Andre Larente took a look at what Franco-Nevada Corp. was doing one
day and got an idea. Mr. Larente's company, Diagnos Inc., developed a
technology that allows it to predict drilling targets on a property.
That put him in great demand in the junior mining business.
Mining promoters who had raised millions of dollars in capital but
could not discover any deposits of note were turning to him for help.
He saw how his friend Pierre Lassonde had used cash to buy royalty
stakes for Franco, and a light went off. Mr. Larente realized he could
use his technology to make his own claims on the exploration projects
he was working on, turn around and sell those at a big premium, and
keep a 2% royalty.
Today, Diagnos has collected about 30 royalty stakes on 30 different
properties and that number is growing every month.
"Franco-Nevada buys royalties with cash and I buy royalties with other
people's cash," the Montreal-based entrepreneur says with a laugh.
Founded in 1983, Franco-Nevada disappeared from public view in 2002
went it merged with Denver-based Newmont Mining Corp. Late last year,
the company returned to the public markets with a whopping
$1.3-billion initial public offering, and the mining royalty business
was immediately thrown into the spotlight.
Franco conducted a long road show where it demonstrated the benefits
of the royalty business as a low-risk way to play the resources sector.
Thanks to Franco, the royalty model became a standard practice in the
industry, and that continued even in the years when it was out of the
limelight.
"As a result of the demonstrated success of the royalty model, just
about all property deals now have some sort of royalty connected with
them," says David Harquail, Franco's chief executive.
"So there's more product being created and developed every day. Most
of the exploration plays have royalties written into them from Day 1."
It wasn't always that way. Back in the 1980s, the Franco team faced a
lot of resistance when it first tried selling the royalty concept.
Investors complained royalties were too "passive," in that they
provided no operating control over the mineral assets and less
leverage to the price of gold and other commodities.
It took a long track record of success before people realized
royalties were an ideal way to get lower-risk exposure to the sector.
Today, the last thing many investors want is operating control. Mining
companies are fighting staggering capital cost increases due to
soaring demand for labour and equipment, as well as fuel and power.
The beauty of the royalty model is that it gives investors all the
exposure on the revenue side and none on the cost side.
Franco could not have picked a better time to return to market.
"People are definitely looking for ways to avoid the operating
problems of the miners," says John Doody, editor of
GoldStockAnalyst.com.
"We all went crazy a little while ago when cash costs went into the
US$300 range, and now it seems that US$400 is the new US$300. It's
strange to read about a company putting a project into production with
an average cash cost of US$600 an ounce, but it's happening."
Turmoil in the credit markets is also helping royalty companies.
Financing for mining projects is nowhere near as easy today as it was
a year ago, particularly since many companies have lower share prices
now and do not want to dilute themselves any further. By turning to
the companies such as Franco-Nevada, they can access money without
disappointing shareholders.
Mr. Harquail says he also gets a lot of calls from junior companies
that are looking for an endorsement in the market-place. "They're not
getting enough visibility and would like Franco-Nevada to participate
as sort of a stamp of approval to make it easier for them to get
visibility," he says.
Franco opened the door for a lot of other companies. Royal Gold Inc.
and International Royalty Corp. have followed the Franco model of
collecting resource royalties and have received premium valuations
from the market as a result.
Junior companies such as Euro Ressources SA have also followed the
model, as have entrepreneurs such as Diagnos who saw an opportunity.
Franco's success also paved the way for new and creative approaches to
playing the mining sector, which includes the ever-popular
exchange-traded fund for gold, various commodity funds, and
non-operating companies like Silver Wheaton Corp. With the ongoing
challenges facing the mining sector and no end in sight to high
commodity prices, experts see the popularity of these investment
vehicles only increasing in the future.
"The track record really speaks for itself," Mr. Harquail says. "You
look at ourself, Royal Gold, Silver Wheaton; we all trade at a premium
to the operating companies."
Then there's Diagnos, a company that's still too small to get a big
premium valuation from the market. But Mr. Larente is seeing the
benefits of collecting royalties: His crown jewel is a royalty on the
highly prospective McFauld's Lake region in the James Bay Lowlands,
which he collected from MacDonald Mines Exploration Ltd.
The exploration in that region is still in its very early stages, so
he is nowhere close to collecting money from his royalty. That doesn't
mean it isn't valuable. "We exchanged service fees for it, so in our
books it was maybe $50,000," he says. "I've turned down $1-million for
it."
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