The rival bids come as soaring gold prices have boosted the appeal of gold assets, such as International Royalty's prized royalty on the Pascua Lama gold project in South America, a prized 18-million ounce deposit owned by top producer Barrick Gold Corp (ABX.TO).
Royalty companies receive a share of revenue from mines and other resource projects in exchange for an upfront payment, which the miners use to fund development.
Royal Gold said on Friday it will offer C$7.45 in cash, or 0.1385 of a share, or a combination of cash and shares, for each International Royalty share, subject to a certain limits.
The offer, which has been unanimously approved by International Royalty's board of directors and has the support of shareholders holding 26.8 percent of its stock, follows an unsolicited C$6.75 a share cash offer by Franco Nevada.
International Royalty also received interest from at least one other player, it said, and conducted a rigorous review process before settling on the Royal Gold offer.
Shares of International Royalty were up 33 Canadian cents at C$7.65 in Toronto on Friday, rising above the value of both bids, suggesting investors anticipate a sweeter offer.
I think it's probably a reasonable expectation that they would come back, but I just don't see it being much higher than where we are, said Haywood Securities analyst Kerry Smith.
He said the break fee of $32 million on the deal could act as a deterrent to a higher offer.
He raised his price target on International Royalties to C$7.45 from C$6.75 to reflect the higher bid.
Franco-Nevada would not comment on the Royal Gold offer.
RIVAL BIDS AS GOLD RISES
The prospect of a bidding war follows more than a year of largely friendly takeovers in the Canadian mining sector, as deals have been done where obvious cost savings are evident or where the target company is in need of a cash infusion.
The longer the gold price stays above $1,000, the more likely you will get M&A, Smith said, noting: It wasn't long ago that gold was $850.
The precious metal was at $1,110 an ounce on Friday.
Adding International Royalty's 84 royalties to Royal Gold would create a portfolio of nearly 200 royalty interests, leaning heavily toward precious metals,
Seldom would we have the opportunity to acquire this many royalties in one spot, Royal Gold Chief Executive Tony Jensen said on a conference call.
The deal requires approval of two-thirds of International Royalty's shareholders and could close by the end of February, officials said.
International Royalty currently draws much of its revenue from nickel royalties -- in particular its royalty on Vale's (VALE5.SA) massive Voisey's Bay mine in Eastern Canada -- but that focus is expected to shift to gold, particularly when Pascua Lama begins production in 2013.
Toronto-based Franco Nevada holds more than 300 royalties, focused mainly in the gold sector but also in base metals, oil and gas, and other precious metals.
Shares of Royal Gold were up 23 Canadian cents at C$50.46, while Franco Nevada was up 18 Canadian cents at C$26.28.
(Reporting by Cameron French; editing by Rob Wilson)