This is an excerpt of "Notes to Consolidated Financial Statements November 2009:

"Exploration Properties (Continued)


Yellowknife Gold Project

(a) Ormsby, Nicholas Lake and Bruce Lake

The Company has a 100% interest in the Ormsby, Nicholas Lake and Bruce Lake properties that consist of 14 mineral leases. Two mineral claims were allowed to lapse during the current fiscal year and an amount of $3,946 was written off. The properties are located 90 km north of Yellowknife, Northwest Territories, Canada.

As part of the purchase price of the Ormsby, Nicholas Lake and Bruce Lake properties, the Company agreed, that commencing in April 2004 and on every anniversary thereafter, to advance to Giauque Holdings Ltd., a private company in which David Webb (Director, President and Chief Executive Officer of Tyhee) is a director and officer, a non-refundable minimum payment of US$20,000 which is deductible from the NSR described below. The advance payments have been paid to date. The terms of the net smelter return royalty (“NSR”) are as follows:

For the period beginning on the commencement of commercial production and expiring on the earlier of:

(i) Recovery of the capital costs (without interest) incurred by the Company in constructing the mining facilities and processing, treatment and other capital facilities; and

(ii) The fifth anniversary of the commencement of commercial production,

The percentage of the NSR will be 0.75%

Thereafter, the percentage will be 1% to 2.25%, depending on the monthly average gold price (with 2.25% applicable at a monthly average gold price greater than US$500 per ounce)."

The meaning of paragraph (i) and (ii) is very simple to understand:
After the start of production and for a maximum of 5 years OR the time needed to recover capital cost. So which one is it going to be? For sure (i)

The PA has an estimated payback time of 4 years.
I expect the payback time to be even shorter. The reasons are very simple:
1- Contingency of 30% should be reduced by half (15%)
2- Total cost before contingency, should also be lower, mainly by reducing capital cost related to the energy part. I expect an agreement with Northwest Territories Power Company. This as indicated in the PA should have the "potential to significantely reduce capital and operating costs" My target is a capital cost of no more than 100 millions.
3- The PA has been done with a gold price of $750. Today we are already above $1100. (I am not, here, going to speculate with the POG when production starts)

Based on the above I expect the payback time to be between 24 and 30 months instead of the 48 months indicated in the PA.

So during the first 2-21/2 years after starting production, Giauque Holdings Ltd will receive a royalty of .75% NSR. (NSR royalty is based on the gross revenue received by the mine less costs incurred subsequent to concentrating, which includes smelting, refining, marketing, transportation, and insurance. Usually no provision is made for deducting direct mine operating costs.)

After the payback period, Giauque Holdings Ltd will receive a royalty of 2.25% NSR (since the POG will be over $500 the rate is 2.25%)

Who is behind Giauque Holdings Ltd?
Up to the 2008 fiscal year the royalty was paid (and payable) to Dr. Dave Webb. However "In the current fiscal year, Mr. Webb sold his royalty interest to Giauque Holdings Ltd., a private company in which Mr. Webb is also a director and officer." (From "Notes to Consolidated Financial Statements November 2008)
Since Dr. Webb is a director and officer of this company. I asked him if there was a connection between the company and himself. The answer is of course YES and is perfectly understandable. (I guess it was done for taxes and legal reasons). This is what Dr. Webb answered (and because this is an important and public information, and with his authorization, I will quote him):
" In 2008 I sold the royalty to a family company I do not own or have any interest in. I am however a director and officer of this company."

I will add this important information (as a base for the next posts to come about Management vs shareholders interests): The NSR is tied to the property and is registered on title. It survives any takeover or sale. THIS MEANS THAT WHOEVER OWNS THE COMPANY WOULD HAVE TO PAY THE NSR TO GIAUQUE HOLDINGS LTD (there are also more legal implications but I do not expect them to happen and will not therefore entertain them)

With the strong M&A activity in the gold sector, investors have to ask the question: What is the board of a company going to do when a friendly or hostile offer is made? How personal interests could effect the board decision? Is it legal? Does it matter?
I will follow-up with 2 posts:
"What could happen in case a hostile take-over is made on the company I own?"

"What could happen in case a friendly take-over is made on the company I own?"

Hubert

Thank you for continuing to pay attention and informing us,

Baires