Franco CEO touts ‘opportunity-rich’ market after Glencore deal

VANCOUVER — Franco-Nevada (TSX: FNV; NYSE: FNV) will pay US$500 million for a gold-silver stream from Glencore’s (LSE: GLNE) large Antapaccay copper mine in Peru’s Cusco region.

Under the deal Franco’s initial gold and silver deliveries will be determined by copper shipments. The company will receive 300,000 oz. gold for every 1,000 tonnes of copper-in-concentrate, and 30% of gold-in-concentrate after 630,000 oz. have been delivered. For silver, Franco will receive 4,700 oz. for every 1,000 tonnes of copper-in-concentrate, and 30% silver-in-concentrate after 10 million oz. have been delivered.

Franco will make payments — through its Barbados-based subsidiary — totalling 20% of spot gold and silver prices until 750,000 oz. gold and 12.8 million oz. silver have been received, and 30% of spot prices thereafter.

“We are in what I call an ‘opportunity-rich environment,’” Franco president and CEO David Harquail said during a conference call. “This deal highlights the quality of these investment opportunities, and shows that they go well beyond the gold industry.”

The deal marks Franco’s second major stream acquisition in the past six months. In October the company picked up a silver stream on Teck Resources’ (TSX: TCK.B; NYSE: TCK) 22.5% stake in the Antamina joint venture, which the major operates alongside Glencore, BHP Billiton (NYSE: BHP), and Mitsubishi Corp., 270 km northeast of Lima in the Peruvian Andes.

The transactions could add between 100,000 and 120,000 equivalent oz. gold to Franco’s annual gold equivalent profile. Antapaccay’s reserves are 547 million tonnes at 0.5% copper, 0.11 gram gold per tonne and 1.44 grams silver per tonne. Total contained metals are 2.9 million tonnes copper, 1.95 million oz. gold and 25.3 million oz. silver. These reserves support mining at the site through 2029.

“We feel really fortunate to partner with Glencore at Antapaccay. Just like our acquisition at Antamina it represents a low-cost, top-20 copper mine,” senior vice-president of business development Paul Brink said. “The transaction will supply front-loaded cash flows, which will allow us rapid payback on the investment. Added to our other acquisitions … we now have stream assets at four of the world’s top copper projects.”

Franco picked up a US$648-million gold-silver stream on Lundin Mining’s (TSX: LUN; US-OTC: LUNMF) Candelaria and Ojos del Salado mining complex in Chile in late 2014, and holds a precious-metal stream on First Quantum Minerals’ (TSX: FM) Cobre Panama copper-gold development in Panama.

To finance the Antapaccay acquisition, Franco arranged a US$800-million bought-deal financing agreement (16.7 million shares priced at US$47.85 per share), with the offer led by BMO Capital Markets, CIBC Capital Markets, RBC Capital Markets and Scotiabank.

“We had the option to comfortably finance the deal from our available credit facility, but if you know us, we do not believe in leveraging our return for debt,” Harquail said. “We always want to keep bullets in the revolver since … we’re dealing with a market that provides a lot of opportunity.”

For Glencore the deal helps in its effort to bring its debt below US$19 billion by year-end. The company has targeted between US$3 billion and US$4 billion in asset sales to meet its goal.

BMO Capital Markets analyst David Gagliano expects Glencore to sell US$2 billion in assets this year, and finish 2016 with US$21.3 billion in net debt. BMO notes Glencore had “slightly better than expected results across the asset base” last quarter.