The 16m-ounce Malartic mine, Quebec, subject to a royalty held by Osisko Gold Royalties. Photo: Osisko

The 16m-ounce Malartic mine, Quebec, subject to a royalty held by Osisko Gold Royalties. Photo: Osisko

Exploration the Strongest Platform for New Royalty Groups

Originally published in July 2014

Continued from Page 1

...pharma giants to fund drugs through exhaustive trials.

Incalculable Returns

At its best, the model generates royalties at less than zero cost. Altius Minerals, which coined the model to minimise exploration costs in a mining bear market, staked its Kami iron ore project in 2004 for $2.2m, spinning it off into a new listing backed by China’s largest steel mill. Altius has retained $38m in stock and a 3 per cent royalty on sales, expected to generate over $20m per annum for 30 years from 2016.

Kami is construction-ready, whilst cash windfalls from uranium discoveries have funded bolt-on royalty deals, expanding Altius’ royalty portfolio into nickel, copper, cobalt, potash and coal.

Osisko Gold Royalties

There is a fine line between using exploration to generate royalties and using royalties to bankroll exploration, converting high margin revenue into highly uncertain returns.

To combat a hostile bid by Goldcorp this year, Osisko Mining spun-out a new listing, Osisko Gold Royalties, containing its management team, C$155m in cash, exploration properties in Mexico and a hefty 5 per cent royalty over Osisko’s Malartic mine, Quebec.

The restructure brought in new bidders and added $1.2bn to Goldcorp’s original offer, but critics say the new company should allocate its royalty revenue to dividends and royalty deals, or face charges it is using the cash flow to bankroll a head office that would otherwise have been closed.

Altius says it plans to “dividend out” its royalty income, whilst Gaumond plans to pay a dividend once cash flow from Eleonore begins to pour. Payouts would represent exceptional steps for both groups, highlighting the edge exploration-royalty stocks have over sub-scale royalty startups, unable to buy royalties of Eleonore or Kami’s size.

Tellingly, Franco-Nevada was also founded as an exploration stock, buying a royalty over Barrick’s Goldstrike discovery for $3m in 1985 to minimise its dependence on equity markets. The royalty has since repaid over $700m.

“Goldstrike was the company maker for both Barrick and Franco-Nevada,” says Franco’s president, David Harquail. “We were going to sell the asset because we had no tax base in the US, but luckily we had a change of heart.”

Originally published in Global Mining Observer's Royalty & Streaming supplement, July 2014 

“Luckily we had a change of heart.”

RELATED NEWS

Sandstorm Gold
in Race for AuRico Metals

Young-Davidson royalty clause acts as "poison pill", say sources pursuing AuRico

............................................

Callinan Cash
Arms Dalton for
Further Deals

Market conditions have got
"even better" says Brian Dalton. "By better, I mean worse."

............................................

Osisko Gold's
$1.3bn Merger with Virginia Mines

"I think history will demonstrate that he bought it before the lid of the can tore off…"

............................................

............................................

Thiam: Guinea's
$200m Technocrat
from UBS

Mining minister on UBS & the $200m bribe he's accused of accepting by Rio Tinto

Red Kite: Off-Take
Model Fills Financing Void

There are valuable alternatives
to vanilla project finance, says
Red Kite's Oskar Lewnowski