Shares of Franco-Nevada (FNV 1.67%) have badly lagged peers Royal Gold and Wheaton Precious Metals. There's a very good reason for this, but long-term investors should probably step back and take a deep breath. If you look just past the current troubles at the precious metals company's largest investment, there's a compelling story that supports the company's long-term success.
What does Franco-Nevada do?
At a high level, Franco-Nevada and its peers sell gold, silver, and other precious metals. But they are streaming companies, not miners. This means that they provide cash upfront to miners, which gets used for things like building mines or expanding existing assets. In exchange for that cash Franco-Nevada gets the right to buy precious metals at reduced rates in the future.
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It's a win-win transaction in many ways. The miner gets the cash it needs to grow without having to issue debt or sell shares, helping to maintain the strength of its balance sheet. Franco-Nevada, Royal Gold, and Wheaton get attractive, locked-in prices on the precious metals they buy. This basically guarantees the companies earn a profit when they turn around and sell the metals.
There's one more subtle, but important, twist here. Gold and silver are often found along with other metals, like copper. For many miners the copper will be the main target, with the precious metals just a side benefit. To ink a deal with a streamer for the precious metals doesn't really impact their businesses all that much.
Looking past Franco-Nevada's big problem
As noted, Franco-Nevada's stock is lagging its peers at the moment. The reason is that its largest mine investment, Cobre Panama, isn't operating right now because of social, legal, and regulatory issues. There's no way to sugar coat this; if a mine is not producing, there is nothing for a streaming and royalty company to buy. Cobre Panama accounted for around 22% of Franco-Nevada's revenue in the third quarter of 2023. This is bad, though Franco-Nevada believes that the issues will, in the end, be worked through.
NYSE: FNV
Key Data Points
But there's more to be learned about Franco-Nevada and its streaming peers by looking at the company's second-largest investment, the Candelaria mine (11% of third-quarter 2023 revenue). Candelaria is a copper mine, so Franco-Nevada's streaming deal has it buying gold and silver that isn't the main focus of the miner.
The big story, however, is that when the streaming deal was inked the mine life was expected to run through 2028. However, investments in the mine since that point have extended the life of the mine out to 2046. It went from a 14-year mine life when the deal was signed in 2014 to a current mine life from today of nearly 25 years. So this mine investment got better with age!
Miners are always looking to enhance their returns. Extending a mine's operating life is one of the key ways to do it. Such investments provide a long-term benefit to streamers like Franco-Nevada that often gets overlooked, but shouldn't be because it means there can be more upside potential than there seems in the deals streamers ink. If you are looking at the laggard performance of Franco-Nevada today, you should make sure you understand both the problems at Cobre Panama and the long-term success at Candelaria.
A chance to buy for the long term
The problems at Cobre Panama are going to have a negative impact on Franco-Nevada in the near term, so investor concerns are valid. But this is likely to be a hiccup along the company's long-term path of growth, not a devastating blow. So the poor relative performance of Franco-Nevada compared to its peers could be a buying opportunity for contrarian investors.
The key to the buying decision, however, is to understand that behind this one mine investment there are a host of other investments, some of which, like Candelaria, have been successful well beyond original expectations. In other words, Cobre Panama hasn't broken Franco-Nevada's business model.
