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Franco-Nevada Hits a Big Milestone

By Dan Caplinger – Nov 6, 2018 at 1:33PM

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Here's why investors are now looking forward to the payoff after a long effort.

Franco-Nevada (FNV) isn't like most precious metals companies. Rather than mining its own material, the company has chosen instead to be a specialist in streaming agreements and royalty interests, providing financing to mining companies in order to help them develop projects of their own. In exchange, Franco-Nevada takes the opportunity to buy precious metals at discounted prices, and the company has also aggressively moved into the energy industry to provide similar assistance to oil and gas exploration and production companies.

Coming into Monday's third-quarter earnings report, Franco-Nevada investors were expecting to see weaker revenue that would reflect some of the challenges the precious metals industry has faced lately. Franco-Nevada's results were better than most had anticipated, and the company remains optimistic that it has a lot of potential for further gains in the future -- due largely to one big milestone that it reached after the end of the period.

Several large gold bars to the left of a chart of prices going upward.

Image source: Getty Images.

How Franco-Nevada held up

Franco-Nevada's third-quarter results showed that the company wasn't entirely successful in escaping tough industry conditions. Revenue was down less than 1% to $170.6 million, and net income dropped 13% to $52.1 million. However, on an adjusted basis, earnings of $0.29 per share fared better than the $0.26 per-share consensus forecast among investors, and sales held up far better than the $159 million target among those following the stock.

From a fundamental perspective, production levels remained under pressure, albeit with some good news. Overall production of 120,000 gold-equivalent ounces was down by more than 3,750 ounces from year-ago figures. Gold production was actually higher by more than 2,500 ounces, but a nearly 3,700-ounce drop in silver production hurt Franco-Nevada, and declines of roughly 900 ounces of platinum group metals and 1,800 ounces in other mined products hurt the company. Only oil and gas revenue that more than doubled from the third quarter of 2017 prevented Franco-Nevada from seeing a dramatic drop in revenue.

CEO David Harquail was happy about how the quarter went. "Franco-Nevada's diversified portfolio and business model continues to generate strong revenues and margins," Harquail said, and the CEO also pointed to expectations for future growth.

Cobre Panama is bought and paid for

In particular, Franco-Nevada sees the Cobre Panama project as an essential component of the company's overall future success. After the end of the quarter, the streaming giant made its final installment on the $1 billion in funding it committed to the project, and Franco-Nevada is expecting a massive impact from the deal once production ramps up fully. Harquail set a growth expectation of more than 30% if the company can not only get Cobre Panama up and running, but also make the most of its other projects, both in precious metals and oil and gas.

Franco-Nevada's collaboration with Continental Resources (CLR) should ensure that the energy side of the portfolio continues to grow. On Oct. 23, after the end of the quarter, Franco-Nevada contributed almost $215 million toward acquisitions of mineral rights in the Oklahoma-based COOP and STACK shale plays. Up to $300 million more could go toward energy-interest acquisitions in the future, and those gains resulted in a $10 million boost to revenue guidance from oil and gas. The new range is $75 million to $85 million, showing the extent to which Franco-Nevada sees promise in the oil patch.

Franco-Nevada shareholders looked pleased with how things went, and the stock climbed as much as 4% in morning trading before falling back somewhat toward midday. Franco-Nevada's strategic direction appears to be taking the company in the right direction, and if energy and metals prices start to cooperate, the future could be even brighter for the streaming and royalty financing specialist in the years to come.

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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