Franco-Nevada will add to Carlin royalty portfolio

As a renowned poker player and would-be cowboy, Seymour Schulich has taken a gamble or two during frequent sojourns to the Silver State. But when it comes to running Franco Nevada Mining Corp., Mr Schulich and partner Pierre Lassonde take a much more risk adverse approach.

While other companies spend millions to develop mines which may not generate any immediate cash flow, the Toronto company has specialized in skimming off the profits of producing mines through royalty interests.

“In keeping with our low-risk, high-reward philosophy, we will put up the front money and then get carried in the drilling stage, so that we get exposed to as many situations as possible,” declared President Pierre Lassonde at the company’s first annual meeting in 1984.

“While keeping our powder keg dry we will be ready to take advantage of any discoveries,” he said.

Just how successful that strategy has been for the company, was revealed during a 3-day tour of the Carlin gold trend in Nevada where Franco Nevada’s portfolio of projects includes a 4% royalty and 5% net profit interest in American Barrick Resource’s Goldstrike mine.

One of the world’s most prolific gold producing regions, the 45-mile Carlin trend has produced nearly six million ounces and current reserves are estimated at 27 million ounces. Cash Flow

To give the company some cash flow, Franco-Nevada bought the Carlin properties (including Goldstrike) in 1985 for a modest $2 million. Most of that heap leach property, which produced around 40,000 oz gold annually from 1983 to 1985, was subsequently leased to PanCana Minerals and partner Western States Minerals for a royalty interest.

However, the purchase was considered a “crapshoot” by some experts until American Barrick, who acquired the Goldstrike properties in late 1986, pulled 620 ft of 0.3 oz gold at the 1,110-1,730 levels during a deep drilling program.

Following the discovery of two new ore zones — the Post and Betze deposits — which brings reserves in three Goldstrike deposits to seven million ounces, the Franco assets are now valued at around $200 million.

“We believe that the Goldstrike properties between Newmont Gold and Barrick will ultimately have four mills producing over one million ounces per year,” said Mr Schulich. “About 500,000 oz of that will come from Franco-Nevada’s royalty lands,” he said. As a result, Franco Nevada expects its share of cash flow to peak in the early 1990s at between $15 and $20 million.

However, John Melville, American Barrick’s senior-vice president corporate development warns that the one million ounces production level will only be reached if Barrick is successful in mining both its Deep Post and surface Post reserves simultaneously.

If not, he says Barrick’s share of production in 1992 could be closer to 460,000 oz.

“Believe me, we like royalties,” Mr Schulich told The Northern Miner after a helicopter tour of the Franco and Euro-Nevada properties. But despite the fact that the Goldstrike royalties add up to a 17% working interest, Messrs Schulich and Lassonde will likely sell their share of the property to a major gold producer. “We can’t utilize that kind of cash flow,” explained the Franco-Nevada chairman. “We aren’t operators and we don’t want to administer to a large staff.” Sister Company

In preparation for selling the Franco-Nevada assets, Mr Schulich and Mr Lassonde spun-out the company’s non-producing assets (including 10 exploration plays) into a new sister company called Euro- Nevada Mining. It began trading on the Toronto Stock Exchange recently.

They also hired Bill White, senior vice-president and director, corporate and government finance with Merrill Lynch Canada Inc. to find likely buyers for the Franco- Nevada interests.

“If we can trade the Franco assets for a large position in a major company, and increase the value of the shares for our shareholders its important to at least take those steps,” said Mr White who has already fielded enquiries from a number of major resource companies.

“Most takeovers, in terms of premiums paid to take over a company, is about 25% to 50% of the stock’s market price. That’s reason enough to consider a takeover.”

Since a lot of money pouring into North America is geared to what Mr White called long term value-in-the-ground-type situations, he expects the Franco assets to be sold within a year.

However, Franco-Nevada is still waiting for the results from the latest round of drilling at Goldstrike and Mr White said the company won’t be sold until a formal reserve update is published in January. Nevada Acquisitions

In addition to financing its share of exploration at the Euro-Nevada properties, proceeds will be used to acquire additional royalties in the Nevada area. “Our goal is to close two major royalty acquisitions within six months,” said Mr Schulich who has been looking for possible Nevada acquisitions.

“We believe we have a formula to put royalties on our books at six times cash flow,” he said. While Mr Shulich opted not to reveal the formula, he said it includes having a pool of $20 million by next year. The formula may also include trading its interest in some of the Euro- Nevada properties in exchange for varying royalties.

The most promising of those looks like the six Chicago claims located just south of Newmont Gold’s Blue Star mine at Carlin. With an IP survey showing the presence of anomalies said to be similar to those at the Post and Betze deposits, the Chicagos are the only property in Euro-Nevada’s portfolio not included in any joint-venture agreement.

To test these anomalies, Euro- Nevada is drilling four 2,000-ft holes in areas coinciding with favorable features determined by surface mapping.

According to Chicago-claim project geologist Ken Snyder, Euro- Nevada’s Hasbrouck Mtn. property near Tonopah, Nev. will be mined next year. Gold Price

A feasibility study by Bechtel Inc. has shown reserves of 12.9 million tons of grade 0.029 oz gold and 0.59 oz silver per ton. While the company is attempting to find an operator, the deposit can’t be mined profitably at a gold price below $500(US).

Euro-Nevada is also involved in a 50%/50% joint-venture exploration with Royex Gold Mining of Toronto in a region of northeastern Nevada that consulting geologist Peter Maciulaitis called a “young Carlin trend.”

According to Mr Maciulaitis, five million ounces of known gold reserves already exists in this area which encompasses the Bull Run Mtns. in Elko Cty. Freeport-McMoRan Gold, for example, announced in July that drilling at its Big Springs gold deposit 10 miles north of the Jerritt Canyon Mine in Elko Cty. had increased reserves to two million tons of 0.17 oz.

Euro-Nevada’s interests include 64 unpatented claims called the Millionaria property where 35 ft of 0.42 oz gold was cut from reverse circulation drilling in 1986.

Located on the southwestern slope of Wilson Peak, the Millionaria property is being accessed by a dirt road and with 12 drill- holes already completed, the partners will continue drilling until the end of this month.