Assessment of value
64 Fortunately for the valuation process, there are several arm's length transactions that cast light upon the value of Montague's interest in the four Mindanoa tenements in January 1997. No one transaction, nor the group of transactions considered as a whole, establishes the correctness of a particular figure. It is necessary to consider them all and then make a judgment as to the appropriate figure. As is not uncommon in valuation cases, it is not possible to demonstrate mathematically the correctness of any particular figure. There are four relevant transactions:
(a) The Montague-Filipino parties MOA of 20 November 1996;
(b) The Montague-Spinifex agreement of 16 December 1996;
(c) The Montague-Spinifex option agreement of 6 January 1997; and
(d) The Spinifex-Filipino parties agreement of 10 January 1997.
65 The terms of the Montague-Filipino parties MOA were set out in my 1998 reasons for judgment. Under the MOA, Montague immediately acquired a 40% interest in the four Mindanoa tenements, rising to 70% at FTAA stage. In order to procure these benefits, Montague had to make two one million peso ($50,000) loans to the Filipino parties, the first immediately and the other at FTAA stage. The loans were repayable only out of production, so there was a real prospect they would never be repaid. It is realistic to analyse the transaction on that basis.
66 Perhaps the more significant obligation incurred by Montague under the MOA was the provision of finance for exploration and development. However, in contrast to the position under later transactions, Montague was not required to shoulder the ultimate burden of the Filipino parties' share of exploration and development costs. Although Montague had to find the money to carry out exploration and development, the Filipino parties' share was to be treated as a loan by Montague to them. The effect of the agreement, therefore, was that Montague obtained a 40% interest in the unexplored tenements for about $50,000 in cash and obligations in respect of finding finance in respect of, and then organising, exploration and development. The cost to Montague of a 70% interest at FTAA stage would be a further $50,000 plus 70% of the exploration and development costs. The only evidence of the likely magnitude of these costs is Mr Eckhof's evidence they would probably exceed the costs set out in the letter of 8 January 1997. It will be recalled that letter estimated exploration and development costs to be in the range $US3.5m - $4.25m, (say $US3.8m or $A5.775m at an exchange rate of US66.6 cents to the Australian dollar). Seventy per cent of the latter figure is $A4.04m. If that figure is adopted, the result is that, under the MOA, for expenditure amounting to about $4.1m Montague would have had 70% of an operating mine.
67 The cost to Montague of putting itself into that position was extremely low - only $50,000. That might suggest the market value of an interest in the unexplored tenements was extremely low in November; or, perhaps more accurately, October, when the Montague-Filipino parties deal was negotiated. Possibly it was low; but it seems the market picked up between then and December/January. In December, Spinifex was prepared to commit itself, and did commit itself, to paying $125,000 ($25,000 to the Filipino parties and $100,000 to Montague) for the right to buy into the project. It also undertook to bear the whole cost of bringing the tenements to bankable project stage within two years. At that stage, Spinifex would take a 51% interest. This would leave Montague with 19%, subject to its obligation to pay 1% of profits to the Ellis syndicate. Montague would hold its 19% interest at no cost; indeed at a capital gain of $100,000 less legal costs. It was not even necessary for Montague to deduct from that computation its initial one million peso ($50,000) payment to the Filipino parties; Ellis and Spinifex each provided $25,000 for that purpose. As Mr Cole agreed in cross-examination, this agreement represented "a very good deal for Montague".
68 Notwithstanding the terms of the 16 December agreement, I accept Mr Eckhof's evidence that Spinifex would have undertaken development expenditure only if exploration results proved satisfactory. It is not realistic to think Spinifex would have developed a mine it knew to be economically unviable. However, it is realistic to think that Spinifex, in January 1997, intended to carry out a comprehensive exploration program; if it failed to do this, it would waste the money it was putting into the project. Moreover, Spinifex was newly listed, "cashed up" and keen to establish an impressive exploration record. The letter of 8 January 1997 estimated the cost of a comprehensive exploration program (phases 1 and 2) at $US750,000; say $A1,125,000 I think it is commercially realistic to see the 16 December agreement as a commitment by Spinifex to expend this sum, on top of the $125,000 down payments, in order to obtain a 51% interest in explored tenements. That approach values the totality of interests in the tenements, as at 16 December 1996, at $2,450,000.
69 At 16 December 1996, Montague held a 40% interest in the tenements. Accordingly, when this approach was under discussion during the hearing, counsel for Montague suggested it indicated that Montague's interest, at 16 December 1996, was worth 40% of $2,450,000; that is, $980,000. Counsel for Clayton Utz argued this approach was illogical; the computation assumes Spinifex will carry out its obligations under the agreement and thereby earn a 51% interest, remitting Montague to only 19%, subject to a 1% profit obligation to Ellis.
70 There is force in the Clayton Utz submission. On the other hand, it would be wrong to calculate Montague's interest at 19% of $2,450,000; that is $465,500. That is because Spinifex would not earn its 51% merely by funding the exploration; it would also have to incur the cost of bringing the project to bankable stage. To do this it would have to incur the expenditure for phases 3 and 4, estimated in the letter of 8 January as lying between $US2,750,000 and $US3,500,000 ($A4,125,000 to $A5,250,000). Montague would have a free ride in respect of that expenditure; it would eventually hold 19% (subject to the 1% profit obligation) in a project upon which Spinifex had spent something like $US5m - 6m (say $A7.5 - 9m); and which was sufficiently prospective to justify going to bankable project stage. The entitlement to obtain that free ride was an element in the value of Montague's 40% interest that would not be reflected in a computation that simply took 19% of $2,450,000.
71 On the other hand, of course, an exploration program might establish that none of the tenements contained commercially viable deposits. In that case, Spinifex would not develop any of them to bankable project stage and thus earn its 51% interest. Montague would be left with a 40% interest, but in tenements that had been demonstrated to have little or no worth. For that reason it would be wrong to adopt the figure of $980,000.
72 It is impossible to put a precise figure on the value of Montague's interest immediately after 16 December. However, it was significantly above $465,000, representing the prevailing confidence that one or more of the tenements would prove economically viable.
73 That assessment is supported by the Spinifex-Montague option agreement of 6 January. I use this agreement only for a limited purpose. As explained, I think it is incorrect to extrapolate from the option a value of 100% of the tenements. However, the option being a genuine arm's length agreement, it is legitimate to take it into account in assessing the market mood in January 1997. Mr Eckhof visited the Philippines between 16 December 1996 and 6 January 1997. He was impressed by what he saw. It seems the visit heightened his enthusiasm for the project. He wanted to ensure that, if it worked out well, Spinifex would have a greater share. Spinifex would need to raise finance for the development stage and, as Mr Eckhof said, it is easier for a company to raise finance if it has 60% rather than 51%. While I accept that Spinifex would have exercised the option only if exploration results were encouraging, the presently relevant point is that Spinifex accepted that, if this were so, it would be reasonable for it to pay $500,000, in cash or shares, for only an additional 9%; if the tenements showed encouraging exploration results, they would be worth several millions of dollars. As encouraging results were regarded in January 1997 as a serious possibility, it is necessary to add a substantial premium to the figure of $465,000 referred to in para 72 above. In my judgment, it justifies a loading of 50% on the figure of $465,000, resulting in $697,500 which I round out to $700,000.
74 The 10 January agreement between Spinifex and the Filipino parties must be treated with some caution. The obligations of Spinifex under that agreement were probably diminished by the fact that Montague was no longer in the market. As Montague's withdrawal was a result of Mr Gore's negligence, it would be wrong to base a valuation directly upon the terms of that agreement.
75 However, once again, the agreement is useful as an indication of the market mood in the period immediately after 8 January. The agreement made on 10 January required Spinifex immediately to provide to the Filipino parties two "loans" totalling approximately $75,000 and one million Spinifex shares (worth about $250,000). Spinifex had already paid Montague $125,000 in cash (in December) and agreed (on 8 January) to issue it 250,000 shares, worth about $62,500. So the effect of the 10 January agreement was to bring Spinifex's "entry fee" to approximately $512,500, in cash and shares. For this it obtained a 39% interest in the unexplored tenements. On that basis, a 100% interest was worth $1,314,102 and a 40% interest $525,641. However, Spinifex also agreed to bear all the exploration costs, previously assumed to be the equivalent of $1,125,000. The addition of that figure to $512,500 results in the conclusion that the costs incurred by Spinifex, up to the end of exploration, would total some $1,637,500. At the end of exploration, Spinifex would hold 69% of the project. If the cost of obtaining that interest is extrapolated to the whole project, it would value 100% of the tenements at $2,373,188; and therefore 19% at $450,905. This is much the same as the figure derived by analysis of the 16 December agreement. However, the 10 January agreement, unlike the 16 December agreement, did not oblige Spinifex to bear the whole of the development cost; so there is no justification for adding a 50% loading to the figure of $450,905.
76 If I had reason to believe that the omission of Spinifex's obligation to bear the whole development cost stemmed from something affecting the market generally, between 16 December and 8 January, I would need to take that matter into account in considering whether the ultimate valuation of Montague's interest on 8 January should include the 50% loading. However, there is nothing to indicate that the more favourable position negotiated by Spinifex stemmed from changes in the general market. The evidence suggests that interest in Philippines prospects remained buoyant throughout January. It seems probable that Spinifex took advantage of the absence of Montague to negotiate an arrangement more favourable to itself, the Filipino parties being almost certainly unaware that Spinifex had previously committed itself (to Montague) to bear all development costs to bankable project stage. I do not think the agreement of 10 January requires reconsideration of the figure of $700,000 previously mentioned.
77 However, before settling on a final figure for the value of Montague's 40% holding, it is necessary to take account of some matters that were mere possibilities, but were possibilities inherent in the 40% holding. The first possibility is that, on or before 30 July 1997, Spinifex would exercise the option to acquire a further 9%; or, at least, purchase an extension of the option, as Mr Eckhof suggested would have been the case if exploration was not sufficiently advanced by 30 June to enable a decision to be made about exercise of the option. The second possibility is that Montague's continuing involvement in the four tenement areas would lead to its being involved in other tenements. There was general agreement amongst the witnesses that it is commonplace in the mining industry for a company that is involved with a partner in one project to invite the partner to participate in another. No doubt that is more likely where the partner has access to significant human and financial resources, which Montague did not. Nonetheless, the proposal put by Spinifex to Montague on 3 January 1997 included this term:
"Under normal joint venture arrangements both within Australia and overseas any ground would be offered to the Joint Venture within a 20km radius of the existing J.V. This would be offered on the same terms and conditions. This shows that the parties are working together and not against each other."
The proposal also included the term that "(a)ny new areas brought to Spinifex by Montague exceeding the 20km radius and within a zone of influence of 100km" would be on the basis of Spinifex 70% and Montague 30%. Further Spinifex would pay Montague a daily fee for commercial services provided to the joint venture. Although these proposals were not accepted, they show it is not wholly fanciful to suppose Montague might have derived indirect benefits from the retention of its interest in the four original tenements. I think the prospect that Montague would have derived benefits under the option agreement, or its extension, is more significant than the prospect of indirect benefits. If the two be taken together, I think they add an additional $100,000 to the value of Montague's 40% interest in the four tenements as at 8 January 1997, taking that value to $800,000.