Franco-Nevada: Tops in Streaming

09/02/2015 8:00 am EST


Adrian Day

Chairman and CEO, Adrian Day Asset Management

Our latest featured recommendation is the leading gold royalty company, with a market cap of almost $7 billion, explains commodity and resource expert Adrian Day, editor of The Global Analyst.

Franco-Nevada (FNV) also has sector-leading asset diversification, political safety, strongest balance sheet, and top management.

Despite a decline in the price of gold (as well as platinum and oil), company revenues have continued to increase, up year-on-year, if only slightly.

This is due to an increase in gold equivalent ounces, up 23% in the last year, primarily from the addition of a new gold and silver stream on the Candelaria copper mine.

Costs continue to be low and reasonably stable, a significant advantage of the royalty business model; for Franco, corporate costs continue to be less than 5% of revenue.

On its current assets, cash flow for the company—including assumptions on Cobre Panama, a major mine currently under construction—could increase from $320 million this year to a peak of $408 in 2019.

Franco has plenty of upside in a good market. First, its Net Profit Interest (NPI) royalties have high leverage to a higher gold price.

It also has royalties on over 200 mineral assets (excluding oil & gas royalties), and only 45 are currently producing.

Some are in the development stage and some may never generate revenue, but there are many that could become producing mines in a higher gold environment.

Since Franco already owns the royalty, it would thus start to generate revenue without any additional expenditure.

Despite the company’s strong cash position—$688 million at quarter-end—the company has increased its credit lines and did discuss last week the possibility of taking on debt if necessary for a major acquisition.

I think the discussion on the possibility of debt is a reflection of just how depressed the market is and how attractive deals are, rather than any change in approach at Franco.

I have stated many times and repeat here that if you can only buy one gold company, if you want a conservative, buy and hold company, that company should be Franco-Nevada.

The current price is a good entry point. Though down from a mid-May high of almost $55, it has bounced from a low just over $39 last week. A soft gold market could see it drift back down again.

For long-term investors, Franco also offers a dividend reinvestment program, under which dividends are reinvested into shares at a 3% discount. Your broker can enroll for you.

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