Replies to post #25919 on Savvy Trades and Investments

[cliffvb]

CUO sued them both to get out of paying for the 32.3 million tons of sand and gravel they did not excavate of the 50 million ton contract and also for alleged overpayments on the 17.7 mil they have excavated and paid for. Valco could go after CUO now for payment of that remaining 32.3 mil tons they contracted for. That is why they may need to establish a reserve. Really need more details. From the 10K:

2. CESSATION OF MINING AT LEASED PUEBLO GRAVEL SITE

In September of 2014 the Company ceased operations at its leased gravel operation in Pueblo, Colorado. This aggregate operation incurred significant operating losses in all but two years since 2005. The principal reasons for the operating losses were the high ratio of sand to rock and the high cost of complying with water augmentation requirements. Except for the sand required in the production of concrete, the demand for sand in the Pueblo area is very weak. The decision to shut down the Pueblo aggregate operation resulted in significant accounting charges in the third quarter of 2014. The Company recorded $4,000,000 to reflect the costs to backfill the mined gravel pit from a previous mining phase. Prior to the shutdown the reclamation plan was to fill this pit with waste material and tailings from the ongoing gravel operation. The Company also wrote-off $1,257,000 of unamortized deferred development expenses and $401,000 of prepaid royalties related to the minimum annual royalties paid during the period of operation. On September 10, 2014, the Company filed suit in Continental Materials Corporation v. Valco, Inc., Civil Action No. 2014-cv-2510, in the United States District Court for the District of Colorado seeking, among other things, to rescind the sand and gravel lease and to recover approximately $1,282,000 of royalty overpayments and $1,470,000 of royalties paid in excess of actual tons produced . The sand and gravel lease called for the payments of a royalty on 50,000,000 tons of sand and gravel reserves. Through the end of the third quarter of 2014 approximately 17,700,000 tons have been paid for, including the overpayments. After consideration of all facts and circumstances, including discussions with legal counsel, management concluded that no reserve was required to be recorded against the amount of overpaid royalties nor was a liability required to be recorded for royalties related to the remaining 32,300,000 tons of unmined sand and gravel.

[michael t]

mermelstein re: CUO

You don't spend millions in a lawsuit to recoup $1.5m in royalty over payments. I may be wrong, but my interpretation is that this was primarily about rescinding the lease and the Company's obligations under that lease. The $1.5m in royalty over payment was just a portion of a larger issue.

The primary question is what are the lease termination provisions in the contract? If the 50m tons in royalty payments was guaranteed then this is a significant development.

[Swick984]

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.