Diversified Mineral Resources NL v CRA Exploration Pty Ltd

[1995] FCA 19

IN THE FEDERAL COURT OF AUSTRALIA                  )
  )
QUEENSLAND DISTRICT REGISTRY  )          QG 163 of 1990
  )
GENERAL DIVISION  )

DIVERSIFIED MINERAL RESOURCES NL

CENTRAL VICTORIAN GOLD MINES NL

Applicants

CRA EXPLORATION PTY LIMITED

Respondent

Coram:           Whitlam J
Place:              Sydney (Heard at Brisbane)
Date:              3 February 1995

REASONS FOR JUDGMENT

Introduction
           This case has its origins in announcements made successively by the firstnamed applicant Diversified Mineral Resources N.L. ("DMR") and by CRA Limited, the parent company of the respondent CRA Exploration Pty Limited ("CRAE").

On 7 September 1990 Mr Wayne McCrae, the managing director of DMR, sent to the stock exchange an announcement in the following terms:

"As part of Diversified Mineral Resources N.L. rationalization programme, the company has sold its Silver King Project for a total cash consideration of $3 million.  This represents a 200% gain on investment within an 18 month period.

This sale has occurred partly due to the uncertain economic times and unwillingness of Diversified Mineral Resources N.L. to proceed with debt financing the project in such times.

The company is still continuing with its divestment of assets including the sale of Mt Freda, excess plant and equipment and part ot [sic] its' [sic] share portfolio.

The potential proceed [sic] from these asset sales could bring the company's cash position to $9m.

This will enable Diversifid [sic] Mineral Resources N.L. to proceed with development of the major Burton Downs Coal Project which contains 115 million tonnes of coal."

Ten days later, on 17 September 1990, CRA Limited ("CRA") issued the following press release:

"CRA EXPLORATION ZINC DISCOVERY

IN QUEENSLAND

At the Century prospect in the old Lawn Hill mineral field, 250 km north-west of Mt. Isa, Queensland, CRA Exploration has discovered significant stratiform zinc-lead-silver mineralisation.

The mineralised zone is approximately 30 to 40 m thick and averages approximately 7% zinc, 1% lead and 30 g silver per tonne.  This zone includes an horizon about 12 m thick averaging approximately 13% zinc, 1% lead and 10 g/tonne silver.  Preliminary metallurgical tests suggest conventional techniques are applicable for separation and concentration.

The mineralised zone, which has been intersected by 25 drill holes covering an area of more than one square kilometre, is flat-lying and sufficiently close to the surface to be amenable to open cut mining.  Exploration and metallurgical test work is continuing to determine the full extent of the mineralisation.

CRAE has been exploring the area for almost three years.  Recently, additional mineral titles were acquired from Diversified Mineral Resources NL.  These are located some distance from the Century prospect and will be the subject of future exploration."

Subsequently Mr McCrae, on behalf of DMR, sent CRAE a letter dated 9 October 1990 in these terms:

"Sale of DMR Interest - Lawn Hill Mineral Field.

We refer to the recent sale agreement between our companies by which, for a price of $3,000,000 your Company acquired tenements held by this Company in the Lawn Hill Mineral Field.

As you would be aware, in the period prior to that agreement, our companies had entered into a Farm-In-Agreement in respect of Authority to Prospect No 5875M and were pursuing the agreement with a view to Joint Venture.

The sale agreement was completed on 14th September, 1990 and on 17th September, 1990, your company made its announcement concerning its discoveries in the Lawn Hill area, which were subsequently reported to contain 70,000,000 tonnes, including a relatively high grade 13 per cent zinc zone containing a 30,000,000 tonne resource.

You will not be surprised to hear that the officers of this company have been criticised by some of its shareholders in consequence of this sale agreement.

The statements in the Press are at variance with advice relied upon by our officers that the field had limited potential of up to 10,000,000 tonnes, that certain of our tenements were worthless and that production from the tenements as a whole would only be useful as part of a satellite pit operation for blending with Dugald River concentrates.

In view of our shareholders' concerns and our own concerns in these circumstances, we seek an early meeting with you to discuss the position."

Correspondence and discussions ensued between CRAE, DMR and their respective solicitors.  The applicants commenced this proceeding on 24 December 1990, alleging that CRAE had engaged in misleading or deceptive conduct contrary to the
provisions of the Trade Practices Act 1974 and that CRAE had breached its fiduciary duty to them.

DMR's Tenements

Pursuant to the sale agreement, which is mentioned in Mr McCrae's letter, CRAE acquired sixteen tenements.  They comprised mining claims, mining leases and an exploration permit.  What had been authorities to prospect prior to 1 September 1990 were on that day effectively converted into exploration permits, and this permit was one of those.  Accordingly, the tenements may be conveniently described by the abbreviations "MC" for mining claim, "ML" for mining lease and "ATP" for authority to prospect or (after 1 September 1990) exploration permit.  The tenements were:

NumberName

ATP 5875Cassowary

ML 7654Silver King No. 2

ML 7655Silver King No. 3

ML 7656Chance

ML 8026*King Extended

ML 8068*King Surrounded

ML 7713Mended Hill

ML 7687*Silver Queen South

ML 7688*Silver Queen North

MC 3119Cassowary No. 1

MC 3120Cassowary No. 2

MC 3121Cassowary No. 3

MC 3122Cassowary No. 4

MC 3116Wooden Duck No. 3

MC 3117Wooden Duck No. 2

MC 3118Wooden Duck No. 1

The secondnamed applicant Central Victorian Gold Mines NL ("CVGM") had a 10 percent interest in the leases shown with an asterisk.  CVGM is a wholly owned subsidiary of DMR.

The group of leases ML 7654, ML 7655, ML 7656, ML 8026 and ML 8068 may be conveniently called the Silver King leases.  The Silver King Project, which is referred to in DMR's announcement above, was a proposal to mine the Silver King and Mended Hill leases and the Cassowary mining claims.

The land the subject of the mining claims was located within ATP 5875.  However, all the leases related to land situated within the adjoining ATP 4949 (known as Termite), which was already held by CRAE.  The Century prospect, as it is described in the press release from CRA, was also located within ATP 4949 to the north-east of the Silver King leases.

Lawn Hill

Although both CRA and Mr McCrae referred in the press release and the letter set out above, to the "Lawn Hill mineral field," there never was a mineral field by that name constituted under the Queensland mining legislation.  (The name of the old mineral field was Burketown.)  The earliest report of silver/lead/zinc mineralisation at the site of the Silver King leases had been made in 1887 by a Mr F.H. Hann.  He was then the lessee of a nearby pastoral property, which was called Lawn Hill Station after the name of the hill upon which its homestead was built.  Accordingly, the surrounding area
become colloquially known as the Lawn Hill mineral field.  Over the next 80 years there was intermittent mining of up to 47 small, discordant lode deposits within the area.

The mineralisation in the area is hosted by sediments of the Lawn Hill Formation.  This is the youngest unit of the McNamara Group, which is a sequence of rocks on a  geological structure known as the Lawn Hill Platform.  The geology of the Lawn Hill region was definitively mapped in a Bureau of Mineral Resources report published in 1982.  The Lawn Hill Formation, which was designated by the symbol Pmh, was subdivided into six sedimentary members (Pmh_1-6).  The Lawn Hill Formation is underlain by sediments of the Termite Range Formation and, at Lawn Hill, is unconformably overlain by Cambrian rocks.  The major structural feature of the area is the northwesterly trending Termite Range Fault which can be traced for over 100 kilometres.

Exploration by CRAE 1987-1989

In 1986 CRAE commissioned a consultant, Mr J.V. Wright to review the potential for major accumulations of base metals in the Mt Isa Block.  Mr Wright identified the Lawn Hill Platform as an important target area.  He concluded that there was great potential for the discovery of a major stratiform lead/zinc deposit, and he recommended that the Lawn Hill Formation in the Lawn Hill area be explored.  Up to that time only small discordant fissure-type base metal deposits were known.  Mr Wright's report identified a target model which was substantially larger than anything previously known in the area and was based on different concepts of ore deposition to those exemplified in the known fissure deposits.

In March 1987 CRAE applied for two authorities to prospect, each of 100 sub-blocks, which covered the Lawn Hill area.  They were granted on 22 September 1987 and were known as ATP 4949 (Termite) and ATP 4948 (Mt Jennifer).

Exploration commenced in 1988.  The initial target was an interpreted domal structure to the east of the Termite Range Fault.  Geophysical reconnaissance involved two orthogonal regional traverses.  However, one of the traverses extended west across the Termite Range towards the Silver King leases, where historically the largest quantity of silver and lead had been produced in the Lawn Hill area.  A one kilometre long section of this traverse returned highly anomalous zinc in soil assays.  Data from the gravity and ground magnetic surveys conducted on the traverses did not yield any anomalous response associated with this anomaly.

The target had now shifted.  Follow-up soil sampling delineated a significant zinc in soil anomaly over an area of 1.5 square kilometres just west of the Termite Range Fault.  In April 1989 five ground electromagnetic traverses were completed on a reconnaissance basis over the soil geochemical grid emplaced to follow up the original zinc anomaly.  Based on the delineation of distinct electromagnetic anomalies over known discordant silver-lead-zinc vein lodes in the Lawn Hill area, it was believed that this survey would locate any conductive sulphide targets associated with the observed geochemical anomaly.  However, no significant conductive anomalies were detected by the survey.  In July 1989 a detailed ground magnetic survey was conducted over the grid.  This survey failed to show any clearly recognizable magnetic anomaly associated with the soil anomaly.  In addition, no surface indications of mineralisation were observed.

CRAE described the next phase of exploration in its November 1990 report pursuant to the statutory reporting conditions in ATP 4949 (Termite) and ATP 4948 (Mt Jennifer) as follows:

"Also in 1989, soil sampling was conducted over a known discordant zinc occurrence called Watson's Lode.  ...  Old records showed that at the 86ft level in the old shaft at Watson's Lode there was a cross-cut assaying 105ft at 10%Zn.  The soil sampling results at Watson's Lode only revealed a small 1000ppm Zn anomaly suggesting intensive surficial leaching.

Late in 1989, a drill hole was drilled into the soil anomaly at Watson's Lode.  The hole confirmed that percent levels of zinc (7m at 20%) at depth do indeed underlie subdued zinc anomalism in soil samples of about 1000ppm Zn.  The realisation that zinc has undergone severe surficial leaching perhaps over several epochs justified drilling of the 1.5km² soil anomaly at what is now Century."

In 1989 CRAE called its exploration project "Termite."  The area of the soil anomaly was referred to within CRAE as Target 1 or Termite 1.  Watson's Lode, which was located about twelve kilometres to the south, was referred to as Target 2 or    Termite 2.

DMR's Exploration

DMR applied in January 1989 for an authority to prospect in respect of land to the west of ATP 4949 (Termite).  The application included land that CRAE had been obliged to release from ATP 4949 by way of reduction in its area at the end of September 1988.  ATP 5875 (Cassowary) was granted to DMR on 2 May 1989.  It comprised 30 sub-blocks, thirteen of which had been part of ATP 4949.

In May, June and July 1989 DMR purchased the Silver King and Mended Hill leases.  Drilling commenced in May 1989 at the site of the old Silver King mine.  Mended Hill was located approximately two kilometres southeast of Silver King and was also the site of an old mine.  Drilling commenced there at the end of 1989.

The Silver Queen leases were purchased in August 1989.  They are located to the north of Silver King.  No drilling or work of any significance was undertaken on these leases.

In November 1989 drilling commenced within ATP 5875 on old workings at prospects known as Cassowary and Wooden Duck.  On 20 March 1990 DMR applied for renewal of ATP 5875 without reduction in area on the basis that its "potential reserves could have a significant impact on the economic viability of our Silver King Project."  On 1 May ATP 5875 was renewed in full.  DMR then applied on 2 May 1990 for the Cassowary and Wooden Duck mining claims, which were in due course registered on 16 July 1990.

DMR's drilling program was designed to indicate potential ore reserves and was completed by May 1990.  Preliminary metallurgical test work on samples was undertaken in 1989.  On 2 April 1990 DMR announced that it had received from its consultants a conceptual feasibility study, which concluded that a technically and economically viable process existed for treatment of Silver King ore.

CRAE and the CRA Group
           The CRA group of companies is a massive mining house.  Exploration by CRAE was ultimately oversighted at the head office of CRA in Melbourne by a Group Executive, Dr Ian Gould.  He reported directly to the Managing Director, Mr John Ralph.

CRAE operated on a geographical basis.  The Queensland District was run by a Chief Geologist, Mr John Main.  He reported to a managing director, Mr John Rebek, who was the Group Geologist located at the Eastern Region office in Sydney.  Mr Rebek was assisted in the management of CRAE by another officer based at the Sydney office, Mr Peter Taylor, a solicitor who was designated General Manager Commercial.

Day-to-day design and implementation of the exploration program in the Lawn Hill area was the responsibility of professional staff based at a sub-district office in Mt Isa.  They operated under the supervision of Mr Main.

In addition, CRAE utilized from time to time specialist divisions of CRA known as Resource and Processing Developments (R&PD) and Resource Commercialisation (RC).  CRA also owned a company called Minenco Pty Ltd ("Minenco"), which provided consulting services as project managers and engineers.

As may be expected, communication between the various offices generates a great deal of paper. In addition, effective exploration requires the keeping of voluminous records.  Mr Main, in particular, has been cross-examined on the contents of many of
those internal documents.  DMR's case against CRAE turns to a large extent on what was said by Mr Main to Mr McCrae and to another of its officers, Mr Richard Seville, and on the developments in CRAE's exploration program.  Accordingly, it will be necessary to set out in some detail contents of such documents.

Further Exploration by CRAE

In 1989 CRAE staff began planning an airborne geophysical survey, which was designed to cover all known lead-zinc occurrences in the Lawn Hill Formation.  The boundaries of the survey area were finalized in March 1990.  They had been discussed between Mr Main and two of his staff, Mr Andrew Mutton, a geologist based in Brisbane, and Mr Ned Stolz, a geophysicist based in Mt Isa.  The southwest corner of the survey area covered land in ATP 5875.  On 16 March 1990 Mr Mutton wrote to the proposed contractor, Geoterrex Pty Ltd ("Geoterrex"), that the "flying of this area is regarded as mandatory".

In a memorandum dated 19 March 1990 Mr Mutton reported to Mr John Main on the "rationale" for flying this survey:

"Termite Survey (Plan Qm 4445 14/3/90)

Main target is lower units of Lawn Hill Formation (Pmh1 - Pmh4) with proximity to major structures.  Hence the survey was terminated to the SE by the Termite Range Fm, which is considered less prospective.  The survey was extended ex-title to the southwest to cover more Lawn Hill Fm adjacent to a fault zone trending sub-parallel to the Termite Range Fault.  The proposed survey incorporated about 1200 line km, and covers all Pb-Zn occurrences as mapped on the BMR 1:100,000 geology.  Plan Qm 4445 shows the location of these occurrences, and the relevant structural and lithological elements." 

In March and April 1990 CRAE also carried out regional stream sediment sampling, which involved at least a few sites within ATP 5875.  Further drilling took place on the Termite 1 site between 4 and 6 April 1990.  On 17 April 1990 Mr Mark Hartley, a staff geologist at Mt Isa, sent Mr Main a "routine" fax saying that: "Significant stratabound sphalerite mineralisation was detected at Target 1 which may develop into economic concentrations down dip as the strata approaches the junction of the Termite Range Fault and the keel of the Pages Ck syncline.  ... Assays are awaited."  On 24 April 1990 Mr Hartley sent Mr Main an urgent fax with the assays for two holes.  They indicated significant levels of zinc mineralisation.  One of the holes, that designated LH4, has since become known as the discovery hole.  The mineralisation was hosted in the stratigraphic unit Pmh₄.

On 27 April 1990 Mr Main sent Dr Ian Gould a memorandum on the Termite Project.  He copied his memorandum to Mr Jacob Rebek.  It reads as follows:

"In 1987 CRA Exploration recognised the Lawn Hill lead zinc field in NW Queensland as an area with potential to host large zinc-lead deposits of the Mt. Isa, Hilton, Lady Loretta type and acquired tenement covering most of the sequence (see Fig. 1).

The area contains a number of lead-zinc prospects from which minor high grade lead-silver production had taken place in the early 1900's.  Records also showed the presence of zinc dominant occurrences which the early miners abandoned as their focus was on lead and silver.

All of these known occurrences are clearly transgressive rather than stratiform and this has deterred the major companies with traditionalist approaches from pursuing exploration in the area.

The CRAE approach has been to use existing data to generate conceptual plays and to re-evaluate the known prospects in their own
right as well as with the view of using these as indicators toward large stratabound/stratiform deposits.

Field work has consisted of reconnaissance drainage sampling, reconnaissance geophysical traverses and soil traverses which culminated in reconnaissance drilling.

Two targets have been reconnaissance drill tested, and have produced encouraging results.  At target Termite 1 two shallow holes were completed to ascertain what the source of the zinc in soil and rock chip samples was and what dimensions it might have.  Figure 2 shows the location of the prospect and holes.  The mineralisation style is stratabound and constitutes a significant discovery with the potential to be large.

At the Termite 2 prospect three shallow reconnaissance holes were drilled to assess an 18m zone of 10% zinc recorded from an old exploration cross cut and partially supported by results from drilling in the 1930s and early 1950s.

Again results are encouraging in terms of grade with size potential still to be ascertained.  See Figure 3.

The sphalerite in both prospects is straw coloured (high zinc content) and therefore capable of being converted to high grade concentrate.

Of significance is the low iron sulphide content of the prospects resulting in poor gossan development and poor electrical survey responses.

Exploration will now progress on two fronts with additional work on the two known prospects and with an appraisal of the entire project area using airborne geophysical surveys.

As a longer term strategy should the Termite project produce the orebody CRAE seeks thought should be given to acquiring the Lady Loretta Project as high grade ore and for the potential contained with the other target within these tenements."

There was much additional activity during May 1990.  A further phase of drilling was conducted between 15 and 30 May.  Dr Gould visited the Lawn Hill area between 14 and 16 May.  On 18 May CRAE applied for new authorities to prospect in order to
control exploration of extensions of the upper stratigraphic units of the Lawn Hill Formation as far away as the Northern Territory border.

Geoterrex flew its airborne survey between 18 and 24 May.  Although this was a combined electromagnetic and magnetic survey, it employed a proprietary electromagnetic system named GEOTEM and the survey is referred to as the GEOTEM survey.  Mr Stolz reviewed analogue charts of the GEOTEM data each day and selected anomalies for ground follow-up.  Towards the end of the survey period, on 22 May,     Mr Mutton sent a facsimile message to Mr Stolz.  He asked Mr Stolz urgently to assess results affecting ATP 5875 and to telephone Mr Main in Brisbane that night with details of possible targets in that area.  Mr Stolz telephoned Mr Main with this information that night or the next night.

Negotiations for the Farm-In Agreement

Late in the afternoon on 21 May 1990 Mr Main sent a facsimile message to DMR, expressing an interest in farming into ATP 5875.  He proposed six conditions whereby CRAE could become "a partner in exploring and developing mineral resources" in that tenement.  They were:

"1.CRAE has a three month period from signing a Letter of Agreement in which to carry out reconnaissance drainage sampling, geological mapping and geophysical surveys, costing not less than $30,000.

2.At the completion of this program CRAE may elect to withdraw with no interest earned and would provide copies of all data to Diversified.

3.Alternatively CRAE could elect to solely fund and manage exploration within the ATP and to earn an interest.  Upon completion of $300,000 expenditure on the tenement within two years of signing the Letter of Agreement CRAE would have earned a 51% interest in the tenement.

CRAE would carry out exploration and would meet the minimum expenditure commitments.  It would however be able to withdraw at any time prior to expending $300,000 (with no equity earned) provided pro rata minimum expenditures had been expended up to that time.  Again copies of all data would be provided to Diversified.

4.Upon earning 51% interest CRAE could then elect to increase its interest to 75% by solely funding and managing a further program of exploration costing $565,000 within a further two years.

5.Diversified could at that stage elect to contribute to exploration and development costs pro rata and retain a 25% interest or could elect to dilute down to a 10% free carried interest to decision to mine.

6.Each party would have first rights to acquire the interests of the other party should that party wish to divest an interest in the tenement."

Mr Main concluded:

"If Diversified wishes to acquire a partner to fund and manage a program designed to locate large zinc-lead-silver deposits CRAE would like to be considered as that partner as it would bring to the partnership the technical expertise and resources of Australia's largest mineral explorer."

The next morning Mr Main received a telephone call in response to his letter from Mr Richard Seville, who was DMR's General Manager. They discussed CRAE's proposal.  Mr Seville was anxious to clarify that the farm-in would not extend to DMR's leases or mining claims.  Mr Main explained that that was alright since CRAE's targets were large stratiform Mt Isa type deposits.  He did say, however, that CRAE's exploration techniques, including airborne geophysical surveys, were regional in nature and would cover the Cassowary and Wooden Duck prospects.  (He did not say that Geoterrex was presently conducting such a survey.)  Mr Seville was concerned that, in view of the fact that large stratiform deposits were CRAE's targets, DMR would wish to prevent CRAE "sitting on" any vein deposits that may be discovered.  Mr Seville also wished to have monthly reporting.  Mr Main said that DMR would be welcome at any time to review the data or to visit the property.

Mr Main then sent Mr Seville a letter dated 22 May 1990, stating that CRAE would be prepared to include five additional conditions in a Farm-In Agreement in respect of ATP 5875.  They were:

"1.The Farm-In applies to ATP 5875M only and does not include the Silver King Leases or the Mining Claims covering the Cassowary Prospect.

2.The Agreement would contain a Sole Risk Clause which would allow Diversified Mineral Resources NL to explore and/or develop on its own within the ATP but at its own risk.

3.Diversified Mineral Resources would have the right to acquire a 100% interest in any in situ resource discovered within the ATP which when fully delineated contains less than one million tonnes of resource and less than 100,000 tonnes of zinc plus lead at a price equal to the cost of exploration of that deposit.

4.CRAE would advise Diversified Mineral Resources of its intention to relinquish ground from ATP 4948M and 4949M and would provide Diversified Mineral Resources the first right to peg any ground or deposits within ground that CRAE elects to relinquish from the adjacent ATP 4949M and ATP 4948M and would provide copies of all exploration data pertaining to the ground to be relinquished.

5.CRAE would provide monthly exploration reports, quarterly exploration and expenditure reports and copies of statutory exploration and expenditure reports."

Mr Main copied his correspondence with DMR to Mr Peter Taylor and asked him to prepare heads of agreement for DMR to consider at a Board meeting on 29 May.    Mr Main also copied Mr Rebek, who indicated his approval to Mr Main and Mr Taylor.

Mr Seville telephoned Mr Main again.  He wished to add a condition that DMR should be able to peg any extension of its Silver King deposit into CRAE's ATP 4949.  After discussion Mr Main said to "leave it with me."  Mr Seville also reinforced his concern that DMR should be able to peg any ground relinquished by CRAE.

On 23 May Mr Main wrote to Mr Seville as follows:

"POTENTIAL FARM IN ATP 5875M

Further to our telephone discussion yesterday I can confirm that:

×CRAE would not unreasonably deny DMR the right to apply for a mining lease to cover the extension of the Silver King deposit outside of the existing mining lease and that CRAE would have no beneficial interest in the Silver King deposit within that Lease.

The only situation under which CRAE would withhold that right could be if part of a deposit (other than the Silver King) in which CRAE was interested was contained in that proposed lease or that if that part of the Silver King deposit in the lease exceeded 1MT at 10% Zn+Pb. DMR would have to demonstrate to CRAE that the Silver King deposit did extend into the surrounding ATP.

If it transpired that CRAE granted DMR the right to apply for a mining lease to cover the extension of the Silver King lode CRAE would retain a 100% interest in any other
mineralisation which may be discovered upon that lease provided it was geologically separate from the Silver King deposit or was greater than 1 million tonnes of less than 10% Zn+Pb.

×CRAE agrees to the request by DMR to be advised of CRAE's intention to relinquish parts or all of ATP's 4948M and 4949M and to have the right to peg mining leases or other tenements within those tenements prior to CRAE relinquishing them; even though the Joint Venture between CRAE and DMR had been terminated; provided DMR was actively exploring for, developing or mining mineral deposits within the Lawn Hill area (within 50km radius of the Silver King deposit).

If these conditions are acceptable would you please advise in writing that this is the case and I will proceed to get the Heads of Agreement drawn up for your consideration."

On 24 May Mr Main copied this letter to Mr Taylor.  Mr Seville also wrote to   Mr Main the same day, indicating his agreement with the revised proposal and requesting heads of agreement for presentation to DMR's Board.

Later that day Mr Taylor sent to Mr Main (and copied to Mr Rebek) the following memorandum:

"Attached is a draft Agreement for your consideration. I would prefer that the "rights" DMR will have to extend the Silver King deposit into CRAE and? J.V. tenements and the right of first refusal on relinquished CRAE ground be in a separate side letter rather than unnecessarily complicate and possibly confuse the main agreement.

The side letter will have effect subject to the Parties entering into the main agreement and will merely confirm the exchange of letters already in existence."

Mr Rebek agreed with Mr Taylor, as did Mr Main who answered Mr Taylor's query by his annotation to the effect that any "rights" of DMR related only to ATPs 4948 and 4949.

Notwithstanding that Mr Main had offered "monthly exploration reports" in his letter of 22 May to Mr Seville, the draft agreement submitted by Mr Taylor provided only for "3 monthly reports" to DMR on CRAE's operations and expenditure within ATP 5875.

On 25 May Mr Taylor sent the draft agreement to Mr McCrae with the following letter:

"Lawn Hill Agreement

I refer to telephone conversations and correspondence between        Mr Seville and John Main of this company.

Attached for your consideration is a draft Agreement.  There are other matters which I propose be agreed between the parties by this letter subject to the parties entering into the "Lawn Hill Agreement".  The matters agreed by this letter are:

1.Provided DMR is actively exploring for developing or mining mineral deposits within an area of a 50km radius of the present Silver King deposit CRAE shall notify DMR prior to lodging relinquishment documentation for all or any part of Authorities to Prospect 4948M and 4949M ("ATPs") and shall consent to DMR pegging mining leases or other tenements within the proposed relinquishment areas of the ATPs from the date of notice until such lodgement which period shall be not less than 30 days.

2.DMR may with the consent of CRAE (which consent shall not be unreasonably withheld) apply for a mining lease to which it shall have exclusive rights within the ATPs provided the lease is for the purpose of and covers an extension of the present Silver King deposit subject to the following:

(i)The onus shall be on DMR to establish to the reasonable satisfaction of CRAE that the proposed lease area covers an extension of the Silver King deposit;

(ii)The proposed lease does not contain more than 1 Mt at 10% or less Zn plus Pb;

(iii)CRAE does not require the proposed lease area for its own exploration or development purposes;

(iv)If the proposed lease is granted CRAE shall have the right to all mineralisation therein that is not an integral part of the Silver King deposit and mineralisation of any integral part of the Silver King deposit within the lease that amounts to or exceeds 1 Mt of plus 10% Zn plus Pb.

3.DMR may acquire exclusively any in situ resource discovered within ATP 5875M which when fully delineated contains less than one million tonnes of resource and less than 100,000 tonnes of Zn plus Pb at a price equal to the cost of exploration of that deposit.

If you agree with the forgoing [sic] please confirm by signing below and returning a copy to me."

DMR's solicitors, Hagan & Co, wrote to Mr Taylor on 28 May, requesting an amendment to a provision of the draft agreement relating to dilution of a non-contributing party's interest.  By letter dated 30 May Mr McCrae returned to Mr Taylor a copy of his letter dated 25 May, signed by himself on behalf of DMR "subject to" the amendment notified in its solicitors' letter.  Following further discussions between       Mr Taylor's secretary and Mr Seville (which resulted in a slight amendment to the provision raised by Hagan & Co), the farm-in agreement was executed under seal by CRAE and DMR on 5 June.

On 6 June Mr Seville submitted to CRAE a proposed announcement to the stock exchange in the following terms:

"Diversified Mineral Resources N.L. ("DMR") has entered into a Farm-In Agreement with CRA Exploration Pty Limited ("CRAE") on A to P 5476M [sic] located near the Silver King project.  The tenement covers 52 sq kilometres of ground that CRAE believe to be geologically prospective for stratiform Pb/Zn/Ag mineralisation.

The Directors of DMR believe that the introduction of CRAE into the tenement will give the Company a partner with the technical expertise and financial resources to locate such mineralisation whilst allowing DMR to concentrate its resources on the development of the Silver King Project.

Details of the agreement will be released in DMR's quarterly report."

CRAE approved the announcement, which was then made later that day.

Exploration by CRAE - June 1990

On 30 May 1990 Mr Stolz reported to Mr Main:

"2.2 TERMITE PROJECT

Termite GEOTEM Survey: Reviewed analogue data.

Fourteen to eighteen discrete conductors have been selected for immediate follow-up with ground inspection and EM 37 surveys.  Most targets fall within the Lawn Hill Formation.  There was no significant response over known mineralization at Termite 1.

Magnetic activity in the area is very quiet."

The "discrete conductors" or "targets" (as Mr Stolz described them) were identified with the number of the flight line at their strongest response, for example, T115, T123
and so on.  EM37 is a ground electromagnetic system.  No magnetic features were considered worth following up.

On 5 June Mr Main reported to Mr Rebek:

"TERMITE PROJECT

The stratabound zinc‑lead mineralisation at Termite 1 (now to be known as the Blackjack deposit) has been traced over 1500m of strike length. It appears to be displaced by the Termite Fault in the east and is still open to the west.

Whilst the grade of the mineralised intersections so far obtained is moderate there are high grade portions in each hole.

There is certainly potential for many tens of millions of tonnes of this material for an open cut situation.

The airborne Geotem survey has identified a number of discrete conductor anomalies within the Termite 1/Mt. Jennifer survey area and the Termite 2 survey area. However, none coincide with the Blackjack deposit.

Four additional ATP's were applied for to cover the known and interpreted extensions of the Upper Lawn Hill Sequence.

...

A Joint Venture Agreement was reached between Diversified Mineral Resources and CRAE whereby CRAE can earn a majority interest in their Authority to Prospect which covers interpreted prospective ground adjacent to the CRAE Termite project.

CRAE now controls all interpreted prospective ground in the Termite area."

...

JUNE WORK PROGRAM

Follow up Geotem anomalies Termite project. Complete drainage sampling over all new Termite tenements. Plan new co‑ordinated exploration program."

In cross-examination, Mr Main agreed that the statement above that "CRAE now controls all interpreted prospective ground in the Termite area" represented the achievement of the objective he had earlier fixed upon.   He said that objective was to "control the outcropping and interpreted parts of the upper part of the Lawn Hill Formation."

Knowing that the electromagnetic and magnetic ground surveys in 1989 had failed to detect the mineralisation at Termite 1, Mr Stolz decided to use a method known as induced polarisation (IP).  Geoterrex commenced the necessary ground surveys over Termite 1 on 18 June.

On 28 June Mr Main sent a memorandum to Mr Rebek, applying for additional exploration funds to cover the cost of drilling the Termite 1 and Termite 2 prospects.  His memorandum was accompanied by what he called a brochure describing the prospects and a proposed resource definition drilling program.  The location of the prospects was shown in Figure 2 in the brochure.  Figure 2 was headed "Termite project GEOTEM survey targets."  It purported to show the boundary of the GEOTEM survey and preliminary GEOTEM anomalies.  (It shows GEOTEM anomaly T177 away from the Silver Queen prospect.)  According to its legend, Figure 2 also depicted the "prospective horizon outcrop" and the "interpreted prospective horizon."  Mr Main said, in cross-examination, that this marked out the Pmh₄ unit in total.  He also said that he and Mr Hartley had visited the small outcrops shown in Figure 2 within ATP 8575 following on the drainage sampling which had been undertaken by the time of this memorandum.  Mr Main said that the outcrops did not have the dolomite, which was the
surface expression of the mineralisation at Termite 1.  Accordingly, the outcrops were prospective, but it was necessary to stage exploration according to known mineralisation and anomalies detected from various surveys.

In the brochure's introduction, Mr Main stated that reconnaissance drilling had shown the two prospects had "potential to contain significant zinc-lead-silver mineralisation."  He concluded, however, that "two significant zinc-lead-silver mineralised systems have been identified within the Termite project area."  Mr Main recommended, inter alia, that existing allocated exploration funds should be used to follow up the GEOTEM anomalies.

On 2 July Mr Stolz reported to Mr Main on geophysical surveys:

"Termite:Seven 100m dipole-dipole IP traverses were completed over Target 1.  The mineralization shows up as a moderately chargeable RESISTIVE anomaly (hence no SIROTEM/GEOTEM response!).  The anomaly has been closed to the west (46200E) and to the south (about 26400N).

Down hole IP surveys were unconclusive.

Ground magnetic data was collected over the Target 1 grid.  The magnetic activity is very weak (dynamic range of 30nT!) with no response over the mineralization.  The data may be useful in mapping structures and rock types.

Seventeen anomalies from the Termite Geotem survey were assessed from the air and flagged for subsequent ground follow-up.

SIROTEM was the name of the ground electromagnetic system used in 1989 which failed to detect any significant conductive sulphide targets.

On 4 July Mr Main sent Mr Rebek his exploration report for June 1990.  Under the heading "Significant Results", he reported:

"TERMITE PROJECT

×This deposit has now been intersected in nine holes.  The mineralised zone is essentially flat-lying and is interpreted to underlie an area of 1500m x 1000m.  It has an average thickness of 20m and an average grade of the holes excluding LH6 and LH12 is 7% zinc, 1.5% lead, 1.5 oz/tonne silver (8.5% zinc equivalent).  The mineralisation shows good lateral continuity.  The resource potential approaches 100M tonnes.  Higher grade, lower mass permutations are also possible.

Although the mineralisation is fine grained it produces clean individual sulphide grains at 90 microns.  SEM and polished sections show few inclusions in the galena and sphalerite and no significant manganese or other deleterious elements in the sphalerite.

This prospect had the potential to be a world class deposit.  A separate report has been prepared describing this deposit and requesting an additional amount of funds to carry out a drilling program."

Under "Significant Issues" he stated:

"Diversified Mineral Resources states that it can mine and process the Silver King deposit (adjacent to Termite 1) profitably over 4-5 years.  It raises the question of CRAE tolerating an operator close to, even possibly within, a [sic] CRAE mining leases.  Should an option to purchase be negotiated?"

Mr Main discussed the Termite project and his request for additional funds with Dr Gould, Mr Rebek and officers from R&PD on 6 July.  Dr Gould approved $1,000,000 in extra funds for resource definition drilling at Termite, and R&PD was to spend up to $100,000 on metallurgical evaluation "paralleled on the drilling evaluation."

DMR Leases - First Phase of Negotiations

On 9 July 1990 CRAE searched the Minerals and Energy Resources Location and  Information Network (known by the acronym MERLIN) for details of mining leases situated within the Termite project area.   The searches revealed that two leases situated within ATP 4949 were held by a Mr Guiseppe Vaiente of Mt Isa.  These leases were called Silver Queen South No 1 and Silver Queen South No 2.

On 11 July the RC division in Melbourne sent to Mr Main (no doubt, at his request) copies of sixteen stock exchange announcements made by Mr McCrae on behalf of DMR covering the period from November 1989 to June 1990.

Mr Main then faxed Mr McCrae the following letter:

"I will be in Surfers Paradise on Friday and would like to take the opportunity to meet you to discuss our joint venture agreement, review any data you have relating to the A to P and to discuss proposals you have for developing the Silver King prospect.

Would it be convenient to meet with you sometime on Friday?"

Mr McCrae replied:

"With reference your letter received by fax on this date.

I would be pleased to meet with you this Friday at 10.00am in the Southport office located at 63 Queen Street.

I trust it will be an excellent opportunity to discuss the Farm In Agreement, but must advise that we have yet to receive an executed copy of the agreement.  It would be appreciated if you would bring a duly executed copy to our meeting."

Mr Main copied this response to Mr Taylor that afternoon with a request "please provide agreement in tonite's bag."

Mr Main then sent a memorandum dated 11 July to Mr Rebek and Mr Taylor.  In his introduction, he stated that DMR and CVGM "hold not only ATP 5875 subject of a CRAE farm in but also 10 mining leases and have applications for five mining claims within the Lawn Hill area close to the CRAE Termite discovery."  He then set out details of the tenements and of DMR's announced resources, summarised the details of a study of its proposed open cut mine for the Silver King deposit by Normet Pty Ltd, and referred briefly to DMR's stock market value and financial position.  (Mr Main had obviously used the MERLIN searches and the material sent by RC to prepare his memorandum, but he appears to have overlooked the fact that two of the "10 mining leases" he referred to were, in fact, owned by Mr Vaiente.)

His memorandum continued:

"The Issue:

The leases and claims held by DMR contain known mineral occurrences, one of which has been explored and shown to contain a resource of about 1MT.

The leases and claims are surrounded by ATPs in which CRAE holds a 100% interest.  One of these ATPs contains the Termite 1 Prospect.  Others contain anomalies and prospects yet to be assessed.  It is likely that the Termite 1 Prospect and it is possible that some of the other anomalies/prospects will become CRA Mines.

The presence of a junior competitor within CRA's patch could lead to problems that through no fault of CRA restrict or at least impinge on the activities of CRA in that area.  For example indirect effects include the field of

×Landholder relationships

×Shire and Council relationships

×Aboriginal site impact

×Confrontation with National Parks Department

×The traditional problems of failure to rehabilitate, decommission the mine and site.

×Competition for infrastructure, services, supplies.

More importantly though there is the possibility that DMR may control a portion of a resource that CRAE wishes to develop and once recognising that it will "ransom" CRA before relinquishing that control. Such extortion is unpalatable at best of times and could at worst jeopardise the whole CRA investment.

Proposal:

That CRAE neutralises the chance that DMR can affect plans for the Termite Project either directly or indirectly.

Timing:

Timing is critical because as CRAE establishes a large presence on the Termite 1 Project DMR will realise its leases may be of value and the price of control to CRA will escalate.

Even though CRAE has insufficient knowledge to evaluate either its ATPs or DMRs ATPs action is necessary now.

The Mechanism:

Three basic mechanisms exist to gain control of the leases and claims.  These are joint venture, or purchase now or in the future (option to purchase) or company takeover.

The Joint Venture Option:

CRAE carries out a work program to a particular value to earn control.  This value would have to be high, and all such expenditure may not be warranted.  Our human resources would be diverted.  It is most likely that DMR would want a sole risk option included which does nothing to prevent the indirect effects of their presence and still means they may get an elevated value for the leases by selling to a party which overvalues the DMR share and forces CRAE, to pay an inflated price via the "right to match option".

The Company Takeover Option:

Market value is $6.1M but the controlling shares are tightly held (Wayne McCrae 25%) and will be difficult to dislodge without increasing the price substantially.  CRA would also get the liabilities as well as the overvalued assets.

The Option to purchase:

This is the most preferred route.  It is quick, and can be done on an independent valuation basis.  The plan is to offer DMR an option for CRA to purchase all their leases.

The option would be $100000 now and $50000 payable every 12 months until the option is exercised with a maximum of five years to exercise.  Exercise price would be net present value of the project as defined and accepted in the bankable feasibility study, plus a premium.  Reimbusement [sic] of exploration/evaluation/development expenditure and the value of written down plant, less of course the value of material extracted would also be paid.  The option would contain a provision that for any additional material mined in any of the leases beyond that planned within the accepted bankable feasibility study would also result in a payment to DMR.  The value of this material would be based on its pro-rata value with respect to the Silver King reserves which formed part of the bankable feasibility study.

A variation on this option/purchase would be to buy all but the Silver King Leases now and acquire the option over the Silver King Leases as above.

The right to match any third party offer for any leases will also be part of the Agreement.

I propose to put this plan to Wayne McCrae, Chairman of DMR on Friday, 13 July."

Mr Main visited the offices of DMR at Southport on 13 July.  He first met       Mr McCrae.  What follows is Mr Main's version of their conversation.  Mr Main explained to him that CRAE was about to begin follow up work in the farm-in area.  After saying that CRAE was interested in large stratiform Mt Isa type deposits, Mr Main emphasized the regional aspect of the airborne survey and the drainage sampling that had already been done.  He told Mr McCrae that a number of GEOTEM targets, including some within ATP 5875, had been identified.  He gave no specific details and said that follow up work "would consist of ground electrical surveys, soil sampling and, possibly, drilling depending on the quality of the targets identified."  Mr Main said that why he wanted DMR's data on ATP 5875 was so as not "to miss any leads you might have outlined, nor to duplicate any work that you might have done."

Mr McCrae told Mr Main that DMR had done some drilling at Cassowary and Wooden Duck.  He said that Mr Seville, who was a geologist, would be able to give the information requested.

They discussed the Silver King Project upon which, Mr McCrae said, DMR was going to focus its attention.  Mr McCrae said that DMR had spent about $1,000,000 and "had to find a resource of about a million tonnes or so."  He said that DMR would consider an option to purchase or an outright sale.  Mr McCrae commented that the property had been valued at $11,000,000 in terms of its earnings and that a purchaser would have to pay a premium so that the purchaser "would be looking at 15-20 million dollars."

After discussing DMR's new coal prospect at Burton Downs, Mr McCrae took   Mr Main through to Mr Seville's office.  First, however, he said "... before we go out there, I'd ask you not to tell Richard that we're talking about divesting Silver King.  I don't want him to know that, as he has no need to know that."

In his evidence Mr McCrae broadly accepted the course and contents of the conversation outlined above, when it was put to him in cross-examination.  However, he adhered to a contrary version which he had given in his evidence in chief about what was said initially about exploration results.  Mr McCrae said that he had asked how drilling was going on "the balance of the properties" (meaning ATP 4949), and that Mr Main had replied "Negative" and had suggested CRAE "had found nothing of significance other than at Watson's Lode."

Mr McCrae then introduced Mr Seville to Mr Main and left them alone.  They discussed in some detail the geology and information on Silver King, Mended Hill, Cassowary and Wooden Duck.  Mr Seville said that DMR had not done any work on the rest of ATP 5875.  He showed Mr Main the plan for an open cut mine.  Mr Seville expressed interest in acquiring additional ore from ATP 4949, including any northeasterly extensions of the Silver King lode.  Mr Main did not foreclose that possibility.  He also told Mr Seville that IP would probably be the best way of tracing any extension of the lode and that CRAE had a crew in the field that would be available some time in September if he wanted to use it.

In cross-examination, Mr Main said that he thought at the time that DMR had done a reasonable job on exploration and resource definition, but that he did not get a "good feel" on the mining or processing proposals.  His impression was that DMR "felt they had a project which could be developed."  Mr Main denied that he was offered any data on the Silver King project to take away.  He said that Mr McCrae had earlier said
that "compilation was still going on" and "we can only give you the data at some time in the future."

Mr Main left Mr Seville to farewell Mr McCrae.  He told Mr McCrae that CRAE would follow up on ATP 5875 with "EM, IP and soil sampling" as diligently as on its own ground, and that DMR was "welcome to contact us" in order to visit the property or obtain any information.

That same day Mr Main sent Mr Rebek a memorandum dated 13 July 1990 (which he copied to Mr Taylor) in the following terms:

"I visited DMR today, Friday 13 July 1990 and spoke with Wayne McCrae (Chairman) and Richard Seville (Geologist).

I had arranged the meeting to review what they had done on the ATP in which we are in joint venture (so as not to repeat any of their work and to communicate what we aimed to do during our exploration campaign). I also asked them to show what they had at Silver King and to elaborate on their plans for that deposit.

The following points emerged from the discussions/data review.

1.They have done virtually nothing on the ATP except drill a few holes under the Wooden Duck and the Cassowary Prospects. We will have to start from scratch there. None of the drilling data gave any leads as to what potential might lie within the claims they have over Cassowary or Wooden Duck or within the surrounding ATP.

2.They have effectively drilled out the Silver King deposit at 20m centres, to define the resources quoted. They have used an unusual cutoff of $30/tonne based on metal values of:         Pb US$650/tonne, Zn US$1400/tonne and Ag $5.30/ounce.

3.The deposit is closed to the south‑west and has little down dip potential in the south western and central portions. However, it appears as though the deposit plunges northwards (30°) toward the boundary of the lease and our ATP. The last fence
of holes is at approximately 400m from our ATP boundary and shows the top of the lode to be at ‑80m depth. The lode is open to the north‑east.

4.The open cut mining reserves they quote are probably slightly optimistic. The lode is not simple, has a 20m deep oxidised top and in fact is comprised of several sub­parallel lodes of unique composition. Grade control will have to be monitored carefully but should not present any major problems as the mineralised lode is easily distinguished from the adjacent country rock.

5.Metallurgical test work gives encouraging results with heavy media separation being particularly useful. Although no data was viewed McCrae advised that HMS increased grade 100% with very little loss of metal.

6.DMR appears to be serious in its intention to develop the project and while no proposal is fixed at the moment the probable project will be:

‑an open cut to 90 metres

‑crushing and HMS upgrading on site to produce a "Lump" product of greater than 50% metal from the oxidised lode which will be trucked to Mt Isa for crushing, flotation etc. McCrae advised that MIM were willing to treat their material but no agreement has been formulated or signed.

7.DMR would transfer much of the crushing and associated plant from Gilded Rose/Mt Freda to Silver King thereby keeping capital costs low.

8.DMR has about $1M in cash reserves and would have to either raise additional capital or divest some equity in the project to an incoming partner when a conventional crushing, grinding, flotation facility was to be established on site (to treat primary sulphides).

9.Several companies have approached DMR with the view to obtaining an interest in the project. This list includes Nicron, Aztec and Aberfoyle. (Note Nicron is highly cashed up now). No deals have been done though.

10.No proposals to purchase the leases and project outright have been received. DMR would not be adverse to an outright sale providing the price was high enough. An option to purchase would also be considered provided the option fee was appropriate.

11.McCrae's estimate of the sale price of the project; $15 ‑ $20M. This is a somewhat generous valuation.

DMR's other main project is a coal property (Burton Downs) in  Queensland (an ATP carrying $3.75M in expenditure in three years) which has indicated open cut resource of 45MT of coking coal and U/G resources of 70MT.

The impression gained was that DMR saw the coal deposit as the big earner and the sooner it could develop this the sooner it would become a significant Australian Mining Company.

As a result of these discussions CRAE should formally offer to DMR an option to purchase or direct purchase all of the leases and claims that DMR holds in the Lawn Hill area. The conditions should be:

.$100,000 option payment upon signing with $100,000 annual payment for each year that option continues.

×option period to be five years

×exercise price to be NPV of properties as presented in the financier accepted bankable feasibility study plus a 25% premium. Exploration and evaluation expenditure to be reimbursed in full. Development costs also to be reimbursed with plant being transferred at written down value.

The price (prior to premium being set) would of course be reduced by the amount of any earnings received. It may be appropriate that the NPV be reviewed and reset during the option period, should this period be several years or more. The price would also have to be reduced by the amount rehabilitation and decommissioning would cost.

The fallback position CRAE should have the first right of refusal to purchase.

Would you please advise whether the principles of this agreement are acceptable and what CRAE should formally propose to DMR."

On 16 July Mr Main received by fax from Mr McCrae the following letter:

"Thank you for the opportunity to discuss the Lawn Hill project.

As you are aware we are at the point of moving the crushing/grinding circuit out of the company's Mt Freda gold operations to Lawn Hill. Our technical personnel are almost at the stage of commencing the tender process for the building of the treatment plant and our final feasibility studies are almost completed. We are at present scheduling appointments with prospective joint venture partners.

The discussions held with you last Thursday affect the decisions the Board must take imminently on the next step for both the coal and the Mt Freda gold tenements.

I would suggest that my ability to persuade the Board to consider an outright sale of all the company's tenements in the Silver King group definitely diminishes daily.

Details of our discussions on Thursday [sic] remain solely with me at this stage so as not to undermine the company's current plans.

I would suggest we arrange a get together on Tuesday or Wednesday of this week."

Mr Main sent a copy of this reply to Mr Rebek.  Later on the afternoon of 16 July Mr Main faxed to Mr Rebek (1) a map showing the situation of mining leases and "our soil anomalies and drill holes" (on Century deposit) and (2) extracts from DMR's stock exchange announcements re "excellent returns" on Silver King Project.

Mr Main discussed his memo of 13 July with Mr Rebek.  Specifically, Mr Rebek authorised the engagement of consultants to audit the Silver King reserves and to prepare a study of the economic feasibility of the Silver King Project.

Mr Rebek sent Dr Gould a memorandum dated 16 July.  He commenced:

"Reference is made to the conclusion from discussion of Termite Project in Melbourne that the possibility to acquire these leases be investigated in order to avoid complexity of diverse ownership of the mineral field.

Several options were considered, however, in the preliminary discussion between John Main and Mr. Wayne McCrae, Chairman of DMR, in Brisbane last Friday, the choice was immediately narrowed down to outright purchase of the whole interest in all leases and resources."

After outlining the reasons for an outright purchase, Mr Rebek wrote:

"John Main and I recommend that CRA commissions an independent valuation of the net present value of the mining project based on known reserves and purchases all leases, resources and fixed assets in the area under consideration for cash.

The sum to be paid would be based on the net present value, with the main issue being the appropriate discount rate and whether the cost of rehabilitation of the old mine and dumps is incorporated into the economic estimates as a cost to be incurred immediately or else after the known reserves are exhausted.

The preliminary estimate of the net present value of DMR's assets in Termite area by John Main is $3 to 5 million.

While $3 to 5 million would appear to be a high price for leases and resources which are not considered vital to success of our Termite Project, the sum would be recouped, either when our project proceeds and the known reserves are mined and processed in our facilities (at a higher profit margin) or else when our project is divested (again at a higher price because of merger with our resources).

...

DMR are anxious to hear what CRA's intent is by this Wednesday, as they are in the midst of gearing up for the shift from Cloncurry area to Termite area.

Your advice as to how to handle this matter would be greatly appreciated."

He also added a postscript:

"P.S.DMR's leases in Termite area also have certain exploration potential, however, the value of this potential has not been considered in the above recommendation because it is unwise to pay cash for exploration potential.  Your attention is drawn to DMR's lease groups covering three other old mines, some of which could prove to be part of Termite 1 type resources.  Furthermore, DMR's minority interest in the agreement with CRAE covering the A to P on the eastern [sic] flank of CRAE's A to P block would be included in the purchase."

In cross-examination, Mr Main denied having estimated the net present value of DMR's assets in the Termite area or telling Mr Rebek that he had done so.  Mr Main also said that he could not recall seeing this memorandum and that he had not been given a direction to acquire DMR's interest in ATP 8575.  He further pointed out that the tenement map enclosed with Mr Rebek's memorandum had not been drawn in CRAE's Queensland District.  This map purported to depict a preliminary GEOTEM anomaly on the Silver Queen South lease.

Dr Gould replied to Mr Rebek on 17 July in a memorandum which he copied to Mr Main.  He said:

"I refer to your memo of 16 July and to our telephone conversations on the matter. I was very pleased to learn that you have tied up the A to P held by DMR on the eastern [sic] flank of our ground. As I explained to you today, I believe that the same strategy should be used to tie up the mineral leases held by DMR, other than the Silver King which is earmarked for production in the near term.

A cash buy out of the Silver King leases for $3 to 5 million would be premature at this stage and could give a lot of wrong signals. DMR is likely to soon discover that silver‑lead‑zinc mining is much more complicated than simple gold operations, and by the time our next drilling program on Termite has been completed at the end of September they may well be much more committed to selling out.

I do recognise that the level of interest in the area will also have increased because of our drilling program, but I believe this is a risk worth taking, particularly because the Silver King is most unlikely to actually lie in an area we would propose for large scale mining and really represents nuisance value rather than a significant resource opportunity.

If we restrict DMR to the Silver King only by tying up exploration Jvs on their A to P and other leases, I do not think it is likely they will be able to attract a major competitor, even if we have substantial success in the next drilling phase."

On 18 July Mr Main sent Mr McCrae the following letter (which he had submitted to Mr Taylor for "vetting" the previous night):

"CRA Exploration is interested in purchasing the leases and mining claim applications held by Diversified Mineral Resources in the Lawn Hill area.

The proposal is for CRA to pay DMR $100,000 for the option to purchase any or all of the leases on or before 31 December 1990.

On the leases and mineral claim applications other than those covering the Silver King deposit CRAE will undertake ground geophysical surveys, rock/soil geochemical sampling and reconnaissance drilling to assess the potential of these to host a zinc-lead- silver deposit.  This program will cost not less than $100,000 and CRAE would employ the DMR site geologist to carry out this work.

The exercise price for these leases and mineral claim applications would be $1 million.

Any resources identified within those leases or claim applications not exceeding one million tonnes when fully defined and containing not more than 100,000 tonnes of zinc plus lead metal could be purchased by DMR for the cost of exploration if CRAE elected to divest its interest in those leases or claim applications.

Separately CRAE requests access to all data for the Silver King deposit necessary to carry out a full evaluation of the project and requests permission to discuss with consultants and contractors used by Diversified Mineral Resources aspects of work carried out by them.

These data and discussions will allow CRAE to assess the value of the project and leases to form the basis for outright purchase at a date no later than 31 December 1990.

CRAE's purchase price would be based upon the net present value obtained from its evaluation study; would contain a full reimbursement payment for all exploration and evaluation expenses incurred by Diversified Mineral Resources; would include payment at written down value of any plant on site as well as the establishment costs of that plant and would contain a premium for Diversified Mineral Resources for foregoing any unrealised potential within those leases.  Deducted from the purchase price would be any profit realised by Diversified Mineral Resources.

Whilst CRAE is evaluating the Silver King leases, Diversified Mineral Resources would be free to develop or exploit the Silver King deposit or to negotiate with other parties with the aim of divesting an interest in the Silver King deposit but CRAE would reserve the right to match any offer a third party might make.

However, Diversified Mineral Resources would not be able to divest an interest in the mining leases and claim applications outside of the Silver King leases during the period of the option.

If this proposal is of interest to Diversified Mineral Resources I will have prepared an agreement for consideration of the Board."

That same day Mr Main discussed by telephone his letter with Mr McCrae.      Mr Main made the following note of their conversation:

"×        DMR not interested in proposition on grounds that they are in limbo for 5 months, value decreases if CRAE elects not to purchase.

×They will come back with a counter-proposal.

×He also advise they have intersected 2-3% Zn in ? shales (not lode) in the black shales in SE of their ML when doing condemnation drilling this week."

In his evidence Mr Main said that Mr McCrae had said the option fee would have to be at least $1,000,000, but that he had said there was little intrinsic value in the other leases and that CRAE's principal target was a large deposit.  He denied the suggestion put to him by counsel for DMR that he thought at the time that the intersection noted reflected mineralisation similar to that at Termite 1.

The next day, Thursday 19 July, Mr McCrae sent Mr Main the following letter:

"Thank you for your letter of 18th July outlining your proposal for acquiring our Lawn Hill tenements.

The proposal in its current form restricts Diversified Mineral Resources N.L. ("DMR") in negotiating with a joint venture partner for our Silver King project. Firstly, if CRAE is given an option over the tenements in question then a joint venture partner coming in to the Silver King is restricted to a maximum 3.5Mt of ore with no prospect of an upside.

As previously explained, we have just been through an exercise with a company that was looking at expanding on the Silver King resource. Basically, your proposal would exclude a number of larger companies from taking an interest in a joint venture where restrictions have been placed on the prospective ground that can be selected from the area DMR currently holds.

Secondly, if CRAE does carry out its exploration programme and, for whatever reason, the option is not converted then the fact that CRAE is not going ahead will have a detrimental effect on the attributed value of the tenements. Consequently, this will place DMR on a back foot in its endeavours to develop the project either using its own resources or in association with a joint venture partner. If DMR were to take its preferred option of sole ownership and development of the  prospects then any endeavour to raise project finance would be hindered should analysts attach a negative perception to the project as a result of CRAE's declining to proceed.

With reference to your offer on the mineral tenements and mining leases, it would be very difficult to split these from the Silver King. To do a deal on tenements other than the Silver King would result in its being devalued and, consequently, any such deal would require increased monetary worth in compensation for any market criticism.

DMR has already expended some $100,000 on preliminary exploration of these tenements, including the drilling of 20 RC holes on 2 of the zones. Results from this drilling and the potential of the prospect would indicate its value to be in excess of $1 million.

However, if CRAE was serious about an offer on the total DMR presence at Lawn Hill then we would consider completely with­drawing from the area.

I will be available in Brisbane until midday on Friday if you feel further discussions would be appropriate."

Mr Main sent the latest exchange of correspondence to Mr Rebek together with a memorandum dated 19 July:

"Attached is correspondence to and from Diversified Mineral Resources in which CRAE seeks an option over the DMR leases and in which DMR replies that the option as proposed is not acceptable. I have had additional discussions with Wayne McCrae and find that:

.DMR would accept an option to purchase all of the DMR leases on or prior to 31/12/90, the option fee would have to be $1 million minimum.

×DMR have been doing "condemnation" drilling for the plant/tailings site on their lease and have intersected low grade zinc in the sediments (values of up to 5% but more often 1% ‑ 3% over 5m and 10m composite samples). This statement has not been substantiated by CRAE except in as much as Mark was advised by the driller that sphalerite was intersected. Clearly this "raises the stakes" a bit if true.

×The problem with the option route at this point is that there is insufficient information available to derive a value for the properties. It would take CRAE at least until 31/12/90 to derive any real measure of the value of these leases. Yet of course an exercise price would have to be put into the agreement now.

×My recommendation is that CRAE does offer an option to purchase all of DMR's leases on or before 31/12/90. The exercise price would be $X million for the Silver King plus $X per tonne of additional indicated resource that has been defined at the exercise date. DMR can continue exploration during the option period and CRAE would undertake to cover each lease/mining claim with EM/IP rock/soil geochemistry, geological mapping and to drill test a minimum five targets (say 2500m drilling).

This will mean DMR will explore as much ground as they can to increase the resource and CRAE will have five months in which to ascertain not only the mineral potential within the DMR leases but more importantly will have a very good appreciation of Termite 1.

The option deal would be subject to CRAE having access to all data relevant to the Silver King Deposit in order to make an evaluation of it. This would include access to consultants employed in the appraisal. It would also be subject to CRAE being able to view core and chips and to carry out repeat analyses as it sees fit. (Allow say 20 days for this).

I point out that one of the axioms of exploration/mine development is to control the field. By acquiring the leases of DMR, CRAE gains this 100% control.

If the very worst result occurs and Termite 1 is not economic then CRAE still has the option of packaging all of the discordant deposits of the field including the Silver King, Termite 2, Bell's Lode and divesting these as an entity and recovering the cost of purchasing the DMR tenements."

In cross-examination, Mr Main was asked about what he had written in the above memorandum next to the second dot point, particularly the last sentence.  Mr Main denied reporting to Mr Rebek that the intersections there noted "could be in material similar to Termite 1."  Mr Main thought (apparently on the basis of what Mark Hartley, his site geologist, had told him) that this was additional small vein or breccia type mineralisation.  He knew that the Pmh₄ unit was mapped on part of the Silver King leases, but it was not the same stratigraphy as Termite 1 where the mineralisation was located in the uppermost part of Pmh₄.

On 23 July Mr Main sent Mr McCrae the following letter:

"LAWN HILL TENEMENTS

CRA Exploration is still interested in purchasing the leases and mining claim applications held by Diversified Mineral Resources in the Lawn Hill area. The proposal is slightly modified from the previous one and contains these essential elements: ­

1.CRAE has 30 days to independently assess all data (exploration results, metallurgical test work, economic studies) relating to the Silver King mineralisation and other prospects in the leases and claims.

In this time CRAE will undertake an evaluation study and will establish a purchase price.

2.Upon the agreement of the purchase price CRAE will pay to Diversified Mineral Resources a $1 million option fee which will allow CRAE up to 180 days in which to carry out additional exploration of any or all of the leases.

3.CRAE will undertake ground geophysical surveys, rock/soil geochemical sampling and reconnaissance drilling to assess the potential of these leases and applications.

This program will cost not less than $100,000 and CRAE would employ the DMR Site Geologist to assist with this work.

4.Whilst CRAE is evaluating the leases and claims Diversified Mineral Resources would be free to continue exploration in its own right.

5.Should CRAE elect not to exercise the option to purchase it will provide to Diversified Mineral Resources copies of all data acquired that related to the leases and applications, including the Evaluation Study.

I point out that the work CRAE will carry out will significantly advance the knowledge of the resource potential of the Diversified Mineral Resource tenements. It is likely that additional resource will be defined so the fear that should CRAE elect not to exercise the option then the value of the tenements will be decreased is unfounded.

CRAE is searching for a large zinc-lead resource and is unlikely to exercise the Right to Purchase if only small discordant deposits are found. Diversified therefore stands to have returned to it not only Silver King but also additional resources from the other leases.

This proposal acknowledges that CRAE needs to carry out its own assessment of the Silver King lode and needs to assess the resource potential of the other leases before spending shareholder funds on purchasing them.

If this modified proposal is of interest please acknowledge this and I will have an agreement prepared for consideration."

Mr McCrae replied:

"Thank you for your offer today.  Unfortunately it is not in the interests of Diversified Mineral Resources N.L. to accept your offer at this stage.

DMR's technical staff are busy collating up to date drilling, metallurgical and engineering data and do not have the time to devote to your request.  The Company has its own deadline to meet on the Silver King Project and, as previously explained, we are at advanced stages of discussion with prospective joint venture partners.  However, we have appreciated your interest.

I wish you and your company every success with your exploration."

One hour later Mr McCrae sent Mr Main a further letter as follows:

"Our final offer to CRAE before my departure is a $250,000 option on the Silver Queen, Mended Hill and Wooden Duck exercisable at $1,250,000 on or by 30th December, 1990, conditional upon CRAE giving approval for DMR to immediately peg a 500 metre northerly extension of the Silver King into CRAE's Authority to Prospect."

Mr Main had two telephone conversations that day with Mr McCrae.  In each of them he stressed that, whilst it did not look as though a deal could be done, if DMR wished to divest Silver King, CRAE would be interested.  He said that CRAE would need to undertake a detailed review of all available data before it could make an offer.  They also discussed price.  Later that day Mr Main sent the correspondence of 23 July to Mr Rebek together with a memorandum, stating:

"I have ascertained that DMR's walk out price is $12.5M.

It appears that they now want a joint venture partner, conditions $6M for 50%.  Rather than to sell it."

Mr Main discussed this correspondence with Mr Rebek, who on 25 July sent a fax to Dr Gould reporting on the current situation and a fax to Mr Main.  His fax to Mr Main said:

"In confirmation of our discussion of the fax letters from DMR dated 23 July 1990.

It would appear that DMR would not like to see their Silver King project subjected to independent assessment.

I agree with your recommendation that the discussions be suspended because of the high expectations on the part of DMR.

In the discussions to date we found out that DMR need 500m of our ground in northerly extension of their Silver King lease and that they would be very interested in our Termite 2 vein.

It would appear that they are seriously short of resources.  We must tell them that we are not going to let go of any resources on our leases."

In cross-examination, Mr Main said that the last sentence in the above memorandum reflected an instruction to him by Mr Rebek.  However, Mr Main denied that this required him to have a cover story to explain why CRAE would now need to retain any discordant vein resources.  Specifically, he did not agree with the proposition that "a suitable cover story, based upon local knowledge or local industry knowledge, would be that CRAE would not be disposing of, for example, Watson's Lode because it was necessary to use the material to blend with Dugald River ore to overcome a metallurgical problem such as either excess iron or excess manganese?"
           Subsequently Dr Gould submitted a memorandum dated 26 July to the Executive Committee of CRA.  He stated:

"Introduction

This prospect will be known to members of the Committee as "Termite" but has now been give the name of Hann, the prospector who pegged the first lease in the area in 1887, exactly 100 years before CRAE applied for its A to P.  The prospect is situated almost 200 km inland from the Gulf of Carpentaria and 300 km north-north-west from Mt Isa and has little infrastructure.  It lies within the old Lawn Hill silver field, which is characterised by a number of small vein deposits and was never a significant producer of metal.  It has been the subject of considerable reconnaissance exploration over the years, but little detailed investigation has been undertaken.

Although CRAE only commenced serious exploration of the area this year and much work remains to be done, the Committee should be aware of the real possibility that a world class zinc orebody will be defined here within the next year and begin to consider the broad implications.

Progress to Date

Two significant and distinct occurrences of zinc mineralisation with subordinate lead and silver have been identified recently by CRAE in a percussion drilling program.  The most significant is at Hann-1 which appears to be a shallow dipping, broadly U-shaped body of stratiform, zinc-dominant mineralisation in graphitic shale.

It is interpreted to underlie an area approximately 1500m x 1000m and to average approximately 20m in thickness.  Early drilling suggests it contains around 100 million tonnes of mineralisation averaging around 7% zinc, 1.5% lead and 46g/tonne silver (8.5% zinc equivalent).  The relatively flat lying, shallow geometry favours open cut mining and a well developed parting suggests the rock should require little blasting; ie mining costs should be low.

Higher grade mineralisation is also known to occur at this prospect, apparently concentrated in structural zones such as faults and folds.  This has been demonstrated by a 10m intersection of 12.2% zinc, 2.5% lead and 120g/tonne silver.

Only one of the existing drill holes was diamond cored, so information on mineralogy is minimal.  However, although some very fine grained sphalerite does exist and pyrite distribution could be very uneven throughout the prospect, early indications are that metallurgy should not present an intractable problem, certainly the mineralisation is not like McArthur River.

The Hann-2 deposit is of the traditional Lawn Hill type, being a discordant, steeply dipping vein, extending over 1.2 km of strike length and including shoots of high grade mineralisation.  The best intersection in the north-eastern shoot is 7m of 26% zinc, 9% lead and 53g/tonne silver.

Although it is likely that more high grade, vein style mineralisation will be found in the area, tonnage would be restricted and it is the shallow, lower grade, stratiform mineralisation which has potential for a world class orebody, principally because of its potentially low mining cost.  It is likely that significant additional mineralisation of this type will be found in the area, although its grade and geometry might not be so favourable as at Hann-1.

The failure of earlier explorers to detect such extensive mineralisation in a known mining field can be ascribed to its unusual nature, with little sulphide other than sphalerite.  Mineralisation is thus largely electrically resistive and not prone to form gossanous or iron-stained outcrops or strongly anomalous surface geochemistry.  It is also partly overlain by Cambrian limestone cover.  The full extent of the mineralisation is therefore unknown and numerous untested targets exist.

DMR earlier indicated to CRAE that it would only consider selling at prices around $11‑12 million but in late August it became apparent that DMR had become serious about selling its Silver King venture. Negotiations commenced and on 6 September it was agreed (subject to CRA approval) that DMR would sell for $3 million its interest in all the tenements it held in the Lawn Hill area. In addition, all fixed plant at Silver King would be sold to CRAE for $50 000.

DMR's recent actions reveal an urgent need for cash, possibly to support its activities at Burton Downs. In view of this urgency it was agreed that CRAE would make the $3 million payment within one week of verifying DMR's titles on the tenements in question. That verification is expected within the next few days.

Public Announcement

In the light of the proposed purchase of DMR's assets and the continuing favourable drilling and metallurgical results coming forward for Century, it will be necessary for an announcement on this project to be made to the Stock Exchange in the near future. The announcement should be made immediately after the conclusion of the deal with DMR. At this point it will also be possible to commence discussions with the Queensland Government on the proposed Lawn Hill National Park extensions, and hopefully to amend them so that they do not preclude prospective areas from exploration and mining by CRA.

Recommendation and Approval

The deal proposed with DMR is particularly opportunistic for CRAE and means that DMR will exit the Lawn Hill field cleanly, leaving CRAE in complete control of an area with immense potential.

Subject to title verification, your immediate authorisation is requested for $3.05 million to be paid to Diversified Mineral Resources NL and Central Victorian Gold Mines NL as an extraordinary out of plan expenditure for CRAE."

The sale agreement was executed and settlement took place at CRAE's office in Sydney on 14 September 1990.  After the cheque had been handed to Mr McCrae, Mr Taylor and Mr Morgan each recall Mr McCrae making a light-hearted remark along the lines: "You blokes must have found something good out there to be paying me this money."

On about 15 October 1990 Mr McCrae telephoned Mr Main at CRAE's office in Mt Isa.  Mr McCrae said that DMR's shareholders had criticized the decision to sell its tenements to CRAE and that he had been made to look foolish by the subsequent announcement of the Century deposit.  Mr McCrae said in his evidence, amongst other things, that in this conversation Mr Main admitted that he had told DMR that there was no large style mineralisation in the area.  Mr McCrae made what he said was a contemporaneous note purporting to record this conversation.  Mr Main denied any such admission.

DMR's Case against CRAE

Against this chronicle of events as they developed, it is now convenient to consider DMR's case.  This is by no means easy to discern from the final form of the statement of claim dated 22 February 1993, the pleading in which is at once confused and confusing.  However, leaving aside the discrete contract counts and the peculiar circumstances of the Silver Queen South lease, DMR's case may be seen to depend essentially on allegations of misrepresentations and non-disclosure by Mr Main on behalf of CRAE.

So far as representations are concerned, DMR relies upon statements attributed to Mr Main on four occasions.  The first allegation relates, it is submitted, to the meeting with Mr Seville where the transparency was discussed or to the meeting with Mr McCrae on 10 August.  Paragraph 9 of the further amended statement of claim provides:

"9.In or about the month of August, 1990 the respondent through its agent John Main orally informed the applicants to the effect that the exploration had shown that "there may be something within ATP 5875M but that follow up EM (Electro Magnetic) work had discounted anything significant."

The next allegation relates to the meeting on 10 August.  Paragraph 13 of the pleading provides:

"13.Immediately after the time the agreement referred to in paragraph 12 was made:

(a)The respondent through its agent John Main orally enquired of the applicants whether it would sell all of its interests referred to in paragraph 1(c);

(b)The applicants through its agent Wayne McCrae responded by saying words to the respondent to the effect that:-

you (the respondent) have found something haven't you?;

(c)The respondent through its agent John Main said words to the applicants to the effect that:-

(i)We haven't found anything;

(ii)But the field is too small for two companies; and

(iii)It would be better for the respondent to either control the field or sell out; as

(iv)The respondent didn't believe the field had any potential beyond ten million tonnes of economic ore;

(v)That if the respondent were able to find four or five deposits like "Watson's Lode" and the "Silver King" the respondent would set up satellite pits with a small plant;

(vi)That the small plant would provide the concentrates of the metallurgically clean Lawn Hill field for blending with the high iron content concentrates of the Dugald River deposit which could be blended to provide a cleaner concentrate; and

(vii)Thereby reduce the amount of penalties charged by the smelter for high iron content ore."

Paragraph 15 then alleges representations which, DMR submits, are to be implied in all of the circumstances as flowing from the representations alleged in paragraph 13.  They are:

"15....

(a)That it had found no significant mineral resource that is to say no significant quantities of commercially recoverable silver, lead or zinc bearing ore in ATP 4949 or 5875M, within ATP 4949 of 5875M;

(b)That ATP 4949 and 5875M including the mining leases held by the applicants within its boundaries was not capable of supporting viable mining operations for both the respondent and the applicants;

(c)That the respondent believed that the mineral resource within ATP 4949 and 5875M including the applicants' mining leases within boundaries of ATP 4949 to be not more than 10 million tonnes;

(d)That the respondent might be able to carry out profitable mining within ATP 4949 and 5875M by combining ore from ATP 4949 and 5875M including
the applicants' mining leases with ore from another source if it were able to located further deposits of ore similar to the small proven reserves at Watsons Lode and Silver King but not otherwise."

Finally, paragraph 24 deals with the discussion on 6 September.  It provides:

"24.In the course of the said negotiations the respondent through its agent John Main asserted:-

(a)That the potential of the total field was ten million tonnes made up of small deposits;

(b)That the respondent proposed to mine the small deposits by utilizing a central mill and satellite pits;

(c)That the proposed method was of doubtful profitability;

(d)That the offer of $3 million for the applicants' interests referred to in paragraph 1(c) was so far in excess of the real value of the applicants' interests that the said John Main would suffer detriment at the hands of the directors of the respondent."

The allegations of non-disclosure relate to various matters.  They are the discovery of the Century deposit, its location within the stratigraphic unit Pmh₄, the "prospective horizon outcrops" and "interpreted prospective horizon" depicted in the map accompanying Mr Main's memorandum to Mr Rebek of 28 June 1990, the effectiveness of IP in detecting the Century mineralisation, the failure to test with IP outcrops mapped as Pmh₄ within ATP 5875, and the results of tests on ATP 5875 and the Silver Queen South lease.

Credibility of Witnesses

There is a controversy about what was said on 10 August and 6 September.  (Indeed, Mr McCrae's evidence raises new controversial allegations, which were not pleaded, in relation to the meetings of 13 July, 23 August and 6 September.)  The discrepancies in the versions of those conversations are important and vital.

Mr McCrae, Mr Seville and Mr Main each gave evidence over several days.  The extensive cross-examination of Mr McCrae was directed towards principally the issue of reliance and that of Mr Seville towards technical aspects of the Silver King Project.  Their evidence on the contents of the conversations in issue was relatively confined.  The cross-examination of Mr Main was necessarily more far ranging on these topics.  He had committed to writing accounts of his discussions and so had others within the CRA group, no doubt based at least in part on their discussions with Mr Main.  There was too a mass of material available about CRAE's exploration of the farm-in area and ATP 4949, with which to tax Mr McCrae.  It was not suggested in cross-examination that, so far as he set out matters discussed, Mr Main had incorrectly recorded matters.  On the contrary, the suggestion seemed to be implicit in such questioning that the views expressed in these internal memorandums were more consistent with Mr Main being likely to have said the things attributed to him by Mr McCrae.

The manner in which a witness gives his or her evidence is important.  Mr McCrae was suffering from very serious orthopaedic injuries when he gave his evidence and was obviously in considerable discomfort.  Nonetheless, when every allowance is made for
that, his manner was overwhelmingly unimpressive.  He was a poor historian. Mr McCrae appeared to make no attempt to distinguish the occasions upon which certain things were said.  Dealing solely with the conversations in dispute, he was obliged, grudgingly, to admit in cross-examination that discussions on various topics had proceeded in the order put to him by counsel for CRAE.  It seemed to me that he did reconstruct conversations, rather than try genuinely to recollect them, and he did that against a fierce attachment to his own view of DMR's "rights" under the side-letter dated 25 May 1990.  The transcript will not convey Mr McCrae's tone, but it is replate with examples of his looseness of expression.  On the matters which detained him in the witness box, there was ample written material in the internal and external correspondence of DMR to pursue his recollection of matters.  When confronted with material which irrefutably contradicted what he had earlier said, whether it be on a subject such as outside interest in the Silver King project or its "bankable" status, the nearest he would permit himself to a frank acknowledgment of the true situation was a blunt "it's possible."

Mr Seville gave his evidence earnestly and with an attempt at precision.  He was, after all, a geologist.  He cheerfully acknowledged his attachment to the Silver King project and allowed that, when Mr McCrae decided to sell for $3 million, it felt a bit "like losing a limb."  My impression is that Mr Seville's attention in the meeting on 6 September was focussed very much on defending his project.  I do not say that lightly.  His work had been occasionally frustrating, with Normet for example at the beginning of the year, and had involved him dealing with a great many organisations outside DMR.  Now here was a huge mining house, which had had his project data for a little over a fortnight, pouring cold water over it.  Mr Seville's concern was with what Mr Main was
telling him from the Whitcher and Minenco briefs.  Importantly, none of that material had anything to say about blending and Dugald River.  I am satisfied that Mr Seville was paying little attention to the mechanics of negotiations.  He does not, for instance, recall Mr McCrae lowering his price.  However, he was a geologist and astute enough to realize Mr Main's estimate of resource was confined to vein deposits.  I find that he was confused about who said what on the blending question.

Mr Main was an impressive witness.  His answers reflected the professionalism one might expect in a person occupying his important position.  I reject entirely any suggestion that his evidence was crafted to meet the allegations conveyed in Mr McCrae's letter of 9 October 1990.  The distinction between large stratiform deposits and vein deposits had informed the whole of CRAE's exploration campaign.  Mr Main knew what he was talking about.  There is nothing inherently incredible in what he says that he said about the potential of the vein deposits in the Lawn Hill field.  DMR's stock exchange announcement of 20 November 1989 (which the RC division had sent Mr Main at the beginning of July 1990) had said that a resource of 4 million tonnes was possible over its leases alone.

This is not an instance of simply preferring the educated man over the self-made man or the professional geologist over the entrepreneur.   What Mr Main said was not only plausible, but consistent with the contemporaneous records.  In particular, had he wished to lie or dissemble, he could not have perceived any advantage in admitting his agreement with the Dugald River blending proposition.

Accordingly, I find that, where there is a discrepancy between Mr Main's account on the one hand and that of Mr McCrae on the other as to what was said on each of these occasions, I accept Mr Main's version and reject the evidence of Mr McCrae.  To the extent that Mr Seville corroborates what Mr McCrae said on the blending issue, I do not accept his evidence on this point.  I should perhaps say too, for the sake of completeness because it touches on the credit of the witnesses, that I do not accept Mr McCrae's evidence that on 23 July and 23 August anything was said by Mr Main as to whether anything had been found on CRAE's properties or that on 6 September Mr McCrae asked for and was denied information about ATP 8575.  Even Mr McCrae acknowledges that the leases, not ATP 8575, were the subject of the sale discussion on that day.  Mr McCrae's effort at "verballing" Mr Main in respect of their telephone conversation on 15 October 1990 is merely ridiculous.

Alleged Misrepresentation

Most of these fall with my findings as to the terms of the conversations.  I have already explained why I am satisfied that the copy of the transparency was given to     Mr Seville on or about 26 July.  Neither by that date or 10 August had the EM surveys on the GEOTEM anomalies been conducted, and I find that on each of those occasions Mr Main said no more than that such follow up work was about to commence.

As to the matters in paragraph 13 of the further amended statement of claim,    Mr McCrae did not even come up to proof in his evidence in chief.  DMR submits that what Mr Main said in the aircraft on 10 August could be reasonably construed as
indicating that at that time CRAE had not found on its local tenements any significant additional mineralisation.  In view of my findings accepting Mr Main's evidence, such a construction could not possibly be urged.  The failure to establish the oral representations pleaded in paragraph 13 necessarily means that there is no basis upon which to build the more extravagant implied representations pleaded in paragraph 15.

Nor have the oral representations pleaded in paragraph 24 been made out.      Mr Main's admitted acquiescence in the suggestion from the DMR side about blending Lawn Hill concentrates with Dugald River does not assist to establish any of the representations alleged to have been made on 6 September, which related to CRAE's intentions.  Accordingly, none of the misrepresentations have been made out.

Non-Disclosure

Silence may contravene s 52 of the Trade Practice Act 1974.  However, to do so, s 4(2) of that Act requires that such silence be deliberate: Demagogue Pty Ltd v Ramensky (1992) 32 FCR 31 per Gummow J at 40-42. That may be a relevant consideration in the circumstances of the non-disclosure here alleged. Accordingly, it is first necessary to consider whether there also exists, as alleged by DMR, a fiduciary relationship between the parties which places positive obligations of disclosure upon CRAE.

The submissions of the applicants' counsel on this aspect of their clients' case have been advanced with great ingenuity and attractiveness.  They rely a good deal on
academic writings.  However, as the further amended statement of claim makes clear the alleged fiduciary relationship rests on the terms of the farm-in agreement itself.

In Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41, Mason J said (at 97):

"That contractual and fiduciary relationships may coexist between the same parties has never been doubted.  Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the erection of a fiduciary relationship.  In these situations it is the contractual foundation which is all important because it is the contract that regulates the basic rights and liabilities of the parties.  The fiduciary relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent with, and conforms to, them.  The fiduciary relationship cannot be superimposed upon the contract in such a way as to alter the operation which the contract was intended to have according to its true construction."

That passage was referred to in Noranda Australia Ltd v. Lachlan Resources NL (1988) 14 NSWLR 1. That was a case concerned with a joint venture agreement in respect of Queensland mining tenements. A provision of the agreement expressly declared that "the relationship of the parties shall be fiduciary in nature." Bryson J said of this provision (at 14):

"Clause 7.8 creates general obligations the operation and content of which in any particular state of facts is not always readily to be perceived or stated.  For many points in the parties' relationship the joint venture agreement states in much greater particularity how the parties are to stand in relation to each other, and where there are such provisions I am of the view that they take effect according to their terms as contractual provisions, and that their meaning as contractual provisions is not qualified by any immanent obligation found in cl 7.8"

So it is here that where the farm-in agreement contains its own provisions about the furnishing of information, any fiduciary relationship must fit within its framework.  There is, in my view, no other duty of disclosure arising under the general law.  Outside the scope of the farm-in agreement, CRAE will (to paraphrase Bryson J) retain its "economic liberty."

Silence as to the Century Discovery

In Fraser v NRMA Holdings Limited (unreported, 27 January 1995) a Full Court of this Court again pointed out that s 52 of the Trade Practices Act does not give rise to a duty to provide information. Nonetheless, silence itself may contravene s 52 if the circumstances are such as to give rise to a reasonable expectation that silence would be broken if particular matters exist.

In considering what is reasonable, I will bear in mind what Davies and Einfeld JJ said in General Newspapers Pty Limited v Telstra Corporation (1993) 45 FCR 164 at 177-178:

"Section 52 provides an objective test: Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 199, 204, 255.  The common understanding of commercial people must therefore be taken into account in determining what is misleading or deceptive or likely to be so.  ...

More recently, in Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 Black CJ, Gummow and Cooper JJ emphasised that s 52 provides its own test, meaning that if conduct is not misleading and deceptive or likely to mislead or deceive in the circumstances in which it occurs, it will not breach s 52.  That section does not require arm's length negotiations to be completely open or require full disclosure at all
times.  The particular facts of the case must be considered in the light of the ordinary incidents and character of commercial behaviour."

There can be no doubt that Mr Main deliberately kept the news of the Century discovery from DMR at all times after 24 April 1990.  Before CRAE commenced negotiations for the farm-in, he knew the discovery was potentially significant.  Further drilling and IP testing progressively increased the information base about the resource.  However the matter is approached, it seems to me that if CRAE's silence is to be characterized as misleading or deceptive conduct, then it must be so labelled from the time of the negotiations about the farm-in at the end of May 1990.  When one looks at the question in that way, I am unconvinced that ordinary commercial behaviour would require that CRAE tell DMR about its discovery at the end of May or, indeed, inform them of developments in relation to it.  DMR's Mr Seville bargained for what he wanted.  The subject matter of the side-letter did not require something to be said about Century, which was hosted in its own stratigraphic unit.  It is not, and could not have been, an extension of the Silver King lode.  CRAE did not tell the Department of Mineral Resources until 7 August, one month after it completed its IP surveys over Century and one week into its resource definition drilling program.

The complaint that CRAE should have told DMR about Century's location in the Pmh₄ stratigraphic unit and its responsiveness to IP testing are just different ways of saying that it was obliged to reveal Century's existence and development.  So too CRAE was under no obligation to instruct DMR in geology.  The Pmh₄ unit is shown on the geological maps.  Mr Main did not know about the IP responses until the end of June or beginning of July.
Information about Farm-In Area

It strikes me as odd that DMR persisted in its allegation that there was something misleading or deceptive in CRAE's failing to disclose that it had not followed up the "northern most first order anomaly" depicted on the transparency.  As Mr Main explained, this site was eliminated as a GEOTEM anomaly.  Accordingly, no follow up was proposed.  Once that happened, it could not be misleading or deceptive to say nothing about it.

IP testing for the Pmh₄ outcrop was proposed by Mr Stolz.  However, it must be borne in mind that he proposed other courses first.  CRAE's obligation under the farm-in provided for expenditure of only a relatively modest $30,000 initially.  The large expenditure would be incurred in the next phase, following Mr Morgan's notice of 5 September 1990.

The farm-in agreement makes it quite clear that CRAE's reporting obligations were quarterly.  The only sensible construction is that this would be done in respect of the 3 month period of work.  DMR also complains that CRAE did not inform it of the results of the EM survey at GEOTEM anomaly T110 on 5 September and the IP survey at Cassowary on 19 September.  The answer is that the results of neither were known to Mr Main on 6 September and, of course, he was not asked about them.

Silver Queen

The agreement reached on the aircraft about the Silver Queen leases was originally a mere prefatory allegation in the statement of claim.  Ultimately it became a fully blown contract count too.  DMR alleged in effect that, in consideration of being permitted to conduct EM traverses on its Silver Queen mining leases, CRAE would make available to it the results of these traverses.  CRAE admitted the contract in its defence, but alleged that the effect of the communication had been that CRAE would only provide such information if the traverses demonstrated anomalies within the Silver Queen leases.

I think that the effect of the conversation is not so qualified.  Mr Main agreed to provide data from traverses over any part of the Silver Queens leases.  This was, in fact, done in December 1990.  The IP survey was conducted on 23 August 1990.  This was covered in Mr Stolz's memorandum of 3 September 1990.  It is not clear whether Mr Main had this information prior to the meeting on 6 September.

There was originally some dispute about where any anomaly detected on IP survey near Silver Queen was located.  The lease boundaries had apparently not been surveyed.  Mr Stolz had pegged his GEOTEM target T177 on 23 June and laid his survey line on 10 August.  However, the issue was put beyond any doubt by Mr Main's affidavit sworn 30 July 1993, upon which he was barely cross-examined.  (His evidence assumed the location of the boundaries propounded by Mr Sippel, a surveyor called by DMR.)  The anomaly was, on any view well outside and to the east of the Silver Queen South lease. 
There was no breach of contract and CRAE's initial silence on the topic could not, in my view, be reasonably regarded as being misleading or deceptive.

Reliance and Causation

CRAE developed a very powerful case to suggest that DMR did not rely on anything said or left unsaid by Mr Main in reaching its decision to sell.  However, in view of the findings I have made on the alleged misleading or deceptive conduct, it is unnecessary to deal with the submission that DMR's true reasons for selling are expressed in its announcement of 7 September 1990.  So too, the interesting question of causal links between a fiduciary's breach and loss does not arise.  See the recent note by J.D. Heydon QC in (1994) 110 LQR 328.

Expert Evidence

In addition to the two principal actors and the other witnesses as to the facts in issue, a great many expert witnesses have given evidence.  These have included, on DMR's side, Mr Neil Draper and Mr Ian Horton, who worked on the data for the Silver King project before the sale to CRAE; Mr Neil Cole, a metallurgical engineer, and Mr R.H. Duffin, a geophysicist, both of whom furnished a report to DMR prior to the commencement of this proceeding; Mr P.J. Sippel, a surveyor; and Mr Robin Slaughter, a consulting engineer.  On the CRAE side, all the authors of the Minenco report were called to justify their views on reserves and mining, together with Mr Whitcher.  In addition, CRAE adduced expert evidence from Mr Colin Thomas, a geologist; Mr D.C.
Tennent, a consultant mining engineer; Mr R.D. Butler, a metallurgist; Mr J.G. Tankard, a mining engineer; Mr M.J. Binns, a geologist; Dr Spero Carras, a mining engineer and specialist ore reserve consultant; and Mr John F. Gilfillan, a geologist.  Most of this evidence was relevant to the question of damages, although it touched too on the issue of reliance.  I have considered whether there is any advantage, in view of the conclusion I have reached, in making any observations or findings in relation to this expert evidence.  Although DMR submitted that the determination of any prospectivity and strategic value to CRAE of DMR's tenements called for a "jury" assessment, I do not think that, as a trial judge, I have derived any particular advantage in relation to this expert evidence which should cause me to venture into what is a speculative and necessarily controversial exercise.

The application will be dismissed with costs.

I certify that this and the preceding ninety nine pages is a true copy of the reasons for judgment herein of the Hon. Justice A.P. Whitlam

Associate:

Date:     3 February 1995

Counsel for the applicants             EJPF Lennon QC and JC Sheahan

instructed by   Clayton Utz

Counsel for the respondent           PA Keane QC and RG Bain QC

instructed by   Minter Ellison Morris Fletcher

Dates of hearing:  27-30 April, 4-7, 10-14 May, 23-27, 30, 31 August, 1 September, 11-15, 18-22, 25-29 October 1993; 8-10 February 1994 (Brisbane)