By Andrew Willis
Franco-Nevada (FNNVF.PK ) is attempting a bit of financial alchemy, attempting to keep a premium valuation as a gold play while making an acquisition that adds base metals to its mix of revenues.
Franco-Nevada, mining’s dominant royalty financier, is in the early stages of a $640 million hostile bid for smaller rival International Royalty Corp (ROY).
While this deal has a long way to go before the closing party, what Franco-Nevada wants, it is likely to get. The buyer has deep pockets, and International Royalty has been a laggard performer. And there’s little chance a white knight comes charging in, as Wellington West Capital Markets analyst Paolo Lostritto said in a report Monday: “Due to the scarcity of players interested in base-metal and precious metal royalty streams, we believe in a minimal probability for a competing bid.”
However, if it does win the day, Franco-Nevada will lose some of its lustre as a play on rising gold prices, something that will weigh on the stock price and may prompt the sale of stakes in some of International Royalty’s base metal royalties. Mr. Lostritto calculates that if the acquisition does go forward, “we expect the base metal contribution of Franco-Nevada’s net asset value to double on a percentage basis to 26% from 13%.”
Look for Franco-Nevada brass to stress that gold is still the corporate focus, even though the company will have more exposure to base metals if the International Royalty acquisition is successful.
“While the proposed acquisition is expected to reduce the relative percentage of gold revenues in the near-term due to cash flows from Voisey’s Bay (nickel, copper, cobalt) and Las Cruces (copper), the company’s growth continues to be predominantly focused on gold through royalties such as Pascua-Lama, Ahafo and Detour Lake,” said Wellington West’s Mr. Lostritto analyst.