Terraco Gold - Royalty Explained

“Each time history repeats itself, the price goes up.” 
--- Ronald Wright 

Royalty - the right to receive a percentage or other denomination of mineral production from a resource extraction operation. 

Net Smelter Return (“NSR”) Royalty - a defined percentage of the gross revenue from a resource extraction operation, less a proportionate share of incidental transportation, insurance, refining and smelting costs.

Franco-Nevada

 

" Franco-Nevada initially began trading as a public gold exploration company in 1983 with no real success. In 1995 Franco-Nevada executives Seymour Schulich and Pierre Lassonde made the decision to focus on investing in royalties. At the time, oil and gas royalty ownership—but not gold royalty ownership—was an established business strategy. In 1985 Franco-Nevada raised $930,000 to purchase gold royalties in a follow-on offering. The company made its first royalty investment in 1986, spending half the corporate treasury ($2 million) to acquire 4% of revenues from a mine in Nevada owned by Western States Minerals. The mine had an annual production of 44,000 ounces of gold. Franco-Nevada assumed that known reserves would allow the royalty to pay for itself regardless of additional exploration results. By 2002 the property generated $23 million annually for Franco-Nevada.


In April 2001, Franco-Nevada sold the Nevada Midas mine, its only wholly owned mine, to Normandy Mining in exchange for 20% of the Normandy and a five-percent royalty on the mine. That September, Anglo Gold made a bid for Normandy at a valuation 60% greater than Franco-Nevada's acquisition cost. Seeing the potential to take advantage of Newmont's rivalry with Anglo, Schulich and Lassonde approached Newmont Mining Corporation to discuss purchasing Franco-Nevada and Normandy, striking a deal richer than Anglo's offer, and ultimately valuing Franco-Nevada shares at a 22% premium."
--- Franco-Nevada Wikipedia Page

Royal Gold Inc.
"Royal Gold, Inc. owns and manages royalties and similar interests primarily on precious metals mines, with a focus on gold. The Company's portfolio provides investors with a unique opportunity to capture value in the precious metals sector without incurring many of the costs and risks associated with mine operations.

A royalty is simply a right to receive a percentage of production from a mine.  By investing in a royalty, Royal Gold buys a percentage of the metal produced from a given property in exchange for an initial payment, without assuming any responsibility for the actual mining operation.  Another interest similar to a royalty is known as a metal stream.  This product allows for a smaller front end payment, but requires that payments be made as metal is delivered to Royal Gold over the life of a mine.  In either case, Royal Gold does not have to contribute to the operating or capital costs at the mine after the initial payment is made.

Royal Gold owns a large portfolio of producing, development, evaluation and exploration stage royalties and similar interests located in some of the world's most prolific gold regions.  Through this high quality portfolio, Royal Gold maintains upside potential through any exploration successes by the operators and benefits when new reserves are produced.

The Company is guided by the experience of a senior executive management team with expertise in the fields of geology, engineering, law and finance.  Our successful business model generates strong cash flow and high margins with a lower cost structure, providing shareholders with a premium precious metals investment."
--- Royal Gold Company Overview

Lake Shore Gold and Franco-Nevada Complete $50 Million Royalty and Equity Investment Transaction
March 8th, 2012 Lake Shore Gold Press Release
Lake Shore Gold Corp. (TSX: LSG|AMEX: LSG)  announced "that the Company has closed its previously announced royalty and equity investment agreements (the "Agreements") with Franco-Nevada Corporation (TSX: FNV|NYSE: FNV) ("Franco-Nevada"). Under terms of the Agreements, Franco-Nevada has paid to the Company US$35 million for a 2.25% net smelter return royalty on the sale of minerals from the Company's Timmins West Complex. In addition, Franco-Nevada has paid C$15 million to acquire 10,050,591 common shares of the Company on a private placement basis. 

Tony Makuch, President and CEO of Lake Shore Gold, commented: "We are pleased to have completed this transaction and to welcome Franco-Nevada as a new shareholder of the Company. With the funds we have received, our pro forma cash position at the end of February stood at approximately $95 million, which provides significant financial flexibility as we prepare for a sharp increase in production beginning late this year."" 
--- March 8th, 2012 Lake Shore Gold Press Release 

 

Current Royalty Valuation per oz of Gold Production

--- AUgMentor.com 2012-04-05
Johnston-Sequoia Commentary:

Just over a year ago a very dear friend of mine told me one of the most endearing/self-deprecating market related stories I've ever heard. This gentlemen is an energy expert, former President & CEO of International Operations of one of Canada's largest energy crown corporations and today a frequent energy expert on Bloomberg and CNBC (point being - the guy knows what he's talking  about).  So, the story begins in the mid 1980s - one evening he and his wife have a guest couple over for dinner & drinks. Both the wives worked together at the time as Professional Engineers in the Nuclear Energy area of this same large Crown Corporation and were the glue that brought the couples together that evening. As the dinner progressed with the inevitable consumption of a few bottles of nice french wine, the conversation eventually evolved in to a potential investment that the host couple should consider making in a new company being formed by the husband of the guest couple (a gentlemen by the name of Pierre Lassonde).  It was then a somewhat innovative idea called 'Franco-Nevada Mining Corporation'. The idea was to establish a 'Royalty' gold company... not a simple gold E&P Co... the basic idea this time being to take royalty positions in various good looking gold companies and grow indirectly through the efforts of others. The price of a unit of this new company would be about $5,000 CDN. The question posed by the guest was - are you interested in this investment idea? 

Later that evening as they cleaned up after the dinner party, the host couple discussed the suggestion and decided that the pressure of their day to day bills and the 'obviously' superior and predictable pensions from a stable Crown Corporation was the best bet for returns to make their eventual retirement years comfortable!  Well, as my friend now knows, a mere 27 years later, the same $5000 investment in Franco-Nevada would be worth somewhere in the neighborhood of $5-7 million today.  

We discover in the most recent transaction from Franco-Nevada above that the value per ounce in the ground gold that Franco-Nevada paid to acquire the 2.25% NSR royalty on Lake Shore's Timmins West Complex was approximately $800.00 per ounce & as you see in the graphic above the market values FNV & RGLD at between $800 - $1,200 per ounce in the ground gold production.  Now, if we cross reference that deal with what gold exploration and development companies we see on average between $90 - $113 per ounce in the ground gold. Point being - the market is valuing ounces in the ground from royalty transactions approximately 800% higher on average than explorers and developers.  

The attraction of royalty companies in this market of course is that they're tied directly to the gold price & they have little to no production risk as their returns will simply be less if a particular mine experiences difficulties.  They do not have to pay for equipment, staffing, insurance, pensions etc. that would be the obligation of a producing company.

Now, as many of our readers know our Terraco Gold Corp. (TSX.V: TEN) has acquired two royalty options (up to 2.5%) on the Barrick Gold - Midway Gold Spring Valley Gold Project in Nevada.

 

In addition - (in terms of six degrees of separation) Charles Sulfrian, Terraco Gold's Vice President of Exploration was "acquired" in the Barrick Gold - Western States transaction (the same project that Franco-Nevada acquired as a royalty in 1986 which is now Barrick's Goldstrike Mine) & Ken Snyder, Terraco's Lead Consulting Geologist discovered the "Ken Snyder" Midas mine in Nevada for then Franco-Nevada and now is Newmont's lowest cost producing mine.


Will our Terraco Gold Corp. be a story that can be told in the same breath as a Franco-Nevada one day? Only time will tell.  What we do know (in particular my dear friend in Florida) - "Every time history repeats itself - the price goes up".

 

I am a shareholder of Terraco Gold Corp & am an advisor of the company.  As always - please do your own due diligence.


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