blackrock

Tax Squirming Caused BlackRock Royalty Blunder

Issue 115, February 2015

A botched effort by BlackRock to minimise tax led the group into a $110m royalty loss in Sierra Leone last year, Global Mining Observer understands.

BlackRock’s World Mining Trust, once the industry’s most influential equity investor, expanded into royalties in 2012, paying $110m for a 2 per cent claim over London Mining’s Marampa mine in Sierra Leone. To great fanfare, the trust’s mandate was also tinkered to allow up to 20 per cent of its assets, equal at the time to $180m, to be ploughed into royalty deals.

BlackRock has since reached only 2 royalty deals, including a $12m gold agreement in Brazil that remains incomplete. Its Marampa royalty meanwhile collapsed in dramatic fashion when London Mining dropped into bankruptcy last year.

A key tenet of royalty investing is that investors gain exposure to underlying deposits rather than an operating company, but for tax reasons, BlackRock’s royalty was levied against London Mining, rather than being secured against Marampa itself. The structure meant that when London Mining failed in October, the royalty was wiped out, rather than being transferred to the mine’s new owners.

The blunder highlights the hidden difficulties of entering the royalty business, a seemingly low-risk game, made to look easy by its largest players. “Royalties are very illiquid,” one royalty boss says. “If you’re a fund manager and you need to realise your portfolio at an arbitrary date, which is true for private equity as well, then you could have liquidity issues.”

BlackRock’s mis-structuring of Marampa also highlights a key advantage held by royalties over streams; whilst streams are structured as contracts between companies, royalties typically represent a right over a deposit itself, classed as “interest in land.”

Newfoundland-based Altius Minerals is the only royalty group to hold all of its royalty assets as “interest in land”, trading any tax advantage for rock-solid ownership rights. Osisko Gold’s Malartic royalty is meanwhile levied against the mine’s mill. 

“Royalties are very illiquid.”

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