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Tanzanian Royalty Exploration Corporation is a blue sky play in my book.  On the surface it appears that not much is going on, but still waters run deep and I think this exploration royalty company is worth a shot. They have a lot of properties that they are optioning off to established companies, such as Barrick, for pre-production royalties and direct royalties if and when production commences.

Gold production has been going down worldwide as demand rises and that fact alone will make exploration companies very valuable as this gold bull rolls on.  If the world’s reserve currency is changed to a basket of currencies, which includes gold, the need for new gold sources will increase dramatically making exploration companies exponentially more valuable.

Tanzanian Royalty is taking the royalty model and applying it to exploration properties.  They earn royalties while the property is being explored and then they earn royalties if the property is put into production.  To put it simply, these shares will rise if gold goes to $1,200 and beyond because a rising tide lifts all boats.  They will take off to the moon if a few of their properties go into production.  The only way you lose with this is if gold goes back to $350 per ounce, and I don’t think that is going to happen any time soon.

Don’t get me wrong, there is risk here, but I think it is one worth taking.  Do your own due diligence before you do any investing.  The following company profile will start you on your way to doing your home work.  After you read through the profile I will give one more very important reason why I am willing to invest in TRE.

Blue Sky In Tanzania?

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.

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.

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 time frames 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.

Acquisition of Tanzam

Tanzanian Royalty Exploration has been a major player in Tanzania’s minerals sector since 1989. In April of 2002, Tan Range,its predecessor company, 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.

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 Tanzanian Royalty 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.

Structure of Royalty Agreements

The Company is extremely diligent in negotiating royalty agreements to ensure they meet internally-defined hurdle rates and provide the revenue stream that will garner us a premium in the marketplace.

Our agreements with industry partners include a cash-on-signing provision for each prospecting license and an obligation on their part to make advanced royalty payments that escalate every year for five years. This arrangement provides Tan Range with a stable source of rental income while the potential of its properties is being evaluated.

In addition, annual work (exploration) commitments are a requirement of all agreements negotiated with industry partners. In years 1 and 2, these commitments are expressed as cash requirements. However, in years 3, 4 and 5, the work requirements are expressed as numbers of meters to be drilled annually. This is done to prevent disagreements with respect to management fees.

Failure to make rental payments and work commitments by the anniversary date of the agreement will see the licenses revert back to Tan Range.

All royalty agreements call for a production decision on or before the end of Year 5, full access to draft feasibility studies, and penalties for any production delays. While the optionee retains absolute discretion as to the manner in which commercial production is achieved, if the mine has not reached a commercial production rate of at least 50,000 ounces gold per year on or before the eighth anniversary of the effective date of the agreement in force, the optionee is obligated to pay Tan Range $US25 for each ounce of production shortfall beneath that threshold.

When project viability is confirmed by a feasibility study, the Company’s royalty interest (or parts thereof) becomes an asset that is easily marketable. Royalty buyers understand the long term nature of the mining industry, exploration upside, and production leverage to higher gold prices – and they are frequently willing to purchase royalty interests at premium prices.

Tanzanian Royalty Exploration Corp is not for the more conservative investor, but it does offer a lot of potential for a relatively low price ($3.63 per share at the time of this writing) for investors who can stand to wait and who sleep well even if the risk is higher.   It is hard to find out a lot about TRE, because very few analysts cover it and I am sure most brokers have not even heard of it, but there is one huge name that is associated with TRE: Jim Sinclair.

Mr. Gold Himself!

This short profile from TRE’s website outlines the basic profile of Mr. Sinclair, but it does not convey the knowledge of the gold markets that Mr. Sinclair embodies.

Mr. Sinclair became Chairman and CEO of Tanzanian Royalty Exploration following a Special Meeting of Shareholders held in April 2002 in which shareholders voted 98% in favour to approve a transaction for Tan Range to acquire Tanzanian American Development, a Tanzanian gold exploration company controlled by the Sinclair family.

Mr. Sinclair is primarily a precious metals specialist and a commodities and foreign currency trader. His past experience includes that of founder of the Sinclair Group of Companies (1977), which offered full brokerage services in stocks, bonds, and other investment vehicles. The companies, which operated branches in New York, Kansas City, Toronto, Chicago, London and Geneva, were sold in 1983. Mr. Sinclair served as a Precious Metal Advisor to Hunt Oil and the Hunt family from 1981 to 1984 for the liquidation of their silver position as a prerequisite for the $1 billion loan arranged by the Chairman of the Federal Reserve, Paul Volker. Mr. Sinclair was a general partner and member of the executive committee of two New York Stock Exchange firms and also President of Sinclair Global Clearing Corporation (Commodity clearing firm) and Global Arbitrage (derivative dealer in metals and currencies). Mr. Sinclair was President of James Sinclair Financial Research SARL in Luxembourg. Mr. Sinclair held the position of Chairman of Sutton Resources from 1989 to 1995.

Jim Sinclair is Mr. Gold and has probably forgotten more about gold and gold mining than most people could ever learn.  You can, and should, read him at www.jsmineset.com if you want to know what is going on with gold and currencies.  His participation in TRE is good enough for me!

Till next time, good luck and good trading!

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• Franco Nevada (FNV.TO)
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• Goldcorp, Inc. (GG)
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