Better Buy: Franco-Nevada Corporation vs. IAMGOLD Corp.

Many gold stocks are on the radars of individual investors today, especially as painful business decisions are now seemingly behind some of the best companies. Many gold miners also have new production coming online this year and in the years ahead, which should be a boon for producers and streaming and royalty companies alike.

Investors surveying their options in the gold mining industry will certainly come across Franco-Nevada Corporation (FNV 0.67%) and IAMGOLD Corp. (IAG 6.30%). Despite very different businesses, the two stocks are locked in a tight battle with the S&P 500 for returning value to shareholders in the past three years.

IAG Total Return Price data by YCharts

Is one about to break out? And if you could only build a position in one of these gold stocks, then which would be the better buy?

Image source: Getty Images.

The matchup

The first difference investors will notice is size. Franco-Nevada Corp. boasts a relatively large valuation of $14.5 billion, while IAMGOLD is valued at a comparatively small $2.6 billion. More important than that are the differences in business models. The former collects royalty and streaming revenue by acquiring stakes in the production of various natural resources including gold, silver, platinum, other minerals, and crude oil. The latter is a true gold miner; moving earth around to uncover raw ore.

That results in big differences in the profitability of each company. Consider the side-by-side comparison for the first half of 2017:  

Data source: Press releases.

One important note: IAMGOLD posted an enormous net income and EPS during the first six months of the year after reversing impairment charges from mines that aren't in operation. However, after removing that, adjusted EPS for the first half of 2017 came in at just $0.02.

That aside, the low-cost business model of Franco-Nevada Corp. easily beats costly mining activities from IAMGOLD in profitability and the ability to generate cash. That's why it earns a much higher valuation despite lower revenue. Then again, investors are paying quite a premium for the lower-risk business model.

Consider a few valuation metrics from Wall Street analysts, as compiled by Yahoo! Finance.  

Data source: Press releases.

Let's be honest: That's not a very great matchup. Both stocks are expensive based on both trailing and forward earnings. Both stocks have wildly high PEG ratios (values less than 1.0 signal growth). And although IAMGOLD Corp. is trading much closer to book value, that should be expected for the riskier business of mining ore.

The head-to-head matchup for future potential is a little more interesting. Both companies are expecting to turn in solid year-over-year improvements in 2017 and have big plans for future periods.

IAMGOLD only reversed a $400 million impairment charge after selling a stake in a mining project that was previously written off (from an accounting point of view anyway). A new feasibility study suggests the project could be a big, low-cost contributor with a 17-year lifetime. The company made a similar move for a separate mine in late July, meaning the company's long-term growth prospects have the potential to be pretty respectable. Remember, the numbers above from analysts only look 12 months into the future.

Franco-Nevada is also eyeing growth thanks to expansion plans at various mines and oil fields in which it owns equity stakes. Steady improvements in gold, platinum group metals, and oil from the Permian Basin are expected to lead to respectable growth in the years ahead. Management also expects to make additional acquisitions in the second half of 2017.

Which stock is the better buy?

The low-cost business model of Franco-Nevada Corp. makes it the better buy in this head-to-head matchup. While growth rates may be relatively modest, the company isn't overly dependent on a single income source. Spreading out risks across dozens of assets is pretty advantageous, especially when it comes to the mining and oil industries. By comparison, IAMGOLD only operates four gold mines -- a number that doesn't get much larger if mines in development are included.

Additionally, it's worth pointing out that almost every gold stock has failed to outperform the S&P 500 over longer periods of time. Franco Nevada Corp. is one of the only exceptions. Then again, that could signal that the relatively expensive valuations won't hold. That's why I won't be going anywhere near gold stocks for my portfolio. Simply put, investors can do a lot better.