Franco trades mine for 20% of Normandy

A market that was plainly awaiting a merger announcement may have been nonplussed, but Franco-Nevada Mining (FN-T) has agreed to exchange the Ken Snyder mine, the Midas property and Australian assets for 446.1 million shares in Normandy Mining (NDY-T), Australia’s largest gold producer.

The transaction gives Franco a 19.9% interest in Normandy and a seat on the board of directors, which will be taken up by president Pierre Lassonde. Both companies have granted each other preferential rights on future asset transactions. Franco’s shares are immediately free-trading.

Franco also puts in US$48 million in cash, which is being applied directly to Normandy’s debt. The cash infusion — roughly A$100 million — leaves Normandy, which had amassed significant debt in its 2000 acquisition of Joseph Gutnick’s Great Central Mines, with A$1.5 billion in debt and A$1.3 billion in net debt.

The market gave the deal a chilly reception, with Franco shares trading as low as $15.50 on April 3. They closed at $16.94, off 80, on a volume of almost 1.7 million. At presstime, the price had rebounded to $17.25, still off the $17.74 close before the announcement.

Normandy’s depository shares (10-share blocks traded on the Toronto Stock Exchange) bounced off the $7 level and were trading at $7.25 at presstime.

The boards of the companies have approved the deal, but Normandy will require shareholder approval for it to close. That closing is expected at the end of May, and Normandy expects to mail an information package to shareholders by mid-April and call a meeting for May 23. Regulatory approvals are still needed, including that of the Australian Foreign Investment Review Board.

Normandy gets ownership of the Ken Snyder gold mine, in northern Nevada, which produced 216,000 oz. gold and 2.1 million oz. silver over the year ended March 31. Proven and probable reserves at Ken Snyder are estimated at 3 million tonnes grading 21.6 grams gold and 266 grams silver per tonne. The figure, based on a cutoff grade of US$75 per tonne (gross value), effectively values the gold reserves at US$300 per oz. and silver reserves at US$6 per oz.

Franco keeps a net smelter return royalty (NSR) on production from Ken Snyder and the adjacent Midas properties, a 105-sq.-km land package at the northern end of the Carlin trend that is also part of the deal. The royalty starts at 5% but increases at gold prices over US$300 per oz., to a maximum of 10% if the price exceeds US$400.

Normandy also gets Franco’s Australian interests. Franco holds a 1-to-10% sliding NSR on the Henty gold mine in Tasmania, operated by Sydney-based Goldfields and a 1%-4% NSR in Newcrest Mining’s New Celebration-Mt. Marion gold operation in Western Australia. It also holds a 2.25% interest in the dormant Browns Creek gold mine, in New South Wales, where operator Durban Roodepoort Deep (drooy-q) suspended production after the mine flooded in early 2000.

Franco-Nevada has been casting about for partners for well over a year. A merger deal with South African house Gold Fields (GOLD-Q), announced in June 2000, fell through three months later, when the South African ministry of finance refused approval that was required under the country’s exchange-control laws. Franco, which had cash and short-term assets (including gold) of $959 million (US$611 million) at the end of December 2000, will still have a substantial treasury once the Normandy transaction closes and will presumably still be looking for other opportunities.

One contrast in the deal is between Normandy, which tends to prefer control and operation of its projects, and Franco, which has traditionally taken on minority interests, leaving other companies to operate the mines. Snyder is currently being contract-mined by Dynatec (dy-t) and had a cash operating cost of US$98 per oz. in 2000; cash operating costs for the year to date have been estimated at US$113.

Paul Dowd, operations chief at Normandy, says the company will review the option of operating Snyder directly. “We would like to think we could engineer those costs even lower,” he says.

Dowd adds that Normandy, which has tended to value its reserves and resources at a conservative US$250 per oz., is unlikely to see much of a difference in the Snyder reserve figure if the values are moved down to meet those of other Normandy operations. “The ore is either in or out of the reserve,” he says. “Small changes in the price of gold make very little difference.”

Another contrast in the deal is between Normandy, which has about 60% of its reserves hedged, and Franco, a philosophical non-hedger, but Normandy management is making little of the difference in philosophies. Normandy’s current hedge book has a negative mark-to-market value, but its hedging counterparties do not have the right to make margin calls. Snyder’s operating margin is high enough that hedging may not be an attractive option in any event.