2017 was a good year for gold, and streaming specialist Franco-Nevada (FNV 1.39%) took full advantage of price gains for the yellow metal in posting a 34% rise last year. Yet as those who've followed the company already know, Franco-Nevada has sought to diversify away from gold and other precious metals to embrace a more holistic exposure to natural resources more broadly. In particular, Franco-Nevada has increased its holdings of oil and natural gas royalties, with the goal of eventually making them represent a sizable 20% allocation within the company's overall portfolio of assets.
Investors look at the recent performance of crude oil and hope that Franco-Nevada's moves will turn out to have been well-timed. Let's look further at the company to see whether it has what it takes to keep moving higher in 2018.
Stats on Franco-Nevada
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What's ahead for Franco-Nevada in 2018?
Those who are watching Franco-Nevada are prepared to see the stock cool off a bit after the company's strong 2017 performance. The current target price among analysts suggests about just a 6% rise from where the stock started the year, and already, Franco-Nevada has seen modest declines in the opening weeks of January.
The biggest issue that Franco-Nevada has to navigate is what will happen with gold prices in 2018. Projections among major players in the industry suggest that the yellow metal might take a break from its recent price gains in the coming year, with some expecting it to hold its own while others anticipate a slight decline. Although upward trends in the commodities markets are encouraging, adverse conditions with respect to interest rates could pull precious metals markets down. In particular, if the Federal Reserve keeps tightening monetary policy, rising financing costs for gold investors could lead to their pulling out of the market, and that could put an end to gains in recent years.
Nevertheless, Franco-Nevada continues to put more money into precious metals. The streaming company agreed to buy an additional precious-metals stream on the Cobre Panama project, investing $178 million to take an indirect interest from Korea Resources' stream. Franco-Nevada already had exposure to Cobre Panama through a separate stream with First Quantum Minerals, and the move now gives Franco-Nevada interests on 100% of the mine's ownership. Some investors were concerned that the streaming company went ahead independently with the deal, choosing not to come to an agreement with a third-party syndication partner, but CEO David Harquail said that he expects Cobre Panama "to add materially to Franco-Nevada's growth profile beginning in 2019."
The big question many investors have for Franco-Nevada is how the company intends to follow through with its initiative to add oil and natural gas exposure to the portfolio through increased royalty purchases. Last year, the company made several moves in the energy sector, and shareholders will want to see more deals with favorable terms.
Recent moves show what Franco-Nevada likes to see. Back in September, the company completed a transaction with Canadian producer Osum Oil Sands, obtaining a 4% gross overriding royalty on its Orion project in the Cold Lake region of Alberta. Franco-Nevada likes the fact that it has been able to find promising energy assets in Canada to give it some geographical diversification with the other plays it has bought into recently.
Further south, Franco-Nevada is now involved in some of the most promising areas in the U.S. oil patch. A recent purchase agreement to acquire royalty interests in the Delaware Basin, which encompasses the western portion of the Permian Basin in West Texas. With other assets including royalties in the Midland Basin, which is the eastern portion of the Permian, and the STACK shale play in Oklahoma's Anadarko Basin, Franco-Nevada should see solid results from energy -- especially if crude oil prices keep rising.
Keep your eyes on the gold prize
Despite its strategic moves into energy, Franco-Nevada is still primarily a play on gold, and gold price movements will be instrumental in determining its success. After so many years of solid gains, long-term investors shouldn't let themselves get disappointed if the stock consolidates in 2018 as the company undergoes its transformation toward a more balanced portfolio of natural resources.