Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
Since the initial IPO in 2007, Franco Nevada Corporation (FNV) has had a nearly fivefold increase in its share price. Franco Nevada shares some similarities with firms such as Sandstorm Gold. Gold streams and royalty agreements form the basis of the company’s revenues. The total number of producing gold assets is 33, with 117 exploration stage royalties and 20 advanced assets with the potential for production in the next 5 years.
This is a company with a business model that is extremely difficult to argue with. Franco Nevada has a diversified portfolio of high margin, cash flow producing assets principally in North America. They own interests in some of the largest new gold developments and exploration projects in the world including mines owned by the biggest names in the business such as Barrick Gold, Goldcorp and Kinross Gold.
Kinross Gold is currently investing huge amounts to develop the Tasiast mine in Mauritania on which Franco Nevada owns a 2% revenue based royalty. The beauty of these royalty based agreements is that various owners of individual mines will commit huge amounts of capital to their own resources at Franco Nevada’s direct benefit.
The 117 exploration stage royalty agreements Franco Nevada owns will be around for as long as Franco Nevada wants them. Some may become hugely profitable operating mines and others will come to nothing. For this reason, they can be thought of as perpetual call options – the premiums for which have already been outlaid!
Although gold streams and royalty agreements form the vast majority of Franco Nevada’s assets and revenues (90%+), interests are also held in numerous other resources including oil and gas, platinum and other non-precious metals and commodities. 80% of all the mines Franco Nevada holds interests in are in North America with the remaining share scattered across the globe.
In an increasingly uncertain political environment where perpetual access to foreign natural resources is far from certain, it is hugely reassuring to know the majority of Franco Nevada’s operations are focused in North America.
With only 20 employees, minimal operating expenses, no debt and substantial cash Franco Nevada appears to be a safe investment.
Shareholders are mostly institutional funds in the U.S., Canada, Europe and Australia. Management and the board are also significant shareholders with around $300 million in stock owned. Chairman of the board Pierre Lassonde has been compared to Apple visionary Steve Jobs on the back of pioneering the royalty business model. It is safe to say the firm is in very capable hands.
Franco Nevada doesn’t hedge any of its commodity revenue – allowing for greater upside but also increased exposure to gold and commodity prices. What separates Franco Nevada from similar firms such as Sandstorm is its longer term horizon. One would think at least some of the 117 exploration stage agreements held should come good in the next 5-15 years allowing for significant growth in earnings with no further outlay.
With market capitalization of $6.7bln this stock is very liquid and remarkably non-volatile – especially considering the turbulent introduction it has had to the share market since the global financial crisis (GFC) kicked off not long after its initial IPO in 2007. If we are to see some form of financial meltdown that some are predicting, we can’t think of too many better companies to hold than Franco Nevada. Zero debt, cash reserves of nearly $1bln and revenues that are almost entirely dependent on the price of gold (which would surely skyrocket in such a crisis – perhaps not initially but post meltdown) Franco Nevada seems very well prepared to weather some powerful storms.
Financially, Franco Nevada is performing very well. Q1 net income was up 121% in 2012 against the same period in 2011. Dividends have been increased in all of the past 4 years and the stock has easily outperformed gold, gold mining stocks and most equities. Dividend yield is currently 1.30% and dividends are paid monthly.
Of course all these rainbows and sunshine come at a cost – and that is the price. Franco Nevada is currently selling at 29x forward expected profits and current free cash flow yield is only 4%. If Franco Nevada can continue the growth in earnings it has already achieved in its brief existence, the current price will be bid much higher. Expect this growth to come primarily from the 20 advanced stage assets they currently hold. It is also very likely a proportion of the vast cash reserves currently held will be put to work before long and with the proven ability to spot a profitable opportunity don’t bet against significant earnings increases within 5 years.
So although this stock is far from cheap, the potential exists for huge growth in earnings. This would be a good one to get into on short term weakness.
Franco Nevada’s symbol is FNV and since September 2011 trades on both the NYSE and TSE.
Disclosure: We currently hold no FNV stock and we have no plans to initiate any positions within the next 72 hours.
Bob Kirtley
URL: www.gold-prices.biz
Email:[email protected]
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