Franco-Nevada Corporation (FNV) has entered into a letter of intent (LOI.V) with Coeur Mining, Inc. (CDE). Per the LOI, Coeur will terminate its existing royalty stream agreement with Franco-Nevada on 50% of gold production from the Palmarejo operation upon completion of the minimum obligation of 400,000 ounces of gold by Sep 2016. Under the LOI, Coeur will pay $2 million to end the existing royalty stream agreement.
The companies have also entered into an LOI for a new agreement for the Palmarejo operation which will be effective once the older agreement ceases. Per the new LOI, Franco-Nevada will provide $22 million as capital required for the development of Coeur’s Guadalupe mine in Mexico. Franco-Nevada will also contribute $800 per ounce for 50% of the gold production from the Palmarejo operation, up from $408 per ounce in the existing agreement.
The existing royalty stream agreement would have added about $40.1 million to Palmarejo's annual costs applicable to sales, or $3.24 per silver equivalent ounce, once the minimum obligation is complete. Under the new gold stream agreement, the annual expected value of gold payable to Franco-Nevada amounts to $22.5 million and would be registered as a reduction in revenue rather than in costs applicable to sales.
With the new gold stream agreement, the Palmarejo mine will be benefited as its free cash flows will increase. The agreement will further aid in creating more prospects for high-return growth through exploration.
Franco-Nevada operates as a gold-focused royalty and stream company with additional interests in platinum group metals, oil and gas and other resource properties. Franco-Nevada’s strategy is to provide its shareholders with superior returns through a diversified portfolio of assets with high margins and geological upside. The company continues to benefit from its future expansions and exploration discoveries made by the operators or developers.
Franco-Nevada currently holds a Zacks Rank #3 (Hold).
Some other stocks worth considering in the gold industry include Agnico Eagle Mines Limited (AEM) and DRDGOLD Ltd. (DRD). While Agnico Eagle sports a Zacks Rank #1 (Strong Buy), DRDGOLD carries a Zacks Rank #2 (Buy).