Royalties are typically common to all agreements.

Transcription

1 Mineral Property Agreements Types of Agreements Examples What worked and What didn t Homer Hoogendorn of Bering Straits Native Corporation and Greg Beischer of Millrock exploration executing an Exploration Agreement with Option to Lease, circa Bluff and Council gold exploration projects east of Nome. Two subsequent Exploration Agreements were signed; Kinross and Ryan Gold. Typical Agreement Types 1. Exploration Agreements 2. Option Agreement (Earn-in Agreement) 3. Purchase Agreements 4. Mining Leases 5. Strategic Alliance Agreements Royalties are typically common to all agreements. 1

2 Royalties Are Valuable! Why do you want a royalty? Assume 2% NSR on a gold mine that produces 300,000 ounces of gold and silver per year. 2% * 300,000 = 6,000 ounces of gold. Transportation cost $30 per ounce. Refining cost $100 per ounce, so mine gets paid $1,200 per ounce of gold produced. Royalty holder payment = 6,000 times $1,200: $7.2 million. Every year. Since the royalty could be worth a lot of money, and there is potential for controversy, make sure you have a robust legal document describing the royalty and providing protections. Royalties Two basic structures Net Smelter Returns ( NSR ) royalty is a percentage of the revenue that the owner of a mining property receives from the sale of the mine's products less transportation and refining costs. Net Proceeds (or Profits) ( NPI ) royalty is a percentage of the profits made by the mining company from the mining property. NSR is more straightforward and less controversial. NPI may not start to pay as quickly. Both can be highly valuable. 2

3 Royalty Variations Lots of potential variations exist, for example, Sliding scale royalties tied to particular commodity prices Different royalties on different minerals Combination royalties that result in the payment of whichever calculation (NSR or NP) yields more Lesser royalty (or no royalty) payable during a payback or capital recovery period Royalty in kind? Sliding scales need to be updated! Area of Interest Price of Gold (per ounce) Net Royalty $ and below 1.0% $ % $ % $ % Over $ % Area of Interest Can negotiate an Area of Interest surrounding the mineral rights you presently own. May be able to negotiate a royalty that applies to claims that may be acquired by the funding partner in the future. In this case there is a large Area of Interest to surround a geological target. We couldn t afford to acquire rights to all of the area just the purple and dark grey. But the purchase agreement applies to the entire Area of Interest. If lithium brines are produced anywhere in the Area by the purchaser we will get a royalty. 3

4 Typical Agreement Types 1. Exploration Agreements 2. Option Agreement (Earn-in Agreement) 3. Purchase Agreements 4. Mining Leases 5. Strategic Alliance Agreements Exploration Agreements 1. Exploration Agreements Almost always with an Option To Purchase, Option To Lease, or an Option to JV Grants the exclusive right to perform exploration, and the exclusive right to enter into an Option or Purchase Agreement with predetermined business terms Advantage: very simple, quick, and can sometimes be done without an attorney eg FQM and MRO Stellar (Zackly) and Alaska Peninsula 4

5 Exploration Agreements Risks to the landowner or claimowner: Landowner may lose an exploration season if agreement contains only conditions to its continued effectiveness rather than obligations to perform a minimum amount of work Landowner remains potentially responsible for reclamation, spills, etc. Typical Agreement Types 1. Exploration Agreements 2. Option Agreement (Earn-in Agreement) 3. Purchase Agreements 4. Mining Leases 5. Strategic Alliance Agreements 5

6 Option Agreements (Earn-in Agreements) Option Agreements aka Earn-in Agreements Option to Purchase Option to Joint Venture Option to Lease Advantage is that is gives the earn-in partner the opportunity to evaluate and de-risk the project before committing to the more expensive purchase, JV or Lease. Advantage to owner is that the property owenership is not transferred until all the earn-in conditions are met. Option Agreements Business Terms Option to Purchase, JV or Lease often have the same basic business terms that must be met prior to the option being exercised. During the option period typical components are: Escalating exploration expenditures Initial cash payment Annual escalating cash payments Data Property maintenance 6

7 Option to Purchase Agreements Exercise of Option Purchase Agreement Upon completion of the Option Period, after the required amount of exploration expenditures and cash payments have been made, the funding party may exercise the option. For an Option to Purchase Agreement there is typically one final payment made in order to exercise the option and take a 100% interest in the property. Option to Lease Agreement Exercise of Option Lease Agreement Upon completion of the Option Period, after the required amount of exploration expenditures and cash payments have been made, the funding party may exercise the option to form a lease for advanced exploration or mining. Sometime the lease is formed immediately at the start of the agreement and contemplates exploration, development and mining. 7

8 Option to Joint Venture Agreement Exercise of Option JV Agreement Upon completion of the Option Period, after the required amount of exploration expenditures and cash payments have been made, the funding party may exercise the option to form a JV. After the JV is formed, each party will own an interest. Typically the partner that earned in will have the larger, majority interest. Stepwise progressions Option to JV Agreement (cont 3) Exercise of Option JV Agreement Once the JV is formed, both parties contribute prorata to further exploration and development Clawback clause? One party earns in to a majority interest position eg 70% Original vendor can regain majority interest by spending and paying some multiple of the original earn-in conditions 8

9 Lets Make a Deal! Underlying obligations Initial cash payment Annual cash payments Share payments Other consideration Expenditures Maintenance + Data Equipment Milestones Management fee Advanced Minimum Royalty (AMR) Net Smelter Return (NSR) Royalty Carried interest to a Milestone Area of Interest Net Profits Interest (NPI) Royalty Option Agreement Business Terms Good Deal Terms for a Grass Roots Project Cash Expenditures Cash on signing: $25,000 First Anniversary: $25,000 $500,000 Second Anniversary: $50,000 $800,000 Third Anniversary: $100,000 $1,200,000 Fourth Anniversary: $200,000 $1,500,000 Fifth Anniversary: $200,000 $2,000,000 Total: $600,000 $6,000,000 Milestone Payments? Advanced Minimum Royalty? Royalty? NSR? NPI? Other consideration? Shares? % Ownership. Value: What has been found? How much have you spent? 9

10 Option Agreement Business Terms Advanced Project with Discovery: Eg Pebble: Anglo signed an Option to JV agreement to earn a 51% interest by: Spending $125 M for a prefeasibility study by Spending another $325 million by Spending another $975 million after a production decision. NDM had made a significant discovery and expended a lot of their own cash on the project. Typical Agreement Types 1. Exploration Agreements 2. Option Agreement (Earn-in Agreement) 3. Purchase Agreements 4. Mining Leases 5. Strategic Alliance Agreements 10

11 Purchase Agreements In some cases it may be desirable to buy or sell a property outright. A simple Purchase and Sale Agreement is used. Consideration may be cash, shares or even precious metals or other consideration. Typically a royalty will be granted. Potentially an Advanced Mininum Royalty and/or Milestone Payments can be negotiated. Purchase Agreements Advantage for buyer is they immediately own 100%. Advantage for seller is they immediately realize full value (but probably less than they would realize over time in an option agreement). Risks to the seller: May miss participating in a big discovery (unless a royalty is reserved) Risks to the purchaser: May turn out to be a waste of money 11

12 Typical Agreement Types 1. Exploration Agreements 2. Option Agreement (Earn-in Agreement) 3. Purchase Agreements 4. Mining Leases 5. Strategic Alliance Agreements Mining Leases A typical mining lease grants the exclusive right to conduct exploration, development, mining, and reclamation Could come with an Option to Purchase The typical mining lease is usually granted for a primary term of years followed by a secondary term that will end automatically upon cessation of mineral production or cessation of other mineral activities Could have performance thresholds 12

13 Mining Leases Advantage of a mining lease for both parties: One document can do everything with respect to the covered Blackacres Risks to landowner of using a mining lease: Landowner may be parting with his properties essentially forever Landowner cannot anticipate every possible event or issue (also a risk for lessee) Landowner remains potentially responsible for reclamation, spills, etc. Mining Leases The typical mining lease is usually granted for a primary term of years followed by a secondary term that will end automatically upon cessation of mineral production or cessation of other mineral activities Advantage of a mining lease for both parties: One document can do everything from exploration to reclamation Risks to landowner of using a mining lease: Landowner may be parting with his properties essentially forever Landowner cannot anticipate every possible event or issue (also a risk for lessee) Landowner remains potentially responsible for reclamation, spills, etc. 13

14 Typical Agreement Types 1. Exploration Agreements 2. Option Agreement (Earn-in Agreement) 3. Purchase Agreements 4. Mining Leases 5. Strategic Alliance Agreements Strategic Alliance Usually between a Major mining company and a junior exploration team. Mining company provides financing for junior to do exploration. Typical arrangement is that Major has the exclusive right to enter an Option to JV or Option to Purchase agreement on claims staked in an Area of Interest. Area of Interest can be quite broad. 14

15 Strategic Alliance Advantage for Junior: If it s a listed company, do not have to sell stock to raise funds. Can pursue projects owned by third parties. Advantage for the Major: Take advantage of local expertise and operational ability. Junior more nimble. Disadvantage: Junior is tied to the Major so it is difficult to get another partner on rejected projects. Strategic Alliance Example: Millrock and Centerra Gold Big Area of Interest: Sonora State Mexico $250K for year 1 to do grass roots exploration and identify third-party properties. Millrock nominated Designated Properties and if accepted became subject to an Option to JV with predetermined business terms. Centerra could earn 80% by spending $3 million. Millrock operates, 10% management fee. Reduce to 1% NSR. Two projects were accepted and exploration is ongoing. 15

16 From first prospect to mine reclamation The legal agreements that protect the parties may have a duration of years or decades. It is important to have robust agreements. 16