Franco-Nevada goes after International Royalty

Gold-focused royalty company, Franco-Nevada (FNV-T), is planning a $640-million cash bid for its smaller rival, International Royalty (IRC-T, ROY-X).

Franco-Nevada will put out a circular with all the details of the $6.75-per-share offer early next week.

At press time, Franco-Nevada president, David Harquail, could not elaborate on the forthcoming offer.

“We are really in a sensitive period right now,” Harquail said in an interview.

International Royalty’s shares shot up about 50% to $7.05 on a trading volume of 14.1 million shares today; the deal was announced on Sunday night.

The offer is a 54% premium to International Royalty’s 20-day volume weighted average trading price on the TSX for the period ending Dec. 4 and a 43% premium to the closing price on that date.

International Royalty reported that it had received notice from Franco-Nevada that an offer would be coming in the mail soon, and said that it was already seeking advice from legal and financial experts.

“IRC’s board of directors will be meeting with its legal and financial advisors to consider an appropriate response to Franco-Nevada,” the company said in a statement.

Much of International Royalty’s revenue comes from nickel royalties but that will change once Barrick Gold‘s (ABX-T, ABX-N) 18-million-oz. Pascua Lama gold project, which straddles the borders of Chile and Argentina, reaches production in 2013. International Royalty has a 0.473%-3.15% sliding scale royalty on the Chilean portion of the deposit. The royalty will add US$20 million in annual revenue.

If the International-Royalty offer is accepted, Franco-Nevada will gain 84 royalties including the contentious 2.7% NSR on the Vale’s Voisey’s Bay mine in Labrador.

In November, International Royalty and Altius Minerals (ALS-T, ATUSF-O) filed a claim in the Supreme Court of Labrador that accused Vale (VALE-N) of underpaying its royalties. The companies claim they have been shortchanged by more than US$26 million.

Harquail said the lawsuit had some impact in its valuation of International Royalty but couldn’t comment on the lawsuit, specifically.

“We look at all the aspects of the company when you put a total value on it,” Harquail said. “But I can’t make a comment on the details.”

International Royalty also holds a 1.5% NSR on Inmet Mining‘s (IMN-T)Las Cruces copper project in Spain and a 1.5% NSR on about 3 million acres of gold lands in Western Australia.

Franco-Nevada has more than 300 royalties, mostly in gold, but also in platinum group metals and oil and gas.

Franco-Nevada reported having US$769 million in available capital as of Sept. 30, 2009, including a US$150-million credit facility, in its third quarter report released in early December.

Since the end of September, the company has acquired three other new royalties: a 2% royalty on Newmont Mining‘s (NMC-T, NEM-N) Ahafo South mine in Ghana for $58 million; a 2.5-5% royalty on Goldcorp‘s (G-T, GG-N) Marigold mine in Nevada for $20 million; and a 0.375% royalty on BHP Billiton‘s (BHP-N, BLT-L) Mt. Keith nickel project in Western Australia for A$20 million.

Harquail said the company is in excellent shape going forward because it has strong cash flow and no debt.

“We will still have net cash on our balance sheet and no debt,” he said. “We are going to be in a very strong position and will have available credit facilities that will be unused to do transaction that will continue to generate cash for further deals.”

Harquail also pointed out that the assets it has right now are growing.

“Our gold revenues will continue to grow for the next four to five years if we do nothing more,” he said.

Franco-Nevada shares fell 7%, or $1.99 today to $26.18 on a trading volume of 1.4 million shares. The company has a market cap of about $2.9 billion.