Franco, Euro to cash in on royalties

Sister companies Franco-Nevada Mining (TSE) and Euro-Nevada Mining (TSE) are planning to move quickly to capitalize on their experience in the royalty acquisition field.

The Toronto-based companies are setting up a data base in Reno, Nev., to monitor new and existing royalties in North America, Chairman Seymour Schulich told shareholders at a joint annual meeting of Euro-Nevada, Franco-Nevada and Franco’s 39% owned Redstone Resources (TSE).

Having already acquired royalty interests in the Eskay Creek, B.C., Hemlo, Ont., and Carlin, Nev., gold camps, Schulich said the companies are preparing to announce at least three more acquisitions in the near future.

“Our ambition is to build the market capitalization of these three firms from the current level of $400 million to $1.5 billion,” said Schulich who believes that a 5-year head start in the field will make it difficult for competitors.

By itself, Franco-Nevada is expected to generate US$1 billion in pretax cash flow over the next two decades thanks largely to its 4% net smelter return and 5% net profits interest in Barrick’s Goldstrike mine on the Carlin gold trend.

The $7.8 million in revenue reported by Franco-Nevada this year was derived only from the 4% net smelter Goldstrike royalty.

But as production rises to over one million oz. over the next two years and Barrick recovers its capital costs, the net profits interest will kick in and Franco-Nevada’s earnings should jump to $2 a share from 40 cents in the year ended March 31, 1991, Schulich predicted.

Without needing to do any external financing, Franco-Nevada will concentrate on acquiring royalties on properties with less immediate cash flow potential, while Euro-Nevada looks to properties that are closer to the production stage.

In keeping with that philosophy, Euro-Nevada recently purchased royalties in more than 10,000 acres in the Harker-Holloway, Ont., camp close to Barrick’s Holt-McDermott gold mine. As the royalty ground covers Barrick’s soon-to-be-producing Mattawasaga zone, containing two million tons of grade 0.18 oz. gold per ton, the company expects to recoup its investment within two and a half years, according to President Pierre Lassonde.

Over the longer term Euro-Nevada will see at least US$500 million in cash flow from a portfolio of royalties that includes Barrick’s Purple vein discovery on the “north claim block” north of Goldstrike, Lassonde estimates.

According to Lassonde, Barrick recently pulled a 200-ft. intersection averaging 1.5 oz. gold per ton while conducting infill drilling on the Purple vein.

“If management sat back today and put the company on auto-pilot, production from royalty properties held by Euro-Nevada over the next four years would increase earnings to $1.20 per share, from 17 cents this year,” he said.

With Franco-Nevada and Euro-Nevada concentrating on gold, Redstone Resources is assembling a portfolio of royalty investments in uranium, base metals and other minerals. Assuming that nickel trades at US$4 per lb. (compared with US$3.80 on the day of the annual meeting), Redstone expects to report around $1 million in annual income from its 1.7% interest in Falconbridge’s Falcondo ferronickel operation in the Dominican Republic.

Redstone also holds a 2% gross royalty interest in the Midwest uranium deposit in Saskatchewan.