Franco-Nevada Corporation (NYSE:FNV) raised its dividend in May. That wouldn't be such a big deal if it weren't for the fact that Franco-Nevada is a precious metals company, an industry that's been suffering since 2011 from generally falling gold prices. That should put this unique player on every gold bug's wish list. Here's how the company has managed to do it.
It's a streaming thing
Franco-Nevada isn't your typical gold miner -- it's what's known as a streaming company. A mining company owns a physical asset, a mine, and has to face the complexities and costs of operating what it owns. Franco-Nevada doesn't own or operate any mines. It provides cash to miners in exchange for the right to buy a portion of the gold the miner produces in the future, usually at advantageous prices.
Why would a miner do that? The answer is pretty simple: It costs a lot of money to build and run mines. By working with a company like Franco-Nevada, miners can avoid tapping the equity and debt markets for capital to support their businesses and boost growth. Right now, for example, precious metals companies are under a lot a pressure, and getting a loan or selling stock would be less than advantageous.
It's really something of a win-win. The thing is, even though its revenues are tied directly to precious metals, Franco-Nevada is more like a specialty finance company than a precious metals miner, which is why it was able to increase its dividend earlier this year.
But here's something that should really interest gold bugs: That dividend increase wasn't a one-off event. Franco-Nevada has increased its distribution in each of the last eight years. That's a pretty solid record in a pretty lousy market environment for gold.
So, how does Franco-Nevada actually do this? A recent silver streaming deal with Teck Resources (NYSE:TECK) is a good example. (Gold makes up about 80% of Franco-Nevada's revenues, with other products like silver and oil pitching in the rest.) Teck's top line has been falling since 2011 as its portfolio of commodities, including coal, copper, and zinc, among others, has been hit hard by a moribund commodities market. That makes it hard to keep spending on growth projects, let alone to pay the day-to-day bills. In other words, Teck could use some cash.
Teck happens to be part-owner of a copper mine that ranks among the largest and lowest-cost in the world. Copper mines often produce silver as a byproduct. So, Franco-Nevada is paying Teck a one-time payment of $610 million for rights to Teck's share of future silver produced from the Antamina mine. Franco-Nevada will pay 5% of the current spot price for the silver as it's delivered. Based on current production, the deal should last for roughly 30 years.
That's the same mine that recently made the headlines because Silver Wheaton (NYSE:SLW) just paid $900 million for the silver streaming rights owned by struggling Glencore. Silver Wheaton is another streaming company using the commodity downturn to bolster its business. However Silver Wheaton has a heavier focus on silver (about 60% of revenues) than Franco-Nevada, which might interest some investors looking for broader precious metals exposure.
But there's more, here. Franco-Nevada has no long-term debt. It manages to give away money and still have no debt by first tapping lines of credit. With a deal like the one with Teck, which will produce cash flows right away, there's cash coming in the door to pay interest expenses and pay down the credit line.
When the streaming deal is for a mine under construction, that's not the case. That's why Franco-Nevada also makes ample use of the equity markets, having nearly doubled its share count since coming public in 2007. Since streaming deals are, effectively, backed by new investments, Mr. Market has so far been more than happy to sop up the new shares and provide Franco-Nevada with the cash to pay down its credit lines. Eight annual dividend hikes shows that investors have been well rewarded along the way.
A gold bug's dream
This is really a different way to get precious metals into your portfolio. And while Franco-Nevada's roughly 1.7% yield isn't huge, the streaming company has clearly shown it's dedicated to growing the dividend over time. Being able to do that in what is a truly difficult precious metals market is a testament to the strength of the company's business model. Indeed, while other miners are trimming or eliminating their distributions because of a long industry downturn, Franco-Nevada appears to be high ground in flood.
If you're a gold bug, this name should be on your watchlist, if it isn't already in your portfolio.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool owns shares of Silver Wheaton. (USA). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.