38. Claim Fees Paid for a Royalty Interest – Good Deal or Not?
Date: January 12, 2016Author: Ken Kuchling
I have read several articles about how the junior mining industry must innovate to stay relevant. Innovation and changing with the times may be what is needed in this economic climate.
One company that is trying something new is Abitibi Royalties. They are promoting a new way for them to acquire royalty interests in early stage properties by offering to fund the claim fees on behalf of the property owner in return for a royalty.
Their corporate website states that they will pay, for a specified period of time, the claim fees/taxes related to existing mineral properties or related to the staking of new mineral properties. In return, Abitibi Royalties would be granted a net smelter royalty (“NSR”) on the property. It may be a gamble for them but it’s not really that risky given that the low investment needed to pay claim fees, even if one considers having to make these payments over multiple years.
Abitibi are specifically targeting properties located near an operating mine located in the Americas. They are keeping jurisdiction risk to a minimum. Abitibi state that their due diligence and decision-making process is fast, generally within 48 hours. No waiting around here but likely this is possible due to the low investment required and often the lack of geological information to do actually do a due diligence on.
To give some recent examples, in a December 14, 2015 press release, Abitibi state that the intend to acquire a 2% NSR on two claims in Quebec and will pay approximately $11,700 and reimburse the claim owner approximately $13,750 in future exploration expenses. This cash will be used by the owner towards paying claim renewal fees and exploration work commitments due in 2016. Upon completion of the transaction, these will be the ninth and tenth royalties acquired through the Abitibi Royalty Search. For comparison, some of their other royalty acquisitions cost were in the range of $5,000 to $10,000 each (per year I assume). I think that those NSR interests are being acquired quite cheaply.
The benefit to the property owner may be twofold; they may have no other funding options available and they are building a relationship with a group that will have an interest in helping the project move forward. The downside is that they have now encumbered that property with a NSR royalty going forward.
The benefit to Abitibi Royalties is that they have acquired an early stage NSR royalty quite cheaply although there will be significant uncertainty about ever seeing any royalty payments from the project. Abitibi may also have to continue to make ongoing payments to ensure the claims remain in good standing with the owner.
It’s good to see some degree of innovation at work here, although the method of promotion for the concept may be more innovative than the concept itself. Unfortunately these Abitibi cash injections investments are not enough to pay for much actual exploration on the property and this is where the further innovation is required, whether through crowd funding, private equity, or some other means. I’m curious to see if other companies will follow the Abitibi royalty model but extend it to foreign and more risky properties.