Even David Cohen, Gold Wheaton's chairman and chief executive officer, admits his business was struggling as a standalone business.
Gold Wheaton owns three significant royalty streams, one in Canada and two in South Africa. The foreign assets have been troubling. First Uranium's Ezulwini project in South Africa has had a choppy track record, and the Mine Waste Solutions project, also owned by First Uranium and located in South Africa, has only recently gone into production.
With limited revenue coming in, Mr. Cohen had trouble expanding his business by buying more royalty streams. Making things worse, surging commodity prices have made these streams even more expensive.
By merging with Franco-Nevada , Gold Wheaton's shareholders get both an immediate cash payout, as well as a Franco-Nevada shares. Mr. Cohen thinks that's a great deal because following the acquisition, the acquirer's cash flow will immediately pop by $100-million, which could push the share price higher. There is also speculation of a dividend hike.
Franco-Nevada doesn't deny Gold Wheaton is a bit of a risky play. "The market is absolutely right. The jury has been out in terms of whether these things would perform or not," chief executive officer David Harquail said on a conference call Monday.
But he's willing to take the risk because the additional royalty streams bump his firm's precious metals holdings to 86 per cent of its portfolio. Franco-Nevada has promised shareholders they would maintain at least a 70 per cent precious metals position to keep it in line with big name gold producers, so now they have room to buy different streams, like oil and gas plays.
However, Mr. Harquail admits he wasn't expecting to strike a deal at this time. Everything was put in motion when Quadra FNX Mining Ltd. declared its 34.5 per cent block of Gold Wheaton shares a non-core asset on Friday. Franco-Nevada quickly swooped in and bought the position, and now they are buying the whole comapny.
Mr. Harquail said the deal pretty much came together this past weekend, but added he always had his eye on Gold Wheaton. "A lot of the things we've been working on for over a year and a half fell into place really quickly," he said.
BMO Nesbitt Burns served as Franco-Nevada's financial adviser and Gowling Lafleur Henderson LLP advised on legal matters. Paradigm Capital Markets and Cassels Brock & Blackwell LLP advised Gold Wheaton.
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Tim Kiladze