So far in 2021 gold has continued to trail stocks. We think this is but a temporary pause and expect gold’s long-term trajectory to trend upward, asserts Scott Chan, contributing editor to The Complete Investor.
Franco-Nevada (FNV) is not a miner — it’s a royalty/streaming company. However, it does have ownership of gold output by way of its investments in various gold operations.
The company also sells gold so it’s not a stretch to regard it as a producer. Unlike miners, though, the company does not shoulder the sizeable risks of operating mines.
Additionally, its business is highly scalable without significantly increasing overhead. One remarkable statistic the company cites is that since 2008, revenue has increased twelvefold, but general & administrative expenses (day-to-day cost of running a business) has stayed relatively flat.
Gross margins have increased for five years in a row. The stock has outperformed not only gold and gold stocks, but also the S&P 500 over the past ten years, a period that encompasses both good and bad times for the Midas Metal.
In 2020, a year deeply affected by Covid-19, Franco-Nevada achieved better results than 2019. There were Covid-related stoppages at some of the mines and even one strike at a major operation in its portfolio, but since its interests are diversified over dozens of different mines, the company recorded over 521,000 GEO (gold equivalent ounces) sold in 2020.
This was below the company’s original (pre-Covid) guidance, but above its revised guidance. It was also a new company record. Note that the metric refers to volume sold, before the increase in gold prices is taken into account.
Helped by higher prices for precious metals (gold, silver, and platinum group metals, together accounting for 91% of revenue) during the year, 2020 revenue surpassed $1 billion for the first time, growing by roughly 21%. In terms of the EBITDA (earnings before interest expense, taxes, depreciation and amortization) margin, the fourth quarter was its best on record at better than 80%.
By 2025, Franco-Nevada expects to surpass 600,000 GEO as more mines come online — future acquisitions could add more. The projection represents growth of at least 15% over the 2020 figure. The ability to deliver output growth, obviously, is a good thing. If gold prices rise, as we expect, the ability to produce — and sell—more ounces will contribute additional revenue growth.
With no debt and more than $530 million in cash, Franco-Nevada sits in excellent financial shape to make further acquisitions.
As of yearend 2020, the company had $1.9 billion in available capital from a combination of credit facilities upon which it can draw, net current assets (net of current liabilities), and marketable securities. Affirming its strong financial position, it upped its quarterly dividend to $0.30 per share, a 15% increase.
Besides its core precious-metals investments, Franco-Nevada also has investments in energy assets and base metals. While down year-over-year overall, energy prices bounced back in the second half of the year.
Franco-Nevada projects its oil and gas investments will contribute $150 million annually by 2025 (up from $91.7 million in 2020). In addition, Franco-Nevada expects meaningful royalty contribution from its base-metal investments. Several new copper operations are expected to come online in the next few years.
FNV remains a strong recommendation. We continue to regard it as a cream of the crop stocks among gold producers. Even before the pandemic, we saw high commodity-driven inflation as an inevitable consequence of the growth of developing economies. Now, the massive fiscal and monetary stimulus packages enacted to battle Covid-19 have only added kindling to the fire.