Royal Gold Starts A Royalty Rumble

Royal Gold (RGL-T, RGLD-Q) has signed a friendly deal to acquire International Royalty (IRC-T, ROY-X) for $749 million in cash and shares, outdoing a $640-million all-cash hostile bid by Franco-Nevada (FNV-T) in early December.

The deep-pocketed Franco- Nevada can still make another offer, but any deal that doesn’t end in Royal Gold’s favour will be subject to a hefty US$32-million break fee.

International Royalty chairman and CEO Douglas Silver says the Royal Gold offer is more enticing than Franco-Nevada’s all-cash deal because it gives shareholders the benefit of holding onto stock in a royalty company.

“This rollover we can do in this transaction allows our Canadian shareholders to continue to invest in the royalty space on a tax-deferred basis,” Silver said in an interview. “It’s a very powerful story compared to an all-cash bid, where everybody has to pay taxes immediately.”

Royal Gold has offered $7.45 in cash or 0.1285 of a Royal Gold share for each International Royalty share. The company will pay a maximum of US$350 million in cash and a maximum of 7.75 million Royal Gold shares.

International Royalty shareholders who live in Canada will have the option of exchanging their shares for shares of Royal Gold or a Canadian Royal Gold subsidiary.

The offer is a 70% premium over International Royalty’s 20-day volume- weighted average trading price leading up to Dec. 4, the last trading day before Franco- Nevada’s offer.

Franco-Nevada’s $6.75-per-share offer represented a 54% premium over the company’s 20-day volume-weighted share price over the same period, or a 43% premium to International Royalty’s share price on Dec. 4.

At presstime, Franco-Nevada had not responded to the rival bid.

Royal Gold president and CEO Tony Jensen says if his company’s friendly offer is successful, the combined company would have even stronger cash flow that is set to grow with 31 producing assets and another 20 in the development stage.

Jensen says that the added revenue — International Royalty brought in about $40 million in the 12 months ending Sept. 30, while Royal Gold’s revenue was about $73 million — would enable it to do bigger royalty financings with companies looking to fund development, without diluting equity or going into debt.

“Every CEO’s dream is to build a company out of cash flow rather than selling equity into the marketplace,” Jensen says. “That’s how wealth is created and I think we are starting to get that momentum in Royal Gold.”

The deal would also give Royal Gold more exposure to Canadian investors.

“We have an extensive Canadian following,” says Silver of International Royalty. “We trade a lot of stock in Canada compared to Royal. . . we were originally a Canadian company and also we have substantial royalties in Canada.”

Much of International Royalty’s revenue comes from nickel royalties, but that will change once Barrick Gold’s (ABX-T, ABX-N) 18- million-oz. Pascua Lama gold project, which straddles the borders of Chile and Argentina, reaches production in 2013. International Royalty has a 0.473-3.15% sliding-scale royalty on the Chilean portion of the deposit. The royalty will add US$20 million in annual revenue.

Royal Gold holds a smaller Pascua Lama royalty, about one-third the size of International Royalties’.

If the deal goes through, Royal Gold would gain 84 royalties, including a 2.7% net smelter return (NSR) royalty on Vale’s (RIO-N) Voisey’s Bay nickel mine in Labrador.

And the combined company would have a total of 200 royalty interests and 11 producing assets. About 70% of total revenue would come from precious metals, and the rest from base metals.

Royal Gold shares were up 2%, or $1.02, to $51.25 on a trading volume of about 4,000 shares in Toronto on the news on Dec. 18.

International Royalty shares added more than 4%, or 32¢, to $7.64 on a trading volume of 9.1 million shares.

Franco-Nevada rose 4¢ to $26.14 on a trading volume of 802,000 shares.