Clash Of The Gold Titans: Royal Gold Vs. Franco-Nevada

While Royal Gold (NASDAQ:RGLD) has become the most popular gold royalty company, at least in the mainstream, my contention is that Franco-Nevada (NYSE:FNV) is the superior investment for the more conservative investor, also with significant upside potential. The primary reason for this thinking is that by 2017-2018 3 assets (below) will make up in excess of 60% of Royal Gold's attributable production (Mt. Milligan, Pascua-Lama & Andacollo). This wouldn't be such a problem if Royal Gold had more diversity among its largest assets.

For example, Mt. Milligan contributes in excess of 35% of future attributable production. Not to say this bad company by any means, in fact I own shares of it, but own more of Franco-Nevada as well as Sandstorm Gold and Silver Wheaton. Franco-Nevada has 5 cornerstone assets which comprise just over 50% of 2017-2018 production, including: Goldstrike, New Prosperity, Cobre-Panama, Weyburn (3 different royalties) and Palmarejo . While Royal Gold does have some premier Tier II assets, notably Voisey's Bay and Penasquito, Franco also has some premier Tier II assets, such as; Stillwater, Tasiast, Detour Lake, Subika and now MWS, who has a great operator at the helm.

In this article we will go through a breakdown of each company's asset portfolio (for the most part) and then go through commonly used valuation metrics (Net Asset Value, Discounted Cash Flow, etc). From there each can draw his/her own conclusion regarding which is more attractive.

Royal Gold's Cornerstone Assets ~

  • Andacollo - (75% stream) ~ 45,000 oz.
  • Mt. Milligan - (52.25% Stream) ~ 138,000 oz. first several years, dropping to 100,000 oz. thereafter
  • Pascua-Lama - (5.23% NSR) - 44,000 oz.

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Tier II Assets;

  • Mulatos ~ 6,000 - 10,000 oz.
  • Robinson ~ 10,000 oz. GEO
  • Penasquito ~ 2% NSR on all metals ~ 18,750 - 24,000 GEO
  • Voisey's Bay (2.7% NSR on Copper, Nickel & Cobalt) ~ 15-18,000+ GEO
  • Holt - 8,000 - 9,200 oz.
  • Robinson - 8,500 - 12,000 GEO
  • Mulatos - 7,000 - 10,000 oz.
  • Cortez - 7,500 - 8,500 oz.
  • Tulsequah Chief ~ 7,000 - 12,500 GEO

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TIER III Assets;

  • Canadian Malartic - 5,000 - 7,000 oz.
  • Goldstrike - 3,500 - 4,500 oz.
  • Inata - 3,800 - 4,500 oz.
  • Leeville - 5,000 - 5,500 oz.
  • Taparko - 3,000 oz.
  • Dolores - 3,000 - 5,000 oz.
  • Las Cruces - 4,000 oz. +/-

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Meanwhile Franco-Nevada has its future attributable production spread over significantly more key assets as well as some key Tier II assets with significant upside potential. Its top 5 assets account for roughly 55% of 2017 attributable production and its top 12 assets will make up roughly 75% of total attributable production.

Franco also significant capacity available and could increase the size of its revolver to at least 1B given its cash flow. Currently excess capacity is sitting at 1.45B, at least 1B of which should be considered restricted cash to remit the capital for prosperity (which would obviously become unrestricted for at least another year if the permits aren't granted) as well as for Cobre-Panama. Franco will begin payments once First Quantum has spent $1B on the project, followed by a pro rata payment schedule on a 1:3 basis.

  • Gold Strike ~ (2-4% NSR & 2.4-6% NPI) ~ 30-35,000 oz.
  • Palmarejo - (50% stream) ~ 60,000 oz.
  • Weyburn (11.71% NRI, .44% ORR & 2.26% WI) ~ 38,000 GEO increasing to 46,000 GEO by 2018
  • Cobre-Panama ~ (86% Gold and Silver Stream) ~ Avg production of 85,000 oz.
  • New Prosperity ~(22% Stream) - 66,000 oz.- Decision expected soon whether construction can begin, otherwise it will take longer (Franco must remit $350m if the decision moves the project forward).

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Tier II Assets -

  • Detour Lake (2% NSR) - 13,000 oz. initially but likely to be expanded over the next several years.
  • Subika (2% NSR) - 11,000 oz., increasing to 14,000 oz. in 2016.
  • Cooke 4 (7% Gold Stream) ~ 15,000 oz.
  • MWS~ (25% Gold stream) ~ average of 31,000 oz. until 312,500 oz. have been received. 19,800 oz. delivered to date.
  • Sudbury PGMS (50% PGM Stream) - Avg of 20-23,000+ GEO as Podolsky is now on care and maintenance.
  • StillWater ~ (5% NSR) ~ 16,500 GEO increasing to 18,500 GEO oz. in 2017
  • Tasiast (2% NSR) ~ 16,500 oz.

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Tier III Assets;

  • Gold Quarry - (7.29% NSR) - Minimum of 11,250 oz.
  • Sudbury Gold - 10,000+ oz.
  • Golden Hwy - 8,000 - 10,000 oz.
  • Hemlo - 7,000-9,000 oz.
  • Duketon - 7,000 - 8,000 oz.
  • Rosemont - 7,000 - 8,000 GEO

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Valuation; We will start with Royal Gold again, showing its NAV and then a Discounted Cash Flow with a sensitivity analysis. The assumptions for both companies are using $1,300 Au, $20 Ag, $3 Cu (and ratios of other base metals at the time of this writing) and a Discount Rate of 8%.

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(asterisks mean what type of asset each are i.e. ** = Tier II asset and so on)

At the time of this writing, Royal Gold is trading roughly $10/share below its Net Asset Value. However, Royalty companies typically are given a 1.25x-2x multiple to this measure, so using 1.5x, yields a price of $81.15 or about $37/share above its current market price.

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Using 5 different valuation metrics, the blended average comes out to $67.11 (although valuations are far from perfect) or $23/share above the current market price or undervalued by roughly 50%. Given the concentration of 2017-2018 production between 3 assets as mentioned above, at least on a relative basis, should warrant a higher discount rate than Franco-Nevada (although this is just my opinion). The more conservative approach would be to place a valuation between $53.10 - $61.65 for the purposes of comparing it to Franco-Nevada. It is also worth noting the leverage factor of Royal Gold, which using an 8% discount rate with $2,000 Gold yields $115.10 or comparing it to Franco, yields $83.31 - $96.75. The reason this is worth noting s because Franco has significantly more streams than Royal Gold and therefore more leverage to increases in the price of Gold.

Franco - Nevada ~ The Net Asset Value Calculation for Franco yields an amount trading $3.50-$4.00 below the current market price. Considerations must be taken into account; The first, as mentioned in the previous paragraph is the leverage factor, the second has to do with Franco having far more excess capacity than Royal Gold and not cash inflow is taken into account regarding warrants being exercised and lastly, Franco has a history of acquiring a royalty at a very cheap price and striking it rich as the asset ends up producing far more gold and lasting much longer than one could have imagined on the day it was acquired.

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(asterisks mean what type of asset each are i.e. ** = Tier II asset and so on)

Franco-Nevada as mentioned above is trading a few dollars above its NAV using its fully diluted share count. After applying a 1.5x NAV multiple, Franco is trading roughly $15/share below this price.

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Using 5 different valuation metrics, the blended average comes out to $50.50 or $16/share above the current market price or undervalued by roughly 38%. Again, It is also worth noting the leverage factor of Franco, which using an 8% discount rate with $2,000 Gold yields $87.68

Conclusion; This is a very close call and up to the individual investor on whether which company is he/she prefers. To some Royal Gold may seem more risky due to the core asset concentration and to others they may see no difference. The following is a chart comparing all 3.

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Disclosure: I am long FNV, RGLD, SAND, SLW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.