The precious-metals market has been on a roller coaster ride over the past several years, having fallen from all-time highs earlier in the decade. But over the past year, gold and silver have recovered some of their lost ground, and that has boosted shares of Franco-Nevada (FNV -0.34%) and Goldcorp (GG). These two companies are very different, with Goldcorp being a mining company while Franco-Nevada owns royalty and streaming interests, but they both offer exposure to the precious-metals markets, and investors who are bullish about the prospects for the sector want to know which is the smartest play right now. Let's look more closely at Franco-Nevada and Goldcorp to see how they match up right now on some key metrics.
Valuation and stock performance
Both Franco-Nevada and Goldcorp have performed well over the past year, but Franco-Nevada has generated a much stronger return. Goldcorp has managed to give shareholders gains of 19% since February 2016, but Franco-Nevada has nearly doubled that return, at 36%.
Image source: Goldcorp.
From a valuation standpoint, it's a lot harder to compare the two stocks, because earnings have been relatively depressed at both companies. For Franco-Nevada, substantial impairment charges and depreciation and amortization costs over the past year have held earnings in check, and that has produced a trailing earnings multiple of 120. Yet that's better than Goldcorp, which has suffered much larger impairment charges that have led it to lose money, making its trailing earnings multiple meaningless.
When you look at forward earnings expectations, things don't get much more attractive. Based on their anticipated bottom lines for the near future, Franco-Nevada has a forward earnings multiple of more than 70, while Goldcorp weighs in at a much lower 42 times forward earnings. Neither of those is particularly compelling, and so while Goldcorp is arguably cheaper based on future projections, it's hard to give it the nod on a true valuation basis while it's still losing money.
Dividend income
Goldcorp and Franco-Nevada are unusual among precious-metals stocks in that they both pay dividends. However, there's a clear winner on the dividend front.
In terms of current yield, Franco-Nevada takes the prize, as its stock yields 1.6% compared to just 0.7% for Goldcorp. Moreover, Franco-Nevada has put together an impressive streak of dividend growth, boosting its payout annually for nine straight years. Goldcorp, on the other hand, has had to cut its dividend, making a 60% reduction in mid-2015 and then moving from monthly dividends to quarterly payouts early last year. From the dividend perspective, Franco-Nevada has a large advantage over Goldcorp.
Growth and potential risk
Franco-Nevada and Goldcorp have exposure to the gold market, but their opportunities are different. Franco-Nevada has been riding high after making a big streaming arrangement with mining giant Glencore in early 2016. The deal involves the Antapaccay mine in southern Peru, and in exchange for $500 million in financing, Franco-Nevada will have the right to buy thousands of ounces of gold and millions of ounces of silver at a fraction of spot price for years into the future. By looking for similar deals, Franco-Nevada can grow even if gold and silver prices stay stable. However, if precious metals do rise, then the streaming giant can do even better.
For Goldcorp, major strategic moves have been in the spotlight lately. The company announced the sales of its Cerro Blanco and Los Filos properties in January, and its guidance for 2017 includes all-in sustaining cost projections of around $850 per gold ounce. That's down 15% from 2013, and Goldcorp hopes it can reduce its costs further by emphasizing its low-expense Pueblo Viejo mine. At the same time, promising projects in Ontario and the Yukon could drive long-term production growth, something that the rest of the industry has struggled to sustain. Goldcorp has ambitious targets, but it has also shown the propensity to make good on its promises in the past.
Based on these measures, a lot depends on what you're looking for. Franco-Nevada provides better income, and it's more of a play on the company's own proprietary success in doing deals with mining companies. Goldcorp, on the other hand, offers purer exposure to the pluses and minuses of mining operations. Franco-Nevada fits better with a conservative investing mindset, but either will do well if precious-metals prices stay strong in 2017.
