the below figure (could not post this diagram that showed corporate structure) outlines the ownership structure of AF, which owns the two iron ore projects. Two agreements are at the centre of this ownership structure:

1) In November 2006 SRK entered the ‘AF Agreement’ to acquire up to a 51% interest in the two iron ore projects from two parties, Minera los Andes y el Pacifico S.A. (MAPSA) and D&C Pesca S.A.C. (D&C).

2) In February 2007 SRK entered into the ‘MAPSA Agreement’ to acquire a further 70% of MAPSA’s residual interest in AF, taking SRK's stake to 68.15% in AF.

D&C is challenging SRK's 70% interest in Iron Associates Corporation (IAC) which was acquired under the MAPSA Agreement. D&C has alleged that SRK's acquisition was contrary to the terms of the AF Agreement.

Based on its legal advice, SRK strongly rejects and dismisses all assertions and claims made by D&C.

We understand that the two minority owners in AF, being D&C and MAPSA, do not get along with one another and accordingly we have anticipated that SRK would eventually acquire MAPSA's residual interest in IAC.

We believe the action by D&C appears to be opportunistic and in protest to SRK's better relationship with MAPSA providing it with an opportunity to build its stake in AF.

Based on guidance from the Company, we expect this legal dispute to take at least 6 months to be settled. We highlight that it only concerns SRK's 70% interest in IAC, which represents a 17.2% interest in the two iron ore projects.

Importantly, SRK has confirmed that it does not believe that these legal issues will impede on its development timetable. Stage 1 is not infrastructure constrained under the current mine plan of 2Mtpa, and first production remains on schedule for the Company's mid-2009 target.

While this Option payment has all but used up the proceeds from SRK's recent A$32m placement, we do not believe funding is a key risk in the short-term.

Upon SRK exercising these Options for US$34.5m, its partners are required to inject a further US$10m in AF. This will see AF become cashed up and able to finance its planned exploration and development studies. This also leaves SRK with circa A$10m in the bank.

If we reduce SRK's ownership to 51% in our estimates to reflect the event that D&C is successful, our valuation decreases from $7.89/share to $6.96/share. We retain a BUY with a price target of $7.89/share.