Exhibit 10.5
CERRO GORDO LETTER AGREEMENT
This letter agreement dated as of the 1st day of September, 1996 is made between
Earth Sciences, Inc. ("ESI"), a Colorado corporation and Xxxxxx Xxxxx Associates
("MTA") a Colorado joint venture consisting of Mine Development & Engineering
Corp. ("MDEC"), a California corporation and MTAARI, Inc. ("MTAARI"), a Colorado
corporation. The principals of MDEC and MTAARI are Xxxx Xxxxxx and Xxxx Xxxxx,
respectively.
RECITALS
MTA has leased certain patented and unpatented mining claims near Cerro Gordo
peak in Inyo county, California from Xx. Xxxx Xxxxxxx and the Xxxxxxxxxx Xxxxx
Trust (the "Mining Claims"), under lease agreements dated August 29, 1995 and
April 1, 1996, respectively (the "Leases"). MTA has provided true and complete
copies of the Leases to ESI.
ESI and MTA desire, initially through an additional joint venture formed by them
(the "JV"), to further explore, develop and place into production the Mining
Claims. ESI will generally arrange for funds for continuance of the Lease,
preservation of the Mining Claims and other JV activities. ESI's obligation for
expenditures may earn ESI a working interest in the Lease, as outlined below.
MTA will contribute the Lease to the JV and, as approved by the JV, agrees to
act as the operator for JV activities. Both ESI and MTA will look solely to the
profits from future production from the Mining Claims or proceeds from the sale
of JV assets to recover their respective investments in the JV. Both ESI and MTA
will only charge the JV on a cost basis for activities performed on behalf of
the JV
AGREEMENT
1. DUTIES AND OBLIGATIONS OF THE PARTIES
ESI, at its sole cost and expense, will arrange for up to $4.2 million to
explore the Mining Claims and place the 'H' area into profitable production to
earn an 80% working interest in the Mining Claims and Leases. Preproduction
exploration has been estimated by MTA at $650,000. MTA will provide access to
all of the technical data it has in its possession and/or available to it, and
will provide assistance in JV activities as directed by the JV.
2. FUNDING
Based on budgets and schedules approved by the JV, ESI will fund the costs of
all JV activities up to the agreed amount of $4.2 million or until the JV
achieves cash flow, whichever occurs first. Nevertheless, ESI may, in its sole
discretion after a 30 day written notice to MTA, cease funding the activities of
the JV without any future obligation except for its portion of the working
interest in the Leases and Mining Claims it may have earned as a result of its
expenditures. In accounting for the expenditures of ESI, reasonable salaries,
wages, overhead and out-of- pocket costs on a no profit basis of ESI personnel
engaged in JV activities shall be included. The value of MTA's contribution to
the JV as of the date of this Agreement is agreed to by the parties to equal
$92,000.
3. ADDITIONAL FUNDING REQUIREMENTS
In the event that the funding obligation of ESI is insufficient to achieve cash
flow from production, the JV will first seek third party debt or equity
financing. Failing such third party financing, ESI and MTA shall contribute the
funds required by the JV in proportion to their respective working interest at
the beginning of the calendar quarter in which funds are required. In the event
that a party is either unable or unwilling to contribute their proportionate
share, the other party may make such contribution diluting the working interest
of the non-contributing party in proportion to the new expenditure required and
the total project expenditures.
4. PURCHASE OF THE ROYALTY
At least one of the Leases provides the option to purchase a royalty granted
therein. If, outside the JV, either party were to exercise any such option the
other party shall have the right for a 2 year period to pay the purchasing party
their proportionate amount of the purchase price plus interest at prime plus 2%
so that the royalty becomes owned by the JV.
5. TIME SCHEDULE
Time is of the essence and both ESI and MTA agree to carryout all of their
respective duties and obligations under this Agreement in a timely fashion. The
management committee of the JV will establish a tentative schedule of foreseen
near term activities as soon as practical.
6. FORMATION OF THE JV
ESI and MTA agree to form a JV to manage and control the joint activities
intended under this Agreement. The JV shall not carry on its activities in a way
that it could be construed to be a partnership for U.S. tax purposes and, ESI
and MTA agree to take all reasonable step to avoid such classification. With
regard to the recognition of tax attributes, any assets acquired by the JV shall
be jointly owned in proportion to the working interest of the parties at the end
of the calendar year in question.
7. JV MANAGEMENT COMMITTEE
All the affairs of the JV shall be directed by a management committee (the "MC")
consisting of 3 members from ESI and 2 members from MTA. Decisions of the MC
will be on a consensus basis. If a consensus cannot be reached, the MC will
proceed as provided below in the mediation section below.
8. MTA AS OPERATOR
MTA will serve as the operator for the JV. The continuation of MTA in that
capacity shall be subject to the review and approval of the MC from time to
time. In such capacity, MTA has advised that it will charge overhead on JV
expenditures which it manages as follows: 5% on 3rd party contractors, 7 1/2% on
purchases of materials and supplies, and 10% on other expenditures. MTA will
rent equipment it owns to the JV at blue book rates less 10%. Such overhead
charges are to represent an estimation of actual cost and are not intended to
include any significant element of profit or loss. Such overhead charges will
compensate MTA for the cost of incidental management salaries, office
facilities, telephone, and other items commonly included in general and
administrative expenses. As operator, MTA will submit budgets and schedules to
the MC which shall include their overhead charges for approval of the MC. MTA
and ESI management personnel shall be reimbursed by the JV for their direct and
indirect costs without any additions.
9. DISTRIBUTION OF PROFITS AND PROCEEDS
The distribution of net profits and any net proceeds shall be made
proportionately to ESI and MTA until they have recovered their investment plus a
factor for the cost of money equal to the prime interest rate plus 2% if the
funds have been borrowed or the interest income lost if funds come from amounts
on hand. Thereafter, ESI and MTA shall share in the distribution of any net
profits and/or net proceeds on an 80/20 basis
10. EARN-IN
As a result of its expenditures under this Agreement, ESI shall earn an
undivided interest in the Leases, any equipment owned by the JV and Mining
Claims pursuant to the following schedule:
Expenditure Level Interest Earned
----------------- ---------------
$ 0 - $ 149,999 0%
$ 150,000 - $ 499,999 10%
$ 500,000 - $ 999,999 25%
$1,000,000 - $1,999,999 37.5%
$2,000,000 - $4,199,999 50%
$4,200,000 80%
MTA agrees to evidences such earned interest by a recordable assignment to ESI.
11. MEDIATION
In the event the MC cannot reach consensus on any issue it shall become the
subject of mediation under the following guidelines: (1) ESI and MTA will
jointly select an unrelated third party familiar with the mining industry, (2)
with the aid of the third party ESI and MTA will reach a consensus on a further
course of action.
12. RIGHT TO ENCUMBER LEASES
ESI is granted the right to encumber the Leases, subject to the terms of the
underlying Leases, solely for the arrangement of financing its obligation for JV
activities. ESI is responsible for repaying any such financing out of its share
of the XX xxxx flow.
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13. AREA OF INFLUENCE
The parties agree to an area of influence of 5 miles from the location of the
Mining Claims in which all property or data already acquired or acquired in the
future by either party will immediately be disclosed to and become the property
of the JV. The restriction imposed by this section shall apply for two years
after the termination of the JV.
14. TERMINATION
Either party may terminate the JV at any time by providing 30 days written
notice to the JV, by paying for all JV commitments that were incurred prior to
the date of termination, and by assigning all of its right title and interest to
the Leases and Mining Claims to the other party. In any event, ESI and MTA can
mutually agree to terminate the JV at any time. In no case will an act of
termination relieve a party from liability for acts of the JV during the period
of that party's involvement.
15. AGREEMENT TO FURTHER DEFINE UNDERSTANDINGS OF ESI AND MTA
The parties agree that at a mutually agreeable future date that they will
negotiate in good faith to further define and formalize the relationship
outlined herein.
SIGNATURES
In witness of the mutual covenants and agreements made herein, ESI, and MTA by
its principals, set their hands and seals as of the day first written above.
Earth Sciences, Inc. Xxxxxx Xxxxx Associates
/s/ Xxxx X. XxXxxxxxx /s/ Xxxx Xxxxxx
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by Xxxx X. XxXxxxxxx, its President by Xxxx Xxxxxx
/s/ Xxxx Xxxxx
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by Xxxx Xxxxx
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