Franco-Nevada: Best-in-Class

04/14/2015 7:00 am EST


Adrian Day

Chairman and CEO, Adrian Day Asset Management

For gold sector investors, this featured recommendation remains a best-in-class company, asserts Adrian Day, editor of The Global Analyst.

Franco-Nevada (FNV)—a royalty streaming company—recently reported very strong annual results, though the stock fell.

Despite a decline in the average price of gold—as well as oil—Franco’s revenue rose 10% last year as did earnings, due to the addition of some paying royalties.

Last year, the company committed over $900 million to new royalties and streams, some of which were immediately generating cash flow to Franco. The company boosted its dividend again by 5%.

With a strong balance sheet ($650 million in cash, plus an unused credit line), Franco is in an excellent position to make more acquisitions this year. It just recently announced the acquisition of a package of royalties by providing a loan to Noront to purchase Cliffs’ chromite assets.

This is a good example of the flexibility of Franco’s approach to royalty acquisition, by being in a position to provide financing in many forms and when needed. The company also expects to be making its first payment to First Quantum on the Cobre Panama project, likely of around $300 million.

Franco had committed to spend up to $1 billion to bring the project into production in exchange for a by-product gold stream, but the financing was staged and dependent upon various milestones.

With the stock down from $52 a week ago—and over $58 in January—Franco Nevada remains the cream of the crop, with top management, a low-risk business model, and solid balance sheet. We continue to rate the stock a buy.

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