Gold Royalties Corp. (OTC:GRYCF) has announced that it has entered into an agreement with Franco-Nevada (NYSE:FNV) to sell two of its gold royalty interests - the Eagle and Lynx gold royalties - for a total consideration of $7 million. Here is an overview of the royalties:
The Eagle Royalty: This is a 2% gross smelter royalty that drops to 1% after $1 million has been delivered to Franco-Nevada. It is on Victoria Gold Corp.'s (OTCPK:VITFF) Eagle Gold Project in Yukon, Canada, which contains 2.3 million ounces of gold reserves and will produce 200,000 ounces of gold at $600 cash costs and $729 all-in sustaining costs once in production. With 200,000 ounces of production and a $1,300 gold price, yearly revenue would equal $260 million, and a 1% gross royalty would net Franco-Nevada $2.6 million a year, which is a pretty good return for such a small investment.
While Eagle is permitted, the project requires $430 million in initial capital, which is a huge price tag that Victoria Gold simply does not have since it carries a $37 million market cap with $21 million cash in the bank. So financing risk is the biggest risk here. But I would like to point out that Kinross Gold (NYSE:KGC) owns 16% of Victoria Gold Corp., so a takeover of Victoria Gold by Kinross - a multi-billion dollar gold miner with deep pockets - would be outstanding news for Franco-Nevada. I'm not certain that this will happen, but it is certainly a possibility down the line.
The Lynx Gold Royalty: This is a net smelter return royalty on Victoria Gold's Lynx Zone, which is an exploration property near Dublin Gulch in the Yukon. According to Victoria Gold's website, drilling has returned intersections with grades up to 28.5 g/t gold. However, this project looks very early stage, with no known resource, so it looks like more of a longer-term gamble by Franco-Nevada.
Previously, I argued that Franco-Nevada shares are a buy under $55 as its streaming and royalty business model means the company is essentially a free cash flow machine. With over 370 assets, and 47 currently producing, but 36 advanced stage assets and 153 exploration assets, I argued that Franco-Nevada is in a great position to grow the company because of its highly-scalable business model. After the company makes the initial investment to purchase a royalty, in most cases, no further investment is required. And with its fixed-cost structure, the company is highly leveraged to a rise in the price of gold and other commodities.
I like this move by Franco-Nevada, even though it's a rather small deal for the company. By investing just $7 million - which is just a tiny fraction of the company's $700+ million cash hoard - the company gains two exploration assets that could pay off big down the line, especially if gold rises in price. For example, the Eagle Zone royalty would net Franco-Nevada $2.6 million a year at $1,300 gold, as I previously mentioned. But if gold were to really take off and hit $1,700-$2,000 an ounce, yearly cash flow from the royalty could be as high as $4 million. So ultimately, Franco-Nevada could earn several times its initial investment of $7 million. I like the deal, and I look forward to seeing Franco-Nevada's next move.
Disclosure: The author is long FNV.
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