The Royalty Business

The mineral royalty business is challenging yet rewarding.  Good mineral royalties command a premium valuation and acquisition at a fair price is often challenging. However, for the very few companies that hold significant royalty assets, the rewards of high free cash flow requiring little ongoing management provided by royalty ownership are compelling.

Callinan owns two royalties on the 777 Mine, which is located in the heart of the prolific Flin Flon mining district in Manitoba, Canada.  It is operated by HudBay Minerals Inc.(www.hudbayminerals.com) and produces significant quantities of copper, zinc, gold and silver.  Callinan owns a 62/3% Net Profits Interest royalty on current and future operations as well as a royalty of $0.25 per ton on all mine production on a large area surrounding the 777 mine.

Hudbay Minerals is currently developing an additional mining operation it calls 777 North Mine, which is located approximately two kilometres north of the 777 Mine.  Callinan’s royalties will also apply to this mine as it occurs within the royalty lands of Callinan.

In addition, Callinan controls a key property named 777 Deeps (also known as War Baby) that is strategically located in an area that appears to cover some of the area down trend from the 777 Mine.  Callinan also has an option from the original claim holder to acquire a 1.5% Net Smelter Returns Royalty on the property by making a payment of $500,000 for each 0.5% or $1.5 million in total.

In 2007, Callinan commenced legal action to ensure full benefit from these assets.

• Legal Action in Manitoba +

  This timeline concerning Callinan’s dispute regarding its Net Profits Interest is provided for the information of any and all interested parties. A detailed account of all court proceedings occurring in this matter is available through the Manitoba Court of Queens Bench.

  March 02, 2007

  Callinan Files an action against Hudbay Minerals in the Manitoba Court of Queens Bench.

  The Action seeks, among other things:

  • A declaration that Callinan has the right to conduct an audit of the books and records of the operations of Hudbay in relation to the Callinan Mine and the recently developed 777 Mine;
  • A declaration that Hudbay must keep and maintain separate records and accounts for each of the Callinan Mine and the 777 Mine;
  • A declaration that the Cumulative Cash Flow defined in the NPI Agreement and accumulated for the Callinan Mine should not be used in calculating the Net Profits interest from the 777Mine;
  • An order compelling Hudbay to make available to Callinan the books and records of both the Callinan Mine and the 777 Mine;
  • An order for an accounting of all sums improperly included or excluded in calculating the Net Profits Interest;
  • General damages for breach of contract and breach of fiduciary duty;
  • Aggravated and punitive damages, interest and costs.

  Oct. 18, 2007 The Master receiving the application orders that Callinan’s motion be heard by a Trial Judge.

  Feb 12, 2008 The Judge that the matter has been referred to, Justice J.M. Scurfield, orders that the matter be heard by means of expedited trial.

  Feb 14, 2008 Callinan applies to Justice Scurfield for an order compelling full and complete disclosure of all documents relevant to the calculation of the Net Profits Interest by HudBay Minerals.

  Feb 25, 2008 Having heard arguments from both Callinan and HudBay, Justice Scurfield reserves his decision. In other words, the Justice will consider the matter and issue reasons at a later date.

  March 26, 2008 Justice Scurfield issues his Reasons for Judgment.

  May 14, 2008 Justice Scurfield outlines the terms of the Order associated with his Judgment.

  June 02, 2008 A Judgment entitling Callinan to direct access to the books, records and accounts of HudBay Minerals relating to the operations of the Callinan and 777 mines, and the calculation of the Net Profits Interest and Royalty is signed by Justice Scurfield. The Justice also signs the Order compelling HudBay Minerals to provide an affidavit of documents disclosing all books, records, accounts and other documents in their possession relating to the same, with the exception of certain records containing confidential information relating to other operations of HudBay.

  October 2008 Callinan demands Hudbay deliver a further affidavit of documents, as ordered by Justice Scurfield.

  December 16, 2008 Hudbay delivers new affidavit of documents and computer discs containing substantial additional financial documentation in respect to the NPI calculations.

  December 2008 Callinan demands that Deloitte produce it’s working papers and files in respect to Deloitte’s audit of Hudbay’s NPI calculation (Deloitte was appointed by Hudbay to perform the annual audit of the NIP calculations, which was required under the NPI Agreement). Deloitte refuses to produce its working papers or files.

  January 9, 2009 Callinan files a notice of motion for an order directing Deloitte’s to produce its working papers and files.

  March 20, 2009 Callinan files an affidavit of an auditor to the effect that in his opinion Hudbay would have prepared schedules, showing allocations of costs, for the purposes of Deloitte’s audit of the NPI. The auditor states that no such schedules have been received from Hudbay.

  May 15, 2009 Deloitte’s files motion to strike the auditor’s affidavit. Under the Manitoba Rules of Court, the motion to strike must be dealt with before Callinan’s motion for the working papers can be argued.

  June 13, 2009 Master Cooper of the Manitoba Court hears the motion to strike Lotz’s affidavit. The decision is very substantially delayed. Counsel for Callinan repeatedly writes the Master requesting the decision be rendered.

  November/December 2009 Hudbay suggests that it would be agreeable to Callinan conducting an audit under the NPI Agreement. Callinan responds that it would be prepared to consider conducting an audit, but only if Deloitte’s working papers and files were first produced. Hudbay refuses to request Deloitte to produce its working papers and files, so discussions regarding an audit cease.

  January 29, 2010 Callinan submits Questions on Interrogatories to Hudbay.

  February 1, 2010 Master Cooper, at long last, delivers reasons, refusing to strike the auditor’s affidavit.  Deloitte files Notice of Appeal.

  March 24, 2010 Callinan delivers further Questions on Interrogatories to Hudbay.

  April 2010 Hudbay accedes to the proposal made by Callinan at least a year previously that the parties seek the appointment of a case management judge.
  Mr. Justice Joyal is appointed case management judge.

  May 27, 2010 Callinan’s motion against Deloitte for production of its working papers and files is heard. The Master will issue a written decision when deliberations are complete.

  June 18, 2010 First case management conference is heard by Mr. Justice Joyal, who agrees to hear all future pre-trial motions.

  October 15, 2010 Judgement A Master of the Manitoba Court of Queens Bench decides not to order HuBay’s auditors, Deloitte to produce its working papers to Callinan. Production is deemed by the master to be premature. Callinan files an appeal.

  July 4, 2011 Justice Joyal Justice Joyal overturns the Oct. 15, 2010 decision, rules in Callinan’s favour:  Access to Auditor’s Working Papers is Deemed Relevant.

  September 9, 2011 Callinan Royalties announces that it will conduct an independent audit of Hudbay’s net profits calculations.The law suit will be held in abeyance during the audit. Please see Callinan’s press release dated September 09 for details.