Royalty sale a windfall for Premier Gold

It’s not every day that an exploration-and-development company can turn a US$35-million profit in just 14 months with what appears to be little effort.

But that’s exactly what Premier Gold Mines (PG-T) seems to have done by spinning off a company in late 2011 called Premier Royalty (NSR-T), and then selling its block in the subsidiary to Sandstorm Gold (SSL-V, SAND-X) for US$70-million worth of Sandstorm stock.

President and CEO Ewan Downie says he got the idea for a royalty company when Premier Gold acquired a private company called Saddle Gold in June 2010. The acquisition — which cost Premier Gold US$36 million, including Saddle Gold’s debt of US$12 million — came with the Saddle Gold deposit and a 1.5% production royalty on Newmont Mining’s (NMC-T, NEM-N) Emigrant Springs deposit, both in Nevada’s Carlin Trend in Elko County. (Emigrant Springs entered production in the fourth quarter of 2012.)

Premier Royalty went on to grow its portfolio of projects in the Carlin Trend, in Canada’s Red Lake gold camp and elsewhere around the world. Today the company owns a 1% net smelter return royalty on the new Thunder Creek deposit of the Timmins West mine operated by Lake Shore Gold (LSG-T) in Timmins, Ont.; a 1% NSR on the Buffelsfontein mine operated by Village Main Reef in South Africa; a 1% NSR on the Mine Waste Solutions tailings processing facility run by AngloGold Ashanti (AU-N) in South Africa; and a 1% NSR on the Gualcamayo mine in Argentina’s San Juan province, which started production in 2010 and is operated by Yamana Gold (YRI-T, AUY-N).

Under Sandstorm’s all-share deal with Premier Gold, the streaming company will acquire 33.7 million shares and 6.97 million warrants of Premier Royalty, which represents all of Premier Gold’s interest in the company.

Each unit of Premier Royalty — consisting of a common share and 0.207 of a warrant — will be transferred to Sandstorm at a price of $2.10 per unit, or US$70.7 million in total. Sandstorm is offering Premier Gold a six-month credit facility of up to US$70 million at a 0.3% interest rate. The agreement  contains an attractive top-up agreement: if within the next 18 months Sandstorm acquires 100% of the remaining issued and outstanding securities of Premier Royalty at a higher per-unit price than it paid for Premier Gold’s block of shares, it will have to pay Premier Gold the difference. Premier Royalty’s other shareholders include Bridgeport Ventures (BPV-T), the second-largest shareholder behind Premier Gold’s 53%, and global resource investment corporation and merchant bank Aberdeen International (AAB-T).

“The top-up agreement was key,” Downie says in a telephone interview from his office in Thunder Bay. “We get additional value in the event that [Premier Royalty] is taken over. I guess our hope is that Premier Royalty goes for a big premium . . . I don’t think we’d be upset if we saw that happen.”

In the meantime, Downie says, he will remain on Premier Royalty’s board and hopes to help the company’s president and CEO Abraham Drost grow the business over the years to come. “Premier Royalty and Sandstorm have the opportunity to complement each other,” he says. “Sandstorm appears to want to become more of a streaming company and Premier Royalty was set up as primarily a royalty company, so I see the potential for both companies working together to grow both of their businesses.”

Downie says that when Premier Gold set up the royalty subsidiary, management believed it would be a shareholder for a longer period of time. But with the premium to the share price Sandstorm was offering, the board thought it was better than selling the stock in big chunks over the long-term.

“If we were bleeding shares out every day in the open market, it would put a perceived cap on the stock over an extended period,” Downie says. “So selling the shares all in one block was a way of securing a strong gain for our company while not having that constant ‘sell’ order in the market, which could negatively affect Premier Royalty over the long-term.”
Now Premier Gold is cashed up to fund its own projects, and if the right opportunity comes up, Downie says, it wants to be able to react.

“We have a pretty significant portfolio of advanced-stage projects, and in this market there aren’t too many companies sitting on $150 million in cash and investments,” he says, noting that US$85 million of that number is cash. “I’m not going to say we’re going to make moves, but we’re always looking at consolidating land in the areas where we’re working, and we’re in a pretty good financial position to do that.”

“These markets do breathe opportunity, in my opinion,” he adds. “The one positive I’ve always seen when share prices get hit in bad markets like these is that there is often opportunity to acquire projects coming out of the woodwork.”

Downie points out that it was in the heart of the financial crunch of December 2008 that Premier Gold picked up its TransCanada project from Barrick Gold (ABX-T, ABX-N), and it was the current market environment that allowed it to buy the high-grade Cove Gold project in Nevada from Victoria Gold (VIT-V) in April last year for US$28 million.

Cove Gold could become a flagship property for Premier Gold. The Cove deposit was mined primarily by open pit between 1987 and 2001 — producing 2.6 million oz. gold and 103 million oz. silver — and the 69.7 sq. km property has seen little surface exploration away from the Cove pit. The project’s Helen zone deposit has an additional inferred resource of 231,300 contained oz. gold at an average grade of 20.23 grams gold per tonne.

As for where the gold price is headed, Downie believes it has nowhere to go but up. “A lot of speculative money is sitting on the sidelines right now, and it’s going to have to take a sentiment change in the market, but I still believe we’re going to have a big year for gold in 2013,” he says. “I wouldn’t be surprised to see it at some point this year touching the US$2,000 per oz. mark. Maybe we’ll see some money coming back into the market, and a company like ours with a lot of cash and advanced-stage projects can capitalize on the gold price.”