Royalties Add Up to a Great Stock

06/20/2013 9:45 am EST


Adrian Day

Chairman and CEO, Adrian Day Asset Management

This gold company's investments are paying off "royally" for smart investors, writes Adrian Day of the Global Analyst.

If you are underweight gold stocks in your portfolio, this period, perhaps throughout the summer, offers an extraordinary opportunity. And one gold company that is making progress—and remains a core holding in our portfolio—is Franco Nevada (FNV).

The company announced the purchase of a couple of smaller royalties on non-producing properties—a newly created 1.7% royalty on Midas Gold's (Toronto: MAX) Golden Meadows property for $15 million (also positive for Vista Gold (VGZ), which holds 28% of Midas' shares), and an existing 1.2% NSR on Pretium Resources' (PVG) huge Brucejack property for $45 million.

Midas Gold has the right to buy back one-third of the royalty for $9 million. These purchases show once again the ability of cash-rich companies being able to take advantage of opportunities from companies who need financing in this market.

Prior royalties are starting to generate revenue. Franco has recorded its first revenue from Detour Lake, which it expects to be a significant revenue contributor as it ramps up.

Other good news: Kinross Gold (KGC) has initiated a feasibility study on expanding its Tasiast mine in Mauritania, which offsets potentially negative news from the new owners of El Cobre Panama that the project is under review, with plans to redesign the strategy completely.

Franco Nevada has the right to acquire gold off-take from this copper project, in what is the company's largest-ever royalty deal. The mine is most likely to go ahead, but possibly delayed and on an initial smaller scale. Franco is acquiring its royalty on staged payments, so any risk is minimized.

Franco Nevada is a core holding, giving exposure to several world-class mines and prospective mines. Down from over $55 at year-end, the stock is a good buy at current levels.

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