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TABLE OF CONTENTS Aug 20 - 26, 2012 Volume 98 Number 27 - 0 comments

Royalty, streaming companies blossom

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By: Matthew Keevil
VANCOUVER 2012-08-20

When equity and debt markets freeze up, cash-hungry mine developers are forced to find alternate financing options. And that means business is looking good for those in the precious metal streaming and royalty game.

Big-time players like Royal Gold (RGL-T, RGLD-Q) and Silver Wheaton (SLW-T, SLW-N) — plus up-and-comers like Sandstorm Gold (SSL-V) — can’t seem to stop breaking financial records, and signing new precious metal deals with emerging developers and veteran producers alike.

For the business model to bear fruit, royalty and streaming companies need abundant cash. Industry giant Franco-Nevada (FNV-T, FNV-N) revealed in its second-quarter financials that it is sitting on more than US$1 billion in working capital, and has no debt.

The company anticipates revenues in the US$430-million to US$460-million range this year, and it has US$987 million cash-in-hand, US$95 million in marketable securities and an undrawn US$175-million revolving credit line. Franco-Nevada has generated a 23% return for shareholders over the past 52 weeks, rising $9.12 and hitting a yearly high of $49.71 per share.

Franco-Nevada should see continued growth from its 50% gold stream in Coeur d’Alene Mines’ (CDM-T, CDE-N) Palmarejo silver-gold operation in Chihuahua, Mexico, which is expected to produce more than 100,000 oz. gold this year. The company also holds interests in promising advanced-stage precious metal projects, including Detour Gold’s (DGC-T) flagship Detour Lake gold project in northern Ontario, where Franco-Nevada holds a 2% net smelter royalty return (NSR) on all current mineral resources.

CIBC World Markets analyst Cosmos Chiu maintains a “sector outperform” rating on Franco-Nevada, with a $55-per-share price target over the next 12 to 18 months.

“We believe Franco-Nevada will continue to grow its net asset value both organically and through acquisitions, where recent market conditions have been tough on mining companies and their ability to gain financing,” Chiu writes in a June research update. “One push-back from investors on Franco-Nevada has always been that the shares are expensive. We disagree with that assessment, but rather would argue that the share price outperformance reflects Franco-Nevada’s ability to generate shareholder value.”

Another heavy hitter on the gold side is Royal Gold, which announced it recorded royalty revenue of US$263 million during the 2012 fiscal year ending June 30. This marked the eleventh consecutive year of record revenue and cash flow for the company, which had a capital surplus of US$430 million at the end of June.

In early August, Royal Gold negotiated an additional 12.25% in future gold production from Thompson Creek Metals’ (TCM-T, TC-N) Mt. Milligan copper-gold project in northern B.C. The deal increased Royal Gold’s financial commitment to US$782 million, giving the company a 52.25% stake in proven and probable gold reserves totalling 482 million tonnes, averaging 0.4 gram per tonne for 6 million contained oz. gold.

Royal Gold’s shares have jumped 26%, or $15.96 since May, nearing 52-week highs of $82.29 in early June and sitting at $76.21 at presstime. Chiu, who also covers Royal Gold for CIBC World Markets, maintains a “sector perform” rating on the company with an $85 target price over the next 12 to 18 months. He cites Royal Gold’s 2.0% NSR on Goldcorp’s (G-T, GG-N) Penasquito gold-silver-lead-zinc mine in Zacatecas, Mexico, as a main driver over the mid- to long-term.

When it comes to silver streams, there isn’t a bigger industry player than Silver Wheaton. The company’s growth over the past two years has been pronounced, with shares rising 57%, or $10.96, and hitting highs of $42.49. Silver Wheaton boasts a $10.7-billion market capitalization and it generated US$770 million in revenue over the past 12 months. During the first quarter the company broke its quarterly record by posting US$200 million in revenue, with operating cash flows jumping 29% year-on-year to US$164 million.

On Aug. 8 Silver Wheaton announced acquiring life-of-mine gold-silver streams from Hudbay Minerals (HBM-T, HBM-N) that include Hudbay’s flagship gold-silver-copper-zinc 777 mine in Manitoba, and Constancia copper-silver-molybdenum development in Peru. In a deal worth U$750 million, Silver Wheaton acquired 100% silver production from the 777 mine and Constancia. The total implied price works out to $18.75 per equivalent oz. silver, with average annual silver production at 777 sitting at 4.2 million equivalent oz. silver.

Canaccord Genuity analyst Steven Butler maintains a US$37.50 price target on Silver Wheaton and a “buy” recommendation. The company rose 6%, or $1.63 in the two trading sessions following the Hudbay acquisition, closing at $30.31 on Aug. 9.

“We view the deal as positive, as we believe it is fairly priced and provides immediate cash flow, supports dividend growth and increases the company’s leverage to gold and silver prices,” Butler writes in an Aug. 8 research update. “It is also an indication that there remain opportunities for Silver Wheaton to enter into accretive silver-stream deals.”

The rising-star award in stream financing has to go to Sandstorm Gold (SSL-V), an outfit that has been on a meteoric trajectory over the past two years under the stewardship of president and CEO Nolan Watson, the former chief financial officer at Silver Wheaton.

Sandstorm has posted an aggressive, 213% valuation gain for its shareholders since the beginning of 2010, with share prices leaping $6.27 en route to an all-time high of $9.30 per share. The company posted consecutive record quarters over the first half of 2012, selling 9,259 oz. gold during the second quarter and posting cash flows of US$11.3 million. Based on gold-streaming agreements, Sandstorm expects attributable production to fall between 28,000 and 33,000 oz. gold this year.

The company acquired three  royalty streams during the second quarter, including: a 2.4% NSR on the Mt. Hamilton gold project in Nevada — owned by Solitario Exploration & Royalty (SLR-T, XPL-X) and Ely Gold (ELY-V) — for US$10 million; as well as a 2.5% NSR on the Coringa gold project, and 1% NSR on the Cuiu Cuiu gold project for US$7.5 million. Both are in Brazil and owned by Magellan Minerals (MNM-V).

Canaccord Genuity analyst Nicholas Campbell maintains a “speculative buy” recommendation on Sandstorm and a $12 price target. At the end of June, the company reported US$25.2 million in working capital, as well as US$50 million available under a revolving credit facility.

“With available cash and quarterly operating cash flow in excess of US$10 million, Sandstorm appears to be in a strong position to continue to grow through acquisition,” Campbell writes in a July 30 research update. “We expect production to increase to 55,000 oz. with the Bracemac-McLeod and Bachelor Lake mines coming online, and Aurizona and Black Fox mine increasing production.”

Toronto-based developer Inmet Mining (IMN-T) is financing its US$7-billion Cobre Panama copper-gold-silver project in Panama, which could create an opportunity for royalty and stream players. Inmet intends to raise US$1 billion by selling precious metal streams from the mine.

President and CEO Jochen Tilk told The Globe and Mail on July 31 that an agreement could be reached as early as the third quarter on stream financing. Potentially up for grabs will be Inmet’s 80% share of gold and silver resources at Cobre Panama, which total 2.3 billion tonnes grading 0.07 gram gold and 1.4 grams silver, for 5.2 million contained oz. gold and 104 million contained oz. silver.



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