Royal Gold buys Andacollo gold royalty for US$300M

Vancouver – Teck (TCK.B-T, TCK-N) and its minority partner have agreed to sell a major share of the anticipated gold stream from their Carmen de Andacollo copper-gold mine in Chile to Denver-based royalty firm Royal Gold (RGL-T, RGLD-N) in a deal worth about US$300 million.

Teck owns 90% of the mine while its partner, state-owned ENAMI, holds the rest.

The sale is part of Teck’s efforts to pay off its nearly US$9.8 billion in mostly near-term debt that it took on last year following its $13.6 billion acquisition of Fording Canadian Coal and its coal assets. More than half the debt – US$6.4 billion worth – comes due Oct. 29, 2009.

The agreement gives Royal Gold 75% of the gold produced from Andacollo’s sulphide ore until the first 910,000 oz. of payable gold has been sold, after which Royal Gold’s royalty drops to 50% of payable gold.

Following completion of an ongoing upgrade, Teck expects to annually produce 55,000 oz. gold and 76,000 tonnes copper for the first ten years of Andacollo’s two decade long mine-life.

Andacollo’s proven and probable sulphide reserves are estimated at 422 million tonnes grading 0.38% copper and 0.13 gram gold per tonne.

Teck plans on commissioning its new sulphide circuit in late 2009.

In return for its portion of Andacollo’s gold, Royal Gold will pay at least US$100 million in cash and up to 4.5 million Royal Gold shares worth around US$200 million.

The final amount depends on the results of a Royal Gold 6.5-million-share equity offering from which it will forward Teck half the proceeds. Royal Gold will subtract the equivalent number of shares from the 4.5 million initially promised to Teck.

Although Royal Gold cannot yet specify at what price it will issue shares, if it is around the US$45 it used to value shares destined for Teck in the gold-stream transaction and if the offering is fully subscribed, including a 975,000 share over-allotment, Teck could see close to an additional US$168 million in cash.

That would bring the cash portion of the gold stream sale to around US$268 million.

If this scenario occurs Teck would then receive about 760,000 shares of Royal Gold worth about US$34 million.

Teck spokesperson Sarah Goodman explained that the sale was part of Teck’s efforts, in view of a heavy load of debt, to reposition itself in the short and long term.

“This transaction allows us to lock in significant value when gold markets are strong,” she says.

It will also help pay for the cost of upgrades at the Andacollo mine which Teck has estimated at US$410 million. Of that, Goodman says Teck has spent US$249 million as of Dec. 31, 2008, and that it still plans on reaching full production in early 2010.

Royal Gold spokesperson Stephanie Brown says Royal Gold management preferred not to comment during the ongoing equity offering.

Kerry Smith, an analyst who covers Teck at Haywood Securities, says that both companies “get a good deal.”

He explains that Teck, a company trading at about five times cash flow, is selling the Andacollo gold stream asset at about ten times its expected cash flow, to Royal Gold which trades at around 25 times cash flow.

“It’s accretive to a gold company (Royal Gold) and it’s a nice premium for a base metals company (Teck) as well,” he says. “That’s the thought process behind it at least.”

A downside of the sale, he says, is Teck loses the gold credit on its cash-cost profile at Andacollo. He expects that without the gold, cash costs will come in at around US$1-per-lb. copper instead of the projected US75¢-per lb. copper.

As for Teck solving its Rubik’s cube of debt, Smith says that the company has more means to do so than people give the company credit.

“People have said they’ve got very few options,” Smith says. “But I’ve always said they’ve got more options than people think.”

Not that it’s going to be easy, he adds.

But Smith believes Teck, as a base metals company, has not received proper value for its precious metals assets. With prices for gold and silver strong, he expects Teck will capitalize on these assets at an opportune time.

He says Teck could raise as much as US$1 billion on precious metals assets alone. For instance he expects to see a sale of its silver stream at the Red Dog zinc mine in Alaska for about US$150 million and he says Teck should shop an interest in the Pogo gold mine, also in Alaska, for between US$300 and US$400 million.

As for its coal assets Smith suggests Teck could sell a 20% stake in Fording, “as I’ve said from the very beginning”.

Although in retrospect Teck may have paid a premium on Fording, Smith says ultimately the company should get a decent price for any sale.

“Because the buyers don’t care about minority interests in and of themselves,” he explains. “All they want is a way to get guaranteed access to supply from a stable asset in a good country. And they don’t want to have all their eggs in Australia because they’ve been beaten up doing that a few times.”

Thus he believes potential buyers of a Fording stake will be prepared to pay “a reasonable value” for security of coal supply.

Add to that a potential equity offering and Teck may see the colours align on the problem of paying back the US$6.4 billion in loans that mature in seven months.

“I think they have to get as many asset sales as they can, maybe they’ll do an equity deal, and then they’ll be in the strongest position possible to restructure the debt,” Smith says.

On news of the transaction Teck gained 31¢ to close at $11.01 in Toronto and Royal Gold dropped $3.25 to $50.30 in Toronto.