5 Takeaways From Franco-Nevada Corporation’s 2014 Guidance

Franco-Nevada (NYSE: FNV  )  recently released its earnings report for the last quarter of 2013 and its outlook for 2014. Based on this report, the company was able to meet analysts' expectations for the fourth quarter: Its net earnings per share, after controlling for impairment charges, was $0.21, and its net sales were $100 million.

But all is not well: Franco-Nevada's sales dropped by 6.1% during the last year, and its operating profitability fell from 50% in 2012 to 40.5% in 2013. Looking forward, Franco-Nevada's annual guidance could affect its valuation over the year.

Here are five takeaways from this outlook. 

1. Higher production
In 2014, the company expects to increase its production again by more than 5.5% year over year. Total metals production is projected to reach 255,000 gold equivalent ounces; last year, the company was able to exceed its guidance by over 7%, mainly due to new acquisitions in the last several months of 2013 including a portfolio of 20 royalties from Barrick Gold (NYSE: ABX  ) and a royalty agreement with Kirkland Lake. The company made several additional deals in the beginning of 2014, which are expected to increase further its sales in the coming months (e.g. a gold purchase and royalty agreement with Klondex Mines, which will start to deliver gold in the middle of the year). These acquisitions will help Franco-Nevada reach its 2014 goal and perhaps even exceed it; they could also offset the decline in the price of gold compared to last year. Finally, the company has the funds to enter new royalty contracts: It has virtually no debt, $770 million in cash, and $500 million unused and unsecured credit. 

2. Assumptions on precious metals prices
The company has updated its assumptions on gold and other precious metals. The price of gold is set at $1,300 per ounce, which is in line with the assumptions of several other gold companies such as Barrick Gold. Conversely, other gold companies such as Goldcorp were more conservative and kept the price of gold at $1,200 per ounce. If the price of gold falls to the $1,200 mark, Franco-Nevada will have to revise its assumptions, which could reduce the value of its assets (royalty agreements).

3. Little progress in the company's oil and gas operations
Franco-Nevada doesn't expect to increase its revenue from oil and gas during 2014: Its revenue is projected to reach $65 million this year, while in 2013 revenue was $67 million.

4. Profitability
The main factors affecting the company's profit margin are its production mix (the share of gold out of total production), royalty contacts, and precious metals and oil prices. For now the main metal the company sells is still gold. But if the company were to purchase new contracts related to other commodities, this could affect its profitability. The lower prices of gold and other precious metals compared to previous years are likely to reduce its profit margin; down the line, this could also reduce the company's dividend payment. 

5. Look out for Barrick
Even though Franco-Nevada has recently purchased royalty agreements from Barrick, the latter still faces financial difficulties. Due to these difficulties, the company's outlook for 2014 consists of a 13% decline in its production. Since Franco-Nevada relies on Barrick in delivering gold, any potential delays in delivery due to Barrick's conditions could slightly reduce Franco-Nevada's production in the U.S.

Final note
Franco-Nevada presented a reasonable 2014 outlook, which includes modest growth in production. Furthermore, the company has the resources to enter new contracts in the coming months to meet this projection. But Franco-Nevada could also face some difficulties, including lower profitability, declines in precious metals and oil prices, little growth in oil and gas operations, and potential delays from struggling gold producers. These factors could impede its progress and adversely affect its valuation during the year.

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  • Report this Comment On April 10, 2014, at 10:54 AM, speedybure wrote:

    The Barrick Portfolio is very small with numerous exploration/development stage royalties. The biggest contributor to FNV beating guidance in 2013 and the biggest contributor to increased attributable production in 2014 is the Terranga stream.

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