Not a Dividend Growth Stock but a good Gold Stock

FNV - Franco-Nevada Corp

Franco Nevada is the leading gold-focused royalty and streaming company. It is the largest company by both gold revenue and the number of gold assets. The company provides financing to miners in exchange for the right to buy gold at contractually discounted rates in the future and in return gets access to precious metals without any mining work.

Franco Nevada is the world’s largest and most successful gold royalty company. The company’s portfolio is highly diversified by commodity, geography, revenue type, and projects. Franco Nevada has interests in 227 exploration stage mineral properties including 202 precious metals assets and 25 other exploration assets. It has a diversified portfolio that includes 56 producing assets consisting of four larger cash-flowing assets, Antamina, Antapaccay, Candelaria and Cobre Panama, and 52 smaller cash-flowing assets. 

Over 89% of Franco’s revenue (Q1 2020) was derived from gold and gold equivalents (69% gold, 9% silver, 9.4% PGM, and 1% other mining assets) and 11% from energy (oil, gas, and NGLs).  Geographically, Americas is its largest market accounting for nearly 87% of total revenues – 49% Latin America, 19% U.S., and 19% Canada, followed by the rest of the world. The company has low exposure to operating risks and provides investors with gold price and exploration optionality. 

Investment Data

Revenue Growth & Market Exposure

Franco Nevada strives to generate 80% of revenue from precious metals such as gold, silver, and PGM over the long term. The balance 20% will be sourced from the energy business, which provides a good diversification from its precious metals business especially at the time of weakness in pricing. Franco-Nevada’s revenue is generated from various forms of agreements, ranging from net smelter return royalties, streams, net profits and royalty interests, working interests, and other types of arrangements.

Its revenues have grown at a rate of 15.5% CAGR per annum over the last decade. The company is expecting a good growth rate in its gold equivalent ounces over the next five years on the back of improved production from its key assets, primarily in Latin America. It is also in a good position to benefit from an increasing number of gold investment opportunities. Franco Nevada’s Cobre Panama, which is its largest investment has now begun milling ore. The company is expecting this project will reach its initial 100 million tonnes per year mill throughput capacity in 2023 with no additional expansion. Franco Nevada is expecting its existing portfolio to produce between 580,000 to 610,000 GEOs by 2024 and energy revenues are expected to range between $115 to $135 million, over the next five years. 

Franco Nevada’s business model does not involve costs other than the initial investment and limits the risks associated with operating companies. The company is witnessing a few COVID-19 related production curtailments in parts of its mining portfolio which have temporarily deferred some of its mining revenues. Suspension of mining activities in the wake of the coronavirus outbreak has hurt its operations. A sharp drop in commodity prices and drilling activity has also led to weakness in its energy business. Energy revenue is expected to account for less than 10% of Franco Nevada’s total revenues this year. But this weakness is expected to be more than offset by strength in the gold business.

The company has withdrawn its GEO sales guidance and energy revenue guidance for 2020.

Dividends

Franco Nevada is a dividend aristocrat. The company has increased its dividend for the 13th consecutive year since its IPO in 2007. It sports an average annual dividend yield of 0.7% with a high payout ratio. It last raised its dividend payout by more than 4% and has an impressive 10-year dividend CAGR of 14.4%. A high payout ratio indicates that dividend could be at risks over time. It has already paid more than $1.2 billion in dividends so far.

Franco Nevada’s earnings have grown at more than 37% CAGR in the last three years. The company is debt-free and has enough free cash flow to fund its capital expenditures. Its business is not generally impacted when producer costs increase as long as the producer continues to operate the underlying asset. The royalty and stream payments/deliveries are based on production levels. Franco Nevada’s business model provides high margins and low overheads which enables it to generate ample free cash flow. Acquisitions of new producing assets have also supported financial results.

Franco Nevada’s business is a free-cash-flow business that is capable of generating cash through the entire commodity cycle. It is a high margin business characterized by a strong balance sheet which enables it to sustain investments even during commodity cycle downturns. The company expects good overall growth in 2020 mostly driven by the continued Cobre Panama ramp-up despite a conservative energy business outlook. 

Competition

Franco Nevada competes with the likes of Newmont Gold Corp., Wheaton Precious Metals, and Royal Gold. Wheaton Precious Metals is the world’s largest pure streaming company with exposure to silver and gold. Newmont is a leading gold producer headquartered in Colorado, while Royal Gold is another precious metals stream and royalty company focusing on gold. However, Franco Nevada’s unique business model sets it apart from peers. In addition, volatile price movements and numerous macroeconomic and industry factors also have a huge effect on gold prices.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:ABXABXBarrick GoldBasic MaterialsGold0.3638.7151.4011.9621.313.240.00970.970.115940.280.009714IntermediateNONONONOCanada1
TSE:FNVFNVFranco-Nevada CorpBasic MaterialsGold0.40214.1040.67166.3921.311.290.00630.631.039741.000.050365IntermediateYESYESYESNOCanada1
TSE:WPMWPMWheaton Precious Metals CorpBasic MaterialsGold0.2472.6724.36197.5921.310.370.00740.741.449940.400.074631IntermediateNONONONOCanada1
TSE:AEMAEMAgnico Eagle MinesBasic MaterialsGold0.45106.3719.1038.7221.312.750.01011.010.390240.800.124555IntermediateNONONONOCanada1
TSE:PAASPAASPan American Silver CorpBasic MaterialsSilver0.2150.057.85244.5421.310.200.00540.541.341240.200.005421IntermediateNONONONOCanada1
TSE:FMFMFirst Quantum Minerals Ltd.Basic MaterialsCopper0.1711.327.800.0021.31-0.790.00090.091.000020.010.000921IntermediateNONONONOCanada1
TSE:TECK.BTECK.BTeck ResourcesBasic MaterialsOther Industrial Metals & Mining0.2213.575.390.0021.31-3.520.01471.471.000040.200.014712IntermediateNONONONOCanada1

Bottom Line

Franco Nevada is expecting increased production from its Cobre Panama project and at Candelaria, which should support the company’s overall production to increase through 2022. The company is a gold investment firm and its high-margin streaming and royalty focus should continue to benefit as gold prices rise. Gold is regarded as the safest form of investment and investors look at gold to seek a safe haven. Investors generally hold a certain portion of gold in their portfolios to seek a safe and good diversification option. 

While the stock pays a dividend, it trades on gold hype and not as a dividend growth stock.

FNV.TO vs INDICES

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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