Franco-Nevada Corporation (NYSE:FNV) is a gold streaming company that operates in the niche precious metals industry, which includes fellow giants Wheaton Precious Metals (NYSE:WPM) and Royal Gold, Inc. (NASDAQ:RGLD). While it's the youngest of this gold and silver streaming stock trio, it's also the biggest. However, relative size isn't the only factor that separates Franco-Nevada from the pack. Here's what investors need to know before buying its stock.
What Franco-Nevada does
Miners like streaming deals because they provide access to capital beyond the traditional bank, stock, and bond market sources that most companies rely on to finance their businesses. When times are tough for miners, like during commodity downturns, streaming deals can be an important lifeline to reduce debt and/or support spending on key projects. Franco-Nevada likes streaming and royalty deals because they lock in low prices for gold and silver. That provides the company with wide margins in both good markets and, perhaps more important, bad ones.
Because Franco-Nevada doesn't actually do any mining, it's probably best to look at it as a specialty finance company that gets paid in commodities. That, meanwhile, makes it a lot easier for the company to diversify its business. Franco-Nevada is, in fact, one of the most diversified streaming and royalty companies in the industry, with a portfolio of around 290 mine investments. Roughly 50 of those mines are currently operating, 36 are in advanced development, and the rest are in some earlier stage of development. The next closest streaming company when it comes to mine diversification is Royal Gold, with 200 mines (40 operating).
Oil and gas investments
However, Franco-Nevada has another distinguishing feature when it comes to diversification: energy. Franco-Nevada has investments in 57 operating oil and gas projects, with another 25 investments that are in the development and exploration stages. These investments follow the same general approach, with the company providing cash and not taking any operating responsibilities. Add these deals to the total, and Franco-Nevada's portfolio swells to around 375 investments.
That said, oil and gas is just a small part of the total; Franco-Nevada is focused on gold. In 2017, gold accounted for 68% of the company's top line. Silver was next up at 15%, with oil and gas coming in at 7%. The remaining 10% was largely made up of other precious metals. Although this breakdown means that gold is the biggest driver of results, the oil and gas investment provides a little added diversification to the mix that the other large streaming companies don't have.
So if you want a pure play on precious metals, that's a negative. But if you're looking to Franco-Nevada to provide some diversification to your portfolio, then it could be a net positive that tilts you toward this streaming company over peers Wheaton (where production is roughly a 50-50 mix between silver and gold) and Royal Gold (where gold accounts for 85% of revenue).
Not only does Franco-Nevada have the most diverse portfolio, but it's also the largest streaming and royalty company, with a $13 billion market cap. The next largest is Wheaton, at $10 billion. Yet Franco-Nevada has only been trading publicly since late 2007, or roughly 10 years. Wheaton has been around in its current form since late 2004, while Royal Gold's public history as a royalty and streaming company dates back to the late 1980s.
That said, Franco-Nevada got off to a running start. The "old" Franco-Nevada started to build its portfolio of streaming and royalty deals in 1985. However, it was acquired by giant gold and silver miner Newmont Mining in 2002, with some of the "old" Franco-Nevada employees sticking around to manage the company's newly acquired streaming assets. In 2007, those Franco-Nevada employees formed a "new" Franco-Nevada and purchased Newmont's streaming portfolio to create the Franco-Nevada that exists today. That helps explain how the youngest of the streaming companies is also the largest.
Although Franco-Nevada's portfolio is fairly diversified by mine, roughly 80% of its revenue comes from the Americas. Moreover, three large mine investments account for about 35% of its adjusted EBITDA: Antapaccay (16%), Antamina (10%), and Candelaria (9%). Antapaccay is located in Peru and arrived in the portfolio in 2016 via a $500 million gold and silver streaming deal with Glencore. Antamina is a Teck Resources mine also in Peru, on which Franco-Nevada bought a silver stream for $610 million in 2015. And the gold and silver streams from the Candelaria mine in Chile arrived in 2014, when Franco-Nevada provided $655 million to Lundin Mining Corporation.
The roughly 10 years that Franco-Nevada has been public have included a deep commodity downturn. That, however, didn't stop the company from producing stellar results. Over the 10 years through early 2018, gold's price rose around 80%, but Franco-Nevada's price was up around 600%.
10-Year Trailing Return
|VanEck Vectors Gold Miners ETF||0.8%||36%|
And while Wheaton's 729% gain during that time is better than Franco-Nevada's, Wheaton's stock price is still roughly 50% lower than the peaks it achieved in 2011. Franco-Nevada, by comparison, has been heading generally higher the whole time. Royal Gold's return over that span, meanwhile, was around 280%.
Performance during downturns
As noted above, the streaming model is somewhat countercyclical: Miners often need cash the most right when it's most difficult to get from banks and capital markets. So Franco-Nevada can benefit from commodity downturns by opportunistically providing cash to miners at a time when other financing options are limited.
For example, the 2015 deal between Franco-Nevada and Teck Resources was struck toward the end of a deep commodity downturn. This streaming deal included Teck's share of silver from the Antamina Mine, where silver is a byproduct of copper mining. Teck used the $610 million from the deal to reduce debt. In exchange, Franco-Nevada got the right to buy all of the silver attributable to Teck's 22.5% interest in the mine until 86 million ounces has been delivered (which was expected to take 30 years) and then 66% of the silver thereafter. The price for the silver is locked in at 5% of the spot price.
This countercyclical dynamic also helps explain why Franco-Nevada's revenue has moved higher every year but one (2013) over the past decade. The company's expanding portfolio has essentially made up for more volatile commodity prices. Its top line expanded from $151 million in 2008 to around $675 million in 2017. Its bottom line has been a bit more volatile, but its dividend has seen consistent growth.
A growing dividend
Although Franco-Nevada's streak of increases isn't as long as the 17 years of hikes Royal Gold has put up, it's hard to knock the company for this, since it's boosted its payment every year since it went public. That's a roughly decade-long streak, which is incredible when you consider the deep commodity downturn between 2011 and early 2016. The current yield of around 1.3% probably won't excite you, but the long string of annual dividend increases is notable. Indeed, when commodity prices are weak, a steadily rising dividend can provide investors with something to watch other than the stock price. That can help to keep you around to see the full diversification benefit that gold can offer to a portfolio.
There's one more factor here that's important for investors to know about -- leverage. The basic model for a streaming company is to use short-term financing to ink streaming deals and then to issue debt or equity to permanently finance the transaction. Cash flow can then be used to pay down long-term debt.
Franco-Nevada tends to err on the conservative side. It has operated over the last decade with little to no long-term debt. It has, instead, used equity sales to finance its expansion. The company's share count has increased roughly 85% over the past 10 years. This is slightly different from peer Royal Gold, which has switched the equation and used debt while generally avoiding equity sales. So a key issue to monitor at Franco-Nevada is the dilution from the issuance of new shares, though it hasn't been an issue so far. And, of course, if the company decides to use debt, it would be a noteworthy event as well.
Is Franco-Nevada stock worth owning?
If you are a long-term investor looking to add some precious metals exposure to your portfolio, then Franco-Nevada should definitely be on your shortlist. That's particularly true if you are a dividend investor. Valuationwise, the company isn't exactly a bargain. Price to tangible book value and price to book value are both at the high end of their historical ranges. These metrics are also above its peers' and miners like Barrick, GoldCorp, and Newmont. That said, Franco-Nevada has rewarded investors well over the years and has rarely been "cheap." It's not a screaming bargain today, but if you are looking to own it for the diversification it can offer, it's worth a closer look. If you prefer a bargain price, then consider at least keeping it on your watch list and waiting for a pullback in its stock price.