Franco-Nevada Looking to Grow in Australia
How to convert a traditionally anti-royalty and streaming market
Franco-Nevada Corporation (TSX: FNV) has added to its Australian team as it looks to grow in the region.
Speaking at the Melbourne Mining Club on Thursday, Franco CEO Paul Brink said there had been US$18 billion worth of royalty and streaming deals done globally in the past six years.
While royalty and streaming financing is popular in North America, Australian companies have been less enthusiastic.
Brink suggested the reason for that was some burdensome royalties in Australia in the past that impeded assets and put developers off.
“Royalties, equity, debt – they’re all good financing tools. None of them is good or evil in its own right,” he said.
“For a CFO, the trick is you’ve got to figure out when to use which one, what is the right time, what is the right amount with equity. If you issue equity at the top of the market, it’s fantastic. It’s non-dilutive. If you issue equity squeezed at the bottom of the market, it’s highly dilutive.
“With debt, if you do the right amount of debt, and everything goes according to plan, it is the lowest cost of capital, but this is the mining industry. It’s highly cyclical, and it’s seldom that things go to plan. So sometimes when you have a downturn, if you’ve levered up with too much debt, the cost of it can be losing the whole company.
“With streaming, if you put too much of a burden on the asset, then the stream can impact and can impede the future development.”
Brink said Franco was careful to ensure it wasn’t putting too big a burden on an asset when doing a deal.
“I’m often having that discussions with CEOs, with CFOs, and pointing out typical royalty is 1-2%, a typical stream, if you’re financing a big part of the capital of a mine, it may start off at 8% - usually there’s a step down so maybe on average, you’ve got about a 5% burden longer term,” he said.
“At 5% for the operator, you still own 95% of the resource, so if you find a whole lot more, it really is a win-win.”
Brink noted the Australian market’s preference for debt.
“If you put too much debt on a company, and production turns down, prices turn down, it is less flexible, and so in some cases you can lose the company, but it can be worse than that,” he said.
“And in particular, often with debt, you get hedging and so you can be in the crazy position where actually, things go right, commodity prices go up, and you lose the company.”
Brink used the example of Pilbara producer Calidus Resources, which collapsed last year due to its onerous hedging obligations, as well as Red 5 (which has since merged with Silver Lake Resources to create Vault Minerals (ASX: VAU)) and Bellevue Gold (ASX: BGL), which are selling gold at well below the spot price.
“I realised that the best analogy for streaming is golf pants,” he said.
“In the old days, we all wore Levi jeans. That was the thing to do. The thing about Levi jeans is they’re just not very flexible.
“I went Toronto, Vancouver, Sydney and Melbourne. I had 24 hours on the plane, and I was sitting there thinking, thank god I’m not wearing Levi jeans. I’ve got a pair of golf pants on.
“You can look good wearing them, and they’re flexible. If you’re sitting on a plane for 24 hours, they’re flexible. If you’re playing golf, they’re flexible, if you’re dancing, they’re flexible, so streaming is the golf pants of mining finance.”
Kevin McElligott has been Franco’s long-time managing director, Australia, based in Perth, but the company recently appointed former Argonaut executive director of corporate finance Matthew Selby to join him.
“The reason that we’re hiring is our plan is to focus more on Australia and it’s not so much about royalty and streaming and the opportunity that attracts us to Australia,” Brink said.
“It’s more around operators. And there is a difference in the way the Canadian industry is run versus Australia. In Canada, we have a tremendous amount of mine developers, teams that explore, make discoveries, do feasibility studies.
“What we call them is promoters, and we celebrate promoters, but their intent is not to build the mines that they find. Their intent is to sell the mines to the senior operators, so it’s hard to find good teams.
“A couple of years ago, as an alternative strategy, rather than just participating in auctions, let’s find those players that are good mine developers, good operators and people who really want to do it, and let’s be a financial backer to those teams.”
Franco is willing to provide not only royalty and stream finance, but potentially also debt and equity.
“We want them to know, and we want the market to know, that we are their financial backers,” Brink said.
“And we figured with that strategy, so much of the risk with a junior mining company is inevitably something goes wrong, and so often investors get horribly diluted.
“So we thought, if we can take the financial risk out of these players, we can really differentiate them from the other players in the field.”
Franco has already taken this approach with G Mining Ventures (TSX: GMIN), which built the Tocantinzinho mine in Brazil.
“It’s been a fantastic success, and they are a darling of the industry,” Brink said.
The second one is Tony Makuch’s Discovery Silver (TSX: DSV), which Franco backed to acquire the Purcupine mine from Newmont Corporation (NYSE: NEM) at the end of last year.
“It’s already been a blowout success. His stock is up somewhere between 400-500% - it’s hard to keep track day to day,” Brink said.
“But those two companies, G Mining and Discovery Silver, are the top two performing junior gold companies in North America. We’re very proud to have backed them.
“And that’s the opportunity we see in Australia. Australia is very different. You have far more teams that actually want to build mines and want to operate mines, and so the opportunity we see here is, is we’d like to find the next team to back.
“Hopefully we can find a couple of teams in Australia that we can back and hopefully have a similar amount of success.”