Hudbay will pay up to $19 million under an agreement that ends a long-standing lawsuit, unlocks crucial exploration opportunities and potentially boosts the lifespan of Flin Flon’s last remaining mine.
The company reached the deal last week with Callinan Royalties Corp., which had sued Hudbay for alleged breach of contract over a profit-sharing agreement.
“We are pleased to have reached an agreement to resolve the litigation and move forward in other areas,” said Scott Brubacher, director of corporate communications for Hudbay. “Settling saved both companies considerable time and money, and forms the basis of a positive relationship between the two companies going forward.”
Under the settlement, Callinan will not only drop its years-old lawsuit, but also let Hudbay explore Flin Flon’s promising War Baby claim by way of an option agreement.
As the Mining Newsletter website reports, War Baby “sits directly in the middle” of the 777 mine ore body and therefore “has to be acquired by Hudbay as the source of mill feed most convenient to and in the way of Hudbay’s operations in the region.”
The settlement gives Hudbay the chance to obtain from Callinan full ownership of War Baby, also known as 777 Deeps, over a four-year period.
At the 777 mine, Hudbay has been conducting underground drilling with the aim of extending the life of the development. Access to War Baby and its exploration data lets Hudbay expand its exploration platform.
“Allowing our team access to the Callinan drill data and lands is good news,” said Brubacher. “The 777 Deeps claim hasn’t been drilled in over 14 years and has never been drilled from underground. Our mine development at 777 is around 15 metres from the 777 Deeps claim. It has the potential to be the down-dip extension of 777 and we plan to utilize our in-house expertise in VMS [volcanogenic massive sulphide] exploration and geophysics to maximize the potential of this claim.
“When we have results, we will have a clearer picture of what those results will mean.”
Brian Irwin, chair of Callinan, said he expects War Baby will see “significant exploration” by Hudbay in the coming years.
Such exploration would have been outside of Callinan’s core business plan, Irwin said in a
news release, and “difficult to execute given the requirements for access.”
Further to the settlement, Callinan has agreed to amend its profit-sharing agreement relative to 777 mine starting on Jan. 1, 2015.
Whereas Callinan now has a 6.66 per cent Net Profits Interest royalty in 777 mine, beginning in 2015 it will receive a four per cent Net Smelter Return royalty.
Callinan called this “a more attractive” arrangement that “reduces the areas of possible disagreement between the two parties over permitted deductions, without significantly impacting estimated yearly royalty income.”
The settlement also gives Callinan a three per cent Net Smelter Return royalty on 31 square kilometres of exploration ground located generally to the south and west of 777 mine.
Hudbay can reduce this royalty to two per cent by paying $2 million to Callinan.
Overall, the settlement is worth a minimum of $6.5 million, in which case Hudbay must return War Baby to Callinan. If Hudbay opts to buy all of War Baby, the settlement is valued at $19 million.
To assume full ownership of War Baby, Hudbay must meet certain milestones over a four-year period, including incurring $7 million in exploration and development expenditures on the property.
Other terms include providing $7 million in payments and granting Callinan a three per cent Net Smelter Return royalty on War Baby.
Like Brubacher, Irwin was satisfied with the settlement.
“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,” said Irwin. “This litigation might otherwise have continued for an unknown period, drawing upon Callinan’s financial and legal resources.”
Though the settlement brings an end to the lawsuit, Hudbay maintains it did not violate any agreement with Callinan as alleged in the latter company’s ongoing lawsuit.
“Our view that Hudbay acted appropriately in administering the [agreement] has not changed, nor did our position in the litigation,” said Brubacher.
Callinan launched the lawsuit in 2007, claiming it did not receive all funds owed under a profit-sharing agreement relative to 777 mine. Callinan did not publicly attach a financial figure to the lawsuit.
Net Smelter Return refers to net revenue received from the sale of metals, minus transportation and refining costs. Net Profits Interest refers to a percentage of funds paid out of a working interest owner’s share of net profits.
