Value Line has initiated coverage of Canada-based gold royalty and exploration company Franco-Nevada (FNV) in its flagship product, The Value Line Investment Survey. Franco-Nevada is a company that possesses a heavily diversified portfolio of cash-flow producing assets, including interests in some of the world’s largest gold development and exploration projects. It generates business by completing new discoveries while simultaneously managing operating costs and taking advantage of appreciating commodity prices on a global scale. That said, it attempts to build royalty streams that suit its long-term growth goals through the acquisition of high-margin assets, thereby discounting downside risk but retaining vast growth potential for its various investments.
The company’s portfolio was established in 1985 by Franco-Nevada Mining Corporation Limited. In 2002, it was acquired by Newmont Mining Corporation where it began growing at a significant level, while also creating new royalties on the property portfolio of Newmont and Normandy Mining. Then, in 2007, members of the original Franco-Nevada Mining Corporation Limited formed Franco-Nevada, and promptly acquired the portfolio of Newmont royalties and other interests.
The company generated $1.2 billion when it issued its IPO on December 20, 2007, and it is now traded on the New York Stock Exchange under the ticker symbol FNV. Since that time, it has outperformed gold and many gold equities that operate in similar markets, while still maintaining a similar correlation to that of gold price expansion. Again, Franco-Nevada does not actually operate any mines, it simply harnesses its portfolio of various royalty streams to achieve its goals. Exposing itself to securities of this nature offers it the opportunity to avoid a variety of operating and capital cash calls, allowing it to generate similar yields while limiting downside risk. This has helped its share price soar to the $55.00 range, and has allowed management to enhance its quarterly dividend payout in each of the last six years.
The company is largely owned by institutional funds across the United States, Canada, Europe, and Australia. Its management and team of directors also make up a significant portion of its total outstanding common shares. In all, the company consists of a mere thirty full-time employees and contractors. This helps maintain a flat management structure that works well for a company with few operational expenditures.
Over the years Franco-Nevada has continued to expand the net asset value (NAV) on a per share basis through the acquisition of high quality, high-margin assets. This method allows the company to maintain a healthy discovery platform so its portfolio may continue to expand on a consistent basis. But it also targets the collection of other precious metals, all of which require it to keep a healthy balance sheet with a great deal of cash on hand. For example, during the company’s March quarter, it closed deals with Teranga Gold Corporation and Klondex Mines Ltd. for $135 million and $35 million, respectively. These deals are set to earn a 2% net smelter return (NSR) royalty, which means that Franco-Nevada receives royalties of 2% on each of these mines, either in a cash payment or in the form of actual output. It is deals of this nature that offer FNV the long-term, consistent revenue streams it needs to remain profitable.
Commodity pricing has not offered Franco-Nevada much help this year, however. Gold pricing has remained volatile through the first three months of 2014. In fact, it decreased about 21% sequentially, and the price of platinum decreased 13% on a year-over-year basis. So, while the company’s cost situation remains solid, and its acquisitive prospects appear strong, it is worth noting that shifting prices of the company’s owned assets has a more material effect than the aforementioned factors. Still, for investors interested in testing the waters of precious metal discovery, these shares have a balance sheet that features a great stockpile of assets and zero debt.
For a more thorough look at FNV, and the particular investment merits of its stock, subscribers should examine our full report in The Value line Investment Survey.
At the time of this article’s writing, the author did not have a position in any of the stocks mentioned.