MINER DETAILS; Making royalties look easy

Mining can be a pretty terrible business. When commodity prices are up, companies make huge capital investments to develop a mineral deposit. The metal price inevitably falls and the company must suffer through years with a paltry return on investment — if any — until prices go up again.

So when would-be mining entrepreneurs are discussing some long-term, high-risk investment, they must look with envy on a group of Canadian companies that have been able to skim the cream from some of the world’s best orebodies and never have to move a ton of rock.

Yet the royalty companies that manage to do just that — Franco-Nevada, Euro-Nevada and Redstone Resources — still have no serious competitors. Redstone, for example, was able to buy a 4% royalty interest in Falcondo, the Falconbridge nickel subsidiary in the Dominican Republic, for about US$1.20 per lb. of produced nickel. Falconbridge wrote off its investment in the mine long ago, and it’s taken 20 years to make a payback. But the orebody is still a good one.

The latest coup for Franco-Nevada was getting royalty on the Ivanhoe project in Nevada’s Carlin area. Production on the property is small, but there’s potential for finding deep-seated orebodies similar to others in the area. Franco picked up the royalty from under the nose of Newmont Mining which was just completing a deal to buy 75% of the project from Galactic and Cornucopia Resources.

Franco had been working on the royalty for a year and had been to visit U.S. Steel, which owned the royalty, at its offices in Pittsburgh. U.S. Steel apparently had little idea of what is going on in Nevada, probably had no idea it had the royalty among its 1,500 others and, besides, would rather have some cash.

The Newmont-Galactic deal closed March 24. On March 25 Franco announced that it had picked up the 5% net smelter royalty.

What it takes in the royalty business is patience and cash. Franco has that thanks to a clean balance sheet and its “foundation” royalty in Nevada’s Goldstrike mine, perhaps the biggest gold producer in the 1990s. “If we do nothing, we’ll do fabulously well,” says Pierre Lassonde, president of Franco and Euro. “Anything we do now has to enhance that value.”

After a recent trip, Lassonde is bullish on the demand for copper and nickel in the Far East. “Copper has absorbed all the fibre optics substitution. Future demand will be from Asia’s need for things like rapid transit systems and air conditioning.”

So what is Lassonde looking at these days? Believe it or not, copper royalties in British Columbia. That should try even his companies’ resources.