CHAPTER 4 THE URANIUM ROYALTY PROVISION: ITS EVOLUTION, PRESENT COMPLEXITY AND FUTURE UNCERTAINTY
| Jurisdiction | United States |
(Nov 1976)
THE URANIUM ROYALTY PROVISION: ITS EVOLUTION, PRESENT COMPLEXITY AND FUTURE UNCERTAINTY
Getty Oil Company
Los Angeles, California
CIRCULAR 5
Any consideration of uranium royalties must begin with Circular 5. I assume that anyone who is active in the uranium industry is familiar with this document, but for purposes of giving necessary background, I will briefly review its provisions. Furthermore, because of its effect on subsequent lease forms, repeated reference will hereafter be made to it.
Circular 5 became effective on March 1, 1951.1 Though not a royalty provision itself, it created the basis for scores of future uranium royalty clauses. By its terms the buyer, the U. S. Atomic Energy Commission (AEC), agreed to purchase any uranium-bearing and vanadium-bearing ore delivered to its depot at Monticello, Utah. The basis for the uranium price was the U3O8 contained in ore as determined by sampling and assay. The amount was a specified sum per pound of U3O8 contained in ore, such sum increasing as the percentage of U3O8 per ton increased. Thus, for each pound of U3O8 contained in ore assaying .10 percent U3O8, or two pounds per ton, the AEC paid $1.50; for each pound in ore
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assaying .15 percent, or three pounds per ton, the price was $2.50. "Ore" was defined merely as follows: "The term 'ore' does not include mill tailings or other mill products." In addition to the base payment, fifty cents was paid for each pound purchased as a mine development allowance. This must be spent for uranium exploration or development. A haulage allowance of six cents per ton mile was paid, up to a maximum of 100 miles. The cost of transportation was borne entirely by the seller, each party bore the cost of its own assay, and the cost of weighing and sampling was borne entirely by the buyer. The only dispute not resolved automatically in favor of the buyer was any dispute in connection with an assay, which was referred to an umpire. The only mineral other than uranium which the AEC would purchase was vanadium contained in ore.
Please note the following facts about Circular 5, all of which have been very important in shaping subsequent uranium lease terms, or conversely, have retarded the development of terms which reflect the fact that there is now a competitive uranium market (the sole purchaser in 1951 was the AEC) and of provisions covering areas not adequately treated in Circular 5:
(1) An uncomplicated purchase price basis was adopted. However, payments based on U3O8 contained in crude ore failed to recognize that the concentrated product, "yellowcake", is much more valuable than the mineral contained in ore. Indeed, it is so much more valuable that the capital
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cost of a uranium mill and the costs of processing the ore may well be justified by the mineral owner prior to any sale.
(2) Quite logically, the purchase price was fixed. However, the precedent of setting royalties based on such unvarying prices later caused some parties to fail to provide for the anomalies and inequities created by a rapid change in the value of U3O8 over the lease term.
(3) Because the AEC was interested only in uranium, Circular 5 naturally covered no additional minerals, except vanadium, which in some instances is produced in association with uranium. Perhaps for this reason, the uranium industry has not done very well in including provisions for minerals other than uranium in a lease under which uranium is the target.
(4) Apparently no thought was given to the desirability or undesirability of tailings ownership and responsibility. At least no one anticipated what complex problems tailings would eventually represent.
THE ROYALTY BASE
Crude Ore vs. "Yellowcake" Royalties
Circular 5 royalties were based on the assayed percentage of uranium contained in crude ore. Since the days of Circular 5, the "yellowcake" royalty has been created.
Simply stated, a "yellowcake" royalty is based on the value of uranium concentrate, commonly called "yellowcake".
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The amount payable may be fixed or variable under a number of possible formulas which will be discussed later. Adopting this basis, however, allows the lessee to process the mined substance prior to paying a royalty.
It would appear that a "yellowcake" royalty makes it simpler to determine the mass against which the royalty is to be calculated, or, in other words, the definition of the royalty base, than does a crude ore royalty. However, it creates new problems, some of which are not unlike those encountered in dealing with crude ore royalties. A surprising number of "yellowcake" royalty provisions appear to assume that the word "yellowcake" is self-defining. "Yellowcake" is, of course, simply uranium concentrate. Just as the term "uranium ore" is not very helpful in defining the exact mineral actually sought, namely U3O8, the term "yellowcake" moves one only slightly nearer that goal. There are many difficulties in attempting to determine how much U3O8 is contained in ore. Unless sampling procedures are highly sophisticated and samples are taken of every pound of ore (which is, of course, highly impractical), the margin of error can be very significant. However, it is no solution to the problem to indicate merely that the royalty will be paid on each pound of "yellowcake" produced or sold. Because of the presence of moisture and impurities, the actual U3O8 content in any two units of "yellowcake" may vary substantially. Care should, therefore, be taken to make a so-called "yellowcake"
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royalty payable not on "yellowcake", but on the dry U3O8 contained therein.
The obvious problem with this proposition is how to dtermine with accuracy and to all parties' satisfaction what the U3O8 content is. This problem is not handled well in any of the numerous lease forms I have seen. In order to achieve the highest possible degree of accuracy and to minimize disputes, special attention should be given to procedures for weighing, sampling, assaying, and moisture determination. This is true whether the royalty is to be paid on the basis of the value of crude ore or "yellowcake". At the very least, the lease should indicate that the U3O8 content is to be determined on a dry basis in accordance with sampling and analysis procedures recognized as standard in the uranium industry. Furthermore, the lease should give the lessor a right of access to the data on which the content conclusions are based, the right to be present when samples are taken and analyses made, and should contain a method for resolving disputes. Surprisingly few leases contain such provisions.
Whether one is dealing with a crude ore royalty or a "yellowcake" royalty, the prime concern regarding the royalty base should be in arriving at a method of accurately determining the U3O8 content of the substance in question. It would be less
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simplistic and more realistic to call all uranium royalties "contained-U3O8 royalties" rather than engage in the somewhat meaningless distinction between "crude ore royalties" and "yellowcake royalties".
The Effect of the Granting Clause
It is most important that the granting clause be drawn with precision and clarity, not only because of its primary function, but because it usually has a significant effect on the amount of royalty payable under the lease. Normally the granting clause enumerates the minerals leased and thereafter all such minerals are collectively described as "Leased Minerals" or some similar term. Furthermore, the royalty is often paid on such "Leased Minerals". Therefore, because the very basis for payment of royalty may be contained in the granting clause, it is obviously important to draft it with exactness and care.
Miscellaneous Considerations
Perhaps as subsidiary points to those which have been discussed, it is important to mention a few additional items in connection with the basis for the payment of royalties. First, in determining the royalty, particularly under the typical provision involving crude ore, as opposed to "yellowcake", U3O8 content is measured and royalty is paid based on an average of such measurements over a specified period. The longer the period, the larger the mass against which average U3O8 content is measured. Thus, if an average of the U3O8
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content is taken over a three-month period, the margin of error will be greater than if a one-month period is used. For this reason, it is in the best interests of both parties, since it is unpredictable to which party's disadvantage the error will operate, to reduce to the smallest possible amount the mass against which the average is measured, since by doing so the greatest possible accuracy of measurement is achieved. Probably the shortest practical averaging period which may be used in order to maintain good operating practice is one month.
Second, the language of the royalty provision often makes it difficult, if not impossible, to determine exactly what must physically be done with the material in question before the royalty is payable. This problem arises principally from imprecise drafting and inconsistent use of terms. For example, consider the provision that a royalty is to be paid on all ore "mined, shipped or sold" from the leased premises. At what point is royalty payable? As drafted it could be argued that it is payable as soon as severed from the ground, i.e., mined. But, if this is so, what effect do the words "shipped or sold" have? Arguably the ore must be not only mined, but also either shipped or sold. Thus, if a large unsold stockpile is maintained on the leased property, the lessee may well argue that no royalty is payable thereon while the lessor would argue that it is.2 To further complicate matters, one of the same leases from which I extracted the
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words "mined, shipped or sold" provides that the royalty...
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