The fall of the paper money and low interest rate environment bring investors' focus towards precious metals where they search for the preservation of purchasing power together with dividend yield. This turns my attention towards the streaming and royalty companies and I select the largest gold royalty company Franco Nevada for detailed analysis and to evaluate how this company will fare in the near future.
Franco-Nevada (FNV) is a royalty and streaming company. Royalties are taken off the top of production from mine operators. Streams are the right to purchase mine production at a low preset price. Royalty companies are the low-cost industry participants. In commodity businesses, the low-cost producers dominate the economic returns. Franco-Nevada is one of those giants that have little exposure to always increasing operating costs of the mines.
Before going any further, first let's compare the business model of Franco Nevada with Gold ETF (GLD) and operators of mines.
Peculiar Business Model
Leverage to Gold Prices
Exploration and Expansion
Exposure to Capital Cost
Exposure to Operating Cost
Exposure to Environmental Cost
The above table clearly depicts the fact that FNV provides a lucrative dividend yield and more upside than the gold ETF, whereas at the same time it is providing limited exposure to the cost inflation.
Key Transaction Principles of FNV
Before going into any transaction, the management of FNV ensures that it is getting long-term optionality. Its key principles for any transaction are as follows:
- Exploration upside
- Long-term secure tenure
- Minimize potential for encroachments
- First dollar is last dollar
- Time is spent on future investments, not operations
Key Transaction Principles Lead to Big Wins
Original Purchase Price <USD 3 Million
Original Purchase Price ~ USD 2 Million Loan
Book Value at IPO ~ USD 2 million loan
Royalties Paid to Date > USD 700 Million
Over 23 Moz M&I Resources
~15 MOZ M&I Resources
Optionality from large Land Positions
Diversity at its play
Franco Nevada has a well-diversified asset base that provides it a strong competitive advantage over its competitors. All of the FNV assets are located in politically stable countries, which is one of the strongest points of the company. These assets are operated by successful gold mining companies like Goldcorp Incorporation (GG) and Barrick Gold Corporation (ABX) etc. Following are the details of FNV's Gold assets:
Sudbury (3 mines)
Golden Highway (3 mines)
Cerro San Pedro
2012 at a Glance
Long Term Debt
Cash Operating Margins
The year 2012 proved to be a good year for the company, registering new heights in the core earnings. Revenues of USD 427 million grew at a rate of 4% to set a new record for the company. The operating income of the company grew at a mind-boggling rate 394% to reach USD 138.4 million. The adjusted EBITDA of USD 347.8 million is also a new record for the company.
One can see from the above pie charts. FNV 89% of revenues are derived from precious metals, importantly gold contributed 75% of the total revenue. Speaking geographically, 83% of the total revenues is derived from a politically stable region, North America.
2012 Actual Vs. Expected
Revenues USD million
Gold Price (USD/oz)
Platinum Price (USD/oz)
Palladium Price (USD/oz)
WTI Oil Price (USD/BBL)
As one can see, production was largely in line with the expectations. Actual revenues would have been USD 440 - 445 at the guidance commodity price assumptions of the company. Though the company missed its own expectation, still results are quite handsome.
Lucrative Dividend Growth Rate
Dividend Paid USD Million
Dividend Per Share USD
The current annual dividend yield is 1.50% and is paid monthly at a rate of USD 0.06 per share. The new Franco-Nevada initiated the dividend six months after becoming public in May 2008, and has raised the dividend annually since then. The company has increased its dividend by 16.67% in 2009, 7.1% in 2010, 60% in 2011 and twice in 2012; by 25% and 20%. The board of directors intend to annually increase the dividend, keeping it at about 20% of the free cash flow. The company aims to maintain the dividend during cyclical downturns, which is a perk for investors.
The company currently has a total available capital of USD 1.4 billion, that can be used for further acquisitions of mines that may give company long-term optionality. The company is looking at more investment opportunities due to tight equity and project lending markets and commodity price volatility. For 2013, it is expected that the company will register oil and gas revenues of USD 55 to USD 65 million and will also get gold equivalent royalty and stream ounces of 215,000 to 235,000 AuEq.
Why to Invest in FNV
The following are the positive aspects of investing in FNV:
- Participation in world class discoveries
- Strong balance sheet position for future acquisitions
- Lucrative Dividend Yield - increase in each of the last five years
- Gives more upside potential that gold ETF at the same time minimizing inflationary cost risks that is inherent in mine operating companies
- Diversified and secure portfolio