Franco-Nevada buys VBN shares, grabs 9.6% of Aber

Having gained a seat at the table with an earlier purchase, Franco-Nevada Mining (FN-T) has cleared more elbow room for itself by buying additional Inco (n-t) Voisey’s Bay Nickel shares.

With the purchase of the 3 million VBN shares owned by Teck (TEK-T), the company has increased its holding to 9.6 million shares, or about 37% of the outstanding capital. VBN shares, created as part of Inco’s takeover of Diamond Fields Resources, receive 25% of the Voisey’s Bay project’s unallocated cash flow.

Teck receives $30 million for the shares but will take a $18-million charge against 1998 earnings to reflect the loss on its VBN holdings. A statement from Norman Keevil, president of Teck, said the deposit was “an exceptional one” but that Teck did not see its VBN shares as a core asset and had better things to do with its capital.

Teck still sold its holding more dearly than two other investors. Franco-Nevada’s first block of VBN shares was acquired for $7.61 a share, when Diamond Fields promoter Robert Friedland sold his 3.6 million shares, and two funds managed by Robertson Stephens Investment Management sold Franco a further 3 million (T.N.M., Oct. 26/98).

Franco’s holding represents a 9.25% net profit interest in the Labrador nickel project, which is currently held up by differences between Inco and the Newfoundland government. Inco is proposing a mine and mill at Voisey’s Bay that would ship concentrate to its Sudbury and Thompson smelters; the government insists it will not grant a lease unless Inco commits to building a smelter and refinery in the province, an option it could enforce using provisions in the province’s recently amended Mineral Act.

Inco insists its feasibility studies have shown that a new smelter and refinery would not be economic for the known reserve at Voisey’s Bay. There is a widely held expectation that Inco will take a writedown on the asset when it releases its 1998 financial statements in early February.

Premier Brian Tobin is recommending that Inco write down the value of the project, which cost $4.3 billion to acquire. This position is at slight variance with statements the premier made in July 1998, in which he described the Voisey’s deposit as “the most exciting nickel, copper and cobalt deposit on the planet.”

Another sign that Franco-Nevada is finding things for its cash to do in the depressed market came with the announcement that the company had bought a 9.6% stake in diamond developer Aber Resources (ABZ-T) for $41 million. Aber holds 40% of the Diavik diamond project, in the Northwest Territories, which is currently in environmental assessment. Aber’s partner, Rio Tinto (RTP-N), is scheduled to complete a final feasibility study on development of Diavik before mid-year. The company’s announcement of the purchase described the stake as a pure investment, but Chairman Seymour Schulich said it could potentially be swapped for a royalty interest later.

Franco-Nevada’s showpiece Ken Snyder gold mine, in Nevada, a joint venture with affiliated company Euro-Nevada Mining (en-t), officially entered commercial production in late January, 11 months from the start of construction. Underground development was finished in December 1998, following which the operation was turned over to the mine contractor, Dynatec.

Reserves at Snyder have increased 36% and now stand at 2.7 million tons grading 1.12 oz. gold and 12.82 oz. silver per ton (2.5 million tonnes at 38.4 grams gold and 440 grams silver per tonne). A US$5.9-million exploration budget has paid off in the form of a larger resource figure for the whole project.

Meanwhile, near-neighbor Romarco Minerals (R-T) has had further exploration success at its Jake Creek project, 15 km west of Snyder. There, Romarco is earning a 51% interest from Echo Bay Mines (ECO-T) by funding and operating a reverse-circulation drilling program.

Two of 12 holes drilled in the current phase of work intersected significant gold mineralization. Hole JK-14, about 750 ft. (230 metres) along strike from an earlier intersection to the south, returned an average gold grade of 0.20 oz. per ton over 15 ft. (6.7 grams per tonne over 4.6 metres), which the company believes could indicate a significant extension of a known mineralized structure.

Hole JK-12, about 300 ft. (90 metres) east in the hangingwall of the same structure, intersected 10 ft. grading 0.31 oz. per ton (3 metres grading 10.7 grams), on a structure believed to strike eastward across the known mineralized zone.

A third hole, JK-07C, intersected a 5-ft. length grading 0.04 oz.; in four more holes, gold grades were below 0.02 oz. (0.7 gram); and two holes were abandoned when drilling conditions proved to be poor. Four other holes missed expected intersections with the known north-striking fracture system, indicating the structure may be offset by faulting. Romarco has proposed to its shareholders that it buy back 5 million shares (about 19% of its capitalization). The offer price is $2.10, or $2 plus a warrant to purchase one share at $2 for two years.