Mineral Exploration Agreement & Option To Form Co.

SUAQUI VERDE
MINERAL EXPLORATION AGREEMENT AND
OPTION TO FORM COMPANY


AMONG


AZCO MINING, INC.


COBRE DE SUAQUI VERDE, S.A. DE C.V.


AND


MINERA PHELPS DODGE MEXICO, S. de R.L. de C.V.


Dated: June 20, 1996 2
TABLE OF CONTENTS


Page


1. DEFINITIONS.......................................................... 1
2. EXPLORATION.......................................................... 4
2.1 Grant of Exploration Rights.................................. 4
2.1.1 Exploration and Evaluation......................... 4
2.1.2 Consents; Surface Consents......................... 4
2.1.3 Removal of Ore for Testing......................... 4
2.2 Control of Exploration....................................... 5
2.3 Data and Information......................................... 5
2.4 Exploration Expenditures..................................... 5
2.4.1 Amount............................................. 5
2.4.2 Notice of Completion............................... 5
2.4.3 Allowances......................................... 5
2.4.4 Statement of Expenditures.......................... 6
2.4.5 Expenditures Cumulative............................ 6
2.5 Dropping Property............................................ 6
2.6 Failure to Make Expenditures................................. 6
3. PAYMENTS TO CDSV..................................................... 6
3.1 Payment Schedule............................................. 6
3.2 Condition to Payment......................................... 6
3.3 Royalty .................................................. 7
3.4 Underlying Agreements........................................ 7
4. INTERESTS............................................................ 7
5. OPERATING COMPANY.................................................... 7
5.1 Exercise of Company Option................................... 7
5.2 Formation of Operating Company............................... 8
5.3 Execution of Operator's Agreement............................ 8
6. OPERATIONS DURING THE EXPLORATION PERIOD............................. 8
6.1 Standard of Performance...................................... 8
6.2 Preexisting Conditions....................................... 8
6.3 Maintenance of Property...................................... 9
6.3.1 Before Formation of Operating Company............. 9
6.3.2 After Formation of Operating Company.............. 9
6.3.3 Upon Termination.................................. 9
6.3.4 Costs Applicable to Exploration Expenditures...... 9
6.4 Dealings with Affiliates..................................... 9
7. REPRESENTATIONS; TITLE............................................... 10
7.1 Representations and Warranties............................... 10
7.1.1 Effective Date..................................... 10
7.1.2 Transfer Date...................................... 11
7.1.3 Title Indemnity.................................... 11
7.2 Complete Disclosure.......................................... 11
7.3 Title Defect; Defense........................................ 11
8. LIENS................................................................ 11 3 9. INDEMNITY............................................................ 12
9.1 Indemnification by MPDM...................................... 12
9.2 Indemnification by CDSV...................................... 12
10. RIGHT OF ACCESS BY CDSV.............................................. 12
10.1 Reports...................................................... 12
10.2 Meetings..................................................... 12
10.3 Documents.................................................... 12
10.4 Audits; Inspections.......................................... 13
10.5 Disclaimer................................................... 13
11. TERMINATION.......................................................... 13
11.1 Termination by MPDM.......................................... 13
11.2 Termination for Default...................................... 13
11.3 Continuing Liability......................................... 13
11.4 Surrender of Possession...................................... 14
11.5 Delivery of Data............................................. 14
11.6 Removal of Property.......................................... 14
12. FORCE MAJEURE........................................................ 14
13. ADDITION OF PROPERTIES............................................... 14
14. OTHER BUSINESS OPPORTUNITIES......................................... 15
15. CONFIDENTIALITY...................................................... 15
16. TRANSFER OF INTEREST................................................. 15
17. NOTICES.............................................................. 15
18. NO IMPLIED COVENANTS................................................. 17
19. FURTHER ASSURANCES................................................... 17
20. BINDING EFFECT....................................................... 17
21. AMENDMENTS, WAIVERS, ETC............................................. 17
22. LANGUAGE; GOVERNING LAW.............................................. 17
23. ENTIRE AGREEMENT..................................................... 18
24. CONSTRUCTION OF AGREEMENT............................................ 18
25. ARBITRATION.......................................................... 18


EXHIBIT A CONCESSIONS EXHIBIT A-1 PLAT OF CONCESSIONS EXHIBIT B UNDERLYING AGREEMENTS (Dausinger)


Page ii 4
SUAQUI VERDE
MINERAL EXPLORATION AGREEMENT AND OPTION TO FORM COMPANY


This Mineral Exploration Agreement and Option to Form Company is made
effective as of June 20, 1996, by and among:


AZCO MINING, INC. ("AZCO"), a Delaware corporation, with a principal
address at 30 South Bowie, Solomon, Arizona, 85551;


COBRE de SUAQUI VERDE, S.A. de C.V. ("CDSV"), a corporation organized
and existing under the laws of the United Mexican States, with domicile
at Ramon Corral No. 15, Colonia Country Club, 83010, Hermosillo,
Sonora, Mexico; and


MINERA PHELPS DODGE MEXICO, S. de R.L. de C.V. ("MPDM"), a corporation
organized and existing under the laws of the United Mexican States,
with domicile at Blvd. Garcia Morales Km. 9.5, Colonia La Manga, 83220,
Hermosillo, Sonora, Mexico.


RECITALS:


CDSV owns or controls mineral concessions on certain lands situated in Sonora, Mexico as described in Exhibit A;


CDSV is a subsidiary of AZCO, which owns 99.97% of CDSV.


CDSV has agreed that MPDM shall have the right to explore and evaluate the concessions described in Exhibit A with the objective of identifying one or more mineral deposits that can be brought into production under economically and technically feasible conditions in a joint effort;


If such exploration is successful, CDSV and MPDM shall form an Operating Company under the laws of the United Mexican States, to which CDSV will transfer the concessions described in Exhibit A;


CDSV and MPDM intend that if the Operating Company is formed it will further explore and, if warranted, develop and mine one or more mineral deposits within the Area of Interest.


AGREEMENTS:


In consideration of the covenants and agreements contained herein, the Parties agree as follows:


1. DEFINITIONS. In addition to words and phrases defined elsewhere in this Agreement, the following words and phrases shall have the meanings set forth below:


1.1
"Affiliate" means any Person directly or indirectly controlling, controlled by or under common control with a Party. For purposes of the preceding sentence, "control" means possession, directly or indirectly, of the right to direct management and policies through ownership of voting securities, contract, voting trust or otherwise.


1.2
"Agreement" means this Mineral Exploration Agreement and Option to Form Company, including all schedules and exhibits hereto, which are incorporated herein by this reference, as amended, modified or supplemented from time to time.


1 5
1.3
"Area of Interest" means the area enclosed by the exterior boundaries of the mineral concessions described in Exhibit A and the peripheral area enclosed by lines drawn parallel to and one mile distant from said exterior boundaries. The acquisition of mineral concessions within such peripheral area shall not operate to enlarge the Area of Interest.


1.4
"AZCO" shall have the meaning given in the first paragraph of this Agreement.


1.5
"Bylaws" means the Bylaws which the Parties shall cause to be adopted by the Operating Company promptly following its formation.


1.6
"CDSV" shall have the meaning given in the first paragraph of this Agreement.


1.7
"Company Option" means the right and option to form an Operating Company as provided by Section 5.


1.8
"Concessions" means the mineral concessions described in Exhibit A and depicted on the plat attached hereto as Exhibit A-1 and all other rights and interests in property, real or mixed, within the Area of Interest that become subject to this Agreement pursuant to Section 13.


1.9
"Dollars" or "$" means currency of the United States of America, except as otherwise expressly stated.


1.10
"Effective Date" means the effective date of this Agreement which shall be the date set forth in the first paragraph of this Agreement.


1.11
"Exploration" means all activities directed toward ascertaining the existence, location, quantity, quality, or commercial value of deposits of minerals, including preparation of one or more feasibility studies.


1.12
"Exploration Expenditures" means all expenses, costs and liabilities paid or accrued incident to Exploration within the Area of Interest, including without limitation amounts paid pursuant to the Underlying Agreement, for taxes and other amounts paid or accrued to maintain the Concessions in good standing, and for preparation of feasibility studies, engineering and metallurgical testing.


1.13
"Exploration Period" means the period beginning on the Effective Date and ending on the earlier of (a) the termination of this Agreement by MPDM or CDSV pursuant to Section 11, or (b) the lapse of 36 months after the Effective Date, or (c) the lapse of 60 days following MPDM's notice of completion of Exploration Expenditures prescribed by Section 2.4.1 and payments prescribed by Section 3.


1.14
"Force Majeure" means an event which is not within the reasonable control of a Party claiming suspension of an obligation or extension of the time for performance, including but not limited to an act of God; strike, lockout or other industrial disturbance (however arising and whether or not employee demands are reasonable or within the power of the Party to grant); accident; act of the public enemy; war (declared or undeclared), blockade, terrorism, revolution, or public riot; port closing; lightning, fire, storm, flood, earthquake, landslide, avalanche, drought or other adverse weather condition; explosion; arrests, title disputes or other litigation;


2 6 governmental requests, restraints or actions; shortage or unavailability of equipment, materials, fuel, supplies, utilities, services or labor or limitations upon the use thereof; delays in or unavailability of transportation; judgments or orders of any court; inability to obtain on reasonably acceptable terms any public or private license, permit, approval or other authorization; curtail ment or suspension of activities to remedy or avoid an actual or alleged, present or prospective violation of national, state, or local environmental standards; or any other cause of whatsoever nature, whether similar or dissimilar to the foregoing.


1.15
"Lots" means the geographical area encompassed by the Concessions.


1.16
"Interest" means the ownership interest of CDSV in the Concessions or the rights of a Party in the Concessions under this Agreement.


1.17
"MPDM" shall have the meaning given in the first paragraph of this Agreement.


1.18
"Notice" means a notice, advice, election, request, order, demand, offer or other communication permitted or required by this Agreement.


1.19
"Operating Company" means the corporation to be formed by MPDM and CDSV for the purposes of further Exploration and, if warranted, development and exploitation of the Concessions.


1.20
"Operator's Agreement" means the Operator's Agreement which shall be executed by the operator and the Operating Company promptly following the formation of the Operating Company.


1.21
"Party" or "Parties" means MPDM, CDSV and AZCO and any other Person that from time to time acquires an Interest.


1.22
"Person" means any individual, estate, trust, general partnership, limited partnership, limited liability company, corporation, association, governmental body or other organization or entity and their respective heirs, legal representatives, successors and assigns, other than a Party.


1.23
"Shareholders Agreement" means the agreement which MPDM and CDSV shall execute promptly following the exercise of a Company Option.


1.24
"Transfer" means sell, grant, assign, encumber, pledge or otherwise commit or dispose of.


1.25
"Underlying Agreements" means the agreement between Maria Loreto de la Luz Gutierrez Badilla de Dausinger, as concessionaire, and CDSV consisting of the binding letter of agreement signed on October 19, 1990, the Contract of Cession of Rights, dated June 13, 1991, registered at Folio 4, page 3 front side and page 4 reverse side, Vol. 265 of the Mining Concessions Book of the Public Registry of Mining, and the Amendatory Agreement dated June 17, 1991, and any other agreement by which a Party or the Operating Company controls mineral concessions within the Area of Interest.


3 7
1.26
"Work Year" means the annual period commencing on the Effective Date or any anniversary thereof.


2. EXPLORATION.


2.1
Grant of Exploration Rights


2.1.1
Exploration and Evaluation. CDSV hereby gives and grants to MPDM on and subject to the terms, covenants and conditions hereinafter set forth, the exclusive and irrevocable right to enter upon the Lots during the Exploration Period for the purpose of conducting mineral Exploration and evaluations on all or part of the Lots with the objective of identifying one or more mineral deposits which could be brought into production under economically and technically feasible conditions. The rights granted by this Section shall be mandatory for CDSV, but voluntary for MPDM.


2.1.2
Consents; Surface Consents. Promptly following the exercise of the Company Option, CDSV shall obtain such consent of the concessionaire under the Underlying Agreement to the transfer to the Operating Company of the rights and obligations of CDSV under the Underlying Agreement as MPDM may request. If CDSV has not already obtained the same, promptly following the Effective Date MPDM shall seek from the owner or owners of the surface of the Concessions, upon terms and conditions satisfactory to MPDM, such surface use rights as are necessary or convenient to the Exploration and evaluation of the Concessions. If MPDM is unable to obtain such surface use rights upon reasonably acceptable terms within 30 days after the Effective Date, MPDM shall have the right within 45 days after the Effective Date in which to terminate this Agreement pursuant to Section 11.1 and receive from AZCO the return of any payment theretofore made by MPDM pursuant to Section 3.1. During the Option Period, CDSV shall not transfer or encumber the Concessions or the Underlying Agreements without the prior written consent of MPDM.


2.1.3
Removal of Ore for Testing. MPDM may remove from the Concessions appropriate quantities of ore which it deems necessary or appropriate to the proper testing and evaluation of the Concessions and may process and dispose thereof in MPDM's reasonable discretion.


2.2
Control of Exploration. Subject to the provisions of Section 2.4.1, Exploration on the Concessions shall be conducted at the sole and exclusive discretion of MPDM. MPDM may cause any potential target within the Area of Interest to be explored and all Exploration will be prioritized by MPDM based upon its sole understanding and evaluation of the economic and technical potential or feasibility of any mineralized zone.


2.3
Data and Information. CDSV shall make available for inspection and copying by MPDM and MPDM shall have the right at all times relevant to this Agreement to inspect and copy, as appropriate, all technical, financial, environmental, title and other data, drill core and information pertaining to the Concessions or the Area of Interest in CDSV's or its Affiliates' possession or subject to their control.


4 8
2.4
Exploration Expenditures.


2.4.1
Amount. Subject to the right of MPDM to terminate this Agreement and further subject to Force Majeure, MPDM shall cause Exploration Expenditures to be made within the Area of Interest in the amounts and during the Work Years as follows in order to continue this Agreement in effect:


Period Amount
------ ------


Work Year 1 $ 500,000
Work Year 2 500,000
Work Year 3 1,000,000
-----------
Total 2,000,000


Exploration Expenditures made in pesos shall be credited at the rate of exchange in effect on the date such expenditures are paid, as such rate is published in the Diario Oficial de la Federacion.


2.4.2 Notice of Completion. MPDM shall promptly give CDSV notice when MPDM has completed Exploration Expenditures totalling $2,000,000 in the aggregate. MPDM shall have the Interest as provided by Section 4 and the right to exercise the Company Option within the time provided by Section 5.1.


2.4.3 Allowances. For purposes of determining Exploration Expenditures made by MPDM, Exploration Expenditures shall include:


(a) The payroll burden for the employees of MPDM or its Affiliates directly engaged in ...