Franco-Nevada: Safe Way to Play Gold

11/15/2013 8:00 am EST


Tyler Laundon

Editor, Cabot Small-Cap Confidential


The bottom for gold appears to be in place. Now the question is how to play it. I suggest looking at a gold streaming and royalty company, suggests Tyler Laundon in Daily Profit.

This royalty business model of Franco-Nevada Gold (FNV) is a winner, especially in this environment, since Franco-Nevada avoids various risks associated with developing and operating gold mines.

Yet investors still get exposure to the upside of commodity price, reserve, and production increases.

In exchange for an initial investment, which helps a miner fund exploration or mine development, Franco-Nevada receives the rights to a portion of future gold production. This royalty is usually around 2% of the extracted gold.

Royalty companies like Franco-Nevada are not subject to cash calls to fund exploration, development, or mine closures.

And they do provide operational or mine development management, so a large and diversified portfolio can be assembled without the need for significant corporate overhead. For example, Franco-Nevada owns a royalty interest in more than 300 different projects.

The hard work is deciding which projects to buy into, negotiating the terms, and figuring out how much to pay. Franco-Nevada has a proven history of doing this well, and I believe the current environment offers up several new opportunities.

Hundreds of junior gold miners are sitting on too few dollars to stay in business. With their share prices obliterated, they can't even tap the equity markets to raise cash. Franco-Nevada can sweep in and buy up assets at fire-sale prices.

As a final point, I should mention that over the past two years, shares of Franco-Nevada are actually up, by 15%. That's incredible performance in the face of an imploding industry.

And I believe it highlights the fact that the gold royalty and streaming business offers investors exposure to gold's strength, without the associated downside risk that an individual miner might face.

Given the low-risk business model, I think Franco is a good way for gold investors to get some exposure to the precious metal today.

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