TORONTO (miningweekly.com) – The market for resources royalties is “very active right now”, Franco-Nevada CEO David Harquail commented on Tuesday.

Toronto-based Franco-Nevada, which holds gold, platinum-group metals, base-metals and oil and gas royalties, announced earlier in the day that it has agreed to buy a 2% net smelter return (NSR) royalty from TSX-listed Moydow Mines on a portion of Newmont Mining's Ahafo property, in Ghana, for $58-million in cash and shares.

The firm has also bought a new gross royalty on nickel produced at BHP Billiton's Mt Keith mine, in Western Australia.

Looking ahead, Harquail said that the royalty transactions that offer the best return on investment fall into three broad categories.

The first of these, and probably the ones with the best internal rate of return, are relatively small deals, which do not even move the needle enough for Franco-Nevada to issue a press release.

The company is continually adding these small royalties, Harquail said.

Secondly, the larger category deals that are popular at the moment are “streaming” type transactions, where a royalty company puts up a big upfront investment, often financing mines into production, and then buys the metal at a cheaper rate once output begins.

“We've been examining those, and there's quite a lot of opportunities out there for all the royalty companies,” he said.

These kinds of transaction tend to involve long negotiations, often in conjunction with joint-venture partners on the asset or banks involved in the project, so the process can become drawn out.

“But you eventually make a substantial capital investment that could be very material for the company for the long term,” Harquail said.

The final category involves royalty transactions that may look expensive at the outset, but which are entered into on the basis of the upside potential of the asset.

Of course, the company would want to know that it will get a decent return in any event, based on current reserves, but the Ahafo deal, for example, would qualify as such a transaction, Harquail said.

Franco-Nevada will buy a 2% NSR that covers 78 km² of the southeastern end of Newmont’s Ahafo South project and the royalty is payable once 1,2-million ounces have been produced from the royalty area, which is expected to be in 2012.

However, the property also includes the Subika deposit, where Newmont is studying an expansion project and where it has identified the opportunity for another four-million to seven-million resource ounces, with a pit layback and underground development below the ultimate pit.

Denver-based Newmont has indicated it plans to start an exploration decline at Subika in early 2010.

“So we know there is going to be a good return on just the openpit reserves that are remaining on the property, but the underground potential is so open that we believe having that participation going forward is important.”

INTERNAL GROWTH

Franco-Nevada will also not need to rely on acquiring new royalties for growth, Harquail emphasised.

The company has a deep pipeline of projects, from which it will receive revenue, scheduled to start production over the next three years and beyond, he said in a presentation.

Late on Monday, Franco Nevada reported third quarter net income of $12,34-million, compared with $9,89-million a year earlier.

The company received revenue from royalties of $36,4-million during the quarter, 77% of which was from precious metals.

For every 10% increase in the gold price, gold revenue will increase by 14%, CFO Alex Morrison said on Tuesday.

As at September 30, 2009, Franco-Nevada had working capital of $559-million, marketable securities of $59,4-million, an undrawn $150-million revolving credit facility and no debt.

The company declared a semi-annual dividend of C$0,14 a share.

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