17-Oct-2011 | News-Press Release

Velocity Minerals Ltd. has arranged an agreement with the holder (the lessee) of certain leases of an Arkansas coal project whereby Velocity can earn a 50-per-cent interest in the project in return for providing: (i) an initial $25-million (U.S.) of capital to commence commercial production on the project from surface; and (ii) an additional $25-million (U.S.), following production of the surface portion of the project, to produce the underground portion of the project. The company will have a preferential right to receive 90 per cent of cash flow until it receives repayment of the capital advanced and a cumulative 40-per-cent return. Thereafter, cash flow will be distributed equally to the company and the lessee.

It has been estimated by the lessee that it will cost $24.6-million (U.S.) to put the surface portion into production at a rate of 35,000 tons per month. The lessee has also estimated that a later capital injection of an additional $25-million (U.S.) will be required to put the underground operation into production. Management has reviewed historical data and feasibility studies, but has not yet conducted an independent assessment of the deposit or confirmed the terms of the studies or the estimated costs.

The project is a historical metallurgical coal deposit with an exposed highwall from previous surface mining. The lessee is proposing starting production with a mining operation that will focus on the highwall and then go underground. Highwall mining occurs when the overburden prevents further strip mining. The exposed coal seam is known as the highwall. Relatively new, specialized mining equipment allows mining 800 to 1,200 feet into the highwall.

There is a non-National Instrument 43-101-compliant in-place resource and minable reserve calculation that delineates approximately 1,386,000 tons and 975,333 tons, respectively, of metallurgical coal in the highwall portion of the project, prepared in 2008 by Greg Lewicki and Associates PLLC. The sampling and analytical methods used are unknown and unverified by an NI 43-101 qualified person, and should be viewed with caution. Similarly, Mr. Lewicki's usage of the terms "resource" and "reserve" does not conform to current usage of the term. Additional data suggest the potential for additional tons of metallurgical coal, bringing the total that can be mined from surface to approximately two million tons.

In addition to the portion of the deposit accessible from surface, historical data suggest a further deposit of approximately 21 million tons of metallurgical coal available for underground extraction. Again, the sampling and analytical methods used are unknown and unverified by an NI 43-101 qualified person, and should be viewed with caution.

Marvin Mitchell, PGeo, a qualified person as defined by NI 43-101, has reviewed the technical aspects of this news release.

The project will be held and operated by a newly incorporated Arkansas limited liability company (the LLC), owned equally by the company and the lessee. Velocity will be the manager of the LLC. Velocity's obligation to provide the funds mentioned above is subject to Velocity receiving confirmation of title, tonnage, grade and feasibility from its advisers, and receiving project permitting from the appropriate authorities. The lessee has granted Velocity a 12-month due diligence period to obtain the confirmations referred to herein, and Velocity will have complete access to the coal project to conduct such exploration and assessment activities, including surface sampling, geophysical surveys and drilling, as its advisers deem necessary.

In consideration of the lessee granting the due diligence period, Velocity has agreed to provide to the LLC, as a contribution of capital, $1.5-million (U.S.) to pay continuing lease maintenance fees ($500,000 (U.S.)), quarterly unsecured advances on future distributions to the lessee during the due diligence period ($125,000 (U.S.) per quarter for a total $500,000 (U.S.)) and project permitting costs ($500,000 (U.S.)). For Velocity to finance these payments and assess the feasibility of the project, it will have to complete a financing of not less than $2.5-million. Should the financing fail to be completed by Nov. 15, 2011, the lessee may terminate the agreement. In addition, within 15 days after completing the financing, Velocity is required to issue 300,000 shares to the sole shareholder of the lessee.

If Velocity determines that one or more of the confirmations or permits referred to above cannot be obtained in a timely manner and at a reasonable cost, Velocity may elect to discontinue its ownership in the LLC without further obligation of either party, and whatever portion of the said $1.5-million then remaining unexpended will be returned to Velocity.  

    We seek Safe Harbor.



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