Royal Gold adds to royalty portfolio

Denver, Colo.-based Royal Gold (RGL-T, RGLD-Q) has found three more projects that meet its three key criteria.

“We look for good mines, with good operators in good locations,” says vice-president of corporate development William Heissenbuttel. “To the extent that a project meets those hurdles, we’ll be interested.”

The first royalty is a 2% net smelter return royalty (NSR) from Goldcorp’s (G-T, GG-N) Marigold mine in the Battle Mountain-Eureka trend of Nevada.

The other two are from Capital Gold’s (CGC-T, CGLD-O) El Chanate mine in Sonora, Mexico. One is a sliding-scale NSR ranging between 2% and 4% and the other is a 10% net profit interest (NPI).

Royal Gold’s original incarnation was as an oil and gas company, before current executive chairman Stan Dempsey came in and took the company in a different direction — towards gold.

After concluding that operating gold mines was a tough business, Dempsey took inspiration from Franco-Nevada (FNV-T, FNNVF-O), figuring the way to make money was to own property interests without being on the hook for any of the operational complications that so often happen.

The current deal is expected to be finalized later this quarter, and once completed, will leave Royal Gold with a portfolio of 19 royalties — 13 of which are attached to operating mines, while six are in the development state.

The bulk of those are attached to projects in Nevada and Mexico — two jurisdictions the company feels comfortable in.

“Political risk is a factor,” Heissenbuttel says, referring to projects the company targets. “The industry is riddled with past situations of government interference, so it’s a factor we always take into account.”

Goldcorp’s Marigold mine is a large-scale, open-pit, heap-leach operation. At the end of 2006, it had proven and probable reserves of 92.7 million tonnes of ore grading 0.71 gram gold per tonne for 2.1 million oz. gold.

The NSR that Royal Gold is buying covers roughly 38% of current reserves, outside of the Basalt and Antler area currently being mined. Royal Gold estimates that it will start to receive the royalty in 2010.

As for El Chanate, which only went into production last year, the mine has proven and probable reserves of 39.5 million tonnes grading 0.66 gram gold per tonne for 832,000 oz. gold.

Capital Gold says production should come in at 60,000 oz. for 2008, with possible expansion to 100,000 oz. per year in 2009.

The sliding-scale royalty pays 2% when the gold price is below US$300 per oz., 3% when it’s US$300-350, and 4% when it’s above US$350 per oz. Once payments reach roughly US$17 million, the royalty is capped, while the 10% NPI royalty is capped at US$1 million.

Heissenbuttel says all oof the newly acquired royalties are attached to projects that still have significant potential to add more reserves.

Royal Gold shares traded recently at $30.15, in a 52-week window of $25.15-41.40. The company has 27.5 million shares outstanding.