As anticipated by Mineweb and mining industry insiders, Denver’s International Royalty Company has partnered with cross-town mining royalty rival Royal Gold in IRC’s fight against a hostile takeover by Toronto’s Franco-Nevada.
Royal Gold Chairman Stan Dempsey, a former top Amax mining executive, and Franco Chairman Pierre Lassonde, a former Newmont president, are well matched in experience and expertise concerning mining M&A.
Royal Gold and IRC announced they have undertaken a plan of arrangement which proposed each common IRC share will be exchanged for either C$7.45 in cash or 0.1385 common share of Royal Gold or a combination thereof, subject to a maximum of US$350 million in cash and a maximum of 7.75 million Royal Gold common shares.
The transaction values IRC at C$749 million, a premium of 70% over IRC’s 20-day average trading price on the TSX through December 4, 2009. The deal would close in February 2010.
Royal Gold CEO Tony Jensen said, “The combination of Royal Gold and IRC brings together a portfolio of nearly 200 royalty interests and creates a combined company that would hold royalty interests on some of the highest quality mines in the world, generate substantial cash flow, and yield one of the most attractive project pipelines in the entire mineral industry.”
Jensen estimated the combined companies generated US$113 million in royalty revenue, 71% from precious metals, during the twelve months prior to September 30, 2009. “With most of the future growth in the IRC portfolio coming from precious metals, both sets of shareholders will benefit from gold focused revenue growth.”
The company’s combined portfolio would include 31 producing royalty properties, 20 development stage properties, and 143 evaluation and exploration prospects.
IRC CEO Doug Silver, a longtime mining managing analyst, said, “Royal Gold’s strong management team has built a high-quality royalty portfolio with impressive organic growth, and the even more rapid growth rate from IRC’s existing precious metals royalties will enhance it significantly. The combined asset base, particularly with its concentration of precious metals royalties on long-life, long-cost mines, should afford shareholders the benefits of premium share valuations and outstanding organic growth for years to come.”
The cash required for the acquisition will come from available and unrestricted cash, together with committed facilities totaling US$225 million. The closing of the transaction will require at least 66 2/3% of IRC shareholders voting in favor.
If Franco-Nevada wins in the battle for IRC, Royal Gold could win a $32 million break fee. However, cash-rich Franco is considered the dominant mining royalty company and could beat Royal’s bid. Nonetheless, through the plan of arrangement, Royal has the right to match any new Franco bid.
Haywood Securities, in a recent analysis, said, “We view a counter offer from Franco-Nevada as possible but unlikely give the valuation of IRC and the break fee. FNV stands to make a nice return on their 3.924 million shares (likely US$10-US$15 million) acquired prior to making their cash offer for IRC earlier this month.”
Analyst Kerry Smith said the IRC bid “comes at an opportune time for shareholders, as uncertainty around the strike at Voisey’s Bay and no revenue from Pascua-Lama until 2013 suggests potential for underperformance going forward.”
Nevertheless, Haywood suggested, “The royalty model remains very attractive, as International Royalty has no capital commitments and is not exposed to operating costs at the mines on which it holds royalties. Its only exposure is to metal prices and the potential for any particular operation to be shut down, temporarily deferring its royalty revenue stream.”
Franco-Nevada formally launched its US$640 million all-cash takeover bid for International Royalty last week, offering C$6.75 for each IRC share.