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 90% of Franco’s 2020 revenue was derived from gold and gold equivalents (70% gold, 10% silver, 8% PGM, and 1% other mining assets) and ~10% from energy (oil, gas, and NGLs). Geographically, America is its largest market accounting for nearly 86% of total revenues – 49% Latin America, 18% 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 prices and exploration optionality.
Key Investment Data
- Opportunity Score: 52
- Ticker: TSE:FNV
- Sector: Basic Materials
- Industry: Gold
- Market Cap: 33.11B
- P/E: 38.74
- Dividend Yield: 0.88%
- Payout Ratio (TTM): 30.50%
- Canadian Dividend Aristocrat: YES
- Chowder Score: Members Only
- Revenue Growth: Members Only
- Dividend Growth: Members Only
- Dividend Growth Fit: 6/10
- Dividend Income Fit: 5/10
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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 of 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. The company’s performance is underpinned by long-life core assets such as Cobre Panama, Candelaria, Antapaccay, and Antamina.
Franco’s 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 entered a new precious metals stream on the Condestable copper mine in Peru and acquired a portfolio of natural gas royalties in the Haynesville play in Texas which are poised to increase future growth. Franco Nevada expects strong growth in 2021 and over the next five years from Cobre Panama and the two new acquisitions.
Franco Nevada is projecting its existing portfolio to produce between 555,000 to 585,000 GEOs and energy revenues are expected to range between $115 to $135 million in 2021, and 600,000-630,000 GEOs and additional revenue of $150 and $170 million from Energy assets by 2025.
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, however, record precious metals prices and the recovery of energy prices in the second half of the year supported an overall good FY2020 for Franco Nevada. The company’s revenue increased by 20% in the last year.
Franco Nevada is a dividend aristocrat. The company’s latest 15.4% increase will mark its 14th annual dividend increase since its IPO in 2007. It sports an average annual dividend yield of 0.7% and has a 60% payout ratio. Franco has an impressive 10-year dividend CAGR of 14%+. It declared a total dividend of $197 million in the last year and has paid a total of $1.5 billion in dividends since IPO.
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. The company’s portfolio is diversified by commodity, geography, revenue type, and stage of projects. New mines, expansions, condestable precious metal stream, and Haynesville natural gas royalties should add immediate cash flow. New gold mine potential and long-term growth options in copper are future growth opportunities for the company.
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 its peers. In addition, volatile price movements and numerous macroeconomic and industry factors also have a huge effect on gold prices.
|WPM||Wheaton Precious Metals Corp||23.65||29.52||YES||1||1||46|
|AEM||Agnico Eagle Mines||16.53||17.40||YES||1||1||46|
|FM||First Quantum Minerals Ltd.||15.58||38.56||NO||1||1||116|
|PAAS||Pan American Silver Corp||6.53||17.36||NO||1||1||89|
|OR||Osisko Gold Royalties||2.53||191.13||NO||1||1||46|
Franco Nevada is expecting increased production from its Cobre Panama project and at Candelaria, which should support the company’s future production target. Its high-margin business is capable of generating cash through the entire commodity cycle. The company is a gold investment firm and its high-margin streaming and royalty focus should continue to benefit as gold prices rise. Franco Nevada’s strong balance sheet further enables it to sustain investments during commodity price fluctuations.
While the stock pays a dividend, it trades on gold hype and not as a dividend growth stock. If a gold stock is not something you want but you still want in on the gold rush, you can always buy a Canadian Gold ETF.