Executive Summary: Key Legal and Evidentiary Issues

• Central dispute concerns interpretation of a 1986 mining royalty agreement and whether revenues from a subsequent streaming agreement could substitute for actual sales revenues to Offtakers.

• Trial judge erred by allowing expert accounting evidence on GAAP to overwhelm the express terms of the Royalty Agreement.

• Net Smelter Returns (NSR) royalty must be calculated on revenues from all sales of mineral products derived from the mine, not on reduced prices from unrelated third-party agreements.

• Reference to "generally accepted accounting principles" in the agreement does not incorporate how the mine operator reports revenues on its financial statements.

• Post-contractual business decisions by the mine operator, however prudent, cannot modify the parties' obligations under the pre-existing Royalty Agreement.

• Sales to Offtakers were expressly contemplated by the Royalty Agreement and cannot be partially excluded from royalty calculations.

Background and the parties involved

In 1986, Lincoln Resources Inc. acquired rights to four mining claims in the Mount Milligan area of British Columbia from Richard Haslinger Sr. In exchange, Mr. Haslinger was promised a 2% production royalty on Net Smelter Returns from any minerals produced from the property. H.R.S. Resources Corp. later succeeded to Mr. Haslinger's royalty interest, while Thompson Creek Metals Company Inc. became the successor mine operator.

The streaming agreement with Royal Gold

In 2010, TCM's predecessor, Terrane Metals Corp., entered into a Streaming Agreement with Royal Gold Inc., which was amended several times from 2011 to 2016. Under this arrangement, Royal Gold provided a cash deposit initially of US $311.5 million, later amended to US $781.5 million, in exchange for TCM's commitment to deliver refined gold at a fixed price of $435 per ounce. By comparison, TCM reported that on February 22, 2016, the closing market price for gold was $1,211 per ounce. The Streaming Agreement did not require TCM to transfer minerals derived from the mine itself. TCM fulfilled its obligations to Royal Gold by purchasing minerals on the open market. The quantity owed to Royal Gold was calculated as a percentage of the mine's actual production, but the minerals delivered came from elsewhere.

The royalty calculation dispute

The mine achieved commercial production in 2014, and the first royalty payments were due to HRS in 2016. TCM took the position that for the portion of gold equivalent to what it committed to provide to Royal Gold under the Streaming Agreement, it could ignore the actual revenues received from sales to Offtakers and instead base the royalty on the fixed price received from Royal Gold. TCM further sought to account for hedging expenses in this calculation. HRS maintained that royalties should be based on 100% of the revenues from all sales of mineral products from the mine to Offtakers.

The trial court decision

Following an eight-day summary trial, the judge delivered reasons for judgment indexed as 2024 BCSC 1847. The judge found that under the "combined operation" of TCM's arrangements with both Offtakers and Royal Gold, TCM's revenues for the portion of gold and copper sold to Royal Gold were funds received from Royal Gold. The judge also required TCM to continue treating a portion of Royal Gold's deposit as "deferred revenue" for royalty purposes. The judge rejected HRS's claim for punitive damages, holding that TCM's communications with HRS concerning the status and calculation of the royalty payments were "transparent and forthright."

The appellate court's analysis

The Court of Appeal found that the trial judge made a palpable and overriding error by misapplying the accounting evidence. The source of the error was the judge's focus on the words "generally accepted accounting principles" divorced from the context of the Royalty Agreement. The appellate court emphasized that NSR royalties are revenue-based with limited, specifically enumerated deductions, deliberately distinguished from net profit interest royalties. The court noted that the judge's approach effectively read new words into the Royalty Agreement as though it stated "net smelter returns will be determined based on revenues reported by the mine operator on its financial statements prepared in accordance with GAAP."

Ruling and outcome

The Court of Appeal allowed HRS's appeal and dismissed TCM's cross appeal. TCM must pay HRS royalties calculated based on the revenues TCM received from all the sales of mine products to Offtakers, without any deductions or recalculations based on the Streaming Agreement or hedging expenses. Interest on these royalties will follow pursuant to the Court Order Interest Act. The exact quantum was not specified in the judgment; if the parties are unable to agree on the amount, they are at liberty to return to the trial court for a damages assessment. HRS emerged as the successful party, with the court affirming its entitlement to royalties based on revenues from all sales of mineral products to Offtakers.