On 21 June the 247Bull portfolio purchased some physical gold as well as several gold companies. This article examines one of them, Franco-Nevada Corporation.
What is Franco-Nevada?
Franco-Nevada is a gold focused royalty & streaming company with additional interests in platinum metals, oil & gas and other assets. The company provides investors with excellent leverage to the gold price and it also pays a monthly dividend. As a result the company is a great alternative to a gold ETF.
From the company’s website: “Since its IPO in late 2007, Franco-Nevada has delivered superior returns to investors through its diversified portfolio of high-margin cash flow producing assets located principally in the United States, Canada and Mexico. The Company also has a growing pipeline of development projects and interests in some of the largest new gold discoveries in the world. Franco-Nevada has a strong debt-free balance sheet and is generating growing cash flows that are being used to add to the portfolio and to increase dividends.”
Franco-Nevada’s vision is “to be the leading gold-focused royalty and stream company while maximising exposure to potential new discoveries.”
The Business Model
Franco-Nevada does not explore for, or produce, precious metals. Instead the company provides cash to those who do in exchange for a discounted percentage of the metal they produce once they are fully operational.
Example of a gold stream: In May 2010 Franco-Nevada agreed to acquire 22% of the gold produced at Taseko’s Prosperity copper-gold mine in British Columbia. Under the agreement Franco-Nevada provided Taseko with a deposit of US$350 million for the construction of the Prosperity mine, and will also grant Taseko two million of its 2017 warrants. In addition Franco-Nevada will pay Taseko US$400 an ounce for each ounce of gold delivered for the life of the mine.
It is estimated that the Prosperity mine will produce an average of 300,000 ounces of gold in each of its first 5 years of production. At the current gold price of $1,600 an ounce, Franco-Nevada’s 22% stake will therefore provide them with US$79.2 million in new revenue, and that’s not counting the estimated 130 million pounds of copper the mine will produce during each of its first five years.
This is a very effective business model that generates a lot of free cash flow while only requiring a small team. Franco-Nevada only has 19 full-time employees.
The company’s revenue for Q1 2012 was to $105 million, a 44% increase over Q1 2011. Over the same period net income also grew by 121%. Over 70% of Franco-Nevada’s revenue comes from gold, the vast majority of while comes from operating mines in the US, Canada and Mexico.
As of 31 March 2012 the company had total available capital of US$1.04 billion with no debt.
A 3 year chart of Franco-Nevada
Source: Chart courtesy of stockcharts.com. Notes: Franco-Nevada trades under the symbol FNV on both the Toronto Stock Exchange (TSE) and on the New York Stock Exchange.
Franco-Nevada has 43 producing assets that are currently generating revenue. It also has 25 at the advanced stage which have the potential to begin generating revenue within the next 5 years, and 139 assets which are at the exploration stage and offer the potential for future discoveries at no cost. These figures do not include the 135 oil & gas assets and the 157 undeveloped oil & gas interests the company has.
Chart: Franco-Nevada’s performance relative to gold & other gold miners
Source: Chart taken from Franco-Nevada’s May 2012 investor presentation. Notes: *Since going public Franco-Nevada has provided a 27% compounded annual rate of return. It has also increased its dividend in each of the past 5 years.
Why Own It?
Franco-Nevada is a great alternative to a gold ETF since it provides better than 1:1 leverage and also provides a return in the form of a monthly dividend which it has just increased by 25% to $0.05 per share. The company also has a diversified portfolio of quality assets and carries less risk than owning a conventional gold miner.
Franco also has an excellent management team that are significant shareholders. The Chairman, Pierre Lassonde, was President of Newmont Mining Corporation from 2002 to 2006 and prior to that was a co-founder and co-CEO of the original Franco-Nevada from 1982 to 2002.
|Company Name||Franco-Nevada Corporation|
|Exchange / Ticker||TSX: FNV|
|Share Price||CAD$ 47.24|
|1 Year Performance||+31.22%|
|Current annualised dividend rate||US$0.05|
|Earnings per Share (EPS)||$0.12|
|52 Week Range||46.76 – 47.63|
Source: Google Finance. Notes: TSE or TSX = Toronto Stock Exchange. NYSE = New York Stock Exchange. AMEX = American Stock Exchange. NASDAQ = National Association of Securities Dealers Automated Quotations, but the acronym is obsolete.