Franco-Nevada (NYSE:FNV) has taken full advantage of a lucrative opportunity to provide financing to the natural resources industry. By using streaming agreements with mining companies and obtaining royalty interests from oil and natural gas producers, Franco-Nevada shares in the success of its partners and avoids the daily operational challenges of running mines or drilling operations.
Franco-Nevada recently reported solid quarterly results, and following that report, executives spoke with analysts about the company's future. Here are some of the highlights of the conference call and what you should take away from Franco-Nevada's latest experience.
1. Franco-Nevada does have exposure to precious metals prices
Despite lower gold and silver prices during the quarter, our revenue was flat in [the third quarter of 2017] compared to [the prior year quarter].
Franco-Nevada has worked hard to diversify its natural resources exposure recently, and those efforts paid off in the most recent quarter. Although gold and silver revenue were down, increases in the rising oil and gas segment helped to offset those declines. Moreover, Franco-Nevada also has streaming arrangements that involve other types of metals, including both platinum-group metals on the precious metals side of the industry and base metals. That latter group was the big contributor to Franco-Nevada's production growth, more than tripling from year-earlier levels and preventing an overall decline in production. Gold and silver remain key drivers for Franco-Nevada, but investors can't ignore the other elements that contribute to the company's overall success.
2. Costs have been on the rise
The cost per ounce [of production] has increased in 2017 when compared to 2016. ... Regardless, we remain a high-margin business.
Franco-Nevada's streaming model gives it exceptionally high margins. The company's streaming agreements call for it to make relatively low payments to its mining partners, compensating Franco-Nevada for the up-front cash that it provides to miners.
This quarter, those costs rose, with CFO Sandip Rana attributing the rise to the higher gold prices that Franco-Nevada's arrangement with the operators of the Guadalupe mine includes. That deal pays $800 per ounce on gold production from Guadalupe, double the more common $400-per-ounce figure in most deals. With production from Guadalupe on the rise, that higher cost has applied to a larger part of Franco-Nevada's overall production. Nevertheless, costs were just $300 per ounce during the quarter, leaving margins of $978 per ounce for Franco-Nevada's bottom line.
3. Franco-Nevada looks to the oil sands
In September, we completed a transaction with a company called Osum Oil Sands Corp. for a 4% gross overriding royalty on their Orion project. ... The royalty applies to the Clearwater formation, which is a key bitumen-producing formation.
Franco-Nevada has focused more on oil and gas deals lately, but much of its recent attention has been on U.S. energy production areas. The Orion project is in the Cold Lake region of Alberta, and it currently produces 7,500 to 8,000 barrels per day. With a planned expansion, Orion hopes to boost production eventually to as much as 20,000 barrels per day, phased in over the next several years. With a long projected life and good cash flow, Franco-Nevada is excited about its ability to complement its U.S. acquisitions with diverse geographical exposure in Canada.
4. Expect more from the Permian Basin
In terms of what's happening in the Permian, it is an incredibly quickly growing resource play [and] is attracting about 50% of all of the active rigs in the U.S. You're seeing capital pour into the basin. It's becoming more and more of a manufacturing play, and so production levels are expected to rise here over the coming years.
Despite its efforts to the north, Franco-Nevada wants to be where the action is in oil and gas, and that means ramping up exposure to the Permian Basin in West Texas. As company executives have noted, the Permian is one of the most attractive areas in the energy industry right now, and Franco-Nevada has every intention of taking advantage of opportunities in the region. Executives didn't give any specifics, merely saying that they expect royalties to grow there over the next five to 10 years.
Keep an eye on Franco-Nevada
Franco-Nevada remains positive about its future, and its moves throughout natural resources are paying dividends for shareholders. Investors should hold management accountable for its promises, but things look good for Franco-Nevada in its immediate future.