RE: RE: RE: RE: RE: RE: Grandich on CRK:
I agree that the 1% NSR appears to not be in dispute going forward. However there is a dispute over when it should start. We don't know how that might impact the valuation of the royalty but I agree it probably isn't material compared to the total $35million dollar balance sheet value. Aberdeen's balance sheet is still including the disputed $10million dollar loan. Hopefully the court case will be resolved quickly or settled, eliminating the uncertainty and allowing Aberdeen to be valued closer to NAV. Given the risk in junior miners and the lack of liquidity in assets like the loans or nonpublic stock, it may never be at 100% of NAV but certainly it should be close to 100% of the publicly traded portfolio.
Here is the relevant portion of the last MD&A.
Valuation Following Simmers Shareholder Vote to Deny Equity Conversion Request
The loan also had an option that allowed Aberdeen to call for its conversion into equity of Simmers at
ZAR 0.80 per share at any time from January 1, 2007 to December 31, 2008, subject to Simmers
shareholders’ approval. On October 16, 2008, the Company called for conversion to equity and a
shareholder vote was held on February 16, 2009, where the Simmers’ shareholders voted against the
conversion as unanimously recommended by Simmers’ board of directors. As a result, it is Aberdeen’s
position that the US$10,000,000 loan was due, as of its maturity date of December 31, 2008, and
Aberdeen was entitled to a 1% life of mine NSR on the gold produced on the underlying assets, beginning
October 16, 2008. In addition, it is the Company’s position that a payment of $1,623,586 is due from
Simmers which is the graduated royalty calculated at a rate of 4.75% on the gold produced between
October 16, 2008 and December 31, 2008, the maturity date of the loan, in addition to the 1% life of mine
NSR royalty on gold produced starting October 16, 2008.
However, it is Simmers’ position that the request for conversion into equity has caused the loan facility to
terminate, ending the remaining graduated royalty payment and forfeiting repayment on the
US$10,000,000 principal and remaining interest payments. Accordingly, Simmers’ management contends
that the shareholder vote to deny the conversion request has resulted in Aberdeen receiving only the 1%
NSR, but not the US$10,000,000 principal.
Aberdeen’s balance sheet, as at October 31, 2009, reflects Aberdeen’s interpretation of the agreement.
As a result, the US$10,000,000 ($10,819,000) loan is recorded as still outstanding at October 31, 2009
and continues to be outstanding subsequent to the end of the quarter.
Management’s interpretation is that, pursuant to section 2.6 of the Convertible Royalty Loan Agreement
(the “Agreement”), the graduated royalty is calculated on production until December 31, 2008,
notwithstanding Aberdeen’s request for conversion. In addition, pursuant to section 2.10 of the
Agreement, if the Simmers shareholders do not approve the loan conversion the 1% NSR would be in
addition to the repayment of the US$10,000,000 principal and, pursuant to section 2.4 of the Agreement,
the principal is repayable in cash until shareholders approve the equity conversion. Aberdeen intends to
aggressively contest any alternative interpretation of the Agreement. The Company provided Simmers’
management and directors with a demand letter and a letter from Aberdeen’s legal counsel outlining
Aberdeen’s interpretation of the Agreement in advance of the February 16, 2009 Simmers shareholder
meeting. Aberdeen also filed the Agreement between the Company and Simmers on SEDAR
(www.sedar.com) under the Company’s profile. Following the vote by Simmers’ shareholder not to allow
for the conversion, the Company provided Simmers’ board and management with a letter reiterating
Aberdeen’s understanding of Simmers’ obligations under the Agreement. Aberdeen was told by Simmers’
board and management that their position regarding the agreement, as described above, had not
changed. As a result, the Company has engaged a leading South African law firm and in July 2009 filed a
claim against Simmers and First Uranium to recover the outstanding US$10,000,000 principal and
balance payable on the graduated gold royalty from the fourth quarter of calendar 2008. The aggregate
amount of damages claimed by the Company is approximately US$11,400,000. Aberdeen firmly believes
that its interpretation of the Agreement is correct and expects to realize the values attached to the royalty
and loan on the balance sheet as of October 31, 2009. In November 2009, subsequent to quarter end,
Simmers filed a statement of defence and the Company hopes that the court proceedings will start prior
to the end of the fiscal year. The description of the Agreement herein is subject to, and qualified in all
respects by, the provisions of the Agreement.
In connection with the Agreement, Aberdeen holds a notarial special covering bond in the amount of
US$10,000,000 plus ZAR5,000,000 ($688,500) over the assets of the North Plant on Simmers’ greater
Buffels property.