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Franco-Nevada grows but still tied to Nevada

Pierre Lassonde, left, is chairman of the Franco-Nevada Corp. board and is co-founder of the first Franco-Nevada, based in Toronto. With him is David Harquail, chief executive officer of Franco-Nevada, which is roughly 11 years old in its new form. 

Franco-Nevada Corp. is worldwide, but the company still has royalties on gold produced at major mines in Nevada.

“Nevada is our middle name,” said Franco-Nevada CEO David Harquail, who described Nevada’s mining industry as “rock solid. It’s been the bedrock of the gold industry. You can make mines in Nevada you can’t anywhere else.”

He predicts Nevada will continue to be a preferred jurisdiction for the industry. Harquail pointed to Barrick Gold Corp.’s Goldrush and Fourmile projects and Newmont Mining Corp.’s operations as examples of why Nevada will still be a mining stronghold.

Franco-Nevada doesn’t have royalties or assets tied with Barrick’s latest projects, but the company does have a royalty on the South Arturo Mine Barrick operates near the Goldstrike Mine north of Carlin. Barrick is 60 percent owner of South Arturo, and Premier Gold Mines Ltd. owns 40 percent.

The Phase I open pit project and the El Nino underground project at South Arturo are slated to begin production in the second half of 2019.

“We’re very excited about that,” Harquail said in a phone interview.

According to Franco-Nevada’s third-quarter earnings report, additional work is planned at South Arturo to assess the potential of new opportunities that could include a Phase 3 pit and processing of heap leach material from all the pits.

Franco-Nevada’s interests in Nevada also include Barrick’s Goldstrike Mine, Newmont’s Gold Quarry Mine, Kinross Gold Corp.’s Bald Mountain Mine, SSR Mining’s Marigold Mine at Valmy and the Midas, Hollister and Fire Creek underground mines Hecla Mining Co. acquired from Klondex Mines Ltd. in July.

“Nevada’s properties are very promising,” Harquail said. “Great ore bodies keep on giving. Companies want to extend mines long enough to be there for the next commodity upcycle.”

Outside Nevada but in the United States, the company has a royalty interest in New Gold Inc.’s Mesquite Mine in California and the Stillwater platinum mine in Montana.

Franco-Nevada also has royalties on future potential producing properties in Nevada, such as Pinson, a project owned by Osgood Mining Co. LLC and Barrick, Newmont’s Sandman property, and Northern Empire Resource Corp.’s Sterling exploration project near Beatty.

Additionally, U.S. potential producers include Midas Gold Corp.’s Stibnite property in Idaho and Equinox Gold Corp.’s Castle Mountain property in California, and Harquail said Franco-Nevada has interest in 31 “pure exploration properties” in the U.S.

Midas Mine

Franco-Nevada in its earlier form developed the Midas Mine, then called the Ken Snyder Mine, in Elko County with sister company Euro-Nevada that later became part of Franco-Nevada. The first gold pour at Ken Snyder was in December 1998.

Franco-Nevada operated the mine until selling to Normandy Mining Ltd. Normandy took over the mine in August 2001. Then, Newmont acquired both Normandy and Franco-Nevada in February 2002.

When Newmont acquired Franco-Nevada, all the royalties the company held were folded into Newmont, so the current Franco-Nevada is a spinoff from Newmont. The new Franco-Nevada acquired 176 mining royalties from Newmont in December 2007. The initial value of the spinoff was $1.3 billion.

Shares of the new Franco-Nevada began selling in New York at $15.20 and now average roughly $65 a share.

Franco-Nevada is the largest of the royalty/streaming companies with a value of more than $12 billion, followed by Wheaton Precious at $7.6 billion and Royal Gold at $5.18 billion, according to Paradigm Capital.

Harquail and Pierre Lassonde, co-founder with Seymour Schulick of the first Franco-Nevada, stayed with Franco-Nevada through its different incarnations. Lassonde is chairman of the company’s board. Others who were with the first Franco-Nevada and now are at the newer one include the chief financial officer, Sandip Rana.

The company provides financing for projects in turn for royalties on future production or for a revenue stream that gives the company a bargain price for future ounces of gold or silver or platinum.

Companies are leaning more toward streaming now because streaming is better for tax purposes, according to Harquail. Companies want to invest all the money up front for development, so Franco-Nevada provides investment dollars and in turn acquires a revenue stream once production starts.

Harquail said Franco-Nevada provided $1 billion to First Quantum Mines Ltd. for the Cobre Panama copper project in Panama and will buy the gold from the mainly copper mine for roughly $400 an ounce, making an $800 profit per ounce if gold sells at $1,200 per ounce. He said the project has a 30-year mine life.

“It takes us a long time to get our money. We take the risk with the investment. We have to be good at assessing properties,” he said. “We’re long-term investors. We have to take the long view.”

Royalties range from 1 percent to 4 percent on standard properties.

Company’s growth Since Franco-Nevada went public in December 2007, the company has grown to include assets on 51 producing mines, 35 advanced development projects, 208 mineral exploration properties, 58 oil and gas producing operations, and 25 oil and gas exploration projects — for a total of 377 assets, according to a chart with the third-quarter earnings report.

More than half of the assets are in Latin America, and there are a number in Australia and West Africa, as well as some in South Africa and in Mexico, in addition to those in the United States and Canada.

“The key thing is we are diversified in oil and gas. Oklahoma and Texas are new to us, but we stay 80 percent with precious metals,” Harquail said.

Harquail keeps a close eye on the gold price not only because Franco-Nevada focuses on precious metals but because he is chairman of the World Gold Council. He said the price has been “remarkably steady despite higher interest rates and a strong equity markets, but interest in gold is picking up because markets are a little shakier now.

The gold price per ounce is based on the U.S. dollar, and because the U.S. dollar is strong now, the gold price looks lower to the U.S. than in different countries where the currency has a lower value, he said.

“I’m very optimistic about the dollar,” Harquail said.

Franco-Nevada’s third-quarter earnings report showed that the average gold price in the quarter was $1,213 per ounce, compared with $1,278 per ounce in the third quarter of last year.

There were 120,021 gold equivalent ounces sold in the quarter, according to the report. For the quarter, 82.1 percent of revenue came from precious metals. Gold equivalent ounces were higher in the third quarter of last year at 123,787 ounces.

“This is a cyclical business, so what we do is lose as little money as we can in the downturns and enjoy the upturns,” Harquail said.

Third-quarter earnings The third-quarter earnings report showed that the company had net income of $52.1 million, or 28 cents per share, and adjusted net income of $54.6 million, or 29 cents per share, compared with $55.3 million, or 30 cents per share, in the 2017 quarter. Revenue for the third quarter of 2018 totaled $170.6 million, compared with $171.5 million in the 2017 quarter.

Paul Brink, president and chief operating officer of Franco-Nevada, said in the earnings teleconference that this year is a “relatively flat year for revenues, but we’re excited for 2019.” That is when the Panama project begins production, more gold is produced at the Candelaria Mine in Latin America and oil and gas revenues go up.

He said the company has $1.2 billion in available capital and “is looking forward to more acquisitions on the precious metals side.” Brink said, however, those depend on the market, although there may be opportunities for midsize transactions.

The company sees “tremendous opportunities in oil and gas” and would like to take advantage of those opportunities while still trying to keep the balance of 80 percent metals to 20 percent oil and gas, Brink said.

Haquail said Franco-Nevada has increased dividends each year since going public nearly 11 years ago, and the dividends declared so far this year are more than $180 million.

“We can do this because royalties is a truly cash-flow business. We participate at the revenue line and are not impacted by cost inflation or capital calls. It is a high margin business, so we make cash flow even at the bottom of the cycle,” he said.

Franco-Nevada has 32 employees, with the main office in Toronto, a small office in Highland Ranch, Colo., an office in Australia and an office in Barbados to cover Latin America.

“I think we win the prize for the most market value per employee,” Harquail said, commenting that Franco-Nevada comes in third behind Newmont and Barrick in market value as a gold company.

Franco-Nevada is active in mining associations in the U.S. and Canada and teaching programs, he said.

“Nevada’s properties are very promising. Great ore bodies keep on giving. Companies want to extend mines long enough to be there for the next commodity upcycle.” — David Harquail, Franco-Nevada CEO

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