Is Franco-Nevada a Buy?

Later this week, Franco-Nevada (NYSE: FNV  ) will release its annual earnings report and guidance for 2014. In anticipation of its release, let's take a closer look at the company's progress in the past year, its revenue in the fourth quarter of 2013, the expectations for the first quarter of 2014, and the main advantages and disadvantages it has over other precious metals royalties and streaming companies, including Royal Gold (NASDAQ: RGLD  ) and Silver Wheaton (NYSE: SLW  ) .   

Reaching the target
One of the main questions the annual earnings report will answer is whether Franco-Nevada met its 2013 guidance. Since the company estimated to sell 225,000 gold equivalent ounces during last year, this means during the fourth quarter of 2013, the company had to sell around 56,000 GEO to meet this target. Moreover, its quarterly revenue from its oil and gas operations was around $10 million. Based on these numbers, its quarterly revenue plummeted by roughly 30%, year over year. This decline is mainly due to the 26% decline in the price of gold.    

Franco-Nevada isn't the only company to show a plunge in revenue in the fourth quarter, Royal Gold's revenue tumbled down by 34%. This was due to the drop in the price of gold and the 11% decline in its production volume. Silver Wheaton's revenue fell by a similar rate. 

For the first quarter of 2014, the company's revenue is likely to pick up mainly because of the rise in prices of precious metals and oil. Further, the company also made a couple of royalty acquisitions in the fourth quarter, including the Kirkland Lake property and a portfolio of nearly 20 royalties from Barrick Gold. These purchases are also likely to improve Franco-Nevada's revenue in the first quarter. Keep in mind, the company has more than $840 million in cash and cash equivalents along with $500 million in unsecured credit, which will enable the company to further augment its operations and purchase additional royalty agreements in 2014. Other precious metals royalty and streaming companies are also likely to increase their volume in 2014: Silver Wheaton will increase its precious metals volume on account of its Sudbury and Salobo mines, which were purchased in early 2013.   

Good mix
One of the main advantages Franco-Nevada has over its peers is the wide array of commodities it sells, including gold, platinum, palladium, and oil. Even though most of the company's revenue is still derived from gold (nearly two thirds), it sells other commodities that reduce Franco-Nevada's risk of relying on a single product. In comparison, Silver Wheaton mostly relies on silver, as it accounts for nearly 80% of its entire revenue, while Royal Gold mostly relies on gold at a similar rate. Further, both companies, unlike Franco-Nevada, only sell gold and silver. But this diversity comes at a cost to Franco-Nevada's profitability.   

Profit margins
In the first nine months of 2013, Franco-Nevada's profitability reached 48%. In comparison, Royal Gold's and Silver Wheaton's profitability were 52% and 56% in the first nine months of 2013, respectively. Silver Wheaton is leading the way in this aspect, because silver tends to have a higher profit margin than gold. Despite the slight differences among these companies' profit margins, all three companies still pay very similar dividends. Franco-Nevada's annual yield is 1.4%, while Royal Gold's and Silver Wheaton's yields are 1.4% and 1.2%, respectively.   

Final note
Franco-Nevada's robust financial situation and resources are likely to enable the company to further increase its operations in 2014. The company sells not only precious metals, but also oil. This mix might be among the factors contributing to its lower margins, but it also reduces Franco-Nevada's operational risk since it doesn't rely solely on precious metals. These factors make the company an investment worth considering for those who wish to include precious metals in their portfolios.

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