For years, Franco-Nevada (TSX:FNV) has been able to navigate turbulent commodities markets to produce long-term growth. Between its streaming arrangements with miners of gold and other precious metals and its acquisition of royalty interests from oil and gas exploration and production companies, Franco-Nevada has been willing to go where the growth is and diversify its portfolio of holdings.
After its latest earnings report last month, during its conference call with analysts, Franco-Nevada went through some of its most important issues. Although the stock hasn't performed as well as it has in past years, investors are growing more confident about the company's longer-term prospects.
Breaking down the Continental deal
As a typical mineral buyer, you don't have any information on timing of development, and so what Continental brings to the table here is the visibility into when acreage will be developed or drilled, and that brings forward revenue. -- Jason O'Connell, VP, Oil & Gas
One of the highlights of Franco-Nevada's second-quarter earnings report was the company's announcement of a major strategic collaboration with energy player Continental Resources (NYSE:CLR). Under the terms of the deal, Franco-Nevada will provide $220 million in cash up front, along with $100 million per year in each of the next three years. In exchange, Continental will give Franco-Nevada both current mineral rights holdings and mineral rights that it intends to acquire in the near future. Not only does this give Franco-Nevada more energy exposure at a critical time for the industry, but as O'Connell points out, it also comes with greater certainty about when and how the underlying fields will get developed. That should add some predictability to Franco-Nevada's energy results going forward.
A tale of two nations
Right now, we're seeing better rates of return in the U.S. for those types of opportunities than we're seeing in Canada. -- O'Connell
Franco-Nevada has concentrated its energy exposure to North America, and it sees considerable differences in the opportunities it has in Canada compared to the U.S. market. As O'Connell explained, in Canada, much of the mineral rights are held by the government, so purchasing outright mineral rights is next to impossible. By contrast, with most U.S. mineral rights being held by individuals, there's a much greater chance for Franco-Nevada to acquire promising rights through its own efforts. So far, that dynamic is favoring Franco-Nevada's efforts in the U.S., but that could change if the royalty company makes more direct agreements with operators in Canada.
Cobre Panama appears to be on track
We're not sweating any individual operation and labor interruptions. The only one we've been watching closely is Cobre Panama. ... We've been working with their various unions there, but that seems to have been all resolved in the last few months, and things are proceeding smoothly. -- CEO David Harquail
Labor issues are a constant threat to mining operations, and given the magnitude of the Cobre Panama project, Franco-Nevada has to be mindful of the impact that labor problems there could have on its results. So far, Cobre Panama hasn't made a substantial contribution to Franco-Nevada's financial success, but that's expected to change as soon as next year as operations at the mining complex ramp up.
Generations of income for Franco-Nevada
I think the 30 years represents what we know right now with the technologies that are being applied. I'm convinced this is going to be something my great-great-grandchildren will still be collecting dividends on. -- Harquail
The challenge for many investors in energy royalties is that they tend to produce less income over time, as specific fields play out. However, advances in technology have enabled energy producers to go back to areas once thought to be entirely depleted and use alternative techniques to bring on new production. Harquail is confident that even in tough-to-reach areas like western Canada, putting in infrastructure is smart, because it opens the door to decades of potential income.
Franco-Nevada shareholders aren't happy with the stock's decline of more than 20% so far in 2018. But with so many promising prospects in its pipeline, Franco-Nevada has plenty of chances to regain its lost glory and get back to the long-term performance trends that investors are used to seeing.