This deal from early 2009 was BAD.... CDE Received $78million and $10 million for sales of stock , sure sounds great until you see that in the last 9 months alone CDE paid 29.8 million in royalty payments..
Palmarejo Gold Production Royalty Obligation
On January 21, 2009, the Company’s wholly owned subsidiary, Coeur Mexicana SA de CV, entered into a gold production royalty transaction with Franco-Nevada Corporation under which Franco-Nevada purchased a royalty covering 50% of the life of mine gold to be produced from its Palmarejo silver and gold mine in Mexico. Coeur Mexicana received total consideration of $78.0 million consisting of $75.0 million in cash plus a warrant to acquire Franco-Nevada Common Shares (the “Franco-Nevada warrant”), which was valued at $3 million at closing of the Franco-Nevada transaction. On September 19, 2010, the warrant was exercised and the related shares were sold for $10.0 million.
The royalty agreement provides for a minimum obligation to be paid in monthly payments over a total of 400,000 ounces of gold, or 4,167 ounces per month over an initial eight year period. Each monthly payment is an amount equal to the greater of the minimum of 4,167 ounces of gold or 50% of actual gold production per month multiplied by the excess of the monthly average market price of gold above $400 per ounce (which $400 floor is subject to a 1% annual inflation compounding adjustment beginning on January 21, 2013). As of September 30, 2010, payments had been made on a total of 70,764 ounces of gold with further payments to be made on an additional 329,236 ounces of gold. After payments have been made on a total of 400,000 ounces of gold, the royalty obligation is payable in the amount of 50% of actual gold production per month multiplied by the excess of the monthly average market price of gold above $400 per ounce, adjusted as described above. Payments under the royalty agreement are to be made in cash or gold bullion. During the three and nine months ended September 30, 2010, the Company paid $11.3 million and $29.8 million, respectively, in royalty payments to Franco-Nevada Corporation. Payments made during the minimum obligation period will result in a reduction to the remaining minimum obligation. Payments made beyond the minimum obligation period will be recognized as other cash operating expenses and result in an increase to Coeur Mexicana’s reported cash cost per ounce of silver.
The Company used an implicit interest rate of 27.7% to discount the original obligation, based on the fair value of the consideration received projected over the expected future cash flows at inception of the obligation. The discounted obligation is accreted to its expected future value over the expected minimum payment period based on the implicit interest rate. The Company recognized accretion expense for the three and nine months ended September 30, 2010, of $5.4 million and $15.4 million, respectively, and $5.2 million and $13.9 million for the three and nine months ended September 30, 2009, respectively. As of September 30, 2010 and December 31, 2009, the remaining minimum obligation under the royalty agreement was $81.9 million and $84.8 million, respectively.
The price volatility associated with the minimum royalty obligation is considered an embedded derivative under U.S. GAAP. Fluctuations in the market price of gold since inception of the agreement have resulted in the recognition of additional fair value adjustments and resulted in higher payments to date. Please see Note 14, Derivative Financial Instruments and Fair Value of Financial Instruments, Palmarejo Gold Production Royalty, for further discussion of the embedded derivative feature of the royalty agreement.
http://www.sec.gov/cgi-bin/viewer?action=view&cik=215466&accession_number=0000950123-10-101030#
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