Among the biggest gainers in our Supervised Lists are Euro-Nevada (EN.TO) and Franco-Nevada (FN.TO). For the purpose of this article let us refer to both companies as "ENFN," as they are in reality only one company, with the same management. The stocks are virtually unknown in the United States yet, in our opinion, are as close to a "sure thing" for further growth as anything we've seen in a long time. We have enormous respect for the brilliant management team of Chairman Seymour Schulich and President Pierre Lassonde, and would like to report on a recent meeting your editor had with Mr. Schulich.

A reason these two blue-chips are so unknown by most investors is that they represent a brand-new type of industry, plus they are not listed on the New York Stock Exchange, where they really belong. They are neither gold-mining companies, nor are they simply lenders. We describe Euro and Franco-Nevada as, "owner-operated, gold-royalty companies," a new industry. Putting it as simply as possible, ENFN lends money to a gold miner with a large property, and gets a percentage of all the gold to be found on that property in the future! The more gold found, the more ENFN gets, but the miner does all the work and investing in the infrastructure of the property! ENFN is not merely a lender, but a "percentage partner," with income growing commensurately with development of the mine. ENFN does no mining, does not need a large staff, and takes none of the risks provided gold is found. What a sweet position in which to be, truly a "royalty."

We describe Euro and Franco-Nevada as, "owner-operated, gold- royalty companies," a new industry.

Historically, Euro and Franco were kept separate for taxation efficiency, but they really should be merged, and probably will be at some future date. For the moment, there are slight differences. Within these Toronto-based companies, Franco includes oil, gas and base metals, while Euro operates in the Pacific from an office in Australia. So Euro is the international arm and Franco is in Canada and the United States, with all the oil in Franco. Euro is starting to operate in Latin America, with royalties from French Guyana and Mexico, and is looking at other Latin-American deals.

ENFN is modeled after the old oil & gas royalty trusts and began by buying a finite number of existing royalties created by gold prospectors. The brilliant leap forward was not to be limited by pre-existing royalties of prospectors vending their property to larger mining companies, instead utilizing financial engineering, with companies with large land spreads where there's a lot of room for growth in exploration. The royalties revenues rise without any extra expenditure by ENFN! This is the secret key to their growth, because gold miners keep plowing money back into the ground for exploration there were over a billion dollars spent by companies last year on lands in which ENFN has royalties. This creates tremendous leverage because whatever else is found is a benefit to ENFN. For example, when ENFN bought Goldstrike it was operated by a tiny company. A year later Barrick took it over and has invested a billion-and-a-half dollars since then such that reserves have increased from 600,000-gold ounces when the acquisition was made in 1986, now to around 30-million ounces.

A similar bonanza occurred at Getchell, which was bought when they had one-million ounces in reserves and now they're up to 8-million ounces, while ENFN hasn't put up an additional penny for all that increase in reserves. Getchell's production is rising from approximately 200,000 ounces a year to around 500,000 ounces a year.

Most of ENFN's properties have fixed costs, while infrastructure and mill are not mobile, so gold miners always strain hard to find additional reserves locally to put through that same mill because it lowers costs; the incremental cost of treating those reserves is relatively small as compared with finding a deposit somewhere else. The royalty holder is the great beneficiary of this imperative.

Franco does the same thing in the oil business, where they have an average 4% royalty on one-and-a-half million acres of land annually. A hundred-million dollars a year is being spent on that land. Franco owns land in an old area of Saskatchewan where most of the production has been from around 4,500 feet in depth, but last year a company called Berkeley, together with Shell, started using two new technologies that allowed them to get down to 9,300 feet and identify patch reefs at that depth. Their success ratio using this new geophysical prospecting tool on 13 new wells was 100%. These new wells come in at up to 2,000 barrels a day. It costs a million-and-a-half dollars to drill these wells, and they pay out in 60 to 90 days. Franco has royalties running anywhere from 2-1/2% to 25% on those wells and they anticipate the cash flow from the oil & gas division will double by this one play alone; the amount of land involved is around 45,000 acres, representing only 3% of the total lands they have. So, essentially, the deeper horizon being developed at a high cost to the operators yields 4% from the entire incremental production at no extra cost to Franco. This is the built-in growth factor that makes it as much of a "sure thing" as one ever gets in investing, reflected in the above charts.

Why do miners sell a royalty to ENFN? Companies might need money to continue to prove up a property enough to take them to feasibility, or perhaps buy out a minority partner. The advantage a royalty has is that ENFN does not take control of their company, nor tells them how to develop the property, plus they are paid a fair price for what exists at the time of purchase which are big advantages over borrowing for example from a bank.

The Midas Mine discovery, first announced by ENFN in late 1995, interests us greatly and will be an enormous factor to ENFN in coming years. John Livermore, a good friend of Mr. Schulich's, discovered the area in 1960. Mr. Schulich felt, if you had told him that there were to be 80-million ounces discovered in only one area around Carlin, the only place you would have looked at was the Midas area because between 1906 and 1920 they had produced a half-million ounces, all high grade and visible (with a cutoff of one ounce). In those days, they had no RC drills, no electricity, no heap leaching, and ran the mills with steam fired by sagebrush! The reason ENFN found the Rex Grande was because it was 300-feet below the surface and previous miners never had the tools to look for it. So ENFN acquired 25,000 acres in the Midas area cheaply, although the land was broken up and they had to deal with 36 different groups to put the package together which took three years. This demonstrates both vision and patience. First Marathon Securities recently estimated that, "A target of 8-million plus ounces in the `resource category' on the entire property is becoming more likely." The first orebody at Midas, Rex Grande has shown excellent continuity and is still open laterally and at depth. It will likely be the highest-grade gold mine in the United States.

Numbers will be announced on 22 Jan 97, but Midas will, in our opinion, produce profits equal to what Goldstrike is generating to the ENFN group. That is with only 1,500 feet of the strike length, and that's only 5% of what they've got! The cash flow will be slower in coming (unlike oil and gas where cash flow starts within a year) but Midas will be coming on stream in 1999 or 2000 because it takes that long to get the permitting, build the plant, and get into production. ENFN is just in the earliest phases of the Midas payback, described by Mr. Schulich as, "Breathtaking, and we'll likely get all of our money back within a year from the date of the start of production."

What boggles the mind is there are merely 45 people in the entire ENFC organization, including engineers, lawyers, geologists and accountants, handling enormous assets with only a few people. Your editor said to him,

Because the company is still so little known, the market isn't paying much attention to the fact that Franco owns the entire western downdip extension of the Hemlo orebody, and is now joining a 2,000-foot underground drive using the Teck-Homestake underground facilities. They bought it for a million six, it's been written down to $800,000 for tax purposes, and is estimated to contain a resource of 1.76 million ounces. Their Queenston joint venture is similar in that Franco walked into the second-largest gold camp in Canada and for $4-million net after tax got a 50% interest on 25,000 acres, plus a mill with a replacement value of $15 million, plus 1.2-million ounces gold resources, plus a royalty on the Macassa Mine it's unbelievable. This strategic Kirkland Lake land package covering 17 miles of strike length of the Larder Lake Break could be yet another big winner. Recent drilling results were spectacular.

Possessing massive personal wealth, your editor asked Chairman Schulich what advice he had for young TDLrs. He replied, "If I were young, the easiest way to get money would be to go to Asia, see what they don't have, and bring it to them. Similarly, see what they have and we don't have and bring it back. And that's how to get rich."His favorite activities are poker and skiing Lake Tahoe. Your editor prefers skiing St. Moritz, which Mr. Schulich doesn't like "Because it's too dangerous. I'm an intermediate skier, and I'm too rich to break a leg these days!"

ENFN is also not very well known because Mr. Schulich is so reclusive, but we believe that he is destined to be much better known in the future. Why? He guesses, "We're doing well in the bull market but when we'll really shine is during the next bear market. That's when our companies will be known as `Goldbusters' because if public-lending markets shut down, where are gold mines going to get money for feasibility studies? For proving up properties? For bridge financing? For completion guarantees? Whom will they call? We're going to be sitting there with a billion seven and no debt. What happens if there's a battle in South Africa, with tribal warfare? What happens if all the gold that was sold in the futures market is impacted by a shutdown in gold production by civil war and South Africans can't cover all those sales? There could be defaults on those forwards and the result would be a buying panic."

"We're doing well in the bull market but when we'll really shine is during the next bear market."

Mr. Schulich likes platinum and is working on acquiring an additional royalty in this commodity. But he likes oil even more, now with a million-and-a-half acres he wants to go to four or five-million acres. Revenue will double in the next year to twenty million. He adds, "We became rich being a bottom feeder and conservative. We wait for a bear market and buy things cheaply, so in this market we are very happy to sit. We buy for cash because we look at our stock like the currency of a country. (In my mind our stock is like Switzerland.) We don't give our stock up, so we'd rather fill our treasury with cash and wait to buy low. Why is it the oldest guy has the patience? One thing I've learned playing poker is patience. Sometimes I'll sit for four hours and play three hands, but I'll make all my money on those three hands."

TDLrs have already Accumulated major positions in Euro and Franco, and as a "strong buy" more should be bought on the current pullback. For additional information TDLrs may call them at (416) 480-6480, identify yourself as a subscriber to The Dines Letter, and request an information package.

June 28, 1997

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