Franco-Nevada Corp. (FNV 0.99%) may not be the first name that comes to mind when you think about precious metal stocks, but you'd be stunned at how the stock has outperformed more popular names in the space like Barrick Gold (ABX +2.21%). Barrick, for example, has unfortunately lost investors money over the past decade. Franco-Nevada stock, by contrast, was a five-bagger during the period!
That incredible rally isn't a fluke, and these five key points go a long way toward explaining what sent the stock soaring.
1. Franco-Nevada doesn't mine gold
It's natural that when most people think of the mining sector, they think of companies like Barrick, that develop and operate mines, extracting gold and other metals to sell to third parties or in the market. Franco-Nevada uses a very different business model, as it neither owns nor operates mines, but buys streams of precious metals at a steep discount from the actual miners.
Franco-Nevada doesn't mine gold, it buys it. Image source: Getty Images
Why would a mining company want to do all the hard work, then sell its production to companies like Franco-Nevada at a discount, you may ask? The thing is, raising the funds to get a mine started can be an uphill task, especially during downturns. That's where streaming and royalty companies like Franco-Nevada and Wheaton Precious Metals (NYSE: WPM) step in – they finance the miners' massive up front costs in return for either royalties or the right to purchase a percentage of precious metals from a mine at discounted prices. For example, royalties from Barrick's Goldstrike mine in Nevada are among Franco-Nevada's primary sources of revenue today.
As a result, Franco-Nevada gets metals at low costs while bypassing mining costs and risks. It has been a win-win business model, earning the company hefty margins that have been reflected in its rising share price.
2. Franco-Nevada has grown rapidly in 10 years
Since it went public in 2007, there has been no stopping Franco-Nevada's growth. Whether you measure that in gold equivalent ounces (GEOs), revenues, or market capitalization, Franco-Nevada's rise has been nothing short of phenomenal.
Image source: Franco-Nevada
2016 was a record year for Franco-Nevada as some of its recently acquired streams and royalties like Barrick/Premier Gold Mines' South Arturo mine and Glencore's Antapaccay started adding value. By 2021, Franco-Nevada projects its GEOs will increase by nearly 14% from their 2016 base, driven primarily by its new streams.
3. Franco-Nevada is bigger than you think
You might be surprised at the sheer size of the company's portfolio of royalty and streaming agreements. Here's a snapshot of its asset count as of March 22, 2017.
Image source: Franco-Nevada
Franco-Nevada has the largest asset base among the three leading streaming and royalty companies. Wheaton Precious Metals, for instance, has only 20 operating and eight developing stream agreements, while Royal Gold (RGLD +0.44%) had 38 producing and 130 exploration properties as at the end of 2016.
That's not all. Franco-Nevada is also the most diversified company among the three thanks to its exposure to the platinum group of metal and oil and gas.
Wait, oil and gas? Yes, that's one of the most interesting aspects about investing in Franco-Nevada.
4. Franco-Nevada sees big potential in energy
Franco-Nevada is the only publicly listed precious metals streaming company that's also into oil and gas. Its royalty deals in that area currently contribute just 5% or so of the company's revenue, but that's because it entered the space only recently.
In December 2016, Franco-Nevada laid out $100 million to buy oil and gas royalty rights in the Oklahoma STACK play. The company is now in the process of closing a $110 million royalty deal in the Midland Permian Basin, and has plans to invest another $27.8 million in the STACK shale play.
Image source: Franco-Nevada
During its fiscal 2016 presentation earlier this year, Franco-Nevada forecast that its oil and gas revenues would nearly double at the midpoint in the next decade from 2016 levels. As its oil and gas portfolio expands, the increased diversification should also push Franco-Nevada's cash flows higher. For investors, that should mean even better dividends.
5. Franco-Nevada has been boosting payouts for 10 straight years
Thanks to a strong business model and great execution, Franco-Nevada has been able to increase its dividends every year since it went public. That's no mean feat for a commodities company.
You should also check how rapidly Franco-Nevada's dividends have grown over the years compared to those of its peers.
ABX Dividend data by YCharts
Mind you, Royal Gold has a longer dividend-raising track record, with 15 years straight years of payout increases under its belt, but their scale pales when measured against Franco-Nevada's dividend growth rate.
When you sum it all up, Franco-Nevada appears to be a compelling long-term buy for any investor seeking exposure to precious metals.
