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Franco-Nevada: Our Top Gold Investment
10/29/2015 8:00 am EST
This featured recommendation remains our single top gold investment and one that belongs in every investor’s portfolio, explains Adrian Day, editor of Global Analyst.
Franco-Nevada (FNV) has made another major streaming deal, using debt for the first time in its history.
The new transaction is a silver stream on the world-class Antamina copper mine. Antamina is the eight largest copper mine in the world and one of the lowest-cost mines in the world
Franco will pay Teck Resources (TCK) $610 million, and in return will receive most of its share of the silver produced from Antamina (starting at 90% and declining to 60% after about 30 years.
The deal is immediately cash flowing and is accretive. It also strengthens and diversifies the portfolio.
On current reserves, the rate of return would be mid-single digits, hardly exciting.
But as Franco notes, they acquire royalties and streams for the upside and fully expect production to grow well beyond current reserves. It is a long-life asset, so Franco expects to participate over several price cycles.
After this transaction, Franco will still have $800 million in available capital. The company has clearly telegraphed that there will be another one or two large transactions.
We think this is a very good deal. It is accretive, it diversifies and strengthens the portfolio, and Franco is buying at a low point in the cycle; finally, this is a world-class asset with a long-life and lots of upside.
Franco sees many opportunities for this type of transaction in the current low commodity price environment. Royalty companies have come a long way from the acquisition of third-party royalties.
The stock has moved strongly from $40 in early September, though it remains below the $60+ level it reached last year.
If you don’t own it already, then buy it here and look for any pullbacks if you are adding to existing positions.
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