Callinan to split royalty, exploration operations

Vancouver — Eighty-three-year-old Callinan Mines (CAA-V) is dividing its royalty and exploration holdings into two entities.

The company plans to keep its royalty on HudBay Minerals’ (HBM-T, HBM-N) flagship 777 mine in Flin Flon, Man., as well as its War Baby property downtrend from the 777 mine, while spinning out its various exploration holdings in Manitoba and British Columbia into a new company.

Current Callinan shareholders will receive a percentage in the exploration company equal to their current holdings of Callinan.

The company’s most valuable and tangible asset is its royalty agreement, whereby HudBay is required to pay Callinan a 6.67% net profits interest (NPI) and 25¢ per tonne from the copper-gold-zinc-silver mine. Last year, payments by HudBay totaled over $12 million from the NPI.

The 777 mine went into production in 2004 and Callinan received its first NPI payment in late 2007 after HudBay recouped capital costs. The mine is expected to operate until 2019.

Mike Muzylowski, president and CEO of Callinan Mines, said in a phone interview that with the company making money, it made sense to split the exploration and revenue portions. Once separated, the exploration company will take full advantage of flow-through money, while the profitable entity can look for company or royalty acquisitions, or even dividends, without worrying about dilution.

The company was also starting to demand a skill set that Muzylowski was not interested in.

“We have revenue and that takes a certain expertise, more of a banking expertise than exploration, which is what my bag is,” he says.

To lead the royalty-focused company, Muzylowski has brought on Roland Butler, while he will take charge of the exploration company.

Butler was one of the founders of Altius Minerals (ALS-T), where he was serving as director, vice-president and chief operating officer when he stepped down in March. Altius, also a royalty-focused company, grew from an initial public offering price of 20¢ per share in 1997 with a $2-million market cap to its current share price of more than $10 with a $300 million cap.

Muzylowski says a spin-out was on the table for some time, but it was not until he secured a suitable candidate that he initiated the move.

“We’ve been studying it for a long time now,” says Muzylowski, “but I wouldn’t have split it, if it wasn’t for the fact that we could get Roland Butler. I like to have a guy with a track record.”

Along with growing the revenue portfolio, Butler will take on an ongoing lawsuit with HudBay over payments from the 777 mine. The companies have been in a legal battle since early 2007, over access to financial records and the exact payment amounts under the NPI.

Muzylowski, who actually worked for HudBay when the original option agreement was signed with Callinan in 1967, says he would help advise Roland on the lawsuit as part of his role as chairman of the royalty company.

“I’ll help Roland along this route because I’m the only person alive who’s been on both sides of the issue,” says Muzylowski. He added that he thought the relationship has improved between the two companies and that he was “very cautiously optimistic” going forward.

The new exploration company, meanwhile, will advance its properties including the 130-sq.-km Coles Creek polymetallic project in B.C., as well as sizable holdings in several base metal projects in Manitoba.

Callinan’s share price was up 40¢ or 16.5%, on the day the division news was released, to reach a 52-week closing high of $2.82 on 774,000 shares traded. The company has a 52-week low of 79¢, and 45 million shares outstanding.