Gold and silver have been extremely volatile, rising and falling with changes in the geopolitical situation, global macroeconomic conditions, and the health of the commodities markets. Precious metals investors have sought to take advantage of volatility by looking to stocks when they've been down, anticipating better times ahead. Franco-Nevada (TSX:FNV) and IAMGOLD (NYSE:IAG) take different approaches to the precious metals market, with Franco-Nevada focusing on streaming interests and royalties while IAMGOLD mines its own properties. Despite the difference in their strategies, both stocks hope to give long-term growth to shareholders. Let's take a closer look at Franco-Nevada and IAMGOLD to see how they match up right now on some key metrics and which might make the better buy.
Valuation and stock performance
Neither Franco-Nevada nor IAMGOLD has performed particularly well recently. IAMGOLD has managed to eke out a 3% gain since May 2016, while Franco-Nevada has seen its share price slide, posting a negative total return of -4%.
From a valuation standpoint, relatively weak earnings lately make it difficult to assess the two companies' prospects fairly. Franco-Nevada has seen a number of one-time charges hurt its bottom line, and that has the streaming specialist's stock trading at nearly 100 times trailing earnings. IAMGOLD posts a more reasonable trailing earnings multiple of 31. But when you look at future expectations, the picture changes. Analysts expect IAMGOLD to suffer losses in the future, making price-to-earnings ratios meaningless. By contrast, Franco-Nevada is expected to see its profit grow, although it still carries a forward multiple of about 60 times earnings. Neither of these stocks meets any traditional definition of a value stock, but the issue has to do with whether prospects for future earnings are as dire as investors seem to believe.
When it comes to dividends, however, there's no contest between these two stocks. IAMGOLD doesn't pay a dividend, having discontinued payouts in 2013. Franco-Nevada, meanwhile, has put together an impressive track record of returning capital to shareholders.
Franco-Nevada's current yield of 1.6% might not look all that impressive, even though it's clearly better than nothing. Yet what makes Franco-Nevada stand out from the precious metals crowd is that the streaming company has established itself with perennial increases in what it pays to shareholders. For nine straight years, Franco-Nevada has boosted its dividends, giving the company a key advantage in the eyes of those who rely on dividend income from their investment portfolios.
Growth and potential risk
Franco-Nevada and IAMGOLD have very different opportunities ahead of them. For Franco-Nevada, a tough industry environment led to a rise in the number of mining companies willing to do streaming deals with the company, and that helped it bring in some high-profile partners that have boosted growth. That's likely to keep gold and silver flows on the rise in the near future. More recently, though, Franco-Nevada has concluded that the gold and silver market might be reaching a level at which new deals won't be as lucrative for the streaming specialist, and so it's turning its attention to the hard-hit energy market. By looking to do oil and gas royalty deals, Franco-Nevada hopes that it can keep up its growth pace and take advantage of the need for investment capital among exploration and production companies.
IAMGOLD has done an exceptional job of controlling its balance sheet, choosing to avoid the common path of incurring substantial debt for mining operations. The miner has actually managed to keep cash levels high enough to offset its outstanding obligations, meaning that it has zero net debt. IAMGOLD has a relatively modest portfolio of gold-producing properties, which puts it at somewhat of a competitive disadvantage compared to larger miners that can produce economies of scale with more extensive facilities. Yet after years of losses, IAMGOLD has leaned itself down and found ways to get itself healthier from an earnings standpoint, and that could produce stronger growth in the near future.
Choosing between Franco-Nevada and IAMGOLD depends largely on your interest. For a dividend-paying stock with broad natural-resource exposure, Franco-Nevada is a clear pick. But if you want the potential for outsized gains that a gold mining stock can deliver, then IAMGOLD will give you more upside, albeit at the price of higher volatility.