During the 2007-2009 recession, gold went up 25% while the S&P 500 fell a painful 36%. That's why many investors seek some exposure to precious metals. If owning bullion isn't your thing, then key industry players like GoldCorp (NYSE:GG) and Franco-Nevada (NYSE:FNV) should be on your watch list. But which is the better buy? Here's why I think it's Franco Nevada.
Doing the basics
GoldCorp is a miner. To oversimplify the business, the company tries to find places where there's gold in the ground. It then builds a mine, which is complex legally, socially, and technically. And once that process is done, which can take years and millions (if not billions) of dollars, it finally gets to mine for gold. Then GoldCorp has to worry about how much it costs to run the mine, how long the mine can produce, and, eventually, the cost of cleaning up a spent mine.
And that's just a simplified life cycle of just a single mine. If GoldCorp wants to keep its production growth over time, it has to have mines in various stages of the cycle, from development to operation to being shut down.
For example, GoldCorp currently has eight major projects in the works, including new mines and expansions at existing mines. Some of those projects are actually being built and others are just being vetted for feasibility. Meanwhile, it has 11 mines that are currently producing precious metals.
To be fair, GoldCorp is pretty good at what it does. For example, the company's all-in sustaining costs per ounce of gold are toward the low end of the industry. And the projection is for even lower costs in the future, with a goal of going from an expected $850 an ounce this year to as little as $700 an ounce in 2021. Production, meanwhile, is expected to increase from 2.5 million ounces to 3 million ounces over the same span. Those numbers are both going in the right direction.
In fact, if you are looking for a gold miner, GoldCorp isn't a bad option. But there's a different way to go: precious metals streamers like Franco-Nevada.
Streaming companies give miners cash upfront for the right to buy gold and silver at reduced rates in the future. That means that Franco-Nevada never has to take on the risks of building and running mines. Streamers can also spread their bets over more properties. Franco-Nevada has investments in over 330 assets (including 80 oil investments), from development projects to operating mines. If one of Franco-Nevada's mines is shut down by a strike, it's not as material as if one of GoldCorp's 11 mines sees a work stoppage.
And, with low costs built into the model, Franco-Nevada has fat margins -- like the 72% adjusted EBITDA margin it achieved in the first quarter! That easily beats what GoldCorp has been able to achieve. Perhaps more important, however, is how consistent Franco-Nevada's margins are compared to miners like GoldCorp. Just take a look at the graph below.
While the precious metals downturn pushed GoldCorp's EBITDA margins deep into the red, Franco-Nevada's EBITDA margins barely skipped a beat. No wonder 2017 marks the 10th consecutive year of dividend increases for the streaming company. GoldCorp's dividend, meanwhile, was cut from $0.05 a month to $0.02 a month in August 2015. And then it went from $0.02 a month to $0.02 a quarter in mid-2016.
You may not be thinking about dividends when you invest in gold stocks, but Franco-Nevada's dividend history shows just how consistent its business model is compared to a miner's.
My preferences lean toward Franco-Nevada's diversification and high and consistent margins. But if that's not enough for you to choose this streaming company over miner GoldCorp, then how about the fact that downturns are growth opportunities for Franco-Nevada?
It wasn't too long ago that gold miners were struggling with low commodity prices and looking for cash to shore up their balance sheets while gold prices were still falling. Franco-Nevada and peers like Wheaton Precious Metals and Royal Gold were happily inking new streaming deals and expanding their portfolios and production...at the expense of cash-strapped miners that had few other choices if they wanted access to cash.
Gold exposure, higher and more consistent margins, and the ability to expand when gold miners are struggling: Three great reasons why Franco-Nevada is a better buy than GoldCorp.