Franco-Nevada: A Core Gold Play

12/26/2014 7:00 am EST

Focus: STRATEGIES

Adrian Day

Chairman and CEO, Adrian Day Asset Management

This gold-related firm has been one of our favorite companies ever since it IPO’d and we subsequently went on a site visit back in 1987, recalls Adrian Day, editor of Global Analyst.

Franco-Nevada (FNV) is the largest gold royalty company, an $8 billion company, with a sound business plan, top management, a strong balance sheet, and excellent execution.

I favor the royalty model, developed by Franco, because it is a low-risk way to gain exposure to gold mining, without the capital costs and risks but with participation in higher gold prices and exploration success.

In addition to acquiring existing royalties (often held by the original land owner), Franco pioneered the concept of creating royalties from companies needing funds to develop a project.

More recently, it has also undertaken some streaming deals, whereby, usually, it buys the gold (and sometimes silver) by-product from a base metal mine for an advance payment and low ongoing per-ounce payments.

With around $600 million in the bank (and no debt), over 380 royalty and streaming assets of which 48 are producing, Franco should be a core fixture in any portfolio, not only of gold investors.

True to its contrarian and value instincts, Franco has been extremely busy over the past 12 months, spending almost $1 billion for 35 gold royalties (and streams), many of them relatively small royalty transactions, mostly on early-stage development projects.

I have often said, and will repeat it now, that if you can only buy one gold company it should be Franco-Nevada. Today’s price I would regard as a reasonable price, particularly if gold does turn around over the year ahead.

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