Solitario limits Peruvian royalty

Facing a new government royalty on mine production that could have discouraged further work by operator Minera Yanacocha, Solitario Resources (SLR-T) has agreed to limits on a royalty it holds on a 600-sq.-km package north of the Yanacocha mine in Peru.

The agreement with Minera Yanacocha comes in tandem with an agreement with Newmont Mining (nem-n), under which Newmont takes a $4.6-million private placement in Solitario to finance exploration in South America.

The Peruvian government royalty, in combination with Solitario’s interest, would potentially have undercut the property’s value to Yanacocha, in which Newmont owns a 51% interest and Companhia de Minas Buenaventura (BVN-N) 44%. Minas Yanacocha instead has agreed to a US$1-million-per-year work commitment on the property for the next four years.

The government royalty ranges from 1% to 3%, depending on the size of the mining operation; the largest operations pay the most.

Solitario had been entitled to a sliding-scale royalty of between 2% and 5%, based on the gold price, and will still receive that scale for heap-leach gold production. However, the new arrangement caps the total royalties payable to Solitario and the government at 5.25% of net smelter return at gold prices below US$500 per oz. At prices over US$500, the cap rises to 5.75%.

There are similar caps on royalties for gold produced by milling other than flotation (4.5% rising to 5% at US$500-per-oz. gold) and for gold produced by flotation (3.5% rising to 4% when gold prices are above US$500 per oz. and copper prices above US$3,300 per tonne).

Solitario’s royalty on silver production, formerly 3%, would be capped at 4.5% less the government royalty, or at 5% if the gold price exceeds US$500 per oz.

The private-placement deal with Newmont requires that the major buy 2.7 million shares of Solitario at $1.70 in exchange for an agreement under which the two companies select exploration projects for Solitario to manage. Solitario would hold a full interest in the property, but Newmont would have a 2% net smelter return and a back-in right.

The back-in right kicks in once Solitario has spent US$400,000 on exploration on a property, and performed at least 1,200 metres of diamond drilling or 2,500 metres of reverse-circulation drilling. The right entitles Newmont to earn a 51% interest by spending twice what Solitario had spent, and to increase that interest to 75% by providing a bankable feasibility study and complete project financing. Solitario would pay back its share of project development costs out of cash flow after the project is in production.

Newmont gets a first right of refusal on joint-venture agreements Solitario offers in South America, and Solitario gets access to the Newmont exploration database.