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.
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.
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.