How Franco-Nevada Has Benefited From the Glencore Deal

By Dan Caplinger Markets Fool.com

Gold stock Franco-Nevada (NYSE: FNV) makes money from precious metals in a way that's different from traditional miners, choosing instead to purchase royalty interests and forge streaming agreements with mining-company partners. In early 2016, Franco-Nevada made a big deal with industry giant Glencore (NASDAQOTH: GLNCY), helping the beleaguered mining company seek to dig itself out from under its crushing debt load. With nearly a year having gone by since the agreement, Franco-Nevada has seen some big positives emerge from the deal. Let's take a closer look at the agreement and what it has meant for both Glencore and Franco-Nevada.

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Image source: Getty Images.

What Franco-Nevada and Glencore agreed to

Under the terms of the deal, Franco-Nevada agreed to acquire a precious metals stream referring to production at Glencore's Antapaccay mine in southern Peru. According to the terms of the deal, Franco-Nevada made a one-time $500 million advance payment to Glencore when the transaction closed. Thereafter, Franco-Nevada received the right to take 300 ounces of gold and 4,700 ounces of silver for every 1,000 tons of copper concentrate Glencore shipped from the mine. Once the total amounts of metal received exceed 630,000 ounces of gold and 10 million ounces of silver, Franco-Nevada will receive 30% of all gold and silver shipped from the mine.

In exchange, Franco-Nevada agreed to pay 20% of the prevailing spot price of gold and silver for the shipped metal, until it has received a total of 750,000 ounces of gold and 12.8 million ounces of silver. Thereafter, the price that Franco-Nevada will pay Glencore jumps to 30% of spot.

At the time, Franco-Nevada had high hopes for the Glencore stream. The companies noted that Antapaccay has been expanding since late 2012, with Glencore spending more than $1.5 billion to develop the property. The streaming company said that it expects 60,000 to 70,000 gold equivalent ounces from the stream in 2016, and that should rise to 70,000 to 80,000 on average over the next five years. Moreover, the way the parties structured the agreement, Franco-Nevada gets to participate in further geographical expansion of the Antapaccay concession beyond the physical limits of the current mine. Glencore expects the mine to produce until 2030.

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Image source: Franco-Nevada.

How the Glencore deal has done

So far, Antapaccay has delivered well on its promises. In the first quarter, Franco-Nevada reported two months' worth of production from the mine, with deliveries of about 8,900 gold equivalent ounces during the seasonally low period for the region. Second-quarter production from Antapaccay climbed dramatically, bringing in almost 19,600 gold equivalent ounces. That figure climbed to nearly 22,200 ounces in the third quarter, bringing the year-to-date total to more than 50,000 ounces and putting the project very much in line with its original guidance for the full year.

One interesting aspect of the Glencore deal was that Franco-Nevada financed the project entirely from sales of shares. The offering ended up being oversubscribed, with Franco-Nevada boosting its size from $550 million to $920 million. Investors who bought in at the offering price of $47.85 per share have seen their stock value rise by a third in the interim, showing the payoff from their confidence in the streaming and royalty company's overall strategic vision.

Looking for more deals

Franco-Nevada learned a lot from the Glencore transaction. Perhaps the most important is that when mining companies are in financial trouble, it's an opportunity for those who have money to offer financing with terms that are extremely attractive to the party putting up the cash.

Moreover, investor appetite for such deals gives Franco-Nevada an edge going forward. If it wants to make a big transaction, it can once again turn to equity investors and ask for more capital to pursue growth opportunities. Even under tough industry conditions in early 2016, investors were willing to buy into that thesis, and that could produce even bigger gains for Franco-Nevada going forward.

The precious metals industry has been volatile, but Franco-Nevada has navigated it well. Looking ahead, the company should get more chances to expand further with lucrative deals that could produce even bigger long-term gains.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.