Pre and Post Discovery Financing

Every mineral discovery requires not only money, but a lot of dedicated effort from many different sources. Many discoveries result from the efforts of prospectors who are financed by a grubstake. This is an informal business association between friends or associates who put up seed money to do some initial work with the intention of participating in the benefits. That is to say, a friend may finance the prospector’s work in exchange for an interest in whatever he or she may find.

Discovery: Let’s assume that our prospector, has staked some ground and found a surface mineral showing. Most prospectors or grubstakers can only put together enough money for a limited amount of work on their ground — some sampling or trenching, maybe a few days work with a backhoe, or one of the less expensive geophysical ground surveys like magnetics or VLF-EM. Beyond this point, they have the choice of forming a company to do more work or finding an established company to take on the work — and the expense.

Under an option agreement, ABC offers an interest in the property to a company with enough funds to do further work. In exchange, the company commits to spend a specified amount on exploration – when it has done what, it has earned its interest.

Often the company taking the option will make a cash payment or issue some of its shares to the property-holder.

The original holders may be left with a participating or working interest in the property, in which they fund part of the future work, or with a carried interest, which gives them a royalty on future production without the obligation to contribute to future expenses.

The other choice for ABC and his grubstakers is to form a limited liability company. Their company could then issue a definite number of shares to raise the capital it needs.

In the case of the incorporated company, consideration for the money and effort our grubstakers have put into the discovery will be returned to them in an agreed-upon number of shares in the new company — ABC Mines Corp. These shares are called vendor shares and the vendors will not be allowed to turn around and sell them in the market. Rather, they will be held in escrow, usually in the hands of a trust company acting under instruction, until a successful application may be made to the securities commission for their release, to be traded on the stock market. The reason for this will be apparent shortly