Khan Signs Memorandum of Understanding With MonAtom LLC

Khan Resources Inc. (TSX:KRI), a Canadian junior with market cap of 44 million CAD whose “current activities are focused on the Dornod area in northeastern Mongolia, the site of a former Russian open-pit uranium mine” that was much in center of spotlight last year caused by controversial Law on Nuclear Energy ” announced today that it has signed a non-binding memorandum of understanding ("MOU") with MonAtom LLC ("MonAtom"), the Mongolian state-owned uranium development company. The MOU establishes the principal elements of a joint venture transaction which would finalize the ownership structure surrounding the Dornod uranium project, and creates a framework for developing the project and bringing it into operation as expeditiously as possible. Khan's objective in entering into this MOU is to protect and preserve value for Khan's shareholders in light of the Mongolian Nuclear Energy Law, the status of Khan's mining and exploration licenses in Mongolia and the hostile bid by JSC Atomredmetzoloto ("ARMZ"). Khan's Board of Directors believes that the transactions contemplated by the MOU will, when completed, deliver far greater value to Khan's shareholders than the $0.65 per share offered by ARMZ in its hostile bid.

Khan's two principal assets in Mongolia are mining license 237A held by its 58% owned subsidiary Central Asian Uranium Company, Limited ("CAUC") and exploration license 9282X held by its wholly owned subsidiary Khan Mongolia XXK ("Khan Mongolia"). CAUC is a joint venture between Khan (58%), MonAtom (21%) and the Russian company JSC Priargunsky Industrial Mining and Chemical Union ("Priargunsky"), a subsidiary of ARMZ.

The principal elements of the proposed transaction include:

• the two pending applications to re-register the existing CAUC mining license and Khan Mongolia exploration license under the Nuclear Energy Law to be approved and new licenses issued within seven days of signing the MOU;
• Khan Mongolia's exploration license to be converted into a mining license within 45 days of signing the MOU.
• Khan and MonAtom would enter into a new joint venture arrangement whereby Khan and MonAtom would each hold shares of a joint venture company which would have ownership in both CAUC and Khan Mongolia.
• The proposed structure contemplates MonAtom acquiring a 51% interest in each of CAUC and Khan Mongolia in accordance with the Nuclear Energy Law, but MonAtom would then transfer to Khan part of its interest in the joint venture in exchange for newly issued shares of Khan representing 17% of Khan's outstanding shares, and a warrant to purchase an additional 2.9% of the shares of Khan at an exercise price equal to the market price on the date that the definitive agreements are signed. This transfer would result in Khan owning 65% of the joint venture company and the joint venture company owning 74% of CAUC and 100% of Khan Mongolia.
• In addition, Khan would have the right to nominate a majority of the members, including the Chair, of the management committee which will serve as the governing body of the joint venture. Certain fundamental decisions would require unanimous approval of the management committee. As long as MonAtom remains a significant shareholder of Khan, it would be entitled to nominate two candidates for election to Khan's board of directors.
• Khan Mongolia would be appointed as the operator of the project pursuant to long term operator agreements with fees on a cost plus basis.
• The joint venture partners will use their best efforts to negotiate and finalize an investment agreement ("Investment Agreement") with the Government of Mongolia on an expedited basis, with the goal of entering into such agreement within six months after signing the definitive joint venture agreement.
• Khan and MonAtom intend that the MOU, definitive joint venture agreement and Investment Agreement will generally follow the precedent setting investment agreement entered into by Ivanhoe Mines, Rio Tinto and the Government of Mongolia in respect of the Oyu Tolgoi copper and gold mining project, which provides for, among other things, a stable tax and operational environment for the project, protection of the shareholders' investment in the project, and provisions relating to mining, environmental, health, social and economic matters.

The transaction is subject to a number of conditions including negotiating and signing the formal joint venture agreement, operator agreements and related definitive documentation, as well as required approvals thereof including by the Khan and MonAtom boards. The parties intend to immediately commence negotiations on the definitive agreements with a goal of entering into such agreements before the end of March 2010.

After consultation with its financial advisors, Haywood Securities Inc.. Khan's Board of Directors believes that, based on a Dornod after-tax net present value (NPV) using a 10% discount rate of U.S.$276 million, and Khan's resulting interest in the project following the transaction contemplated by the MOU, such transaction implies a value for Khan of approximately U.S.$2.14 (C$2.26) per common share. Accordingly, after taking into account Khan's cash on hand of C$0.26 per common share (after dilution), the total after-tax net asset value (NAV) attributable to Khan would be $2.52 per common share. Khan believes this amount more closely reflects the actual value of Khan's shares and represents a significant improvement in value for Khan shareholders when compared to ARMZ's opportunistic and inadequate offer of $0.65 per share.

"Since the passage of the Nuclear Energy Law last summer, it has been clear that the only viable path for Khan is to negotiate a mutually acceptable solution with the Government of Mongolia which achieves the Government's 51% ownership objective while protecting and maximizing value for Khan and its shareholders," said Martin Quick, President and CEO of Khan. "With this MOU, we think we have achieved the right balance. It gives us a stable ownership and regulatory platform upon which we can obtain the necessary financing to complete the project. We believe that this transaction delivers far greater long term value to Khan's shareholders than ARMZ's hostile bid."

Mr. Badamdamdin, CEO of MonAtom, said: "We are very happy to have negotiated this MOU with Khan. We respect Khan's operating and financial expertise and look forward to taking Dornod as quickly and efficiently as possible to production."

"The Board of Directors and Special Committee repeat our recommendation to all Khan shareholders to reject the highly conditional and opportunistic ARMZ Offer," said Mr. James Doak, Chairman of the Khan Board. "The MOU with MonAtom offers a going concern alternative that we hope, by removing regulatory uncertainty, will increase our share price closer to its net asset value. Our Board looks forward to working with MonAtom to negotiate and sign the definitive documents necessary to reflect the transactions contemplated by the MOU and develop the Dornod deposit into an operating uranium mine."

Since ARMZ launched its hostile offer to acquire all of the outstanding common shares of Khan at $0.65 per share on November 30, 2009 (the "ARMZ Offer"), the Special Committee of the Khan Board of Directors has been actively engaged in a process of identifying viable strategic alternatives that may be in the best interests of Khan and maximize value for its shareholders, having regard to the policies and laws of the Government of Mongolia and the unique circumstances in which Khan operates. Khan believes that the transactions contemplated by the MOU provide greater clarity for all interested parties to assess the true value of Khan and provides shareholders with a viable strategic alternative to the ARMZ Offer. Khan cautions, however, that the MOU is non-binding and is subject to negotiation of definitive documentation and other conditions. There can be no assurance that the transactions contemplated by the MOU will be concluded or that the terms and conditions or proposed final structure will not change.

UPDATE ON THE ARMZ OFFER

More information about the circumstances in Mongolia and the ARMZ Offer is provided in the Directors' Circular dated December 15, 2009 issued by Khan's Board of Directors. The Board continues to stand by its unanimous recommendation that shareholders reject the ARMZ Offer and not tender their shares to the ARMZ Offer. Khan strongly urges shareholders to read the Directors' Circular in its entirety and particularly the detailed "Reasons for Rejection" set out therein and summarized in Khan's related press release dated December 15, 2009.

ABOUT MONATOM LLC

MonAtom LLC is a Mongolian state-owned company in charge of representing the government of Mongolia in all activities regarding radioactive minerals. MonAtom LLC represents the Mongolian state ownership in all uranium projects in Mongolia and is the holder of all uranium licenses under Mongolian state control.”

KRI stock jumped 20 per cent on the announcement as of 2:30pm EST on January 26, 2010 trading at 0.82 CAD at TSX.

Regarding broader context of Mongolian uranium industry, according to Word Nuclear Association and “2007 Red Book, Mongolia has 62,000 tU in Reasonably Assured Resources plus Inferred Resources, to US$ 130/kg U.

Mongolia has a long history of uranium exploration commencing with joint Russian and Mongolian endeavours from 1950s involving investment of some US$ 200 million. Initial success was obtained in the Saddle Hills area of northeastern Mongolia (Dornod and Gurvanbulag regions) where uranium is present in volcanogenic sediments. However, the country has been considered to have relatively high political risk associated with investment. One aspect of this was the existence of an eminent domain provision for strategic minerals which involved the possibility of claw-back at the discretion of the government, applied where new exploration covered areas which were previously explored or developed, such as Dornod and Gurvanbulag. Originally this was understood to involve compensation if it were invoked, but this provision may have been abolished in the July 2009 Nuclear Energy Law.

The main uranium prospect is the Dornod open cut mine and undergound orebody, with the surrounding area containing a number of deposits in the Dornod aimag (province) in the far northeast of the country. The main deposits was mined by the Erdes Mining Enterprise, a subsidiary of Priargunsky Mining & Chemical Enterprise from 1988 to 1995. The ore was railed 400 km to Krasnokamensk in Siberia for treatment by Priargunsky. About 627 tU was produced.

Mardai township close to Dornod was built in the 1970s and was reported to house 10,000 Russian workers at the mine with a very high standard of living and commerce. It is now in ruins, and the railway north has been removed and the materials sold.

In 2008 the government established a new Ministry of Minerals and Energy. Then the Nuclear Energy Agency was set up about the beginning of 2009 as a government line agency directly accountable to the Prime Minister. In February 2009 the government set up MonAtom LLC to undertake uranium exploration and mining on behalf of the state, as well as pursuing nuclear energy proposals. It will hold the state's equity in uranium and nuclear ventures and so comes under the Nuclear Energy Agency and the State Property Committee. The Radiation Control Authority is a part of this Agency, along with MonAtom. The existing Mineral Resources and Petroleum Authority of Mongolia (MRPAM) is expected to work closely with MonAtom and the Nuclear Energy Agency.

In mid July 2009, after consultation with the International Atomic Energy Agency, parliament passed a Nuclear Energy Law to regulate the exploration, development, and mining of uranium and give the state a greater degree of ownership and control of uranium resources. It included transitional provisions dealing with existing mining and exploration licences.

In April 2008 Russia and Mongolia signed a high-level agreement to cooperate in identifying and developing Mongolia's uranium resources, and this aimed to restore and consolidate Russia's involvement in Mongolia's uranium sector. Russia is also examining the feasibility of building nuclear power plants in Mongolia.

During the visit of the Mongolian Prime Minister to Russia in mid 2009, an agreement was signed between the Mongolian Nuclear Energy Agency and Russia's Rosatom corporation. This agreement envisaged a creation of a joint venture company between MonAtom and ARMZ to develop two uranium projects in Mongolia in which Russia retains an historical stake: Dornod and exploring East Gobi further south. A Japanese partner in this joint venture is also envisaged. Rosatom says that the new JV is of particular interest due to its proximity (350 km direct) to Priargunsky operations, allowing creation of a "single infrastructure". Russian aid is expected for railway upgrades throughout Mongolia. The final intergovernmental agreement to set up the 50-50 joint venture - Dornod Uran LLC - was signed on 25 August. The joint venture is to be relieved from taxes and other compulsory payments imposed by Mongolian legislation, because Russian labour is to be used initially.

At least until mid August 2009, the Canada-based Khan Resources Inc. (KRI) claimed a 69% share in the Dornod project, mostly through a 58% subsidiary Central Asian Uranium Co. Ltd (CAUC), a Mongolian stock company set up by World Wide Minerals at the behest of the government in the late 1990s. Russia's Priargunsky Mining & Chemical Enterprise (a subsidiary of ARMZ and Rosatom) and the MonAtom own 21% of CAUC, which holds the only uranium mining licence in Mongolia. A bankable feasibility study undertaken for Khan had confirmed the viability of the project, the capital cost estimate being US$ 333 million and first production possibly in 2012. A definitive feasibility study released in March 2009 showed that the project was sound, on the basis of 24,780 tU indicated resources (NI 43-101 compliant), including 20,340 tU probable reserves. Annual production of 1150 tU over 15 years was envisaged. In July 2009 MRPAM suspended for three months the CAUC mining licence due to alleged violations of Mongolian laws. Then in late August the Nuclear Energy Agency announced that the joint venture of MonAtom with Russia's ARMZ would develop the project to produce about 2000 t/yr. Uranium will be exported but not necessarily to Russia.

Khan was granted a 3-year exploration licence from MRPAM early in 2008 covering part of the Dornod orebody, and was applying to have this converted into a mining licence contiguous with that held by CAUC. In addition, Khan holds 100% of an exploration license covering an adjoining "Additional Dornod property". In March 2009 Khan was reported as holding 58% of the No.2 deposit (open cute mine) and two thirds of the deep No.7 deposit (via CAUC?), and 100% of the remaining third of the No.7 deposit, which would give it 69% of the overall uranium resource. The company was aiming to negotiate an investment agreement with the government as soon as possible, and engineering was then likely to take three years to mine start up.

On 27 November 2009 ARMZ announced a cash offer to buy all Khan's shares, at a substantial premium on the market. ARMZ said that it believed "the offer represents full and fair value for the Khan shares and provides Khan shareholders with an opportunity to receive liquidity at a significant premium to the current market, as well as value certainty today, relative to the significant political and licensing risks associated with the development of the Dornod property in Mongolia." On 15 December Khan's board of directors unanimously recommended its shareholders reject the offer, describing it as inadequate, failing to recognize the full value of the company, and containing "objectionable" terms and conditions, as well as being "highly prejudicial and opportunistic" and exposing Khan to serious risks.

Gurvanbulag, about 30 km west of Dornod, had extensive underground development down to 560 metres in the Soviet era. The Canada-based Western Prospector Group Ltd Gurvanbulag as the main focus of its Saddle Hills project since 2004. A recent NI 43-101 inferred resource figure based partly on Russian exploration to 1989 is 9000 tU. Western Prospector and its Mongolian subsidiary, Emeelt Mines, undertook a definitive feasibility study which showed that the project is barely economic, on the basis of 6900 tU reserves averaging 0.137%U. With radiometric sorting the head grade would be 0.152%U and the mine could produce 700 tU/yr for 9 years. Mine development cost would be about US$ 280 million. It is only 100 km from the Chinese border.

In mid 2008 KRI made a bid to take over the Western Prospector Group so as "to consolidate its position in the Saddle Hills district" but was outbid by Tinpo Holdings, who subsequently withdrew the offer due to political uncertainty. In March 2009 Western Prospector agreed to a US$ 25 million takeover by China's CNNC International, a 74% subsidiary of CNNC Overseas Uranium Holding Ltd and through it, of SinoU. In June 2009, 69% of the shares had been taken over by CNNC. In July MRPAM suspended for three months all of the company's uranium exploration licences due to alleged violations of Mongolian laws, but MonAtom appears to be more positive about Chinese equity here than Canadian involvement. In October 2009 it said that CNNC's equity "would be decided soon", but it would evidently be less than 50%. CNNC said it hoped to start mining the deposit within two years.

Canada's Denison Mines has a 70% interest in the Gurvan Saihan Joint Venture (GSJV), with the Government of Mongolia and a Russian partner, and also holds leases though its Mongolian affiliate International Uranium Mongolia XXK (IUM). GSJV has focused on defining ore which is amenable to ISL mining, and it holds interests in several Mongolian properties. In 2007 NI 43-101 resource figures were published for some of these. Indicated and inferred resources of 4400 tU are quoted for Hairhan, and 2400 tU Haraat.

In 2007 Century City entered into an agreement with China Nuclear Energy Industry Corp (CNEIC), a subsidiary of CNNC, to explore and develop uranium resources on its leases in eastern Mongolia.

Red Hill Energy and Mega Uranium hold a number of exploration licences including the Emeelt, Khashaat and Bagamurat deposits 350 km southeast of Ulaan Baatar, and Jargalan, 500 km west of the city.

In December 2008 Japanese trading company Marubeni acquired rights to conduct feasibility studies on three uranium deposits, including Dornod and Gurvanbulag, developed by KRI and Western Prospector. The company planned to invest US$ 430 million and had signed a letter of intent with Khan. Since it was perceived that the laws of the mining-dependent country had become increasingly protectionist in recent years, Khan Resources then commented that “We are excited by Marubeni's interest in Khan's Dornod uranium project and are optimistic about the positive influence Japanese investors have on the Mongolian mining investment environment. Marubeni will work to improve the mining investment climate in Mongolia. MonAtom and Rosatom have both said that a Japanese company, presumably Marubeni, may be involved with the Dornod project JV.

In September 2009 India signed a uranium supply and nuclear cooperation agreement with Mongolia.

In latest development, on Dec. 21, 2009 according to Bloomberg, “Mitsubishi Corp., a Japanese trading company, will invest in a project of Areva SA to explore for uranium in Mongolia, the Nikkei newspaper reported on its English service.

Mitsubishi will pay 34 percent of exploration costs to date, 34 percent of future costs, and acquire 34 percent of an Areva unit in Mongolia, according to the report. It didn’t say how much Mitsubishi would invest, or who provided the information.”

In a most recent development in Mongolia, according to Media, Information and Promotion Office of the Parliament, on “January 22, 2010, in the afternoon united session of the Parliament MPs continued discussions of the Draft Resolutions on approving Main Directions to privatization of State Property is 2010-2012 and on Making Amendments to the List.

By 93.2 per cent vote of the Parliament, it has been supported to discuss the Resolution and the draft resolution has been transferred for preparation for initial reading to the Economic Standing Committee.”

According to major Mongolian daily “Zuuny Medee” , the Resolution includes establishment of state controlled holding company based on Mongolian uranium deposits that is to have state stake not less than 51 % and also would be IPO-ed domestically and internationally.

In related news, Denison Mines Corp with 519 million CAD market cap “ mid-sized uranium producer in North America, with mining assets in the Athabasca Basin region of Saskatchewan, Canada and the southwest United States including Colorado, Utah, and Arizona with ownership interests in two of the four conventional uranium mills currently operating in North America and a portfolio of exploration and development projects in the United States, Canada, Mongolia and Zambia” announced today as well that

“On development stage projects a total of $8.8 million will be spent in 2010 of which $6.5 million will be incurred to advance the Zambian and Mongolian projects and to develop a longer term strategy for these assets and their development.”

In latest uranium analysis, according to Mineweb, “the December review of the global uranium scene by Sydney-based Resource Capital (RCR) said that the uranium spot price was now about $US45/lb, down 5% on three months ago.

However, the fund implied price (FIP) was also $US45 which was up on the December 2008 figure of $US41/lb.

RCR's managing director John Wilson said the FIP has generally been a good leading indicator for the near-term spot price performance.

The long term contract uranium price was $US61/lb down from the $US70/lb of December last year.

"The focus on supply expansion in the uranium sector is shifting from exploration success to permitting and production," John Wilson said.

There was a growing pipeline of solid development projects and advanced exploration projects, and a growing number of mining permits being granted.

"With a typical 10 to 12 year development timeframe from initial discovery to production and technical, regulatory and financing hurdles for pending producers to overcome, development timeframes are far from certain.

"The outlook for the uranium market supply-demand balance remains finely poised through 2015," he added

RCR said there were 436 new nuclear reactors planned or proposed globally as of December, up from 376 a year ago.

There were 436 nuclear power reactors in operation and 53 under construction - eight more than six months ago.”

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