Franco-Nevada Calls for Syndicated Royalty Deals
Issue 65, November 2013
In a $1bn deal last year over gold from the Cobre copper project in Panama, Harquail fixed ounces deliverable in proportion to copper output, insulating Franco against any uncertainty in the gold reserve. Cobre is also subject to a 3-to-1 spending ratio, whereby each dollar financed by Franco must be met by $3 from elsewhere. “We never want to be 100 per cent of the financing,” Harquail explains. “Otherwise if the operator runs out of money, we know they’ll come back to us.”
The evolution of royalty and streaming terms represent one of the most pioneering corners of the market, with profound implications for the risks investors shoulder and the capital available to the industry.
Harquail says Franco’s clauses are not dreamt up in helicopters or in meetings with lawyers, but through its due diligence process. “We do the due diligence and try to identify what the weaknesses are in the operator’s plans. The more they underwrite, the higher valuation we can give them.”
“We want to avoid the yellow truck disease,” he adds, “that’s for operators. We can’t afford to get caught up in the operating of previous investments. I want my management team to move on.” Harquail previously headed Newmont Mining’s merchant banking unit, but says with 23 mines, management was perpetually bound up in crises.
“Executives were being put in jail in Indonesia, or there were riots in Peru, or the government was trying to cut off our electricity. You don’t have time to think about future investments. When our board meets, we have no health and safety committee, no operations review. It makes us much more long term orientated.”
“The industry needs more long term capital,” Harquail continues. “The average project from discovery to development is 12 years and increasing. You need partners that can take that view. A lender just wants their capital back and an equity holder wants to ride the bull market and sell the stock. Generalists are only there for the bull market; they finance the good projects, but all the marginal projects as well and when you need them in a down cycle, they’re not there. We’re discriminatory, but that’s what investment capital should be.”
Harquail warns that the market’s call for miners to focus on short term profitability may end as badly as prior calls for ever increasing reserves and output growth. “Investors are saying they want mining companies to be run like a business and only to run their profitable ounces. There’s a term for that: it’s high grading. There’s a much shorter mine life and the market starts looking at you as a liquidity event. You have to accelerate your closure costs and investors start asking, why are you going into liquidation mode? It’s just the same cycle all over again.”
Unlike operators, Franco is free from the cycle of Sisyphus. “This is a different investment class,” Harquail says. “Cycles are to our advantage. We are the most cash rich gold company in the world and we have no unscheduled capital expenditure. These downturns are wonderful times to buy things.”
Several of Franco’s royalties are paid in-kind and Harquail agrees there is a case for holding bullion rather than cash, making the company comparable to a dividend distributing gold bar that grows heavier each year.
In the current market however, Harquail is keen to demonstrate to operators and investors alike Franco’s abundant liquidity. “I have in excess of $1.3bn and we’re confident we’re going to deploy that capital. As the bull market takes off, we’ll start accumulating gold, but now’s the time to buy more assets."
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