Franco-Nevada Calls for Syndicated Royalty Deals
Issue 65, November 2013
Franco-Nevada, the most cash rich gold company in the world, is looking to capitalise on the current market by striking multi-billion dollar syndicated deals, president David Harquail tells Global Mining Observer.
Franco-Nevada became the world’s first gold royalty business in 1985 when it paid $2m for a royalty on the Goldstrike property, Nevada. Operated by Barrick Gold, the royalty has repaid over $700m, including $56m in 2012. The return has allowed the company to build a portfolio of over 350 royalties and streams, generating $1m per day at free cash flow margins of over 80 per cent. With cash of $840m and $500m in an undrawn credit facility, Harquail has more liquidity than any other boss in the gold business.
“Everyone competes on the short term,” he says, “but you make money by holding tight.” Harquail’s strategy in purchasing royalties is to pay close to full value, based on analyst consensus and an operator’s budgeted mine plan, whilst encompassing the surrounding acreage so that over time, Franco amasses claims over huge swathes of conducive geology.
“I’ll pay full value for everything I can see right now,” he says, “but I’m also trying to judge if there is a lot of capital associated with the mine, if the company has a big photo of the asset in their annual report, if the geology has depth and is likely to continue at strike, because then they’re incentivised to invest risk capital exploring the property.”
Most royalties therefore deliver unremarkable returns, he says, but “1 in 20 give us something spectacular. It justifies us doing lower return deals. For the 1 in 20, yes we get it cheap, but no-one knew at the time.”
In the late 1990s for example, Franco paid $1.5m for a 2 per cent royalty over the Detour property in Ontario. Then a shuttered gold mine, drilling has since discovered 16m gold ounces, resuming production in February this year. “Exploration is a lottery,” Harquail explains, “and development usually underperforms, but through royalties we’re trying to get exposure to land for free.”
Franco’s 1-in-20 approach creates big but imperceptible barriers to entry. Competitors without the capital to strike 20 deals are forced to push harder on valuation, landing them lower-end assets. “You can’t start with a portfolio of 5 mines,” Harquail says damningly. “The odds are against you. You need a critical mass in this business.”
Harquail however is far from a gung-ho competitor. Royalty and streaming companies he says will only fulfil their capacity for reshaping mining finance once they begin jointly striking deals, pooling risk and increasing scale. “At some point,” he says, “we should be acting like commercial banks. We could do multi-billion dollar syndicated deals and share the risk.”
Franco-Nevada has grown revenue threefold in 5 years to $427m, versus streaming and administrative costs of $79m, the company’s only operating expenditure. Revenue is profit for Franco-Nevada, which management can allocate at its discretion, rather than being buffeted into fronting capital. “Our first dollar is our last. We don’t want unscheduled capital costs.”
On the same basis, Harquail prefers royalties to streams. “They’re higher margin and I’d rather have a smaller percentage than a big chunk, where I might be influencing the economics.”
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