This week, we’ve been marking the 10-year anniversary of Inco agreeing to a takeover by Brazil’s Vale. Along with the sale of Falconbridge to Xstrata of Switzerland shortly before, the deal saw the biggest mines in Ontario’s rich Sudbury basin pass into foreign hands.
One of the elder statesmen of Canadian mining told BNN that allowing the sale of the two nickel producers to non-Canadian buyers a decade ago was "a huge political mistake, to let two giant Canadian companies go.”
Pierre Lassonde, chairman of royalty and streaming player Franco-Nevada (FNV.TO), said “Australia would have never done that. They would never have let BHP (BHP.N), for example, go. With that, the head office left and the jobs and the research…. I think it has been an unmitigated disaster.”
Franco’s stock has climbed an impressive 142 per cent in the past five years as investors bought into its allure of offering a play on precious metals without actually having to spend hundreds of millions of dollars building mines. “You’re not running any yellow trucks,” as Lassonde puts it. Meanwhile, the blue chip index of gold producers on the Toronto Stock Exchange has dropped almost 40 per cent.
But so far in 2016, with bullion’s rally above US$1,300, Toronto gold shares are up 80 per cent while Franco is ahead just 45 per cent.
“I think it’s only because the (gold producer stocks) were so far behind,” Lassonde told us.
Some 95 per cent of Franco’s revenue comes from precious metals, up from about 80 per cent three years ago (the company also invests a little in energy and base metals). Lassonde told us that the increased weighting in gold and silver is partly because of major gold-focused purchases in the past two years and also because low crude prices have tended to cut revenues from energy.
For instance, in 2014, Franco agreed to acquire a gold and silver stream on the Candelaria and Ojos del Salado mines in Chile from Lundin Mining (LUN.TO) for more than US$600 million.
For Lassonde, getting a stake in gold from big copper mines carries a particular advantage: Those mines last for decades. In the case of Cobre Panama, a copper mine being built by First Quantum Minerals (FM.TO), he says "it's going to go for 100 years. Have you ever heard of a gold mine going to 100 years? No.”
He conceded that the buoyant gold market, which has seen a raft of stock issues, has made it harder to strike deals. “Usually when equity is very available, we can’t buy much” in the way of royalties. “Our biggest competitor has always been the investment banks.”
Finally, some gold producers such as Rob McEwen of McEwen Mining (MUX.TO) warn that streaming and royalties are an overpriced form of financing.
But Lassonde says that they can beat a massively dilutive equity issue. “Some CEOs would prefer to sell half of their company rather than sell 5 per cent of an ore body.”