Franco-Nevada: Our Top Gold Investment

10/29/2015 8:00 am EST


Adrian Day

Chairman and CEO, Adrian Day Asset Management

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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