Commodity prices have been relatively strong lately, especially in the energy markets, and that's good news for Franco-Nevada (FNV +1.86%). The streaming and royalty-based financing company has set its sights on becoming better diversified, with the intent of boosting its exposure to oil and gas to complement more fully its portfolio of precious metals streaming arrangements.
Franco-Nevada had a strong 2017, but investors want to know whether the company can sustain its positive momentum into 2018 and beyond. Here are some of the things that executives shared with investors in Franco-Nevada's most recent conference call.
1. Don't count gold out at Franco-Nevada
The current wave [of growth] has been diversification in the form of oil and gas. I expect the next wave of growth on the mineral side will be project financing as the industry gets back to building mines again. Asset fund management is limiting the amount of new equity available to the sector, and bank capital requirements are limiting the amount of project debt. So I believe streaming will play a meaningful role in the coming round of mine financings. -- Paul Brink, SVP of Business Development
Franco-Nevada has made substantial acquisitions recently to bolster its position in the oil and gas industry, but it's important to understand that precious metals still make up the lion's share of Franco-Nevada's business. About 90% of revenue in 2017 came from gold, silver, and platinum group metals, and even the company's most ambitious targets had oil and gas rising to only about 20% of total revenue. That simply reflects the fact that precious metals will remain the bread and butter of Franco-Nevada's portfolio, and Brink sees fundamentals in that area improving in the near future in a way that could lead to greater success for the company.
2. Look to Cobre Panama for growth
The key [asset], of course, is Cobre Panama, and we're watching that very closely. Right now, Panama is proving to be a very receptive country for investment. We see no pushback from the government. We see them very commercially minded. There we haven't seen any [non-governmental organization] issues. It's been very receptive, so that's what's giving us the confidence to put more money in that country. -- CEO David Harquail
One issue that companies in the mining industry always have to pay attention to is the need to work well with labor organizations. Latin America has seen contract renegotiation efforts on a regular basis for mine workers, and given how much exposure Franco-Nevada now has to the Cobre Panama project, some analysts worry that a labor dispute could cause material damage to the streaming company's financials. Harquail did his best to allay those concerns, as Franco-Nevada has sought to invest largely in well-established operations with good relationships with various stakeholders. Nevertheless, political risk is always present, and investors are wise to consider it in assessing Franco-Nevada's prospects.
Image source: Franco-Nevada.
3. Energy will remain a big deal for Franco-Nevada
There certainly is opportunity to spend [$420 million in] capital [in the Permian]. The nature of the landholdings in the U.S. is such that most of the mineral title is held by individuals, and so there is a tremendous inventory of mineral title and hence royalties that we can buy, and there are a lot of private equity-backed companies in the U.S. that are looking to sell packages of those royalties. ... It's a matter of picking the right opportunities and also just balancing off how much oil and gas exposure we want, versus gold and other precious metals. -- Jason O'Connell, VP of Oil and Gas
Franco-Nevada has purchased oil and gas interests in several locations, including the STACK play in Oklahoma and Alberta's oil sands region. Yet the Permian Basin of West Texas remains one of the most fertile prospects for new investment, and Franco-Nevada believes there's more opportunity there than ever before. When asked whether the company anticipates continuing to invest in oil and gas at last year's run rate of roughly $420 million annually, Franco-Nevada's key oil and gas division executive said that a lot depends on the strategic direction that the overall company takes. Nevertheless, there are many opportunities in the region, and it's up to Franco-Nevada to identify the best ones and then come up with lucrative terms for moving forward.
4. Lower U.S. taxes are coming
Our projection for effective tax rate for 2018 is about 17%. -- CFO Sandip Rana
Tax reform has had a positive impact on many companies, and Franco-Nevada looks like it'll be one of them. In fact, once operations in Panama kick in at top gear, the company anticipates effective tax rates to fall to around 13% in the next three years. That's good news for shareholders, especially because lower taxes could mean larger distributions in the future.
Keep watching Franco-Nevada
Franco-Nevada built up good business momentum heading into 2018, and shareholders are hopeful about the company's prospects. Even though its stock price has foundered somewhat in recent months, strong fundamental performance could help turn shares around in the coming year.
