CUO - I sold about half of my position at $24 on average. I think the reason they sued was so that they could rescind the lease and avoid having to pay the royalty on the remaining tonnage. The agreement is buried in an 8-k filing from 1996. The agreement has a minimum royalty in place that call for a payment on roughly 810 thousand tons per year. The royalty rate per ton was initially set a $0.37 per ton. That rate is subject to change based on the linkage to a cost index. With 32.3 million tons remaining on the contract, that means there is 39 years remaining of royalty payments (32.3 million / .8 million per year).
Doing some quick math using the initial royalty rate, that means up to $12 million potentially in future payments... Theoretically, this would be spread out over the next 39 years and any payments would be tax deductible. So the present value of the payments after-tax may be much less. The other big question is, what has happened to the cost index since the time of the deal?
I think the comment at the end of the press release regarding taking additional reserves relates to this potential liability. It would be best if they could just settle the future payments with Valco with a cash payment today that reflects the present value of the potential liability. I'd rather see this go away, even with a one-time cash payment today, than continue to see $1 million + go out every year for legal costs to fight it.
