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It’s a buyer’s market for gold royalty companies as cash-strapped miners look to fill the capital void left by fleeting venture capital and bank debt. Few know this as well as Franco-Nevada (FNV.TO), the Toronto-based rival of Silver Wheaton (SLW.TO) who announced a dividend for the first quarter of 2015 earlier this month.
Pierre Lassonde, Franco-Nevada's chair, is making big bets ahead of the exploration drought he sees five-to-ten years down the road to the tune of U.S. $900 million in 2014.
Franco-Nevada announced in October it’s providing an up-front deposit of $648 million to acquire the gold and silver stream from Freeport-McMoRan Inc.’s (FCX.N) Candelaria operation in Chile from Lundin Mining Corporation (LUN.TO). It's the biggest deal of the year for Franco, the royalty and streaming investor that became famous for acquiring a royalty on Barrick Gold's Nevada mine in 1985.
“What we are doing is betting on the fact that Lundin will be able to keep that mine going for the next 20 to 25 years, and then we provide price optionality to our shareholders, and also land optionality because there is quite a lot of exploration in and around the area,” said Lassonde.
He says Franco-Nevada, whose revenues skew mainly towards gold at 66 percent, with smaller returns from oil and gas and Platinum Group Metals, has provided a 20 percent annual return to shareholders in the eight years since they’ve been back in business. Without having to do any actual mining, Franco-Nevada avoids complications like operational mishaps, capital cost overruns, and labour problems.
“The strength of our business is very simple, it’s optionality. We provide two types of optionality, land optionality, and price optionality. [With] the land optionality we get that when we purchase a royalty for example on a big package of land. We get the exploration essentially for free. Give me a perpetual option on a large piece of land, and I’ll make you rich. Then we have the price optionality, which is more streaming deals where we get large amounts of gold delivered to our account and they provide the price optionality,” said Lassonde.
The string of deals amid depressed gold prices is a result of a 15 year lull in big deposit finds, a trend he says spells a trouble for investors, but will breathe new life into metal prices.
“The exploration cycle hasn’t kicked in. For example, in the 70s, 80s, 90s, every 10 years the junior companies, or senior, would find 50 million ounce orebodies. If you look at the last 15 years, none of that has happened,” said Lassonde.
Franco-Nevada CEO David Harquail, a veteran of the Canadian mining scene also speaking at the Prospectors and Developers Association of Canada in Toronto this week criticized profit hungry investors obsessed with quarterly performance. He said the gold mining industry is struggling to meet demands that are out of step with the reality of mine development.
While investing in early stage mining operations poses significant risk, Lassonde says the reward is well worth it even if half the mines put into production fail to return their capital. He likens the success ratio to the number of hit movies that Hollywood studios greenlight.
“They make over 6,000 movies in Hollywood. How many do you think gross over $100 million? It’s one in 1,000. It’s the same odds all over,” said Lassonde.
He points to the net smelter return (NSR) royalties Franco-Nevada has received from Barrick Gold Corporation’s Goldstrike complex in Elko, Nevada since 1985 as proof. 2015 production is expected to top one million ounces.
“I bought the Barrick Goldstrike (ABX.TO) NSR for $2 million, but Barrick wasn’t in the picture at that point in time. It was a very junior company. Of course now that has paid us over $900 million, and by the time it’s over that will be will over a billion,” said Lassonde.