Franco-Nevada's 'Conservative Acquisition' from Newmont Mining

Includes: ALIAF, NEM
by: FP Trading Desk

Since the markets went into meltdown mode in the fall, investors have been wondering how long it will take before gold royalty company Franco-Nevada Corp. starts putting its large cash reserves to work for shareholders.

Toronto-based Franco finally answered the call on Tuesday, striking a deal to buy a 7.29% royalty on the Gold Quarry property in Nevada - controlled by Newmont Mining Corp. (NYSE:NEM) for $103.5-million. The royalty is expected to yield minimum production of more than 11,000 gold royalty ounces a year.

Paradigm Capital analysts Don MacLean and Don Blyth wrote in a note that given the prior relationship between Newmont and Franco, it is fair to assume that Franco management is very familiar with this asset.

They wrote:

The most important aspect of this transaction is this royalty increases Franco's leverage to gold, while also being located on private lands in Nevada, a marquis jurisdiction and an important part of Newmont's investment plan.

At Wellington West Capital Markets, analyst Catherine Gignac called the deal a "conservative" acquisition from a large, known gold mine in Nevada. She did note that Franco could have received better value by buying a royalty from a junior company that is desperate for funds.

She wrote:

We believe the Gold Quarry royalty is a positive first transaction and anticipate management is likely to be actively reviewing global gold situations, perhaps including Anatolia (OTCPK:ALIAF), Andean, Dundee Precious Metals, Greystar, New Gold and Oceana.

She thinks the market is "heavily discounting" Franco's shares because of its exposure to non-gold royalty streams, so this is a step in the right direction.

The Paradigm and Wellington West analysts each have targets on the stock of C$24.00 a share.

Franco still has about $400-million in cash and other facilities to spend, and analysts said that investors will likely continue to focus on what the company will decide to buy next.

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