The Company
Tanzanian Royalty Exploration (T.TNX, AMEX.TRE) is a unique, publicly-traded financial gold company whose business strategy is to acquire royalty interests in gold production from its core assets in the Lake Victoria greenstone belt (LVGB) of Tanzania where a reported 40 million ounces of gold have been discovered since the mid-1990's.
Tanzanian Royalty ranks among the largest landholders in the LVGB - one of the most prolific goldfields in the world. Established producers in this belt rank within the lowest percentile globally in terms of cash production costs.
Our royalty strategy offers investors significant, low-risk leverage to gold prices, limited shareholder dilution, and the potential to have their shares valued at a premium in the marketplace.
Business Plan
The Company's long history in Tanzania, the strategic location of its Lake Victoria properties, coupled with its strong in-house technical capability and capacity to identify and acquire high quality projects in a timely manner, distinguishes Tanzanian Royalty Exploration from its competitors and provides an asset base for the Company's royalty strategy to unfold.
In actual fact, the Company's practice of farming out (optioning) its landholdings to qualified industry partners for pre-production royalties and direct royalties in future gold production positions Tanzanian Royalty Exploration to receive a much higher market valuation than other companies in its peer group.
The Company's business strategy is a variation or hybrid of the one employed by Franco Nevada Mining which merged with Newmont Mining and Australia's Normandy Mining to form the world's largest gold producer.
At the time, Newmont paid 97 times annual 2001 sales for Franco Nevada, a premium that will certainly be used as a yardstick in future takeovers of royalty companies. Royal Gold, the only "pure" royalty play on the market, was trading at 32 times sales in June of 2003 and would likely be valued much higher in any takeover scenario.
Franco Nevada's strategy involved the purchase of production royalties on the open market whereas Tanzanian Royalty Exploration intends to develop royalty income by way of property agreements with industry partners, most of them major companies. In essence, Tanzanian Royalty Exploration believes it can find gold cheaper through exploration than buying gold reserves on the open market.
In order to exploit the potential on our holdings in the Lake Victoria region, we first define gold potential on the properties (in effect value-adding them) after which they are dealt to industry partners who meet strict internal selection criteria.
Entering into partnerships with major companies to exploit the mineral potential on our properties helps mitigate financial risk to the Company and its shareholders. This is extremely important given the cyclical nature of the minerals business and the Company's reliance on capital markets to fund its activities.
In our situation, the funding commitment for these properties is the responsibility of our industry partner which is usually a major company with the financial capacity and commitment to meet its long term obligations.
All of our property agreements are structured such that we receive advanced royalties before production and escalating royalties after production that are based on rising gold prices.
For most properties in our exploration portfolio, we prefer industry partners with assets net of liabilities of at least C$100,000,000 and gross annual revenues exceeding $500,000,000. Nonetheless, we have partnered with junior companies that are willing to advance our prospecting licenses on terms generally accepted by larger companies.
Because our properties are also prospective for diamonds (the historic Mwadui pipe of the Williamson diamond mine is located in the area of our core holdings), we have structured our royalty agreements to include diamond production as well. In the past year, we have also acquired a major land position in Tanzania's Kabanga Nickel Belt where Barrick Gold and Falconbridge Ltd. are developing a high grade nickel deposit.
At this juncture - and assuming the various royalty projects we have negotiated advance as expected - management of Tanzanian Royalty Exploration expects that in the near future advanced royalty payments from our holdings will cover the majority of the Company's general and administrative expenses, allowing Tanzanian Royalty Exploration to maintain a sound working capital position which has been the number one priority of its Chairman and CEO, James E. Sinclair.
Premise Behind our Royalty Strategy
The premise behind our royalty strategy is that we can discover gold at a much lower cost by utilizing our exploration expertise as opposed to purchasing production on the open market. While other companies in our peer group feel they can do the same, they simply don't have a land position like ours in one of the world's most prolific greenstone belts.
Also, few if any companies in Tanzania have the depth of management and experience that Tanzanian Royalty Exploration possesses in the critical fields of exploration geology, deal structuring, and the application of venture capital to achieve our exploration objectives.
We also have a core group of industry consultants and advisors on board who are preeminent in their fields and are dedicated to seeing Tanzanian Royalty Exploration achieve its corporate objectives. Their expertise in Archean greenstone belts - which host most of the world's gold reserves - and the geophysical techniques that can reveal hidden gold and diamond deposits - is world-class and should produce results that will enhance shareholder value.
Also, with a long history in Tanzania, Tanzanian Royalty Exploration has the ability to expedite processes (new property acquisitions and regulatory approvals) that would normally be much more time consuming and expensive for its competitors.
Royalties Versus Percentage Interest
The Company has elected to pursue royalty interests rather than "percentage interests" (also known as "participating interests") in mineral projects because the latter are very high risk, especially when your partner is a major company with production earnings and ready access to capital - be it equity or debt financing. This is a strategic advantage that majors instinctively use as leverage against their junior partners. (See Figure # 1 for a comparative list of Pros and Cons for both options).
In cyclical market downturns, meeting exploration obligations as a participating interest holder can be problematic for a junior partner with no earnings stream, not to mention the difficulties associated with raising equity capital in depressed market conditions. Also, shareholders would face substantial dilution because of the funding requirements associated with meeting its percentage obligations as a working interest partner.
As a percentage interest holder, Tanzanian Royalty Exploration would also have to fund its share of feasibility and mine development costs, which would also be highly dilutive and would place the Company and its shareholders in a vulnerable position.
In many instances, after production is achieved the mine operator has the right to recover its capital investment in the property before any production revenue accrues to its junior partner which is simply not the case with royalties.
Also, the definition of capital investment or capitalized expense applied by the major can be very nebulous and may include all of the mining operator's expenses, direct and indirect, cash and non-cash, up to the implementation of commercial production.
These can aggregate in the hundreds of millions of dollars, meaning the minority partner (percentage interest holder) would likely not receive any income for 3-6 years.
Time Restrictions on All Agreements
In all our agreements, we apply strict timeframes to exploration and development programs committed to by the project operator. If any of these prerequisites are not met, the property reverts back to Tanzanian Royalty Exploration.
In effect, our royalty agreements provide a measurable timeframe in which advanced royalties and escalating production royalties from successful outcomes will accrue to Tanzanian Royalty Exploration. (See Figure 2 for Exploration Cycle Flowchart).
Acquisition of Tanzam
Tanzanian Royalty Exploration has been a major player in Tanzania's minerals sector since 1989. In April of 2002, Tan Range acquired the assets of Tanzania American International Development Corporation 2000 Limited (Tanzam) for shares, significantly expanding the Company's land position in the Lake Victoria greenstone belt and revitalizing its management team.
Tanzam held rights to 51 prospecting licenses in the belt, several of which were the subject of agreements with Barrick Gold. Tanzam, a private company controlled by the Sinclair Family Trust, expended approximately $US6 million on its holdings, including $2 million for a high tech, low altitude, airborne geophysical survey that covered most of its prospecting licenses and helped define numerous gold and diamond exploration targets. These targets have been prioritized for ground follow-up and several are currently being evaluated.
Sinclair Appointment Revitalizes Management Team
Following the takeover, Mr. James Sinclair became the Company's Chairman and CEO. He brings to Tanzanian Royalty Exploration Corp. a unique background as a commodities trader and businessman, one that is rarely seen in this segment of the industry.
His ability to integrate and apply innovative financial principles to the Company's core business, places Tanzanian Royalty Exploration Corp. in a leadership role within its industry segment and will enable the Company to achieve its corporate objectives while maximizing benefits to shareholders.
The Company's former President, Marek Kreczmer, a professional engineer and geologist, has more than 25 years experience in the minerals industry in North America, East Africa and Southern Africa.
A seasoned industry veteran with a broad knowledge of the minerals sector and its various players. He also heads the Company's Technical Advisory Committee which evaluates data from various projects and develops geological models and strategies to exploit the full potential of the Company's prospecting licenses.
For additional details on these two key members of the Company's management team and its Board of Directors, please check the Tanzanian Royalty Exploration Corp. website at:
www.TanzanianRoyaltyExploration.com.
Net Smelter Royalties
Net Smelter Return (NSR) Royalties are characterized by royalty payments that are a fixed or variable percentage of the gross revenue the smelter or refinery pays the mining company for its gold production.
In our case, these NSR interests will provide Tan Range with a direct interest in a mine's cash flow, with exposure to new discoveries and production growth but without the capital obligations and environmental and social liabilities associated with direct ownership.
The NSR is usually based on the spot (current price) of the commodity in question (in our case gold) less deductions for the actual cost of refining the metal to a specific purity. Production royalties do not dilute the equity position of existing owners and are not on their balance sheets.