Franco-Nevada Goes After International Royalty

Gold-focused royalty company Franco-Nevada (FNV-T) is planning a $640-million cash bid for its smaller peer, International Royalty (IRC-T, ROY-X).

At presstime, Franco-Nevada said it would put out a circular with all the details of the $6.75- per-share offer within days.

Until then, Franco-Nevada president David Harquail said he could not elaborate on the forthcoming offer.

“We are really in a sensitive period right now,” Harquail said in an interview.

International Royalty’s shares shot up about 50% to $7.05 on a trading volume of 14.1 million shares on Monday, Dec. 7; the deal was announced the previous night.

The offer is a 54% premium to International Royalty’s 20-day volume- weighted average trading price on the TSX for the period ending Dec. 4 and a 43% premium to the closing price on that date.

International Royalty reported it had received notice from Franco-Nevada that an offer would be coming in the mail soon; the company said it was already seeking advice from legal and financial experts.

“(International Royalty)’s board of directors will be meeting with its legal and financial advisers to consider an appropriate response to Franco-Nevada,” the company said in a statement.

Much of International Royalty’s revenue comes from nickel royalties but that will change once Barrick Gold’s (ABX-T, ABX-N) 18- million-oz. Pascua Lama gold project, which straddles the border of Chile and Argentina, reaches production in 2013. International Royalty has a 0.473- 3.15% sliding-scale royalty on the Chilean portion of the deposit. The royalty will likely add US$20 million in annual revenue.

If its offer for International Royalty is accepted, Franco-Nevada would gain 84 royalties, including the contentious 2.7% net smelter return royalty (NSR) on Vale’s (VALE-N) Voisey’s Bay nickel mine in Labrador.

In November, International Royalty and Altius Minerals (ALS-T) which owns 9.4% of International Royalty filed a claim in the Supreme Court of Labrador that accused Vale of underpaying its royalties. The companies claim they have been shortchanged by more than US$26 million.

Harquail says the lawsuit had some impact in its valuation of International Royalty but wouldn’t comment on the lawsuit specifically.

“We look at all the aspects of the company when you put a total value on it,” Harquail says. “But I can’t make a comment on the details.”

International Royalty also holds a 1.5% NSR on Inmet Mining’s (IMN-T) Las Cruces copper project in Spain and a 1.5% NSR on about 3 million acres of gold lands in Western Australia.

Franco-Nevada has more than 300 royalties, mostly in gold, but also in platinum group metals and oil and gas. In its third-quarter report released in early December, Franco-Nevada reported it had US$769 million in available capital as of Sept. 30, including a US$150- million credit facility.

Since the end of September, the company has acquired three other new royalties: a 2% royalty on Newmont Mining’s (NMC-T, NEM-N) Ahafo South gold mine in Ghana for $58 million; a 2.5-5% royalty on Goldcorp’s (G-T, GG-N) Marigold mine in Nevada for $20 million; and a 0.375% royalty on BHP Billiton’s (BHP-N, BLT-L) Mt. Keith nickel project in Western Australia for A$20 million.

Harquail says the company is in excellent shape going forward because it has strong cash flow and no debt.

“We will still have net cash on our balance sheet and no debt,” he says. “We are going to be in a very strong position and will have available credit facilities that will be unused to do transactions that will continue to generate cash for further deals.”

Harquail also points out that the company’s existing assets are also growing.

“Our gold revenues will continue to grow for the next four to five years if we do nothing more.”

Franco-Nevada shares fell 7%, or $1.99 on the Dec. 7 to $26.18 on a trading volume of 1.4 million shares. The company has a market cap of about $2.9 billion.