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Hello there,

I had a question regarding a long-term loan connected to royalty financing. I just wanted to get a better understanding of if the transaction below would be considered a derivative.

Entered into a $9M loan that requires a minimum fixed amount of quarterly payments of $200,000 that is not interest-bearing and can be settled either in shares or cash each quarter. Also and suggestions on what steps should be taken to calculate the discount rate for this arrangement?

Any feedback would be greatly appreciated?

Thank you

is the conversion factor fixed or variable...

Hello there!

The conversion factor is fixed USD 200,000 at the sole discretion of the company to pay back in cash or shares = to the value of the minimum payment.

Thanks so much.

I think it's only a liability, which is measured at amortised cost.

Feryal24 wrote: ↑13 May 2022, 19:34 The conversion factor is fixed USD 200,000 at the sole discretion of the company to pay back in cash or shares = to the value of the minimum payment.

But it's a fixed number of shares that convert for each $200,000 of loan, or does the number of shares vary depending on something else (like latest company valuation etc)?

From my understanding, it's variable number of share for a fixed amount ?

That is correct. It’s variable number of shares for a fixed amount.

I think this might help :

viewtopic.php?f=4&t=847

Thank you.

this part is also relevant:
https://ifrscommunity.com/knowledge-bas ... nstruments

Feryal24 wrote: ↑13 May 2022, 17:35 Entered into a $9M loan that requires a minimum fixed amount of quarterly payments of $200,000 that is not interest-bearing [...]. Also and suggestions on what steps should be taken to calculate the discount rate for this arrangement?

Why is there no interest? is it a loan from a related party? or government? see also this page:
https://ifrscommunity.com/knowledge-bas ... ate-loans/

Hello there,

There are two elements within the agreement. 1. Its a royalty financing therefore, the royalty holder will provide an advance of $10M for a future NSR if we were to enter into commercial production. However, for the next 3 years until we do so, they require a minimum payment of$200k quarterly for the next 3 years, totaling approximately $2.4M in payments. There is no interest rate its a fixed amount that should be paid either in shares or cash.

Thanks

What NSR stands for ?

net Smelter Royalty

I would recognise the first part, 9m - 2.4m as a payable. and the other part, 2.4m as a loan at amortised cost.

Initially, debiting cash and crediting payables and loan. And subsequently reducing the loan by repayment schedule and adjusted by conversion into shares if needed.

For the payables, I would assess at the end of every year if the project is viable. If not, reverse vs P&L.

When the project is live, I would reverse the payable for the corresponding royalty paid every year, in the P&L until the payables become 0. then, only royalty charges will be shown in the P&L.

Could you please share with us what you finally come up with ? and what's are your auditor's feedback ?

Thank you, Leo. Appreciate the input.

I would say that the initial advance on the Royalty should go against the Mineral Property as a reduction as it will be treated as a "Acquisition of mineral interest" since the NSR will be paid as long as its producing, for the Royalty holder this will be recorded as an investment. With respect to the loan repayment I agree, it should be classified as a Financial Liability using the amortized cost. Question the transaction fees incurred for this loan should that go against Mineral Property?

I would be more than happy to share the feedback from our auditors. Just need to put some thoughts on paper before we have the discussion with them.

Sorry, I'm not into mineral sector, by mineral property, do you mean that you book them as a join operation by using proportional method ?

No problem. No your essentially selling a % of your mineral rights away.....

Question - Since the loan is non-interest bearing, can you please confirm if the initial recognition should be at the Fair Value and then the loan subsequently accounted for using the amortized cost method?

Yes, I would say so.

Apart from the loan, So, you would credit intangible/tangible assets for 6.6m LC right ? When will you start the amortisation ?

That's correct. The amortization would begin at the time we are in a position to sell the commodity. At that point we would trigger a deferred revenue liability on our books and draw it down accordingly....

"At that point we would trigger a deferred revenue liability on our books and draw it down accordingly...."

Could you please be more precise, What will be the accounting entry ? Why don't you book a liability in the first place ?

I still think it's more appropriate to book a liability at the beginning. So, please keep us posted ! Thank you

Let me think about this one.... I will come back!

Looking at this more in detail there is actually a 5 % discount on the shares in case we decide to settle for shares instead of cash. Does this give rise to a derivative now?

Can you be more specific with an example ? I would say no because the total price won't change?

Hello,

Of course. The payment is fixed at $200,000, however, we have the option to issue common shares of the Company at a price per common share equal to 95% of the volume-weighted average price of the common shares for the 5 trading days immediately prior to the date payment is due. This means we will still issue $200,000 worth of shares however, the holder of the debt can arguably be making more if they were to sell it at 100%.

In this case, I think it's a derivative liability. You may have to account the liability and the derivative liability separately.

Thanks, Leo.

Thinking about this some more, although the underlying value can change due to the discount on the shares, however, it wouldn't meet one of the criteria of a derivative "no initial investment or small investment" since we are receiving a large upfront payment. Right? The Royalty advance.

but if the share has a low volatility, and if it's only the last 5 days average price before conversion. The value of the derivative might be NS.

Anyway, you can still opt for the fair value option under IFRS 9 (IFRS 9.4.3.5), meaning that you account the whole instrument under FVTPL.

"no initial investment or small investment", I would interpret it as an investment to enter into the derivative contract by the initiator, which is your company I think.

The royalty prepayment is an investment by the investor.

I see what you mean. However, the investor is giving $10M upfront for a future royalty but requires repayment totalling $2.5M over 5 years until the company reaches commercial production. However, if the company is unable to produce the investor would not be entitled to receive the remaining $7.5M. I am thinking that the $7.5M is recorded as a "Acquisition interest in a mineral property" - intangible asset IAS 38 and the $2.5M treated as financial liability measured at FVTPL. Thoughts?

Like I've said earlier, I wouldn't reduce the intangible assets. I would book a payable for 7.5M$ which is assessed every year and 2.5M$ at fair value.

For example, if in year 2, you assessed that the project won't be feasible, you would write off the 7.5M$ against P&L. But if the project is feasible, and in production, I would reduce the payable for the amount of royalties generated every year, until it become 0.