Due Diligence Process in New Acquisitions
Since our initial public offering in December 2007, we have continued to build our asset portfolio through additional acquisitions, adding numerous royalty, stream and other interests.
When evaluating new opportunities, we employ extensive methods to identify, assess and, where possible, mitigate our risks prior to entering into royalty and stream agreements. Franco-Nevada’s management team uses a multi-disciplinary approach when evaluating potential transactions. Our team consists of professionals with significant experience and expertise in the fields of geology, mining, metallurgy, engineering, oil & gas, finance and law. Environmental, social and governance issues relate to a number of these disciplines and Franco-Nevada’s experience in evaluating and structuring royalty and stream transactions has given Franco-Nevada significant exposure to and experience in addressing such issues.
In addition to relying on management’s expertise, Franco-Nevada benefits from the experience and expertise of its Board of Directors. Board members are very active in the review of potential investments including participating in due diligence and providing technical, operational, political, financial, environmental, corporate social responsibility and other expertise.
When conducting due diligence, Franco-Nevada routinely engages third-party experts to assist in its evaluation of new investments. Third-party experts that may be engaged include external legal counsel (including in the jurisdictions in which a project is located), technical consultants, environmental consultants, corporate social responsibility consultants and governance consultants, for the purpose of assessing political, environmental, social, legal, technical and regulatory issues in applicable jurisdictions and the Third-Party Operator’s management of the same. These third party experts report their findings to management and/or the Board of Directors.
The due diligence normally conducted by Franco-Nevada generally includes, but is not limited to, the following:
- review of the historical record of the Third-Party Operator and the specific project from both public sources as well as information provided by the Third-Party Operator
- review of the general conditions of the jurisdiction in which the project is located, including local government and local community relations
- analysis of the plans and prospects for the Third-Party Operator and project going forward
- analysis of the environmental, social and governance programs and policies put in place by Third-Party Operators and the effectiveness of same
- country risk analysis where the project is located
- site visits to the project with third-party consultants, as appropriate
- extensive engagement with the Third-Party Operator’s management team
When conducting due diligence, environmental, social and governance issues are considered as these are critical to the long-term success of a project and the industry generally, which, in turn, is key to Franco-Nevada’s success. Franco-Nevada will typically assess the following as part of its due diligence:
- whether any external certifications have been obtained by the Third-Party Operator or project
- whether the Third-Party Operator is a member of the World Gold Council and/or has committed to the principles of the International Council on Mining & Metals or other relevant standards
- water management and reduction plans
- other environmental programs and initiatives put in place by Third-Party Operator including carbon reduction and biodiversity protection
- operating plans and closure plans
- community initiatives and engagement with indigenous peoples
- safety records
- workplace standards, protections and policies
In addition, when engaging in exploration efforts as part of advancing a property or to conduct due diligence in advance of undertaking an investment, Franco-Nevada undertakes to be guided by the Principles and Guidance for a Framework of Responsible Exploration as set forth by the e3Plus program of the Prospectors and Developers Association of Canada (the “PDAC”).
Franco-Nevada also uses a proprietary ranking system to evaluate potential investments. Assets are ranked on a number of quantitative and qualitative factors (including environmental, social and governance factors) to ultimately come up with a ranking against Franco-Nevada’s existing assets as well as other mining projects. Franco-Nevada aims to hold highly ranked assets in its portfolio.
Following the completion of due diligence, if management proposes to proceed with a transaction in excess of a threshold amount, it must first seek Board approval. Below this threshold amount, management has discretion to proceed with an investment but must report the transaction to the Board in order to refresh its executive authority before being able to proceed with another investment.
The due diligence process will vary in each case as Franco-Nevada deems necessary or appropriate in the circumstances, all applied on a risk-adjusted basis. For instance, the purchase of newly created royalties or streams, requiring the negotiation of a binding agreement with the Third-Party Operator of a project, will typically permit more comprehensive due diligence than the acquisition of existing royalties where Franco-Nevada is acquiring royalty interests, often within a royalty portfolio on an as-is, where-is basis, from a third party rather than the Third-Party Operator. In such latter cases, Franco-Nevada must rely on the limited information provided by the third party as well as any publicly available information with respect to the Third-Party Operator and the project. The due diligence process will also vary based on the jurisdiction, type of mineral, and whether the project is an exploration, advanced or producing project, among other things.
Ongoing Management Through Contractual Rights
When negotiating new investments, we endeavour to negotiate our royalties and streams to provide us with information from the Third-Party Operators as well as to mitigate risk.
Out royalty and stream agreements typically include, the following types of provisions:
- Reporting Obligations. Royalty and streaming agreements typically contain a series of reporting obligations including the delivery of monthly and annual reports, updated mine plans, forecasts and other documentation, which serve to keep Franco-Nevada informed of operations. Third-Party Operators are also typically required to notify the Corporation of any material adverse changes to a project or its operations. Upon a material adverse change occurring, Franco-Nevada maintains regular communications and offers its guidance and expertise to the Third-Party Operators where appropriate.
- Audit and Inspection Rights. Franco-Nevada may be entitled to audit the books and records of the Third-Party Operators on a periodic basis and may access and inspect the properties comprising the project. These rights provide Franco-Nevada further insight into the operations and management by the Third-Party Operators of such operations and confirm compliance with the terms of the agreement.
- Operating Covenants. Royalty and streaming agreements typically contain certain operating covenants designed to ensure that Third-Party Operators are conducting mining operations in accordance with applicable law and responsible practices.
- Transfer Restrictions. Franco-Nevada’s royalty and streaming agreements may have restrictions that either (a) require consent for the Third-Party Operator to transfer the project, or (b) otherwise establish the circumstances in which such transfer is permissible. Such constraints are intended to ensure Franco-Nevada continues to be partnered with a quality operator over the life of the agreement.
- Remedies. Streaming agreements afford Franco-Nevada the ability to terminate and recover specific remedies upon a material breach of the contractual provisions, providing the Corporation with the flexibility to exit unsuitable arrangements.
There can be no assurance that the Corporation will be able to identify or mitigate all risks relating to holding royalty and stream interests in respect of properties, mines and projects.