Franco takes for sale sign off Goldstrike royalty bet

Toronto-based Franco-Nevada Mining (TSE) has taken the For Sale sign off its Goldstrike royalty asset. Priced at $180 million, Franco- Nevad a’s 4% net smelter return and 5% net profit royalty in American Barrick’s Gold strike gold mine in Nevada has proved too expensive for prospective buyers. “We received a number of creative ideas but we couldn’t get the kind of cash premium that we wanted,” said Bill White, senior vice-president corporate finance at Merrill Lynch in Toronto.

Hired to sell the asset which is sitting on a substantial portion of Barrick’s 15 million oz in-situ gold reserves, White was asking prospective buyers to pay $15 per share for 12 million Franco-Nevada shares. But that represents a 53% premium on Franco-Nevada’s current trading price and it proved too much for the 25 companies (including Corona Corp. (TSE)) who made enquiries.

Although White regards Franco- Nevada as a cash cow capable of generating $35 million in cash flow by 1992, analysts say the company’s lack of control over Barrick’s production plans creates a certain amount of uncertainty as to the timing and rate of return.

In a bid to accelerate its Goldstrike production rate from 115,000 oz this year to a minimum 500,000 oz in the early 1990s, Barrick is planning to construct a mega open pit. But the details won’t be available until November.

“Buyers aren’t going to lay money out until a final feasibility study is available at Goldstrike,” Franco-Nevada Chairman Seymour Schulich told The Northern Miner.

Meanwhile, Schulich, partner Pierre Lassonde and a third partner have taken steps to increase their control of Franco-Nevada from 15% by agreeing to buy a block of 1.8 million Franco-Nevada shares from Corona Corp., for $9 per share.

Of those shares, Franco-Nevada intends to buy 980,001, while the remaining 820,000 are being acquired by management.

The agreement is subject to completion of a 20,000 oz ($10.5 million) gold loan arrangement with the Chase Manhattan Bank. In addition, under Ontario Securities Commission rules, the agreement is also subject to the Franco-Nevada issue trading at within 85% of the $9 per share purchase price, during a 20-day period prior to closing. At press time the issue was trading at $7 on The Toronto Stock Exchange. Franco-Nevada is required to pay Corona any profits made on the shares if they are resold within 12 months of the closing date.

When the deal is closed later this year, Shulich, Lassonde and a third party will control 30% of Franco- Nevada’s 12 million outstanding shares.

According to Schulich, management will eventually attempt to increase its ownership in the company to about 37%. “We hope to bring the number of outstanding shares down to about nine million,” he said.