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Here's How Franco-Nevada Corporation Crushed It in 2017

By Reuben Gregg Brewer - Dec 31, 2017 at 7:40AM

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This was another solid year for the gold streaming company, but the real good news is the diversified foundation it's building for the future.

Franco-Nevada Corporation (FNV -1.57%) is tied to the precious metals market, with roughly two-thirds of its revenue derived from gold and 16% from silver. These businesses are doing reasonably well, but there's something else going on at this streaming and royalty company you should know in order to understand how Franco-Nevada crushed it in 2017.

A different model

Franco-Nevada is not a miner: It provides miners with cash up front for the right to buy gold and silver at reduced rates in the future. This locks in wide margins for the company no matter what's going on in the often-volatile precious metals market. Franco-Nevada's September 2017 deal with First Quantum Minerals Ltd. is a great example of its business.   

A woman in a hard hat and reflective vest standing in front of mining equipment

Image source: Getty Images.

Franco-Nevada provided First Quantum with $178 million to help the miner increase its stake in Cobre Panama, a copper, gold, silver, and molybdenum project in South America. Cobre Panama is expected to be commissioned in late 2018, with Franco-Nevada reporting that it was nearly two-thirds complete as of December. In exchange for that cash infusion, Franco-Nevada will get to buy gold and silver at 20% of their spot prices until certain production levels have been met, and then at 50% thereafter.   

This investment is just one example of the foundation that Franco-Nevada is building for the future. Its portfolio consists of 340 investments, with 47 currently-producing mines, 40 in an advanced stage of development (like Cobre Panama), and 173 in the exploration stage. As these mining investments start to bear fruit, Franco-Nevada expects its gold equivalent production to increase by as much as 16% between 2016 and 2021.   

Out of the norm

Franco-Nevada also has 80 oil and gas investments, with 61 currently producing these commodities and the rest in the exploration stage. In fact, four of its last five deals have been in the energy space, as it has taken advantage of relatively low oil and gas prices to increase its investment in the industry.   

A list of Franco-Nevada's recent deals, showing that four of the five are in the energy space

Oil and gas have been a near-term focus at Franco-Nevada. Image source: Franco-Nevada Corporation. 

Franco-Nevada currently gets about 7% of its revenue from the energy space. This is unique among its major streaming peers, Royal Gold (RGLD 0.13%) and Wheaton Precious Metals (NYSE: WPM). These two competitors only provide exposure to precious metals. That said, expanding into a new commodity space might concern investors, especially if you look at the disastrous foray that Freeport-McMoRan (FCX -0.77%) made into the oil arena. That miner wound up writing down the value of its oil and gas investments and eventually extracting itself from the industry.

However, there are key differences between Freeport's failed efforts at diversification and what's taking shape at Franco-Nevada. For example, Freeport bought physical drilling assets, pulling it in a new direction that had little to do with its core mining competencies. Franco-Nevada is using the royalty model to invest in the energy space, so it hasn't actually changed much about what it does -- it just extended the same model into a new area. And, equally important, Franco-Nevada is expanding its oil and gas investment during a weak spot in oil and gas prices; Freeport made its investment just a short time before oil prices peaked in mid 2014.

A pie chart showing Franco-Nevada's revenue sources. Seven percent is from oil and gas investments.

A quick breakdown of Franco-Nevada's third-quarter revenue. Image source: Franco-Nevada Corporation. 

Opportunistically investing in oil and gas is just the start here, though. The real reason I think Franco-Nevada crushed it in 2017 was because of the growth it's added to its portfolio. With the new investments it's made, the streaming company believes its oil and gas revenue could more than double between 2016 and 2021. While that's coming off a small base relative to its precious metals business, it would materially increase the company's exposure to energy from the 7% of revenue it gets from the area today.

It's about the foundation

What Franco-Nevada has really done in 2017 is set itself up for solid revenue growth over the next four to five years. This effort will keep it well within its core competency of providing cash to commodity producers while increasing the diversification of its portfolio of investments.

If all you want is exposure to precious metals, look at Royal Gold or Wheaton. But if you're looking for a diversified commodity investment with a penchant for capitalizing on unique pricing opportunities, then do a deep dive on Franco-Nevada today. In my opinion, it killed it in 2017, though the real evidence of that will only start to show up over the next couple of years.

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Stocks Mentioned

Franco-Nevada Stock Quote
$177.04 (-1.57%) $-2.83
Freeport-McMoRan Inc. Stock Quote
Freeport-McMoRan Inc.
$30.78 (-0.77%) $0.24
Royal Gold, Inc. Stock Quote
Royal Gold, Inc.
$110.29 (0.13%) $0.14

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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