Gold and silver streaming company Franco-Nevada Corporation (FNV 1.98%) hit record highs for gold production, revenues, net income, and adjusted EBITDA in 2017. It was, by any measure, a good year.
While that's important background information, investors tend to look toward the future. So while CEO David Harquail and his team noted the company's 2017 performance while talking to analysts and investors during a recent quarterly conference call, it was the commentary about the future that's even more exciting.
1. We hit the target
There's no question that turning in record performances like Franco-Nevada did in 2017 is impressive. Any CEO would be proud of that. However, Harquail gave only a brief introduction before handing the conference call to CFO Sandip Rana. Rana breezed through the financial achievements before quickly switching gears to discuss the promises the company made.
Image source: Getty Images
[Y]ou can see how the Company performed against the guidance levels that were issued... I'm very pleased to report that the full-year actual did reach the higher end of the ranges with oil and gas exceeding the top range.
Essentially, the management team is proud of the records it achieved, but even more proud of living up to its word. As an investor, it's always nice to see a company that does what it says it will. That's particularly true when it means posting record results along the way.
2. Plenty of capital for growth
As a streaming and royalty company, Franco-Nevada provides cash up front to miners in exchange for the right to buy gold and silver at reduced rates in the future. To do this it uses its balance sheet to fund deals before permanently financing the transactions with long-term debt or stock.
This is why Rana's comment that the company currently has "$1.4 billion of available capital when including our credit facilities" is such exciting news. Essentially, if Franco-Nevada sees a good streaming deal, it won't have any problem coming up with the cash to take advantage of it.
However, this isn't a unique event. When asked by an analyst about the complete lack of long-term debt on the balance sheet today, CEO Harquail explained:
So, our philosophy is if we're generating surplus cash, we don't mind having surplus cash [on] our balance sheet because we like to -- we know it's always going to be [a] cyclical business and we like to be positioned, so that we have the check -- [the] ability to write a check when no one else can.
Having the capital today is exciting, but knowing that this is a long-term business focus is even nicer when you consider investing in a cyclical business like precious metals.
3. Expect another good year, thanks to diversification
According to the CEO, Franco-Nevada's conservative assumptions call for lower gold production in 2018. That would normally be a bad thing for the top line -- except that,
If you do the math including our oil and gas business, you'll note that even with the lower [gold equivalent ounce] projection for 2018, Franco should be able to match increased revenues this year.
Franco-Nevada's portfolio of assets. Image source: Franco-Nevada Corporation
Being able to match its financial results despite lower gold production is nice to see. But the real takeaway here is the diversification. Franco-Nevada is slightly different from peers like Royal Gold, Inc. and Wheaton Precious Metals because it also invests in oil and natural gas. That's an added level of diversification which will obviously be important in 2018, and has longer-term implications for investors who tend toward the conservative side of the spectrum. Although Harquail wasn't explicitly trying to highlight this point, it comes across very clearly.
4. More production is in the cards
So 2018 should be a relatively weak year for gold production, with oil picking up the slack. That's a mixed story at best. However, CFO Rana provided a quick rundown of the assets to watch over the next few years:
[These are] the assets that will drive our growth over the next 3 to 4 years. This year, you'll see the initial benefit of the Tasiast and Ahafo expansions and from Brucejack, Cerro Moro and Sissingue that are new builds. Cobre Panama will be the big growth driver in 2019 and 2020 and expansion of Stillwater from roughly 500,000 ounces per annum, up to 800,000 ounces per annum will be completed in 2021.
Clearly there's a lot of detail lost in that list, but the real story is that Franco-Nevada's partners have projects in the works that will help push Franco-Nevada's production higher after 2018. So don't get too caught up in the production numbers this year; pay more attention to how the company's litany of growth projects are moving forward. And don't stop with the list above -- Rana made sure to add that, "There is also a stable of projects we expect to move into development." In other words, there's more good news to come.
5. Dividends, dividends, dividends
One of the most interesting things about Franco-Nevada compared to gold miners is the company's dividend. It has been increased every year since its IPO in 2008. According to the CEO:
[W]hat I'm most proud of [is] our dividend track record. In 2017, Franco-Nevada paid more in dividends than any other gold Company in the world... We've been able to increase our per share dividend each year for the past 10 years.
During the call Harquail describes Franco-Nevada as the "risk off" gold investment. While that's partially about the company's low leverage, the dividend is another important part of the story. Essentially, while commodity prices may move around, Franco-Nevada's growing dividend provides investors something to hold onto so they stick around to benefit from the long-term diversification that gold and silver can offer.
GG EBITDA Margin (TTM) data by YCharts
If you are wondering how Franco-Nevada manages this feat, the answer is the strength of the streaming and royalty business model. A quick look at Franco-Nevada's EBITDA margins compared to miner Goldcorp (GG +0.00%) captures this dynamic in action. The commodity downturn pushed Goldcorp's margins deep into the red, while Franco-Nevada's margins stayed stable and wide because of its locked-in low gold costs. Expect another dividend hike this year, by the way.
If you are looking for gold exposure
All in, the story from Franco-Nevada's management team was a good one, despite the dip in gold production expected this year. The streaming and royalty company lived up to management's projections in 2017, is financially strong, is benefiting from its diversification efforts, and has projects that will drive growth over the next few years. All of that should support another dividend hike in 2018, with more to come after that if CEO Harquail's long-term expectations are close to the mark. With the stock off roughly 20% from its late 2017 highs, investors might want to take the time to get to know Franco-Nevada a little better today.
