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Gold/Mining/Energy : Gold and Silver Juniors, Mid-tiers and Producers -- Ignore unavailable to you. Want to Upgrade?

To: WalterWhite who wrote (52587)	11/8/2007 5:33:11 PM
From: E. Charters	Respond to of 78421

Well I did some work helping Algoma Central Railway structure their agreements on their mining lands, (the largest land grant in North America-- tax free to boot. The only larger one was Prince Rupert Land.). One of the central points of discussion was the royalty to Algoma, its value to the bottom line or net profit and its buy-out value. Algoma held that the ratio of Net smelter return royalty percent to net profit was 5.5 to one and I held the view that the ratio was closer to 7.5 to one. Algoma believed the buyout price of a royalty should be about $20,000 a basis point or a million dollars a half per cent. I felt that it should be closer to 1 million dollars a percent on the average. Algoma was financially brain dead and could not figure out a way to make any money on their land which consisted of a tax free 1,368 square miles of greenstone belt. They made so so bucks on licensing to forest product companies. Nobody of note would get into serious discussions with them about mining lands as they made it a bit too expensive to occupy and explore, a tad too onerous vis a vis exploration fee obligations or carry over and too expensive a buy-out of the royalty. They should have made it simply a buy out according to a fixed percentage of the calculable Net present value of the feasibility study at some fair IRR. 50% of that value would have been attractive. If it is a huge mine, the value of the 50% share would be perhaps $24-32 million. A small mine would cost perhaps 2.5 million for 50% of the NSR at NPV over 20 years of cash flows at 8% discount rate. So both parties make some money on the deal at the end of the day. Nobody is going to drill off a mine for peanuts. If they had lowered the cost of exploration (holding cost) to 5 dollars per acre per year, and valued man days fairly, they would have opened up their lands to hundreds of explorationists. As it was no one had any incentive to find a mine on their lands for 100 years or more. They never "got it" The door has to fairly widely opened for new business to get a foot hold and the doors at the end of the hall, when production looms, has to allow everyone to make fair money. Algoma's attitude was "well oak furniture is worth a fair bit per board foot, so let's put the price of acorns, at say ten bucks, and the buyout on each oak tree at perhaps 1000 dollars." They could not understand why lumberjacks had simply disappeared from sight by the time they finished reading the agreement, had raised their head and peered over their bifocals. They put it down to a "disappearing lumberjack syndrome". Price allergy never occured to them. Ontario's cost of acquisition is perhaps $2.50 an acre. Its holding cost is ostensibly five dollars per acre. But the hidden cost is the cost of keeping a small enterprise alive, and doing research. This base cost may be $12.50 an acre, perhaps less. Kingfisher's holding cost right now is $8.00 per acre. EC<:-}