St. LOUIS (ResourceInvestor.com) -- Royal Gold [TSX:RGL; Nasdaq:RGLD] announced today that it will take a stake in the mineral rich Penasquito project. The mining royalties company will pay $100 million in cash and stock for a 2% royalty on Minera Kennecott SA's Penasquito stake.
"We are very pleased to obtain this substantial royalty on a world class, long-life project and become associated with yet another senior mining company. This acquisition further diversifies our royalty portfolio, augments our future revenue stream, and positions the Company to sustain high quality royalty revenue for many years into the future," Tony Jensen, Royal Gold's President and CEO said in a company press release.
Royal Gold will pay $80 million in cash and the remaining $20 million through 577,434 shares. The company also received rights to buy additional royalties on properties in the region ranging from 1.0% to 2.0% on a number of properties in the region. The right to these additional royalties expires on May 1, 2007.
Penesquito
The Penasquito property, which is being developed by Goldcorp [NYSE:GG; TSX:G], is located in the mining state of Zacatecas, Mexico. It is composed of two main deposits called Penasco and Chile Colorado.
According to a feasibility study, the deposits contain Proven and Probable reserves of 10 million ounces of gold, 575 million ounces of silver, 8 billion pounds of zinc and 3.7 billion pounds of lead. The drilling results represent 150 core holes totaling 80,000 metres.
Very strong mineralization was intersected west of the Penasco pit revealing 440 metres of 0.63 g/t gold, 75 g/t silver, 1.06% lead and 1.64% zinc from 392 to 832 metres, which included 282 metres of 0.88 g/t gold and 97 g/t silver, 1.48% lead and 2.20% zinc.
The project also boasts a respectable mine life of 17 years with annual production expected at 388,000 ounces of gold, 23 million ounces of silver, 303 million pounds of zinc and 156 million pounds of gold. Co-product cash costs are forecast at an average of $125/oz for gold, $4.91/oz for silver and $0.44/lb for zinc.
(Silver Wheaton [NYSE:SLW; TSX:SLW] acquired the right of first refusal on future silver production from the project in September.)
Penasquito is expected to come online during late 2008 with full production coming in 2012. Royal Gold said that if the 2008 schedule was met, it could "expect to begin receiving royalty revenue in late calendar year 2008."
According to Goldcorp, engineering work for process facilities is proceeding ahead of schedule. The site has all the necessary permits to begin building the ancillary facilities such as roads, offices, and camp structures which will support mine construction in 2007.
For 2007, Goldcorp will focus on the completion of its in-fill drilling in an effort to convert resources into reserves. The exploration budget for next year tallies up to $20 million and Goldcorp stated that it will continue to assess other exploration targets in the region.
Royal Gold
As opposed to exploring and developing its own resources, Royal Gold instead owns and manages the royalties of precious metal mines via its royalty portfolio, giving investors a different method to seek value in the commodities sector.
The company said that it holds royalties "without incurring the ongoing capital or operating costs associating with an operating mining company," and providing "valuable leverage to improving gold prices with sliding-scale royalties."
Royalty Gold's flagship producing project is the Pipeline Mining Complex, owned by the Cortez Joint Venture, a JV between Barrick Gold [NYSE:ABX; TSX:ABX] (60%) and Kennecott Explorations (Australia) Ltd. (40%), a subsidiary of Rio Tinto [NYSE:RTP].
The project produced 125,365 ounces of gold and provided Royal gold with $4.5 million in revenue for Q1 2007. (A full listing of Royal Gold's portfolio can be found here.)
In early November the company announced its Q1 2007 financial report with income of $5 million, or 21 cents per share on royalty revenue of $9.7 million; representing a premium to the corresponding period a year earlier of $3.1 million or 14 cents per share on $6.8 million in royalty earnings.
Share Activity
Shares of Royal Gold have fluctuated throughout the year; however, they have been on a steady climb since late August as seen in the accompanying graph. Shares today were trading down 1.54% or 66 cents on the TSX to C$42.29.
