Tanzanian Royalty Exploration (T.TNX, AMEX.TRX) is a unique, publicly-traded financial gold company whose business strategy is to acquire royalty interests in gold production from its core assets in the Lake Victoria greenstone belt (LVGB) of Tanzania where a reported 40 million ounces of gold have been discovered since the mid-1990's.
Tanzanian Royalty ranks among the largest landholders in the LVGB - one of the most prolific goldfields in the world. Established producers in this belt rank within the lowest percentile globally in terms of cash production costs.
Our royalty strategy offers investors significant, low-risk leverage to gold prices, limited shareholder dilution, and the potential to have their shares valued at a premium in the marketplace.
The Company's long history in Tanzania, the strategic location of its Lake Victoria properties, coupled with its strong in-house technical capability and capacity to identify and acquire high quality projects in a timely manner, distinguishes Tanzanian Royalty Exploration from its competitors and provides an asset base for the Company's royalty strategy to unfold.
In actual fact, the Company's practice of farming out (optioning) its landholdings to qualified industry partners for pre-production royalties and direct royalties in future gold production positions Tanzanian Royalty Exploration to receive a much higher market valuation than other companies in its peer group.
The Company's business strategy is a variation or hybrid of the one employed by Franco Nevada Mining which merged with Newmont Mining and Australia's Normandy Mining to form the world's largest gold producer.
At the time, Newmont paid 97 times annual 2001 sales for Franco Nevada, a premium that will certainly be used as a yardstick in future takeovers of royalty companies. Royal Gold, the only "pure" royalty play on the market, was trading at 32 times sales in June of 2003 and would likely be valued much higher in any takeover scenario.
Franco Nevada's strategy involved the purchase of production royalties on the open market whereas Tanzanian Royalty Exploration intends to develop royalty income by way of property agreements with industry partners, most of them major companies. In essence, Tanzanian Royalty Exploration believes it can find gold cheaper through exploration than buying gold reserves on the open market.
In order to exploit the potential on our holdings in the Lake Victoria region, we first define gold potential on the properties (in effect value-adding them) after which they are dealt to industry partners who meet strict internal selection criteria.
Entering into partnerships with major companies to exploit the mineral potential on our properties helps mitigate financial risk to the Company and its shareholders. This is extremely important given the cyclical nature of the minerals business and the Company's reliance on capital markets to fund its activities.
In our situation, the funding commitment for these properties is the responsibility of our industry partner which is usually a major company with the financial capacity and commitment to meet its long term obligations.
All of our property agreements are structured such that we receive advanced royalties before production and escalating royalties after production that are based on rising gold prices.
For most properties in our exploration portfolio, we prefer industry partners with assets net of liabilities of at least C$100,000,000 and gross annual revenues exceeding $500,000,000. Nonetheless, we have partnered with junior companies that are willing to advance our prospecting licenses on terms generally accepted by larger companies.
Because our properties are also prospective for diamonds (the historic Mwadui pipe of the Williamson diamond mine is located in the area of our core holdings), we have structured our royalty agreements to include diamond production as well.
At this juncture - and assuming the various royalty projects we have negotiated advance as expected - management of Tanzanian Royalty Exploration expects that in the near future advanced royalty payments from our holdings will cover the majority of the Company's general and administrative expenses, allowing Tanzanian Royalty Exploration to maintain a sound working capital position which has been the number one priority of its Chairman and CEO, James E. Sinclair.
Premise Behind our Royalty Strategy
The premise behind our royalty strategy is that we can discover gold at a much lower cost by utilizing our exploration expertise as opposed to purchasing production on the open market. While other companies in our peer group feel they can do the same, they simply don't have a land position like ours in one of the world's most prolific greenstone belts.
Also, few if any companies in Tanzania have the depth of management and experience that Tanzanian Royalty Exploration possesses in the critical fields of exploration geology, deal structuring, and the application of venture capital to achieve our exploration objectives.
We also have a core group of industry consultants and advisors on board who are preeminent in their fields and are dedicated to seeing Tanzanian Royalty Exploration achieve its corporate objectives. Their expertise in Archean greenstone belts - which host most of the world's gold reserves - and the geophysical techniques that can reveal hidden gold and diamond deposits - is world-class and should produce results that will enhance shareholder value.
Also, with a long history in Tanzania, Tanzanian Royalty Exploration has the ability to expedite processes (new property acquisitions and regulatory approvals) that would normally be much more time consuming and expensive for its competitors
|Royalties Versus Percentage Interest |
The Company has elected to pursue royalty interests rather than "percentage interests" (also known as "participating interests") in mineral projects because the latter are very high risk, especially when your partner is a major company with production earnings and ready access to capital - be it equity or debt financing. This is a strategic advantage that majors instinctively use as leverage against their junior partners. (See Figure # 1 for a comparative list of Pros and Cons for both options).
In cyclical market downturns, meeting exploration obligations as a participating interest holder can be problematic for a junior partner with no earnings stream, not to mention the difficulties associated with raising equity capital in depressed market conditions. Also, shareholders would face substantial dilution because of the funding requirements associated with meeting its percentage obligations as a working interest partner.
As a percentage interest holder, Tanzanian Royalty Exploration would also have to fund its share of feasibility and mine development costs, which would also be highly dilutive and would place the Company and its shareholders in a vulnerable position.
In many instances, after production is achieved the mine operator has the right to recover its capital investment in the property before any production revenue accrues to its junior partner which is simply not the case with royalties.
Also, the definition of capital investment or capitalized expense applied by the major can be very nebulous and may include all of the mining operator's expenses, direct and indirect, cash and non-cash, up to the implementation of commercial production.
These can aggregate in the hundreds of millions of dollars, meaning the minority partner (percentage interest holder) would likely not receive any income for 3-6 years.
Time Restrictions on All Agreements
In all our agreements, we apply strict timeframes to exploration and development programs committed to by the project operator. If any of these prerequisites are not met, the property reverts back to Tanzanian Royalty Exploration.
In effect, our royalty agreements provide a measurable timeframe in which advanced royalties and escalating production royalties from successful outcomes will accrue to Tanzanian Royalty Exploration. (See Figure 2 for Exploration Cycle Flowchart
Acquisition of Tanzam
Tanzanian Royalty Exploration has been a major player in Tanzania's minerals sector since 1989. In April of 2002, Tan Range,its predecessor company, acquired the assets of Tanzania American International Development Corporation 2000 Limited (Tanzam) for shares, significantly expanding the Company's land position in the Lake Victoria greenstone belt and revitalizing its management team.
Tanzam held rights to 51 prospecting licenses in the belt, several of which were the subject of agreements with Barrick Gold. Tanzam, a private company controlled by the Sinclair Family Trust, expended approximately $US6 million on its holdings, including $2 million for a high tech, low altitude, airborne geophysical survey that covered most of its prospecting licenses and helped define numerous gold and diamond exploration targets. These targets have been prioritized for ground follow-up and several are currently being evaluated.
Sinclair Appointment Revitalizes Management Team
Following the takeover, Mr. James Sinclair became the Company's Chairman and CEO. He brings to Tanzanian Royalty Exploration Corp. a unique background as a commodities trader and businessman, one that is rarely seen in this segment of the industry.
His ability to integrate and apply innovative financial principles to the Company's core business, places Tanzanian Royalty Exploration Corp. in a leadership role within its industry segment and will enable the Company to achieve its corporate objectives while maximizing benefits to shareholders.
The Company's former President, Marek Kreczmer, a professional engineer and geologist, has more than 25 years experience in the minerals industry in North America, East Africa and Southern Africa.
A seasoned industry veteran with a broad knowledge of the minerals sector and its various players, he also heads the Company's Technical Advisory Committee which evaluates data from various projects and develops geological models and strategies to exploit the full potential of the Company's prospecting licenses.
Net Smelter Royalties
Net Smelter Return (NSR) Royalties are characterized by royalty payments that are a fixed or variable percentage of the gross revenue the smelter or refinery pays the mining company for its gold production.
In our case, these NSR interests will provide Tanzanian Royalty with a direct interest in a mine's cash flow, with exposure to new discoveries and production growth but without the capital obligations and environmental and social liabilities associated with direct ownership.
The NSR is usually based on the spot (current price) of the commodity in question (in our case gold) less deductions for the actual cost of refining the metal to a specific purity. Production royalties do not dilute the equity position of existing owners and are not on their balance sheets.
Structure of Royalty Agreements
The Company is extremely diligent in negotiating royalty agreements to ensure they meet internally-defined hurdle rates and provide the revenue stream that will garner us a premium in the marketplace.
Our agreements with industry partners include a cash-on-signing provision for each prospecting license and an obligation on their part to make advanced royalty payments that escalate every year for five years. This arrangement provides Tan Range with a stable source of rental income while the potential of its properties is being evaluated.
In addition, annual work (exploration) commitments are a requirement of all agreements negotiated with industry partners. In years 1 and 2, these commitments are expressed as cash requirements. However, in years 3, 4 and 5, the work requirements are expressed as numbers of meters to be drilled annually. This is done to prevent disagreements with respect to management fees.
Failure to make rental payments and work commitments by the anniversary date of the agreement will see the licenses revert back to Tan Range.
All royalty agreements call for a production decision on or before the end of Year 5, full access to draft feasibility studies, and penalties for any production delays. While the optionee retains absolute discretion as to the manner in which commercial production is achieved, if the mine has not reached a commercial production rate of at least 50,000 ounces gold per year on or before the eighth anniversary of the effective date of the agreement in force, the optionee is obligated to pay Tan Range $US25 for each ounce of production shortfall beneath that threshold.
When project viability is confirmed by a feasibility study, the Company's royalty interest (or parts thereof) becomes an asset that is easily marketable. Royalty buyers understand the long term nature of the mining industry, exploration upside, and production leverage to higher gold prices - and they are frequently willing to purchase royalty interests at premium prices.
Lake Victoria Land Position
By mid-2005, Tanzanian Royalty Exploration held 138 prospecting licenses in the Lake Victoria goldfields, a large number of which were subject to royalty agreements with various companies.
The Company's Itetemia property is adjacent to Barrick's Bulyanhulu gold mine and remains a prime candidate for the discovery of an economic mineral deposit.
Other projects are the subject of royalty agreements with Montreal-based MDN Inc. whose Tulawaka gold project involves a joint venture with a subsidiary of Barrick.
Tanzanian Royalty negotiates royalty agreements for prospecting licenses in the Lake Victoria goldfields on an ongoing basis. For both senior and junior companies seeking an entry point into Tanzania, Tanzanian Royalty is seen as the partner of choice given its extensive land position in this major goldfield.
Internally Developed Projects
One of the Company's greatest strengths is its ability to select, acquire and value-add exploration projects for mineral industry partners. With that objective in mind, we develop geological models internally, find projects that fit these models, confirm the validity of the models on the ground, acquire the necessary land position for further evaluation, and present our findings to potential industry partners.
Tanzanian Royalty Exploration is also exploring several projects for its own account, the objective being to make them attractive to third parties for royalty agreements. Luhala is the most advanced, followed by Lunguya and then Kigosi, a new project where initial sampling has produced some spectacular results.
In most cases, companies meeting our strict partnership criteria have minimum reserve thresholds that will ensure their projects deliver a specific return on investment and materially impact their bottom line. That being the case, a 100,000 ounce per year gold producer would have hardly any material impact on the bottom line of a major company producing several million ounces per year.
In a situation like this, a property with this production capacity would likely revert back to Tanzanian Royalty given the heavy advanced royalty requirements that would be due to the Company from our partner for failing to achieve production.
With 100% ownership in our hands, such an asset would be very attractive to mid-tier gold producers seeking growth and it would also represent a valuable asset to Tan Range if the Company elected to exploit the property for its own benefit.
Industry Profile/Social Responsibility
Tanzanian Royalty Exploration maintains an extremely high profile in Tanzania and abroad because of its quality exploration assets and its partnership royalty agreements with Barrick and other companies.
In addition, the Company's polices on Social Responsibility (Sustainable Development) are breaking new ground in the exploration sector and have garnered it considerable attention in the media and within socially-conscious investment circles.
A Sustainable Development program has been implemented that will enable the Company to develop "Social Capital" and leave a positive legacy in Tanzania.
Elimination of Takeover Impediments
The Company no longer issues any significant numbers of common share options and has eliminated all corporate employment contracts that might impair a takeover by another corporate entity.
Management is committed to advising shareholders of any material information concerning the sale of assets or acquisition of the Company by a third party. It is the Company's belief that all corporate events that materially impact shareholders should be settled in a free market environment where everyone is treated equally - irrespective of their shareholding.
It's hardly a novel idea that people make companies and Tanzanian Royalty Exploration is staffed with a unique and multi-skilled team of professionals that is second to none in the minerals industry. In addition to Mr. Sinclair and Mr. Kreczmer, the following people provide a broad range of professional services to the Company that are critical to its long-term success:
Victoria Luis, the Company's former Chief Financial Officer, was previously on the Board of Tanzanian American Development (Tanzam), the private company that vended its Tanzanian holdings into Tan Range.
As the Company's Chief Financial Officer, she was responsible for the implementation of all operating budgets for exploration and administration. Previously, she held various management positions with General Electric Capital Corporation where she was part of a team that facilitated the amalgamation of companies acquired by GE. Ms Luis continues to play an active role in the company and remains on the Board of Directors.
Ms. Regina Kuo-Lee, C.A.is the Company's new Chief Financial Officer. She is a Chartered Accountant with more than 16 years experience in the accounting field, more recently as CFO and Vice President of Finance for Trimin Capital Corp., a management company with large equity interests in operating businesses. She also has several years experience as Controller with various companies in the Technology Sector and worked as an internal auditor in the brokerage industry after four years with Deloitte & Touche, Chartered Accountants in Toronto.
Responsible for Special Projects, including all corporate communications, is David Duval, a 30 year veteran of the minerals industry and a prominent mining author, journalist, and former Technical Advisor to the United Nations Department of Technical Cooperation for Development (UNDP). Mr. Duval's principal mandate is to ensure the transparency of all corporate communications and that Tanzanian Royalty is a shareholder-friendly company in every respect.
The Company maintains an active exploration office in Mwanza, Tanzania which is staffed by several geologists, a geophysicist, and occassional specialist consultants, some of whom are fluent in Swahili. We pride ourselves in having a stable, motivated workforce many of whom have been with us for 10-14 years.
Explores and develops mineral properties
Tan Range Exploration Corporation. The Group's principal activity is to explore and develop mineral properties. Its principal operations are located in Tanzania. The group is exploring 141 mineral resource properties in the Lake Victoria Greenstone Belt and Kabanga regions of Tanzania. It has joint venture and royalty agreements with its three industry partners covering a total of 34 prospecting licences: 2 with Barrick, 15 with Ashanti Goldfields, and 17 with Northern Mining Explorations. . During the fiscal year 2005 the Group acquired additional prospecting licenses, including 7 licenses in the Kabanga Nickel region.
Shares Outstanding: 82,986,098