Franco-Nevada: Smart Way to Play Gold

05/06/2014 7:00 am EST


Kuen (Scott) Chan

Editor, Investing Daily's Real World Investing


Our latest recommendation is a smart way to own gold; in our view, it is safer than miners and more leveraged than an ETF, explains Kuen Chan in The Complete Investor.

After a dreadful 2013, gold is up roughly 14% through mid-March of this year. The strong start has boosted miner shares and likewise benefited Franco-Nevada (FNV).

As a gold-focused royalty and streaming company that doesn’t operate any mines, Franco-Nevada was squeezed less than miners by the one-two punch of exorbitant mining costs and falling gold prices.

Only about 15% of Franco-Nevada’s revenues are based on a percentage of profits or working interests in assets it finances.

And its shares offer far more leverage to gold prices than a pure gold ETF. The stock has convincingly outperformed both the SPDR Gold Shares (GLD) and Market Vectors Gold Miners ETF (GDX).

The balance sheet is clean, with no debt and more than $1 billion in capital available for new investment opportunities. About 74% of revenues are from precious metals (61% from gold, 13% from platinum group metals), with oil and gas assets contributing most of the rest.

Around 83% of the assets in which Franco-Nevada holds interests are in the geopolitically favorable US, Canada, Mexico, and Australia, another major plus.

We continue to view Franco-Nevada as an excellent way to invest in precious metals. While it’s not fully immune to volatility in gold prices, its limited exposure to miners’ operating and capital cost risks and its superior margins let you benefit from gains in gold with less downside risk.

Like other royalty/streaming companies, Franco-Nevada deservedly trades at a premium compared to miner stocks, and we expect the trend to continue.

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