Aberdeen finds royalty niche in high-risk countries (January 22, 2007)

While Aberdeen International (AAB-V, AABVF-O) has scored only one gold royalty project since changing directions more than a year ago, the company’s president still believes there’s a niche to be filled by its unique royalty concept.

Formerly focused on exploration, the Toronto-based company has developed a concept called “secured convertible royalty debenture” or “secrod.” The royalty loans are for a fixed term with a graduated royalty tied to the gold price. The principal is either repayable or convertible into the underlying equity of the mining company. The concept was developed with high-risk countries in mind, which often don’t have a mature equity market or a good banking regime.

“These royalties are not for life-of-mine like many other royalty structures,” says Aberdeen president, George Faught. “The reason we haven’t been able to acquire other royalties is a combination of strong equity markets, even in these less developed areas, and lenders who are a bit more aggressive in terms of providing debt to projects — in large measure a result of the higher commodity prices.”

To be precise, Aberdeen is earning two royalties: the initial royalty was acquired in late 2005 for the Buffelsfontein (Buffels) uranium-gold mine (on gold only), which is 160 km from Johannesburg, South Africa, and owned by Simmer and Jack Mines (SJACF-O, SIIF-J); and the other from a tailings recovery project at Buffels, which is owned by First Uranium (FIU-T, FURAF-O), a Simmer subsidiary created in December.

Production is being ramped up at the Buffels underground mine to 230,000 oz. per year. During the 9-month period ended Sept 30, 2006, Aberdeen received about US$2.26 million at an average royalty rate of 3.2% under the royalty loan facility with an average gold price of US$601 per oz.

“It was a bit of a windfall, but we knew there was a possibility this might happen,” Faught says.

The Buffels tailings recovery project has an estimated 1.9 million oz. recoverable gold, with production set at 138,000 oz. gold per year.

Life-of-mine gold production estimates from the underground Buffels mine and the tailings recovery project have a pretax value of US$40.3 million based on a gold price of US$600 per oz., discounted at 5%.

Simmers’ US$10-million royalty loan will mature at the end of 2008, at which time the principal will be paid back to Aberdeen and a 1% royalty will follow for the remainder of the underground mine and tailings recovery project.

Until 2008, Aberdeen will receive a gold royalty rate of 3.45%. Many royalties are set at a flat rate but Aberdeen’s graduated royalty ranges from half a percent when gold is US$300 per oz., up to 4.75% at a gold price of US$740.

Alternatively, Aberdeen may convert the royalty loan into Simmer shares at a conversion price of 0.80 rand (13) per share, subject to Simmer’s shareholder approval.

Faught would like to see Aberdeen acquire another royalty by the end of the year. He’s had ongoing talks with two mining companies — one in Malaysia and the other in gold in a region that he won’t disclose — though neither company has yet made their operations National Instrument 43-101-compliant.

Faught says the secrod royalty system works best early in a rising commodity cycle, but he’s confident Aberdeen can grow.

“The conversion into underlying equity gives us leverage and the life- of-mine tail royalty gives us an added incremental return,” he says.

Before it became a royalty company, Aberdeen focused on grassroots exploration and had an interest in an oil and gas well in the United States.