Carlin royalty up for sale but price tag limits buyers

One of the most valuable assets in the Nevada gold belt is up for sale.

Located on the Carlin gold trend near Elko, Nev., and associated with about 15 million oz of untapped gold reserves, it will likely attract some of the world’s largest mining outfits.

But with a price tag of around $250 million, it may even be too expensive for potential buyers such as Placer Dome Inc. (TSE), Western Mining, Consolidated Goldfields and Newmont Mining.

While insiders have known for some time that Franco-Nevada Mining’s (TSE) royalty interests in the burgeoning Goldstrike mine would be offered for sale this year, a major sales drive has been put on hold.

“To give buyers a better idea of what they are getting for their money, we wanted to wait until operator American Barrick Resources (TSE) had posted their new reserve figures,” said Franco-Nevada Chairman Seymour Schulich. He and partner Pierre Lassonde hope to swap the prized asset for a large equity stake in a major gold company.

“We are not operators and we have no intention of becoming an operating company,” Schulich told The Northern Miner recently.

Since Franco-Nevada acquired 3,416 acres of mineral rights at the Goldstrike heap leach mine in 1986 as part of a 6,000-acre land package, reserves at Goldstrike have increased from a modest 500,000 oz to 14.8 million oz proven/probable.

Almost all of that increase is due to a deep drilling program initiated by American Barrick after it acquired the 44,000 oz-per-year heap leach mine in December, 1986. After spending $8.3 million on drilling and exploration in 1987, Barrick has added over 640,000 oz per month, (the equivalent of the average Canadian mine) to its gold inventory.

Since the Toronto company is planning to spend $15.8 million this year on additional exploration and mine development, Carlin observers say the Goldstrike mineral inventory could get much bigger.

“There is no question that Goldstrike will be the largest gold mine in North America by 1993,” said Bill White, senior vice-president at Merrill Lynch Canada’s corporate and government finance department.

With a 4% net smelter return and 5% net profit interests at Goldstrike, Franco Nevada had a stake in 40,144 oz of gold production in 1987. However, with 81.9 million tons grading 0.16 oz gold per ton now outlined in the Deeper Post-Betze sulphide deposits, Goldstrike production will swell from an expected 115,000 oz this year to a minimum 500,000 oz by 1992.

During a recent tour of the Carlin gold belt, Schulich frequently told an entourage of about 50 mining executives (including some potential buyers) that Barrick is being extremely conservative in its production estimates.

“We believe that the Goldstrike properties between Newmont Gold and Barrick will ultimately have four mills on them producing well over one million oz of gold per year,” he said.

“About 66% of this, or approximately 660,000 oz per year will derive from Franco-Nevada’s royalty lands.” Franco-Nevada’s share of that would amount to over 26,400 oz gold annually.(in addition to the 5% net profit interest).

As the man hired by Schulich to sell the Franco-Nevada holdings, Merrill Lynch’s Bill White will spend the next 60 to 90 days talking with a number of top mining executives who will be asked to sign a letter of confidentiality before seeing the offering. While not everyone agrees, White fully expects to find a buyer this year.

His confidence is based on Franco-Nevada’s value relative to other gold companies on the market and the major production increases expected at Goldstrike over the next five years.

“Franco-Nevada is in the favorable and unique position of receiving cash flow without any responsibility for capital expenditures,” said White. But a potential buyer would also be at the mercy of the operator (in this case Barrick) who will dictate Franco’s rates of return and when the buyer is going to get it, warns Davidson Institutional analyst, Ernie Nutter.

Because he is selling a net smelter royalty controlled by the operator, Nutter says White may have difficulty finding a buyer.

“I’d be very surprised if someone steps up to the plate and pays the kind of money (an estimated $14 per share) that they are looking for,” he said. “For $250 million, a potential purchaser like Barrick would be half way to buying Lac Minerals (TSE).”

Nevertheless, with 12.1 million shares outstanding (trading recently on the Toronto Stock Exchange at $10.63), he says the company is worth about $96 million(US) or $74 per oz of gold in the ground.

“Someone could pay a 100% premium for Franco-Nevada and still come in at the low end of the scale in terms of price per oz paid,” said White. According to the Merrill Lynch executive, when Western Mining of Australia bought Seabright Resources and Northgate Mines Inc., the Australian giant paid $142 per oz and $185 per oz respectively.

Based on capital costs of $300 million and operating costs of $200 per oz, Schulich said the average pretax cashflow net from Goldstrike to Franco-Nevada could aggregate $375 million(C) or $30 per share over the life of the project.

“The bottom line is that cash flows to Franco-Nevada will peak in the early 1990s at over $30 million per year,” said Schulich.