Two Core Plays on Gold Streaming

12/14/2015 9:00 am EST


Adrian Day

Chairman and CEO, Adrian Day Asset Management

I’ve long been a fan of royalty businesses, which offer exposure to gold (and silver) at far less risk than operating mines; indeed, we see them as core holdings, asserts Adrian Day, money manager and editor of Global Analyst.

Franco-Nevada (FNV) is the largest and, in my view, best of the group. It has 46 assets that are generating revenue.

Franco continues to grow and make significant investments. It recently made its first payment—$338 million—on Cobre Panama; initial production is expected at the end of 2017.

The firm also used debt for the first time in its acquisition of a silver stream on Antamina, one of the largest and lowest-cost copper mines in the world.

Franco also increased its credit facility and now has $830 million in available capital. The net debt of $330 million is more than manageable, with some $90 million in quarterly cash flow.

Franco would not be mistaken for a 'Graham-and-Dodd' value investment, but it is—in my view—the most solid of the group, with top management, conservative balance sheet, a diversified portfolio, and growth potential.

It’s a buy at the current level, if you don’t already own it. If you only own one gold company, make it Franco.

Royal Gold (RGLD) is the second largest of the gold royalties (approximately $2.4 billion market cap against Franco’s $7.4 billion).

By comparison, it’s not quite as diversified as Franco; it has more ris and not as solid a balance sheet.

But these are points of comparison and Royal remains a conservative way to gain exposure to the gold market, with lots of growth potential in coming years.

It is also less expensive than Franco and a stronger buy at current prices. Indeed, Royal’s stock collapsed from almost $50 a share following its recent quarterly results, which showed a loss, surprising the market.

As often happens, when the market focuses on bad news, it overreacts.  The loss was due to the timing of sales from a new stream on the giant Pueblo Viejo mine, as well as a one-time restructuring charge.

In the last quarter it spent over $1.3 billion on four new royalties and streams, three of which are cash flowing this year.

The debt is manageable and the company—though not ruling out further acquisitions—will focus on using its cash flow to reduce its debt in the near term.

At the current level, Royal is an extremely strong buy and should be bought aggressively.

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