I do not have a definitive answer to the headline question. But a brief investigation starting from bare facts out on Thursday suggests that at the very least people with both direct and indirect ties to well known copper-market caller, Michael Farmer, and his Red Kite funds are possibly involved with one of the larger net smelter return royalty (NSR) acquisitions in recent months.
First, a quick bit of background on Western Copper and Gold and its sale of a NSR on its Casino deposit. On Thursday Western Copper and Gold said that an arm’s length buyer – “8248567 Canada Limited” – had agreed to pay it C$32 million for a 2.75 percent NSR on its Casino project in the Yukon. The NSR sale followed an acquisition, by the same buyer, of a five percent net profit interest in Casino earlier this year for C$30 million from Strategic Metals. Indeed the NSR is essentially a conversion of that NPI. Western Copper and Gold agreed to sell the 2.75 percent NSR in return for the C$32 million and the cancellation of the five percent NPI.
Beyond the question of who this mystery royalty buyer is – not it would seem one of the publicly traded royalty companies, but more on that in a moment – the acquisition is itself interesting for what it says about Western Copper and Gold. It means a group or individual, very well funded, is a strong believer in Western Copper and Gold and willing to make a C$62 million bet Casino gets through permitting and gets some billion dollars in funding to build what could be a massive open-pit mine on a deposit estimated to contain 8.4 million ounces gold and 4.4 billion pounds copper.
Yes, a gutsy and forward-thinking move, to be sure, on an NSR that could prove quite lucrative if Western Copper and Gold jumps through permitting and engineering hurdles in the next few years (which, notably, it is now fully funded to do).
Indeed, for Western Copper and Gold valuation-wise the C$32 million is a remarkable sum. Its marketcap is currently C$81 million, and for it to have gone to markets to raise that C$32 million would have meant gut wrenching dilution. Speaking with me on Thursday, Western Copper and Gold President Paul West-Sells said that the junior had considered going that route, but that it was doubtful Western Copper and Gold could have raised $32 million given the terrible shape of financing markets for juniors. Moreover, had it tried anyway, a couple months ago Western Copper and Gold’s marketcap was closer to C$60 million, so a $32 million financing would have meant issuing some 50 percent more shares.
“Excessively dilutive,” was how West-Sells described this prospect.
Further, as West-Sells pointed out, the C$62 million that the semi-secret NSR buyer has now put into Casino also suggests an overall valuation of Western Copper and Gold closer to C$600 million, or roughly ten times its current market cap. That in itself is an intriguing part of the NSR sale.
But back to the question at hand about the identity of this NSR buyer. It’s an interesting one to consider as the acquisition would appear to come from beyond the better known and publicly traded royalty firms. You would have to think if the NPI and then the NSR had been bought by such a royalty company we would have heard about it by now in a press release or a quarterly filing. Yet, as far as I know, none of these firms have laid claim to the acquisition.
Of course, I asked Western Copper and Gold’s West-Sells if he would tell me more about 8248567 Canada Limited. The answer was that he would not, “other than to say it is a group that is active in the royalty field.”
Indeed, based on my research, it would appear that this group could well have connections to Red Kite Capital Management and other funds well known for having made savvy calls on the copper market, and which companies are active in mine finance, especially in the copper sector. I have been unable to confirm, however, whether they are directly involved in the acquisition so this is speculation based on some circumstantial evidence.
I started with a search of Industry Canada for registered information on 8248567 Canada Limited. The company is listed therein with a brief outline available on the Internet (report here). According to this report 8248567 Canada Limited is an Alberta-based business incorporated in July of this year; with a contact address at 3400-350 7th Avenue, SW Calgary, AB T2P 3N9, Canada; and, most intriguingly, that it has two company directors: Gordon J. Fretwell and Priscilla Murray Brown.
The address is notable as it is the corporate address of the Calgary office of law firm Fasken Martineau (website here). Interestingly, Fasken Martineau, a high level firm that is very active in the resource sector, has advised royalty streamers in the past, including Royal Gold on its C$700 million acquisition of International Royalty in 2010.
But it is the names Gordon J. Fretwell and Priscilla Murray-Brown that are potentially the most revealing. Bloomberg Businessweek carries a profile for a Gordon J. Fretwell whose past directorships included a seat on International Royalty’s board of directors starting in 2003 which would give him an indirect link to Red Kite as well as prior experience in the Royalty sector
Likewise, Murray-Brown would also appear to have close connections to Red Kite. She has been listed by the SEC as a Bermuda-based director of both the Red Kite Explorer Fund and Red Kite Mine Finance Fund (e.g. report here and here). These are both funds associated with Farmer, who is also listed by the SEC as a director alongside Murray-Brown in the aforementioned reports.
In sum, this appears to me to be possible evidence that the directors of the company that bought Western Copper and Gold’s Casino NSR are personally connected to top level Red Kite management. Of course, the obvious question now becomes, is a Red Kite company behind the NSR acquisition?
This is not a question to which I have yet been able to find a definitive answer. No doubt all will be revealed in time.
But whatever the case may be, one fact is clear. The publicly traded royalty companies – widely viewed as the best performing companies in the precious metals sector in the past couple years – may now have added competition from what looks to be an experienced potential competitor.