International Royalty takes Vale to court over royalty spat

International Royalty (IRC-T, ROY-X) and Altius Minerals (ALS-T) are taking Vale (VALE-N) to court over royalty payments they claim shortchanged them by more than US$26 million.

International Royalty holds a 90% stake and Altius a 10% stake in the Labrador Nickel Royalty Partnership, which holds a 3% NSR royalty covering Vale’s Voisey’s Bay nickel-copper-cobalt mine in Labrador.

The statement of claim filed in the Supreme Court of Labrador states that Vale has underpaid royalties that are due to the partnership and includes an order to correct the calculation in future payments.

The two companies claim that payments did not represent fair market value and that Vale incorrectly calculated the NSR paid through its contracts.

“One or more intercompany transactions (sale of concentrate from one Vale subsidiary to another) are used as the basis of payment calculation, which are believed to be non-representative of what would transact if at arm’s length,” Altius Minerals explained in a press release. “The underlying royalty contract expressly states that payments must be computed as if carried out at arm’s length.”

The suit also claims that Vale deducted certain income taxes that it pays to the province of Newfoundland and Labrador in determining the NSR, which they claim is not allowable under the royalty agreement.

Vale spokesman Bob Carter told The Northern Miner he could not comment on the dispute because the matter was before the courts.

Peter Zinc, president of International Royalty, said IRC had reservations about the calculation of the payments as early as 2006, but that it took management time to research the market and determine precisely what was at fault with the contract.

“It took a while to do the research to find appropriate experts in the business who could help with the research and piece all the facts together,” he explained in an interview.

“Royalties are tied to the value of the mineral in the concentrate so as nickel prices and cobalt and copper prices vary over time, as does production, the fair market value in that concentrate will vary,” he said. “We believe that the value that the mine received for that concentrate should have been higher and that would have obviously paid us a higher royalty.”

In addition, there have been “certain taxes based on income that we don’t think ought to be deducted under the contract.”

Zinc added that IRC could not sort out its issues with Vale satisfactorily and came to the conclusion that taking the dispute to the courts was the only way forward.

“It’s not unusual at all in the royalty business for the royalty holder to question the operator as to the calculation of royalties,” he said, noting that it was unlikely to sour IRC’s future business dealings with Vale.

Apart from its 2.7% NSR on the Voisey’s Bay mine (Altius holds the remaining 0.3% of the NSR), IRC has a sliding scale NSR on the Pascua gold project in Chile, a 1.5% NSR on the Las Cruces copper project in Spain and a 1.5% NSR on about 3 million acres of gold lands in Western Australia.