Gold Wheaton (TSX: GLW) sold itself today for 40% cash and 60% stock for about CAD$830 million. The acquiring company is Franco-Nevada Corporation (TSX: FNV). The buyout price caused a jump of about 14% in GLW shares today.
Both corporations are very similar in that their economic interests lie with royalty streams derived mainly from gold mining. FNV has other metals and oil and gas royalties as well.
I have done a lot of research on the valuation of Gold Wheaton, primarily because of its relationship to First Uranium (TSX: FIU), and can safely say that FNV paid what would be the high end of a fair value range for Gold Wheaton’s assets. The primary variable would be the assumption of the future price of gold.
Gold Wheaton does own an equity interest in First Uranium (14 million shares or a 7.7% interest) plus $20 million in First Uranium senior secured notes, which if converted into shares, would result in an increase in equity ownership to about 10% of the company.
I generally do not believe in the royalty trust model of company, in that the administrative costs and management salaries generally are overburdened by economic benefits of purchasing cash streams from mineral proceeds. Royalty companies then become a matter of getting capital cheaply and investing into projects with a higher return, which means that you are investing in a bank that is choosing to align itself with the price of a commodity. There is usually more value created with mining operations than purchasing royalty streams, but it depends on the whims of the marketplace at that time.
Such companies become a bet on the underlying commodity price and the ultimate control goes to the company that you are purchasing the royalty from – if they suddenly decide it is unprofitable to mine from a particular venture, they will have a higher incentive to doing so if they have a lesser share of the revenue. The company purchasing the royalty will be out of luck at that point. In Gold Wheaton’s case, the Quadra FNX (TSX: QUX) venture was quite profitable for Quadra, who wisely chose to sell their nearly 1/3rd stake in Gold Wheaton at an opportune time.
One person to pay attention to in the future is soon-to-be former CEO of Gold Wheaton, David Cohen, who seems to be fairly good at being involved with companies that generate value. He is the chairman of Eastern Platinum (TSX: ELR)
I will disclose I flipped some GLW shares like pancakes in 2010, which created some capital gains that would purchase quite a few pizzas. I currently have no position and have no further intentions of acquiring anything related to FNV.