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JTVIR provides independent research reports to institutional clients for fixed and subscription fees. JTVIR's affiliate, JTVIO, provides advisory services to entities in connection with financing deals, mergers and acquisitions, mine services, valuations, fairness opinions, strategy, corporate services and capital raising. For its advisory services, JTVIO may be compensated up to a year after the termination of JTVIO's services or advisory agreement. It is JTVIR's policy not to provide research reports or updates to such reports for any entity that has engaged JTVIO's services.
JOHN TUMAZOS VERY INDEPENDENT RESEARCH, LLC (JTVIR LLC) is
registered as an investment advisor in the State of NJ. We have 30-odd
institutional clients in the U.S. and Canada. We do fundamental research on
commodities markets and common
stocks in the metals, fertilizer and forest
products sectors. For example, we typically publish 20 investment reports per
month and travel for research each month often travelling abroad. We formed our
company in 2007 when the former Prudential Equities Group shut down. We are
regulated like a
money manager, but our business is to advise
active money managers and we also manage a few accounts. We are not a
broker-dealer, but deliver the same basic research services that we had since
1981 as an employee at major brokerage firms. In our business model we sell our
research direct payments and deliver it via email and our
web site. Our clients pay us via direct checks, wire transfer, commission
sharing agreements or soft dollar payments. We have limited distribution and
depend on our existing reputation, existing relationships and "word of mouth."
We have provided corporate advisory services to seven small
emerging mining companies since inception. John Tumazos became Chairman of the
Board of one such company in which he has invested, Texas Rare Earth Resources.
May 22, 2013
We can imagine a “next phase” of growth for creative royalty companies funding sustaining capital spending for existing mines. For example, Rio Tinto may accept royalty funding to go underground at Bingham Canyon if iron ore or aluminum prices fall. FCX might supplement monies for Grasberg underground cap ex if copper or natural gas prices fall. Barrick Gold may need extra funds with soft gold prices, poor equity markets, a lesser share of Dominican cash flows and larger Pascua-Lama outlays. Glencore-Xstrata’s net debt is near $65 billion, and its Sudbury nickel, Antamina copper or lead-zinc mines have precious metals byproducts. Such opportunities could be billion dollar transactions much larger than the Pretium royalty, and more beneficial to Franco-Nevada. Some of these operators may be willing to sell gold streams on better terms after incidents such as Rio Tinto suffered in Utah on April 10th with a 150 mmt pit wall slide or the tragic loss of 28 lives FCX suffered on May 15th when a training room caved in underground.
We estimated that Franco-Nevada would double its March 2013 quarter pretax income if it paid $2 billion for a 250,000 oz gold stream on a mature existing mine like Grasberg, Antamina or Kennecott. A $500 drop in gold prices would cut the margin in half to $500 from $1,000 per oz, or $100 mm down from $200 mm pretax earnings net of finance and $500 per oz paid for the gold. We think that is unlikely in view of rising industrywide gold mining costs that we estimate rose $199 per oz in the March 2013 quarter and another $100 per oz in the June 2013 quarter. Buying just 125,000 rather than 250,000 oz of gold for $2 billion would cut returns in half. Alternatively, a combination of buying just 187,500 oz of gold, a $1,250 open market gold price and a continued 3% debt or blended 2.5% interest expense/interest income foregone would cut returns to 5% before taxes. We do not believe FNV, SLW, RGLD or another royalty company would accept 5% today, and this is just a “stress test.”
While we applaud it, the Pretium transaction is small and benefits post-2017 results by about a nickel per share. We estimate Franco-Nevada paid 10% to 30% of “fair value” in its $45 mm outlay for a 1.2% royalty after roughly 2 years of production or 500,000 oz on the Brucejack zones of Pretium based on Franco-Nevada’s target of a 5% return at spot gold, where it patiently waits for the optionality of higher gold prices or exploration success. Based on Pretium’s target 2,700 mtpd mill throughput, $1,500 estimated long-term gold prices, Pretium’s published “Valley of the Kings” 16.55 g/t gold and 14.58 g/t silver grades and our estimate of 97% gold and 92% silver recoveries, the 1.2% royalty should yield $9.2 mm to Franco-Nevada or a 20.5% return. If Pretium expanded to 4,000 mtpd after several years, Franco-Nevada would enjoy $13.6 mm or a 30.3% pretax return.
We raised our price target for FNV by $1 to $44 from $43 per share based on $1,500 long-term gold prices. We do not forecast any earnings growth in 2014-15, and cut our 2013-18 earnings estimates by nearly $0.40 per share per year due to a variety of setbacks among various mine operators. The detail of the report describes a multiple mines of weaker operators that are not performing well in Africa, Canada, Mexico or elsewhere.
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Copyright © 2008 John Tumazos Very Independent Research,