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Franco-Nevada, Teranga Entering Stream Deal

Zacks Equity Research

Canada-based gold-focused royalty and stream company Franco-Nevada Corporation (FNV) and another Canadian gold company Teranga Gold Corporation have agreed to enter into a $135 million stream transaction.

The transaction has enabled Teranga to enter into definitive share purchase agreements with Bendon International Ltd. and Badr Investment & Finance Company to acquire the remaining shares of Oromin Joint Venture Group Ltd. (:OJVG) and repay $30 million of its $60 million Macquarie Bank Limited bank loan with minimal dilution to shareholders. By purchasing the stakes of Bendon and Badr, Teranga will hold 100% interest in OJVG.


Franco-Nevada will offer a $135 million deposit of which $105 million will be used to buy Bendon's stake in the OJVG and $30 million to repay half of the currently outstanding Macquarie bank loan.


Once these transactions are complete, the combination of Sabodala and the OJVG satellite deposits are expected to enable Teranga to reach its phase 1 growth target of 250,000 to 350,000 ounces of gold production leveraging off of its existing mill and infrastructure in Senegal.


As per the stream agreement, Teranga will deliver 22,500 ounces of gold annually over the first six years followed by 6% of production thereafter.  Franco-Nevada's purchase price per ounce is marked at 20% of the spot gold price. The stream agreement will initially cover a 40 year term.


The combination is expected to offer guaranteed ounce delivery to Franco-Nevada with opportunities to share in Teranga's exploration success. On the other hand, it will provide greater growth, flexibility and higher free cash flow to Teranga.


Franco-Nevada will benefit from this transaction as an attractive stream asset will be one of its top contributors. Also it will deliver stable, immediate cash flows and increase gold contribution in its portfolio.


This is a mutually beneficial transaction for both the parties. Investment by Franco-Nevada in a well-run operation with an established track record and a favorable cost structure will provide greater exploration opportunity on land, covering a 70km strike extent on an emerging mineral belt.


On the other hand, Teranga with a 100% interest in OJVG will move a step forward in developing a pipeline that will aid near, medium and long-term production growth on an emerging gold belt and will be able to retain its focus on protecting the balance sheet. It will also prove to be beneficial for shareholders when gold prices increase.


Franco-Nevada currently maintains a Zacks Rank #3 (Hold).


Better-ranked stocks in the gold mining industry include Golden Star Resources, Ltd. ( GSS), Pretium Resources Inc. ( PVG) and AngloGold Ashanti Ltd. ( AU). While Golden Star Resources carries a Zacks Rank #1 (Strong Buy), Pretium Resources and AngloGold Ashanti hold a Zacks Rank #2 (Buy).

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