Author: Andrew Willis

Royal Gold Inc.’s RGLD-Q share price sank on Monday after the Denver company announced friendly takeover bids for Sandstorm Gold Ltd. SSL-T and Horizon Copper Corp. HCU-X in a $5-billion transaction that will create one of North America’s largest gold royalty companies.

Early Monday, Royal announced a US$3.5-billion, all-share bid for Sandstorm and a separate $196-million cash bid for Horizon, both of which are based in Vancouver. Sandstorm is the largest shareholder in Horizon, with a 34-per-cent stake.

Royal’s share price dropped sharply on news of the takeover, closing Monday down 6 per cent on the Nasdaq exchange. Sandstorm’s share price rose 6 per cent on the Toronto Stock Exchange, and Horizon shares jumped by 67 per cent on the TSX Venture Exchange.

In recent years, numerous gold companies have seen their share prices drop after announcing takeovers, on investor concerns that the buyer has overpaid.

“Royal Gold outlined the transaction would be accretive to net asset value and dilutive to its operating metrics,” analyst Josh Wolfson at RBC Capital Markets said in a report. “Our take is this will be viewed as slightly negative to Royal Gold.”

Royal, Sandstorm and Horizon are royalty companies that provide upfront financing to miners in return for the right to a percentage of production from a mine, for the life of the project. The transactions, which Royal called Project Helix, give Royal significantly more geographic diversity and lessen the company’s reliance on any one gold mine.

“In the medium term, we question if this transaction reaffirms Royal Gold’s relative discount versus peers given low accretion, or if it will act as a catalyst for shares to re-rate given its larger liquidity and diversification,” Mr. Wolfson said.

Precious-metal prices are currently soaring on geopolitical unrest, with investors paying a premium to own the largest mining companies. Prior to announcing the takeovers, Royal’s share price was up by 36 per cent this year and Sandstorm shares were up 76 per cent.

“This is a milestone transaction for Royal Gold – it will significantly increase the company’s scale, diversification and potential for organic, long-term growth,” Royal Gold chief executive officer Bill Heissenbuttel said in a press release. “We’re looking forward to building on our investments in the Canadian mining sector.”

Royal offered 0.0625 of its shares for each Sandstorm share, a 21-per-cent premium to the closing price ahead of the July 4 weekend.

It also bid $2 a share in cash for Horizon Copper, an 85-per-cent premium to the company’s closing price last Friday. In 2022, Sandstorm sold a number of royalty interests to Horizon and took shares in the company as part of the payment.

Royal has 171 royalties on gold, silver and copper mines and an US$11.6-billion market capitalization. The company’s largest stake is in the Mount Milligan mine in British Columbia, operated by Centerra Gold Inc., which accounts for roughly 25 per cent of Royal’s net asset value.

If the Sandstorm and Horizon takeovers are approved by shareholders and the Canadian government, Royal’s largest royalty will be worth just 13 per cent of the company’s net asset value. Royal said that if the transactions go forward, it would increase gold equivalent ounce production – a measure that wraps in royalties on all metals – by 26 per cent.

Sandstorm has 230 royalty agreements, including rights to revenues from 40 operating mines. Its major assets include stakes in the Mara project in Argentina, which is being developed by Glencore PLC; the Antamina copper mine in Peru, owned by BHP PLC, Teck Resources Inc., Glencore and Mitsubishi Corp.; and Rio Tinto’s Oyu Tolgoi mine in Mongolia’s Gobi Desert.

“Joining forces with Royal Gold will amplify the strengths of Sandstorm’s portfolio and unlock new opportunities for our shareholders,” said Sandstorm CEO Nolan Watson.

Royal will continue to be a gold-focused company after the takeovers, with 75 per cent of revenues coming from the precious metal. The company said 41 per cent of production will be at mines in the United States and Canada, “and the remainder from countries where mining is a welcome and well-established contributor to local economies.”

Royal and Sandstorm executives have held informal merger talks for several years, according to a company executive. The two companies, along with Horizon, started serious negotiations in February, at a Bank of Montreal mining conference in Florida. The Globe and Mail agreed not to name the executive because they were not authorized to speak publicly about the transaction.

Both takeovers require the approval of two-thirds of shareholders in the target companies. The boards of all three mining companies endorsed the transactions. If approved, the deals are expected to close by the fourth quarter of 2025. RBC’s Mr. Wolfson said: “We see a competing offer as unlikely.”

The largest royalty companies are Vancouver-based Wheaton Precious Metals Corp., which has a $56-billion market capitalization, and Franco-Nevada Corp., which is headquartered in Toronto and has a $44-billion market capitalization.

As industry leaders, Wheaton and Franco-Nevada have market valuations significantly higher than Royal Gold’s based on metrics such as their stock price compared with their net asset value, cash flow and earnings before interest, taxes, depreciation and amortization, according to a recent report from RBC Capital Markets.

One of the country’s largest property owners, H&R Real Estate Investment Trust, is up for sale after receiving a hostile takeover offer.

H&R REIT HR-UN-T, which owns $10.5-billion of residential, industrial, retail and office properties, announced on Friday it formed a special committee of independent directors in February to consider its strategic options “after receiving an unsolicited expression of interest.”

The Toronto-based company said in a press release that since February, it has received several other proposals on “potential transactions.”

H&R REIT has hired investment banks and law firms to advise the special committee and the company. The company did not disclose who made offers, and the price of the potential transactions.

The price of H&R REIT units jumped by 15 per cent to $12.25 on the Toronto Stock Exchange after the company released news of the takeover activity. H&R REIT’s market capitalization is $3.3-billion.

“No decision has been made as to whether the REIT should proceed with a potential transaction, nor has any agreement been reached with a counterparty,” H&R REIT said in a press release. “There can be no assurance that the special committee’s process will result in any potential transaction or any other alternative transaction.”

H&R REIT owns properties in Canada and the U.S., and its mix of real estate sets it apart from peers, which tend to specialize in one sector, such as residential apartments, malls or industrial buildings.

Residential properties make up 49 per cent of H&R REIT’s portfolio. The company holds 18 per cent of its assets in industrial and office buildings and 15 per cent in retail real estate.

H&R REIT units trade on the TSX at a discount to their net asset value (NAV), as do units of many domestic REITs. In a report on Friday, analysts Jimmy Shan and Pammi Bir at RBC Capital Markets said potential bidders would likely put a $14.50 per unit NAV on the REIT.

“This will not be an easy transaction as 1) we believe it is unlikely that one buyer is interested in all properties; and 2) the office assets are difficult to underwrite in a largely illiquid market,” said the RBC analysts. “Stating the obvious, there is a better chance that an acceptable bid surfaces in the presence of competition.”

In mid June, RBC Capital Markets hosted investor meetings for H&R REIT chief executive officer Tom Hofstedter and chief financial officer Larry Froom. In a report published on June 18, the analysts said the two executives “provided a rather sober outlook on the state of affairs.”

Three weeks after the investor meetings, H&R REIT publicly announced the strategic review that has been underway for five months.

In 2023, hedge fund K2 & Associates Investment Management Inc. ran a successful activist campaign that put two new trustees on the H&R REIT board. The K2 campaign supported selling H&R’s retail and office building portfolios, steps the company has yet to announced.

The discount between the trading price of domestic real estate companies and the underlying value of their properties has led to several large takeovers in the past year.

In May, the executive chair of InterRent Real Estate Investment Trust, Mike McGahan, offered to acquire the apartment owner for $2-billion with the backing of Singapore sovereign wealth fund GIC.

Last year, New York-based asset manager Blackstone Inc. acquired apartment owner Tricon Residential Inc., which is headquartered in Toronto, for US$3.5-billion.

H&R REIT’s special committee hired National Bank Financial as its financial advisor and Fasken Martineau Dumoulin LLP as legal counsel.

The REIT hired CIBC Capital Markets is its financial advisor, along with law firm Blake, Cassels & Graydon LLP.