Joe Leadbetter is a prospector. With many others, he forms the backbone of Canada’s mining industry. In Canada – we have what is called a “free entry system”[i]. Prospectors like Joe can enter onto Crown Land and look for minerals. If they find something interesting, they can stake a claim. This is what Joe does for a living. He of course does not have the resources to build a mine, which could cost hundreds of million of dollars. He passes those opportunities on to companies who will conduct further operations on the lands to see if the minerals found can be economically produced. As those companies themselves need to raise money to conduct this exploration and development, cash is a premium. Therefore, these companies often acquire property by letting the prospector retain a royalty on future production, if and when it occurs. This risk is shared and cash is preserved[ii].
This is what Joe did, when he discovered that is now called the Leadbetter Diamond Deposit[iii] north of Wawa, Ontario. He entered into a deal with a junior mining company called Dianor[iv] to develop the deposit. He retained a 20 per cent royalty. He registered the royalty on the title to the property.
Often royalty agreements permit the company paying the royalty to buy back part of the royalty for a fixed amount of money. Joe’s royalty did not have this provision. Dianor wanted to buy back part of the royalty so they had the royalty valued by a third party. The royalty was valued at $15.9 Million[v]. Joe accepted this valuation and agreed to sell half of the royalty. Dianor started to gradually buy back the royalty from Joe. The royalty was reduced from 20 per cent to 15.44 per cent.
And Dianor found diamonds. Lots of them[vi]. And big ones[vii]. All looked good.
But diamond exploration and development is very expensive. So along comes the lender, Third Eye[viii]. Third Eye provides a $10 Million credit to Dianor[ix] to help Dianor advance the project. Third Eye sees that Joe has his royalty registered on the property and has no problem with it. Third Eye registers its mortgage after Joe’s royalty.