Franco-Nevada: A Favorite Royalty

09/30/2016 7:00 am EST


Adrian Day

Chairman and CEO, Adrian Day Asset Management

The year’s strong performance of most gold stocks has left newcomers wondering what to buy. In such circumstances, we believe investors are better off paying up for quality than looking for something “cheap” down the food chain, states Adrian Day, editor of Global Analyst.

Franco-Nevada (FNV) is the bluest of blue-chip gold companies, an originator of the royalty model for the gold industry.

Royalties, and their cousin streams, provide exposure to gold mining without the high costs and risks of mining, but with leverage and dividends, unlike bullion.

They are my favorite way to invest in the sector for more conservative and longer-term investors, though no-one would confuse the leading royalty companies with “Graham and Dodd”-type value investments.

Franco continues to perform well, with record ounces and revenues (up 38%) in its latest quarter, only partly due to the addition of two major streams, from Antamina and Antapaccay copper mines.

The balance sheet remains very strong, with debt taken on last year for stream acquisitions now paid off; there is $226 million cash plus $1 billion in available credit lines.

Currently about 94% of the company’s revenues come from precious metals (of which 72% is gold).

Its large portfolio has seen increased exploration activities as the price of gold has recovered. But is it cheap? One could argue that Franco is trading at its fair value, and as large existing holders we would wait for better prices before adding to positions.

However, Franco has a habit of providing consistent growth, with fair value constantly increasing.

Yes, Franco (they said) was overvalued at $40 in mid-2015 and at $30 in 2011 and at $20 in 2009. I have often said that if one could buy only one gold company, and lock it away, the choice would be Franco without question.

The company has now instituted a DRIP program, available to US holders, whereby dividends can be automatically reinvested, at a 3% discount to the market, making it a great vehicle for long-term investors.

The recent drop in the stock price, from an early-July high over $80, presents a good opportunity to add to positions for those underweight.

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By Adrian Day, Editor of Global Analyst

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