After more than a decade of huge growth during the 2000s and early 2010s, gold investors have had to deal with an industry that has been facing major crosscurrents in recent years. Price volatility has moved in both directions, but shareholders in Franco-Nevada (FNV +2.35%) have benefited from the company's ability to negotiate royalty and streaming deals that reduce its exposure to operational problems while still giving it exposure to favorable price movements in precious metals. Coming into its fourth-quarter financial report late last month, Franco-Nevada investors wanted to see evidence that its recent growth surge would continue, and the numbers that the streaming giant reported confirmed most of those hopes.
Let's look more closely at Franco-Nevada to see how it did and what lies ahead for the precious metals financing company in 2017.
Franco-Nevada has extended its reach toward the energy industry recently. Image source: Franco-Nevada.
Putting 2016 in the books
Franco-Nevada's fourth-quarter results put an exclamation point on what was an important year for the company. Revenue jumped 28% to $155.3 million, which was slightly better than the already ambitious growth targets that most investors were looking to see from the company. Franco-Nevada reported a GAAP loss of $4.5 million, but after accounting for depletion, impairment charges, and other extraordinary items, adjusted net income of $42.9 million was up more than 80% from year-ago levels, and the resulting adjusted earnings of $0.24 per share was $0.03 better than the consensus forecast among those following the stock.
Looking more closely at the numbers, Franco-Nevada's production highlights were impressive. The company delivered a record of more than 129,000 gold equivalent ounces during the quarter, and it sold nearly 122,000 gold equivalent ounces to raise cash for distribution of dividends and further financing deals in the future. The quarter continued the upward trajectory for Franco-Nevada's throughput, and for the full 2016 year, the company reported more than 464,000 gold equivalent ounces sold.
Franco-Nevada remained largely dependent on the gold market for its precious metals exposure. For the quarter, more than three-quarters of its revenue came from gold. Silver was responsible for roughly 15% of the gold equivalent ounces that Franco-Nevada reported, and platinum group metals were largely responsible for the remainder.
One area in which Franco-Nevada saw a nice boost was in the oil and gas arena. There, revenue more than doubled, and although the $10.4 million that the segment brought in was relatively small, Franco-Nevada sees room for improvement in the area.
CEO David Harquall was pleased with the way that Franco-Nevada finished the year. "Our diversified portfolio continues to perform very well," Harquall said, and "the growth in 2016 is reflecting the contribution from acquisitions we made during the recent downturn and increased activity by many of the operators on our lands." The CEO also highlighted the fact that the company has no debt and is growing its cash balances.
What's ahead for Franco-Nevada in 2017?
If anything, Franco-Nevada is even more excited about what the future will bring. As Harquall noted, the company sees plenty of investment opportunities going forward, and it's looking forward to deploying its cash into profitable ventures in the near future. With the extension of its existing $1 billion credit facility from 2020 to 2022 and the creation of a new facility for $100 million more in borrowing capacity, Franco-Nevada will have access to capital as necessary to finance its future growth.
In particular, the oil and gas industry is likely to be a source of interest for Franco-Nevada in its acquisition strategy. The company said that it had just closed on a $110 million deal to purchase a portfolio of Permian Basin assets in the Midland shale play, and Franco-Nevada expects to close on the deal during the second quarter. More energy sector exposure will meet the streaming company's goal of diversifying its natural resources exposure further.
Finally, Franco-Nevada's guidance for 2017 and beyond was favorable. The company expects 470,000 to 500,000 gold equivalent ounces from mineral assets, and revenue on its oil and gas assets should climb to between $35 million and $45 million. Streaming will be primarily responsible for bringing metals in, and Franco-Nevada's figures assume conservative estimates for precious metals and oil prices that could prove to be overly pessimistic. Looking forward, Franco-Nevada expects production to rise modestly over the next four years, with 515,000 to 540,000 gold equivalent ounces and $55 million to $65 million in oil and gas revenue by 2021.
Franco-Nevada investors seemed pleased with the company's report, and they hope that rising gold prices will add to the streaming specialist's long-term success. For now, Franco-Nevada is doing everything it can to foster growth in multiple directions and make itself as strong as it can be.
