Franco-Nevada uses Nevada assets as springboard for growth

With the sole exception of the Ken Snyder mine in Nevada, Franco-Nevada Mining (FN-T) prefers to leave the operating of mines “to companies more expert in such matters.” Armed with a war chest of cash and marketable investments totalling about $1 billion, the company also states that it intends to add to its asset base “when bargains present themselves.” With good royalties tougher to find than ever, industry tongues are wagging about what sort of bargains the royalty giant might be interested in acquiring.

While persistent rumours are circulating that Franco-Nevada may be interested in penetrating the South African mining scene, the company has remained mum about its next big deal. And so the rumours swirl. One day, the company is considering taking a run at Gold Fields or Placer Dome; the next day, it’s plotting to take out Newmont Mining with the help of a South African gold miner. Tomorrow’s rumours are anyone’s guess.

Until recently, Franco-Nevada has found plenty of royalties and mining opportunities in the western United States. While this mineral-rich region might seem an obvious place to continue its search for growth, recent political events have made new mines difficult to permit… a state of affairs not lost on the astute management of Franco-Nevada.

At a recent mining conference in Toronto, President Pierre Lassonde noted that numerous projects were subject to “de facto expropriation” by local companies, examples being Crown Jewel in Washington state and Crown Butte and McDonald Gold in Montana. So far, Nevada’s mining industry has been largely free of government heavy-handedness, he stressed. “Twenty years ago, Nevada was the best place to explore and develop mining projects; it still holds true today.”

Franco-Nevada’s core asset has long been its net smelter return (NSR) and net profit royalties in the Goldstrike property in the state’s prolific Carlin trend, where Barrick Gold (ABX-T) operates several mines. This complex — now the largest primary gold operation in the world — generated $47.4 million of revenue for Franco-Nevada during fiscal 2000, up 10% from 1999’s total of $43 million. This should increase, as Barrick is expecting Goldstrike to produce 2.5 million oz. this year — 16% more than in 1999.

Franco-Nevada also holds an NSR royalty on a portion of Newmont Mining‘s (NEM-N) Deep Star deposit, on the southern boundary of the Goldstrike property. Newmont is driving a 5,000-ft. drift between Deep Star and its Deep Post deposit, to the north. The company also has an NSR royalty on Deep Post, as well as royalties (from 2% to 8%) covering Newmont’s Maggie Creek pit, which turned out a modest 29,263 oz. gold last year.

Despite its strong presence in North America, Franco-Nevada has ventured to other locales in search of mine royalties to add to its existing portfolio. It now holds royalties on mineral projects in Australia, Indonesia, Mexico and Brazil, among other jurisdictions.

Ken Snyder

Franco-Nevada had never aspired to be a producer in its own right, but that changed in 1992, when the company began acquiring ground in the historic Midas gold camp, at the northern end of the Carlin trend.

Geologist Ken Snyder, now Franco’s chief geologist, saw the potential of the area and went on to discover the orebody now named in his honour. The grades were so spectacular — above one ounce per ton and higher — that the company overcame its hesitation about becoming a miner in early 1997. After much debate, the board approved plans to develop the mine for US$84 million, using contract miners.

The underground operation was officially opened in June 1999, with Nevada Governor Kenny Guinn on hand for the ribbon-cutting. During its first full year of commercial production, the Ken Snyder mine produced 230,258 oz. gold-equivalent. Cash operating costs were US$98 per equivalent ounce, whereas total costs were US$142 per oz.

Production was slightly below budget, mostly because of higher-than-anticipated dilution on Colorado Grande, one of two veins being exploited. This vein accounts for 60% of all mined material, with the other, Gold Crown, meeting expectations.

Independent consultants were called in, who soon found that the problem stemmed from a wandering high-grade ribbon that constitutes only 20% of the vein’s width yet hosts 80% of the contained gold. The high-grade ribbon wanders from the footwall to the hangingwall, making stope design and ground control crucial. The consultants recommended changes to grade control practices, mining methods and material handling. Most have now been implemented.

A US$2-million program is under way to expand the mill’s production capacity to 1,000 tons. It is expected to be operational shortly.

The Ken Snyder mine gave a major boost to Franco-Nevada’s bottom line in its fiscal year ended March 31, 2000. The Toronto-based company posted net earnings of $97.6 million (after tax) on revenue of $218.2 million for the year, compared with after-tax earnings of $68.5 million on revenue of $135.6 million in fiscal 1998.

At the end of 1999, proven and probable reserves at Ken Snyder stood at 3 million tons grading 0.81 oz. gold per ton and 9.83 oz. silver (1 oz. equivalent grade). This amounts to 2.45 million oz. gold and 29.47 million oz. silver. Global resources are estimated at 4.8 million tons grading 1.33 oz. per ton, or 6.4 million oz. gold-equivalent. This, combined with other Midas property resources, brings the global Midas resource to 7.5 million oz. gold-equivalent.

Franco-Nevada has budgeted US$1.8 million for surface exploration at Midas. This work will include drilling to follow-up high-grade intercepts encountered late last year at the Rico and Queen areas. The latter target yielded 3.98 oz. gold and 1.25 oz. silver over 7.7 ft. true thickness.

Other assets

Franco-Nevada has royalties on other mines in the western United States, including a 2% NSR on Canyon Resources‘ (CAU-A) Briggs gold mine in California. This open-pit mine produced 86,669 oz. last year, a new record for the 3-year-old operation. This year’s production is expected to be 87,000 oz. at a cash operating cost of about US$260 per oz.

The Dee mine, owned by Barrick and operator Glamis Gold (GLG-T), turned out a modest 38,400 oz. in 1999. However, with the North underground mine now in production, this Carlin trend mine is expected to produce 69,000 oz. this year. Barrick, meanwhile, is exploring the property for its underground potential. Franco’s royalties here range from 4 to 9%.

At Placer Dome‘s (PDG-T) Bald Mountain mine, near Ely, Nev., Franco-Nevada has NSR royalties ranging from 1 to 4%. The mine churned out 105,475 oz. last year, helped in part by recent development of Mooney Basin, a satellite deposit to Bald Mountain.

Franco-Nevada’s royalties at the Rosebud mine in Nevada and the Castle Mountain mine in California are phased-out, or will be shortly. Rosebud was recently closed and Castle Mountain is in its last two years of production.

A major disappointment — albeit a temporary one — was the Getchell gold mine, also in Nevada, in which Franco holds a 2% NSR. Placer Dome paid US$1.1 billion to acquire Getchell Gold, the project owner, more than a year ago, with hopes of spending US$230 million to boost annual production to 800,000 oz. gold annually by 2003. However, the major decided last summer to suspend mining and milling while certain issues related to mine reserves and infrastructure were addressed. A US$20-million exploration program is under way, with work focused on development of the N zone.

If all goes as planned, Placer Dome will develop an expanded operation combining production from the Getchell, Turquoise Ridge and N zone deposits.

Franco-Nevada’s royalty portfolio also includes a 5% NSR covering more than 80% of the reserves and resources at the Stillwater platinum group metals (PGM) deposit in Montana. The mine’s owner, Stillwater Mining (SWC-A), is the most significant producer of platinum and palladium outside of South Africa and Russia.

A US$85-million expansion, currently under way, is designed to triple production. This involves expanding the main Stillwater mine to 3,000 tons per day and developing the East Boulder deposit, 13 miles to the west, as a 2,000-ton-per-day mine. East Boulder is on schedule and expected to begin production next year.

By 2002, Stillwater expects to boost its overall production to 1.2 million oz. PGM. Production last year was 409,000 oz. palladium and platinum, below plan and below the 444,000 oz. produced in 1998. Production this year is expected to reach 500,000 oz. PGM.

What’s next?

With gold mining in a prolonged slump, Franco-Nevada’s name is increasingly bandied about as a potential merger partner with another major. The company has been preaching industry consolidation for so long that some market-watchers expect it will soon practise what it has been preaching.

Franco-Nevada merged with a sister company, Euro-Nevada, last year to form the fifth largest gold company in the world.

Earlier this year, Lassonde told an industry audience that the recent flurry of mergers was prompted by an underlying fear, as well as the usual business rationalizations about synergies and cost savings. The companies fear that if they don’t become more significant in today’s dot-com investment universe, they will disappear from the radar screen of the key investors in equity markets, he said.

Mining companies will have to provide better returns if they are to compete for investment capital, he stressed. “We certainly are not attracting new capital with our investment returns. In the last three years, our combined sector has delivered annualized returns of negative 16%, ranking it as the worst sector among Toronto Stock Exchange industries.”

While Franco-Nevada itself has not had problems delivering decent returns for investors, its challenge in the years ahead is to find projects that will meet its stringent criteria for investment. With royalties becoming increasingly difficult to find and acquire, the company has made strategic investments in companies holding prominent mining projects, including Diavik Diamonds and Voisey’s Bay Nickel. While the Voisey’s Bay nickel project has stalled because of an impasse between Inco (n-t) and the Newfoundland government, the Diavik diamond project, in Canada’s North, appears to be moving toward production. (Diavik is a wholly owned subsidiary of London-based Rio Tinto.)

Unlike many larger companies these days, Franco-Nevada is keeping up an active exploration department, focused mostly in Nevada, Canada and Australia. A key strategy is to assemble land packages in prospective regions, and then vend them to other companies in return for a royalty.

In Nevada, Newmont is planning a second year of drilling on Franco-Nevada’s Knoll property, a short distance from its Twin Creeks mine. Toronto-based Aur Resources (AUR-T) is planning to drill a portion of Franco’s Adelaide claims on the southern part of the Getchell trend. And AngloGold (AU-N) has optioned Franco’s Baxter, Orbel, Giant and Oslo claims, in the Carlin trend, where it plans to spend US$1.25 million over three years.

In addition to exploration at and near Midas, Franco-Nevada plans to drill-test a newly acquired property at Tuscarora this summer, as well as conduct a second phase of drilling at the Seven Troughs project, 20 miles south of the Rosebud mine.