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How 1 Underfollowed Stock Wants to Make Gold and Energy Investors Rich

By Dan Caplinger – Aug 6, 2018 at 4:16PM

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This is no traditional resources company.

Many investors mistakenly believe that if you want to make money in natural resources, you have to invest in the companies that go out and find those resources. Exploration and production companies in the oil and gas industry, and mining companies searching for gold, silver, and other precious and base metals indeed have had their share of successes, especially when commodity markets were favorable for them.

But if you want to make money in natural resources, it's worth looking beyond the base producers to find other business models that can be profitable. One strategy involves obtaining rights to streams of production in exchange for early financing of mining and drilling projects. Franco-Nevada (FNV -0.12%) has followed that strategy very well for more than 10 years as a public company.

Lately, challenging conditions in the precious metals markets have led Franco-Nevada to emphasize the energy side of its business, and with the streaming specialist set to report its second-quarter financial results on Aug. 8, shareholders want to see signs that the company will deliver on its potential. By making a transition toward energy at an auspicious time, Franco-Nevada is hopeful it can build on its legacy of excellence.

Stats on Franco-Nevada

Analyst EPS Estimate


Change From Year-Ago EPS


Revenue Estimate

$169.46 million

Change From Year-Ago Revenue


Earnings Beats in Past 4 Quarters


Source: Yahoo! Finance. EPS = earnings per share.

What's ahead for Franco-Nevada?

Investors have high hopes that Franco-Nevada will be able to keep its earnings moving higher. Yet when you look at full-year projections for 2018, there's a full understanding that relatively tough conditions in the precious metals markets are likely to weigh on short-term performance. After several years of strong double-digit growth rates in its history, Franco-Nevada seems prepared for a subpar year given the industry environment.

Franco-Nevada's first-quarter results showed some of the potential challenges ahead, as well as the opportunities. The company was only able to grow revenue by less than 1%, and many saw the streaming specialist as fortunate that it avoided a year-over-year decline on the top line. Yet Franco-Nevada managed to squeeze a lot of profit from those flat sales, with net income jumping 43% to help drive some enthusiasm.

Open pit mine at night with lights from artificial sources.

Teck Resources' Antamina mine, in which Franco-Nevada has a streaming interest. Image source: Teck Resources.

The problem, though, was that tough trends toward falling production of precious metals stayed in place. Gold, silver, and platinum-group metals all saw double-digit percentage declines in production volume. Even the base-metals division, which has helped to save Franco-Nevada's top line from an overall drop before, wasn't able to contribute positively. Only rising production in oil and gas was able to offset the volume losses elsewhere to drive profits.

A brighter future

Poor performance in precious metals during the second quarter won't help profits. Gold has fallen from the mid-$1,300s to just over $1,200 per ounce since early April, and silver has seen recent declines from $17 per ounce to around $15.25 per ounce. Some of those declines came late in the quarter, so hopefully, Franco-Nevada will have gotten better prices for much of its production. Yet that could put further downward pressure on Franco-Nevada later this year if precious metals don't rebound.

Rising production could also help to offset poor pricing. Cobre Panama won't ramp up fully for several years, but in the long run, it could dramatically enhance overall production for the streaming company. Cobre's output could be enough to offset considerable price drops for precious metals.

More importantly in the short run, Franco-Nevada's oil and gas plays have worked out well initially. Good timing in its strategic move led to some good bargains, and even with oil prices much higher now, the environment still looks good for Franco-Nevada to negotiate attractive royalty deals to tap into potential profit streams.

Investors in Franco-Nevada should look for signs of greater production in its earnings report, especially at key assets like Cobre Panama. At the same time, if the natural resources company can announce more streaming and royalty deals, that could convince shareholders that Franco-Nevada is taking advantage of low metals prices to negotiate even better terms going forward.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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