2017 was an unusually quiet year for Franco-Nevada Corp. (NYSE:FNV) from a business standpoint. With most gold miners cutting costs and boosting cash flows this year, Franco-Nevada hardly found any miner facing a cash crunch and willing to part with a portion of production from one or more of their mines in return for funding. That's what the precious metals streaming business is all about. In fact, I can think of only one gold and silver streaming agreement that Franco-Nevada struck in 2017.
Yet, investors weren't flustered, and Franco-Nevada shares soared nearly 32% in 2017 to become the top-performing large-cap gold stock for 2017. Among its peers, Franco-Nevada handily beat Wheaton Precious Metals (NYSE:WPM) and only slightly lagged Royal Gold Corp. (NASDAQ:RGLD).
Investors are clearly optimistic about Franco-Nevada, and for good reason. Here are three things that the company did right in 2017, and which positions it for growth in 2018.
Because Franco-Nevada doesn't own and operate mines but buys precious metals from pure-play miners like Barrick Gold (NYSE:GOLD) and Kinross Gold (NYSE:KGC), the only way to ensure a steady stream of metals and revenue is to spread out investments across mines and geographies. Franco-Nevada is a champ in that, owning a portfolio with streaming agreements attached to more than 200 precious metal assets. The company may not have had much success with new deals in 2017, but it continued to reap the fruits of its previous investments.
So while Wheaton Precious Metals' sales declined 5% during the nine months ended Sept. 30, 2017, Franco-Nevada's gold equivalent ounces (GEOs), revenue, and net income jumped 10%, 11.6%, and 19%, respectively, during the period. Aside from contribution from recently added asset streams such as Barrick Gold-Premier Gold Mines' jointly owned South Arturo and Glencore's Antapaccay, strong production from previously invested mines, especially Sibanye Gold's Stillwater and Kinross Gold's Tasiast, boosted Franco-Nevada's GEOs substantially. Tasiast, in particular, was welcome news as it's a high-potential mine that was in a limbo but is now back on track.
Meanwhile, Franco-Nevada extended its streaming agreement with First Quantum Minerals on its Cobre Panama copper mine for $178 million. In return, Franco-Nevada is entitled to buy up to 302,000 ounces of gold and 4.8 million ounces of silver from the mine at only 20% of the spot prices of gold and silver, respectively, and 50% of the spot prices thereafter.
Thanks to Cobre Panama and other recent deals, Franco-Nevada foresees its GEOs growing by nearly 9% at the midpoint from estimated 2017 production by 2021.
|Metric||2015||2016||2017 Estimate||2021 Estimate|
|Gold equivalent ounces
(in hundred thousands)
|Oil and gas revenue
Oil and gas, however, should steal the spotlight.
Making inroads into oil and gas
Franco-Nevada is the only precious metals streaming company to have ventured into oil and gas, and it made significant headway in 2017.
Oil and gas contributed 7% to Franco-Nevada's revenue in Q3. During the quarter, the company purchased a royalty on a private oil sands company's Orion Thermal Project in Alberta, as well as royalty interests worth $109.8 million in the Delaware region of the Permian Basin in Texas. These deals came within months of Franco-Nevada spending a little more than $200 million on oil and gas royalty rights in the Midland Permian Basin and the emerging STACK play in Oklahoma.
With the addition of Delaware, Franco-Nevada now has royalties in the top three U.S. shale basins. What you need to know is that the company expects the contribution from its new royalties in the U.S. to "become more significant after 2017". With oil prices recovering, Franco-Nevada is making the right moves at the right move, diversifying its portfolio like no other streaming company.
Staying on course with debt and dividends
Picture this: Franco-Nevada has zero debt on its books, generated free cash flow worth $482 million in the trailing twelve months, and increased its dividend for the 10th consecutive year in 2017. That makes Franco-Nevada one of the best dividend gold stocks and, financially, the strongest among Royal Gold and Wheaton Precious Metals.
By keeping its balance sheet clean and maintaining its dividend streak in 2017, Franco-Nevada assured shareholders of its commitment to them.
By now, it's evident that Franco-Nevada's run-up in 2017 was backed by strong operational performance and growth initiatives. Exposure to oil and gas adds a nice touch of diversification to the company's portfolio even as it continues to grow in the precious metals space. Given that backdrop, it looks like Franco-Nevada shares have a lot of steam left for 2018.