Franco-Nevada (TSX:FNV) has done an excellent job over the years of giving investors exposure to precious metals prices without the operational constraints of being a mining company. With royalty and streaming interests, Franco-Nevada has gained valuable interests in its partners' mining assets, and 2016 was a year of strong growth for the company. In March, CEO David Harquail and his management team discussed Franco-Nevada's performance and future prospects, and investors were interested to see the direction in which the company wants to move. In particular, four things stood out as key drivers for Franco-Nevada going forward.
1. Franco-Nevada's Peruvian assets have been huge growth drivers
The largest increase is due to the acquisitions that the company has made. We benefited from a full year of Antamina. ... Antapaccay was added, so we benefited from that stream as well in 2016.
Franco-Nevada has assets in many parts of the world, but Latin America has become increasingly important. As Senior Vice President Paul Brink explained during the quarterly call, Antamina was the company's top outperformer during 2016. The mine produced 4.5 million ounces of silver during the year, which was far higher than the 2.8 million to 3.2 million ounces that the company had expected from the deal. Franco-Nevada doesn't necessarily expect a repeat of that huge outperformance in 2017, but something better than 3.2 million ounces is likely. Similarly, Antapaccay has represented a great opportunity to take advantage of partner Glencore's need to recapitalize. Looking forward, investors hope that the Peruvian mines will continue to make up a key part of Franco-Nevada's throughput.
2. Oil and gas in the U.S. is a huge opportunity
Our business model, being a very long-term strategy, is perfectly positioned to acquire these packages from short-term private equity funds or from private companies that are looking to pull forward some of the value of their long-term undeveloped lands.
Franco-Nevada has been concerned lately that the opportunities for investment in precious metals are starting to get lean. In response, the company has turned to the oil and gas market, where it sees greater opportunity. In particular, oil & gas executive Jason O'Connell believes that the U.S. has a lot of potential as a market for future deals, in large part because of the higher levels of activity and private ownership in the U.S. compared to Franco-Nevada's other key energy market, Canada. With a couple of key deals already in the books, Franco-Nevada believes that there will be additional chances to take larger positions in oil and gas, with an eventual goal of making the sector a larger portion of the company's overall revenue.
3. Dividends are a huge part of Franco-Nevada's strategy
Franco-Nevada in 2016 was the largest dividend payer in the entire gold industry in the world.
Few precious metals investors expect big dividends from their investments, but Franco-Nevada has historically done an excellent job of rewarding shareholders. The company boasts more than $700 million in dividend payments since its initial public offering, and CEO David Harquail sees that as a testament to the priority that Franco-Nevada has given toward dividends. If anything, investors have started taking that for granted, arguing that the roughly 1.5% yield that Franco-Nevada currently sports is too low. Yet Harquail noted that rising share prices have made it hard for dividend yields to keep up, and that IPO investors are seeing 6% to 7% yields relative to their cost base.
4. Efficiency is a key driver of profit
I'm also pleased the company continues to perform very efficiently. ... We like to think we're twice as efficient as the gold ETF.
Investors want the cheapest exposure they can get to the markets in which they want to invest. Franco-Nevada took an interesting tack toward measuring its efficiency, comparing its overhead expenses to its market cap in a similar way that a gold ETF like SPDR Gold Shares (NYSEMKT:GLD) would have an expense ratio. As Harquail sees it, Franco-Nevada carries expenses of about 0.20%, which is about half what the SPDR gold ETF charges. Combined with dividend payments, Franco-Nevada is proud of its performance and wants to see it continue.
Franco-Nevada has plenty of potential, especially as it considers new initiatives going forward. Further moves into the oil and gas market will change the nature of the company somewhat, but executives are hopeful that the strategy will pay off with even higher profits in the future.