New funding speeds Kryso Resources towards production at Pakrut Gold Project

We have seen mixed news over the last couple of weeks from Kryso Resources (AIM: KYS), the Tajikstan focused gold developer. Their big fund raising with Vertex Mining is off, as shareholders voted down the amendments being proposed to the Articles of Association, which would have given Vertex de-facto control of the company. But a smaller funding - enough to finish the bankable feasibility study - is on, with less dilution for existing shareholders. CEO Vassilios Carellas has stepped down for personal reasons, but his place is temporarily filled by Trevor Davenport. The project is running behind schedule, but current drilling is looking promising, and an acceleration in metres drilled is on the cards when two extra drills will be in operation in a few weeks time.

So how did we get to where we are today? 

Kryso's main project in Tajikistan is the Pakrut gold project, which sits at the centre of a large licence area of some 6,300 hectares, alongside a number of other smaller mineralised systems. Currently hosting 1.7 million ounces of gold, over half of which is a JORC compliant measured resource, the project is currently well on the way to completion of a bankable feasibility study.

Junior developers have found working capital hard to come by in the last twelve months, and Kryso have been seeking further funding for some time. In February it was announced that Cyprus-based Naveen Holdings (who subsequently changed their name to Vertex Mining) had advanced £500,000 to the company as a loan which would convert automatically to 9,090,909 Kryso shares at the rate of 5.5p each on 13 May. In addition, they proposed to subscribe for 29,157,925 new shares at 8.78p each, lifting their stake to 29.99% of the issued share capital and bringing another £2.56 million into Kryso's kitty. Provision was also made for sufficient warrants to be issued to Vertex at 8p per share to permit them to increase their holding up to 51% at a later date, which would bring in significant additional cash.

The placing was subject to a number of conditions, including the appointment of Vertex's nominee Mark Gyetvay as Chairman along with two other Vertex-nominated directors, and the amendment of the company's Articles to give the Chairman a second or casting vote at board meetings. At the subsequent EGM on 13 May, shareholders were happy to give the company the authority to raise additional equity, and cheerfully disapplied their pre-emption rights, but the resolution regarding the Articles of Association was met with disapproval and was not passed. As the placing and warrant issue were conditional on this resolution being passed, discussions between Kryso and Vertex were discontinued, although the loan note converted as planned, giving Vertex a 9.24% holding in Kryso.

Within just two weeks, it was announced that Orbis Equity Partners, Kryso's co-broker, had entered into an Equity Placing Agreement with the company to raise up to £1.5 million at 5p per share, plus attached warrants at 8p per share, exercisable within 2 years. The first £500,000 of these funds will be raised in three tranches over a period of two months from the date of the agreement - half now, a further £250,000 within one month, and the remaining £250,000 a month later. Further issues on the same terms will be arranged between Kryso and Orbis as required, to a maximum of £1.5 million in total. Kryso were also able to announce that Great Basin Gold, who had advanced the company £500,000 last Spring, would convert their loan - and the interest due - to Kryso shares at the rate of 5p per share, and would be granted warrants exercisable for 2 years at 8p for each share so converted.

These two arrangements - totaling just over £1 million in funds - will add around 21 million new shares to the 98.5 million currently in issue, giving Kryso a market cap of approximately £7.2 million. Conversion of warrants will potentially bring the company a further £1.7 million when exercised.

At the same time, the company announced the decision of MD Vassilios Carellas to resign from the board for personal reasons. Kryso will seek a replacement CEO, but in the meantime non-exec Chairman Trevor Davenport, who has been with the company since 2004, will take over his role. Trevor visits Tajikistan regularly, and before joining Kryso he had been with both Nelson Resources and Zeravshan Gold, so will hold the fort admirably whilst Kryso seek a new man for the MD role.

Kryso lost no time in updating shareholders on the progress made at the Pakrut gold project since their treasury was given a boost by the Vertex convertible back in February. The most important work in hand right now is the completion of the bankable feasibility study and as part of this, the continued development of Zone 1 - still open in all directions - has been the main focus of diamond drilling so far.

The two rigs currently drilling on site will be augmented shortly by another diamond drill and a reverse circulation rig, which are awaiting the imminent arrival of drilling supplies. The internal pre-feasibility study conducted last year estimated that the current resource at Pakrut - now over 1.7 million ounces - could support a combined open pit and underground mining operation generating around 100,000 ounces per annum at cash costs of well under $300 per ounce.

This model will be strengthened by the drilling campaigns currently under way, which should lead to an increased resource overall, and an upgrade of inferred resources to indicated and measured in preparation for the completion of the BFS. The portents for this are good, as last year, Kryso had to compile a resource/reserve statement compliant with the Russian classification system in order to obtain approval from the State Committee for Reserves, which defined a C1+C2+P1 gold resource of 2,055,047 oz at an average grade of 2.44g/t, including a C1+C2 reserve of 1,257,454 oz at an average grade of 2.62g/t.

It also emerged that, as well as pursuing Zone 1, Kryso have begun investigating other Pakrut mineralised zones, several of which - Zones 4-6 - lie just across the river from the main development. These, whilst explored at surface and through adits by the Russians, have never been studied in any depth, and have not been drilled. But two holes drilled into Zone 6 have both revealed 30 metre intersections of mineralisation, opening up the potential for further mineable resources. Zone 6 will be followed up with a further drill programme later in the year. Independently produced assay results from the 2008 programme as well as the current drilling have been backing up for some time, but will be released as they become available from the SGS Lakefield labs in South Africa.

If the forthcoming assay results replicate some of the early 2008 results - which turned up the best intersection yet of 123m @ 6.16g/t in Zone 1 - then perhaps the market will revise its current niggardly valuation of Kryso. And niggardly it is. When house broker Fox Davies published their update on Kryso at the end of April, giving a target price of 47p per share, they calculated that the discovery cost of the Pakrut gold resource was $7 per ounce. At a market cap of £7.2 million, investors are valuing 900,000 ounces of measured gold resources and a further 800,000 ounces of indicated and inferred gold resources at just $6 an ounce - less than Kryso have spent to find it.