A right royal opportunity « Mining Blog

A right royal opportunity

5. June 2012,

Royalty companies that raked in cash from strong precious metal prices in the last three years, look poised to drive a wave of deal activity in the Canadian mining sector, especially among junior players hungry for financing.

That’s the conclusion reached by Euan Rocha of Reuters, in a report published on 4 June 2012

Royalties companies fund mining projects in return for a portion of future revenues. They’ve generated “huge amounts of cash flow from existing deals as the price of gold and silver soared since the beginning of 2009”.

But now, “with the recent pullback in precious metal prices and slumping stock markets, they could be the saviors for small and mid-tier miners who are eager to grow but strapped for capital”

According to Rocha: “Europe’s debt crisis and slowing Asian growth have tempered banks’ appetite for lending”.

Moreover, the mining companies “are not keen to issue equity when their share prices are severely depressed”.

This leaves junior companies with “few alternatives to royalty and stream deals” in order to fund project development, although they “typically try to avoid royalty and stream deals, as they tend to negate any future upside from rising metal prices”.

While royalty deals require investors to provide cash upfront in return for a set percentage of future income, “stream deals” give miners cash in exchange for their agreeing to sell by-products in the future at a discounted price.

Says Rocha: “Royalty companies like Franco-Nevada Corp, Silver Wheaton Corp, Royal Gold Inc, Sandstorm Gold Ltd and Anglo Pacific Group now find themselves in the perfect spot to strike new deals and secure their own future growth”

The level of equity financing activity in the metals and mining sector has “swooned this year”. Oreninc, which tracks equity financing activity in Canada, notes that first-quarter financings in the sector fell almost 50 percent from levels at this point last year.

In contrast, gold focused Franco-Nevada has working capital on hand of almost $1 billion, an undrawn credit facility of $175 million and investments that are valued at over $100 million.

Earlier this year, junior gold miner Lake Shore Gold Corp struck a $50 million deal to sell Franco-Nevada both an equity stake in itself and a royalty interest on the sale of minerals from its Timmins West mine in Ontario.

In May, Franco’s smaller rival Royal Gold struck a deal to buy a net smelter return royalty on the Ruby Hill gold mine from International Minerals Corp.

Even some mid-tier miners are now mulling stream deals to finance mega projects. Last month, Inmet Mining Corp said it plans to raise roughly $1 billion from a stream deal to fund a portion of the construction costs for its $6.2 billion Cobre Panama copper project in Central America.

Further details on Franco-Nevada, Royal Gold and Anglo Pacific can be found on From Money to Metal wiki site at:

http://moneytometal.org/index.php/A_data_base

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