Seymour Schulich says “a free option is a terrible thing to give up, and a wonderful thing to own” in his book Get Smarter: Life and Business Lessons. His success as the co-founder to the predecessor to Franco-Nevada Corp. can be credited to optionality, a concept often misunderstood and undervalued.
Two primary types of optionality come into play with a minerals royalty business model like Franco-Nevada’s – price optionality and land optionality. However, there is now a third option associated with Franco-Nevada – the potential reopening of the shuttered Cobre Panama mine option – and investors are currently getting this option for free.
The most remarkable form of optionality lies in land optionality. This involves holding a royalty over an extensive land package, even if the mining operator initially targets only a small portion of that land for development.
If successful, the operator will eventually proceed to develop other sections of the land. The royalty company incurs no costs or obligations for additional exploration and development expenses. However, should minerals be discovered in these areas, the royalty company benefits.