- Settlement Agreement resolves historical litigation
- NPI royalty on 777 mine converted to NSR on current ground and a new NSR on expanded ground
- War Baby to be explored by Hudbay via option earn-in and future NSR to Callinan
VANCOUVER, Nov. 26, 2014 /CNW/ - Callinan Royalties Corporation ("Callinan", or the "Company") (TSXV: CAA) is pleased to announce that it has entered into a definitive agreement (the "Settlement Agreement") with Hudson Bay Mining and Smelting Co. Limited, a wholly owned subsidiary of HudBay Minerals Inc. (together "Hudbay"). This Settlement Agreement marks an end to protracted litigation which Callinan initiated in early 2007, and commencement of a new consensual relationship with Hudbay.
The Settlement Agreement was structured to achieve the following objectives:
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1)
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Evolution of a 1988 6 2/3% Net Profits Interest royalty ("NPI") to a more attractive 4% Net Smelter Return royalty ("NSR") which reduces the areas of possible disagreement between the two parties over permitted deductions, without significantly impacting estimated yearly royalty income;
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Establishment of a new 3% NSR on 31.10 square kilometres of surrounding Hudbay exploration ground, ("expanded royalty ground") which broadens Callinan's area of exposure to prospective exploration that Hudbay may pursue in the future;
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3)
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Allows for Hudbay to explore Callinan's War Baby claim1 (also known as "777 Deeps") by way of option agreement, which requires access from the existing 777 mine and significant funding to properly explore;
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Recognition of the need to settle ongoing litigation and for a co-operative and enduring working relationship with Hudbay, benefiting the Flin Flon community.
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Brian Irwin, Callinan's Chairman, commented, "We are pleased to resolve this ongoing litigation in a way that compensates us and provides a mechanism for transparency in our future royalty income. This litigation might otherwise have continued for an unknown period, drawing upon Callinan's financial and legal resources. If fully exercised, the settlement will result in aggregate payments by Hudbay of up to $19 million, including expenditures on the War Baby Claim of $7 million. Over the years, we have received shareholder and other stakeholder encouragement to modernize our 1988 NPI royalty to reflect the current 777 production and zinc refinery operations controlled by Hudbay and to reduce our exposure to potentially increasing sustaining capital costs and operating costs as the mine gets deeper." Mr. Irwin added, "The War Baby property, which is deeply embedded in our history, will see significant exploration over the next few years, an objective which would have been outside our core business plan and difficult to execute given the requirements for access. Finally, the payments described above are in addition to the $6.3 million adjustment received in 2011 from Hudbay."
The value of the settlement, in cash payable to Callinan for general corporate purposes, includes Hudbay committed exploration expenditures to earn into War Baby and the additional advance royalty payment if the War Baby option is exercised, and ranges from a minimum of $6.5 million to a maximum of $19 million. The minimum is received regardless of whether or not Hudbay elects to terminate its work after certain specific milestones and return the War Baby property to Callinan; whereas the maximum assumes Hudbay elects to earn a 100% interest in War Baby. The following tables illustrate the minimum and contingency payments payable upon certain milestones and the NSR entitlements:
Cash
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Immediate
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By end of Year 2
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By end of Year 4, upon option exercise
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$3.5 million cash
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$3 million War Baby expenditures
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$4 million milestone payments
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$1.5 million to keep option or access ground
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$4 million expenditures
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$3million advance royalty payment
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$3.5 million
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$4.5 million
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$11 million
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Royalty
Immediate
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Upon option exercise
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4% NSR on 777
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3% NSR on War Baby
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3% NSR on
Expanded Royalty
Grounds
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The elements in the table above comprise the minimum and maximum payments assuming exercise of the War Baby option. In addition, Hudbay has the right to pay a further $2 million at its election to reduce the 3% NSR on the expanded royalty lands to 2%. Moreover, if Hudbay terminates the War Baby option, but chooses to use War Baby ground to access its 777 mine operations, Hudbay will pay to Callinan an access fee of $125,000 per quarter.
These changes become effective at different dates in order to accommodate the lag times associated with the current royalty payments and adjustments. The release of Hudbay from any further litigation action, start of the exploration expenditure period for Hudbay's option to earn up to 100% of War Baby and payment of the initial $3.5 million from Hudbay to Callinan are all effective as of the agreement date. Finally, the conversion of the existing NPI royalty to a new 4% NSR royalty and establishment of the new 3% NSR on the expanded land package take effect January 1, 2015.
The following sections summarize the main components of the Settlement Agreement and its implications.
The Settlement Agreement
Conversion of Existing NPI Royalty to 4% NSR
Under the Settlement Agreement, Callinan and Hudbay have agreed to terminate the NPI agreement effective as of December 31, 2014 and have entered into a new 4% NSR royalty agreement over the 777 mine claims effective January 1, 2015. They also agreed to maintain the production royalty of 27.56 cents per metric tonne payable to Callinan by Hudbay on all ore removed and processed from the 777 mine. Raymond James Limited has provided an opinion to Callinan that the conversion is fair from a financial point of view.
New 3% NSR on 777 Expanded Royalty Ground
Hudbay has granted a 3% NSR royalty over additional mineral claims covering 31.10 square kilometres of adjacent royalty lands located generally to the south and west of the 777 mine, including the former producing Flin Flon mine. The new royalty lands are underlain by prospective geology. This action significantly expands the total royalty area of Callinan, but equally importantly, it mitigates potential areas of future dispute over logistics and access to the War Baby claim, given that the intersected mineralization is at depths of approximately 200 metres below and east of 777 known reserves. Hudbay has the right to repurchase 1/3 of the 3% NSR for $2 million.
The production royalty of 27.56 cents per metric tonne does not apply to the War Baby claim or to this additional royalty ground.
War Baby Earn-in Agreement
Hudbay has entered into an earn-in agreement (the "Option Agreement") on the War Baby property. Under the Option Agreement, Hudbay may earn a 100% interest over 4 years in War Baby by completing the following milestones:
- Incurring $7 million in exploration and development expenditures of which $3 million is a firm commitment, staged as described in the above table.
- Providing $7 million in cash payments, staged as described in the above table.
- If, after spending the initial expenditures and providing cash payments to Callinan, Hudbay elects to complete the Option Agreement, then Callinan will also be granted a 3% NSR royalty on War Baby including an advance royalty payment of $3 million.
- If Hudbay fails to complete the Option Agreement by the fourth anniversary, the property will be returned to Callinan in good standing and with no interest retained by Hudbay.
- If, during the option period, Hudbay uses the War Baby ground to access the 777 mine operations, Hudbay will pay Callinan an access fee of $1,500,000 (as referenced in the table above). If Hudbay terminates the option agreement and subsequently uses the War Baby ground to access the 777 mine operations, Hudbay will pay an access fee of $125,000 per quarter for each quarter when access is used.
Conference Call
Callinan will hold a conference call on November 26, 2014 at 8:00 AM PST/ 11:00 AM EST to provide additional details on the Settlement Agreement and to make senior management available to interested shareholders and analysts. Interested investors are invited to participate as follows:
Via Conference Call: Toll-Free: 1-888-390-0546; International: +1 416-764-8688 (No passcode required.)
Via Webcast: https://www.newswire.ca/en/webcast/detail/1452473/1615483
On Behalf of the Board of Directors,
Brian Irwin
Brian Irwin, Chairman
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Callinan's 100% ownership of War Baby is subject to (i) a 2.5% Net Smelter Royalty payable to W. Bruce Dunlop, which is subject to a right to repurchase up to 1.5% of the NSR for payment to Bruce Dunlop of $500,000 for each 0.5% acquired, and (ii) the Bison Back-in Right, which allows Bison Gold Resources a 10% back-in right subject to certain conditions.
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About Callinan Royalties
Callinan Royalties Corporation is one of the oldest public listings in Canada, and one of the first contributors to development of the Flin Flon, Manitoba copper-zinc district. Callinan holds a 6?% net profits interest royalty and a production royalty of $0.275 per metric tonne of ore milled on lands that include the producing 777 mine and 777 North mine operated by Hudbay Minerals Inc.
The Company invests its royalty income to provide alternative financing options to mineral exploration and development companies with attractive projects and excellent management.
Callinan is a dividend-paying Tier 1 company listed on the TSX Venture Exchange under the symbol CAA. The Company has a strong financial position with no debt, recurring annual cash flow from the 777 royalties and approximately 49.2 million shares outstanding.
Cautionary Statement on Forward-Looking Information
Neither the TSX Venture Exchange nor its Regulation Services Provider (as that term is defined in the policies of the TSX Venture Exchange) accepts responsibility for the adequacy or accuracy of this release. Certain of the information presented in this News Release may constitute "forward-looking statements" or "forward-looking information" within the meaning of Canadian securities legislation (together referred to as "forward-looking statements"). The forward-looking statements are subject to risks, uncertainties and other factors that may cause actual results to be materially different from those expressed or implied by such forward-looking statements, including any delays in the receipt of consents or approvals. Although Callinan Royalties has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. There can be no assurance that such statements will prove to be accurate as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements contained in this News Release and in any document referred to in this News Release. Forward-looking statements are made based on management's beliefs, estimates and opinions on the date the statements are made and Callinan Royalties undertakes no obligation to update forward-looking statements if these beliefs, estimates and opinions or other circumstances should change, except as required by applicable law.
SOURCE Callinan Royalties Corporation
