Vendors, operators battle over NPI royalties

The confusion surrounding net profits royalties (NPIs) and their definition is resurfacing once again, this time in the form of a dispute between American Barrick Resources (TSE) and part-time prospector Bill Hennessy.

Hennessy claims Barrick is manipulating the terms of an agreement reached in the late 1980s, when he and his two partners handed over a piece of the Holt-MacDermott gold mine property near Kirkland Lake, Ont., in return for a 15% net profits interest.

Although Barrick has been mining what is now known as the Three Star property since 1988, Hennessy and his partners have yet to see a royalty cheque. The reason, says Barrick, is that the company has yet to make a “net profit” on the zone when capital investment plus interest charges are taken into account, as outlined in the agreement. But Hennessy argues that Barrick, by selling forward its gold production at an average of about US$440 per oz., is pocketing over $1 million per year from the zone while the vendors get nothing. From a moral standpoint, he believes Barrick is ignoring the spirit of the agreement.

“The vendors are not even making what the janitor at the mines makes,” said an infuriated Hennessy. “By pencilling us out, (Barrick) is not doing any service to the mining industry.”

In the case of royalties, “net profit” is generally what’s left over after operating and other costs, including working capital and reclamation, are taken into account.

Barrick refused to comment on production or operating costs for the Three Star zone, but judging from a diagram in the company’s annual report, Three Star is not a large contributor to Holt-McDermott’s overall production — 59,164 oz. in 1990.

According to Louis Dionne, vice-president of Canadian operations, Barrick has yet to make NPI payments on any of Holt-McDermott’s six producing zones. He says it could be years before Barrick recovers enough of its original capital investment, about $70 million, to warrant a payout.

But to appease Hennessy, Barrick has offered to discuss the terms of the agreement or, alternatively, to buy out his royalty. “We want to make him happy,” says Dionne. “That is our goal.”

But Hennessy says Barrick’s $60,000 buyout offer is a joke since, based on an assumed production rate of 10,000-12,000 oz. per year, Three Star is worth about $1.3 million per year to Barrick.

The two parties are continuing negotiations.

This type of royalty, although popular among operators, has been the source of heated disputes between many a vendor and producer. In an article published in the June, 1987, issue of The Northern Miner Magazine, lawyer Karl Harries writes, “The NPI is the most complex of the royalty types and is one of the most commonly used in Canada. If it is managed properly it is probably the fairest of the royalties because the operator receives back its investment with a reasonable return. . . . It is, however, open to abuse by a disreputable operator.”

Another royalty dispute that still rages involves Minnova’s (TSE) Lac Shortt gold mine in northwestern Quebec. In that case, Opawica Explorations (TSE) claims that Minnova and former property owner Falconbridge are in breach of agreement and fudiciary duties with respect to a 7.5% net proceeds royalty (a newer version of the NPI) on the property. The junior is demanding, among other things, the return of the property and $50 million in damages after waiting six years for a royalty payment. Minnova says Opawica has not yet received a royalty payment because there have been no proceeds from the mine. A trial is pending.

“The royalty requires detailed accounts to be kept with respect to both capital and operating costs and the prudent royalty holder will want his own accountant to at least `spot check’ the operator’s accounts,” warns Harries. “No agreement is airtight.”