February 25, 2016 / 6:39 AM / 2 years ago

Franco-Nevada values long-term gain over fat returns in streaming deals

MELBOURNE, Feb 25 (Reuters) - Canada’s Franco-Nevada Corp chief said on Thursday the company does not see the high rate of return it is set to reap from a recent $500 million gold and silver “streaming” deal with Glencore Plc as a benchmark for future deals.

Franco-Nevada pays cash up front for future supplies of precious metals or for production royalties, which miners are increasingly relying on to help them fund exploration and new mines and, more recently, to raise cash to pay down debt.

This month it agreed to pay Glencore $500 million for a stream of gold and silver from the Antapaccay mine in Peru, in a deal estimated to give it an internal rate of return (IRR) of nearly 10 percent, or about double the average return that streaming companies have been getting.

“The market is so focused on IRR and I think it’s a mistake,” Franco-Nevada CEO David Harquail told reporters after speaking at the Melbourne Mining Club.

The high rate of return was not the best measure of value, he said, because supply under the deal drops to a third of previous levels after a specifiied amount of gold and silver has been delivered, giving less potential gain to the company if precious metals prices rise.

The Antapaccay deal was agreed on those terms because Franco-Nevada did not want to pay up front for supplies from the Coroccohuayco section of the mine that Glencore has yet to commited to building.

Harquail said the company’s $610 million deal last year to acquire a stream of silver from Teck Corp over the life of the Antamina mine in Peru was a better deal long-term for Franco-Nevada.

“I actually like Antamina better because we keep a higher stream over that whole license forever, so I think I’ve got a lot more optionality,” Harquail said.

Franco-Nevada is looking for more royalty or streaming deals in Australia but Harquail said that was a long-term option.

The company is also looking for more opportunities to help fund mine acquisitions and consolidation in the industry, just as it did with Lundin Mining’s $1.8 billion acquisition of the Candelaria mine in 2014.

“There should be more buying of assets, put them in better hands, and we can be an instrument to do that,” Harquail said.

Reporting by Sonali Paul; Editing by Richard Pullin

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