Stockfriend and MetaComet.

RE: “It may be presented that way, but Copper Fox does have around $80 million in prepaid equity in the Copper Fox/Teck mine at Schaft Creek. I have a hunch that will be required to be returned, however it might be presented.”

We have discussed this before, but I want to make my understanding public in case I am incorrect. In the following, I am assuming that Copper Fox is not bought out or that any purchaser of Copper Fox will take over Copper Fox’s rights and obligations. Therefore, where you see Copper Fox, also think of acquiring company X. If acquiring company X is Teck, then none of the following matters.

As I understand it, the $80 million will be treated in the following manner. First, the $80 million is spent, sunk and gone. It will not be returned. If Teck elects to earn back 75% (more probable than Teck’s other options, except for maybe a buyout), then a joint venture is established whereby Copper Fox will have 25% after Teck has made $80x4=$320 million in expenditures. For that next $320 million of expenditures, Copper Fox has to contribute nothing. In other words, Copper Fox, a 25% co-owner, gets a free ride for its $80 million share of the first $320 million in expenditures of the joint venture. That is how the return of the $80 million is presented.

Another way to think of this is as follows. After Teck spends $320 million to earn back 75%, a total of $320+$80=$400 million will have been invested in the project. Copper Fox will retain 25% of that investment, which is $100 million. Copper Fox comes out slightly ahead, because they will have spent $80 million for a $100 million investment.

Of course, the total capital cost is much more than $320 million of additional expenditures. As a 25% joint venture partner, Copper Fox would have to contribute its share. Teck, however, with a 75% earn back is responsible for raising Copper Fox’s share of the financing. This does not mean that Copper Fox gets a free ride. Copper Fox must pay back its share of that financing from its future cash flow and profits.