Franco-Nevada: Great Q4 Results Overshadowed By Market Turmoil

Summary

• Franco-Nevada sold 153,396 toz of gold equivalent in Q4 2019, setting a new record high.
• The operating cash flow equaled $184.6 million and net income equaled $113.3 million. Both the numbers reached new record highs.
• The debt declined to $80 million (it was eliminated completely after the end of Q4) and net debt declined to negative figures.
• The 2020 guidance envisions gold equivalent production of 550,000-580,000 toz gold and energy-related revenues of $80-95 million.
• The technical picture looks really bad. Adding to it the current stock market panic, and Franco-Nevada's near-term share price development doesn't look positive.

Franco-Nevada Corp. (NYSE:FNV) reported its Q4 2019 financial results. The numbers are great: the company achieved record high quarterly gold equivalent sales, record-high revenues, record-high operating cash flow and also record-high net income. The problem is that these great results are reported during a global stock market turmoil. During a single trading day, just before the release of the financial results, Franco-Nevada lost almost 10% of its value. Given the current market sentiment, it is hard to say whether the positive news will be able to ease the pain.

In Q4 2019, Franco-Nevada sold 153,396 toz of gold equivalent. It means a more than 15% increase compared to Q3 and an impressive more than 46% increase compared to Q4 2018. The growth was fueled especially by the successful ramp-up of First Quantum's (OTCPK:FQVLF) Cobre Panama mine. Candelaria, Guadalupe-Palmarejo, Sudbury, and Stillwater also contributed to the growth. The overall 2019 sales equaled 516,438 toz of gold equivalent, which is a new record as well.

(Source: Author's own processing, using data of Franco-Nevada)

The increased volumes of gold equivalent sales, as well as improved gold prices, helped to lift Franco-Nevada's revenues to new highs. In Q4 2019, the company recorded revenues of $258.1 million, which is 9.5% more than in Q3 and even 75% more than in Q4 2018. The majority of revenues, nearly 68%, were generated by gold sales. Silver contributed by 8.83%, PGM's by 9.53%, energies by 11.62% and other mining assets by 2.29%. The importance of gold keeps on growing, as the yellow metal was responsible for 62% of Franco-Nevada's revenues in Q2, and its share increased to 64% in Q3 and almost to 68% in Q4. On the other hand, while the energies generated more than 16% of revenues in Q2, it was only less than 12% in Q4.

(Source: Author's own processing, using data of Franco-Nevada)

Along with revenues, Franco-Nevada's operating cash flow also set a new record high. In Q4, the company generated an operating cash flow of $184.6 million, which represents an 8.3% growth quarter over quarter. When compared to Q4 2018, the operating cash flow increased by approximately 89%. Also, Franco-Nevada's net income keeps on growing. While in Q4 2018 Franco-Nevada recorded a loss of $31.3 million (the net income was significantly affected by a $75.4 million impairment charge related to the Sudbury project), in Q4 2019 it climbed to $113.3 million. In comparison to Q3 2019, the net income increased by 11.5%. Q4 EPS increased to $0.6.

(Source: Author's own processing, using data of Seeking Alpha and Franco-Nevada)

The very positive cash flows helped to improve the financial situation of the company significantly. Franco-Nevada's cash position improved from $91.7 million to $132.1 million, or by 44%, quarter over quarter. Moreover, total debt declined by more than 67%. As a result, net debt decreased to negative $52.1 million. In other words, Franco-Nevada's volume of cash, cash equivalents, and short-term investments is $52.1 million higher than its debt. According to the news release, after the end of Q4 (i.e., during Q1 2020), the debt was fully repaid and Franco-Nevada became debt-free. On the other hand, the debt was reduced at the cost of share dilution, when the company used its high share price and via its ATM program (At-the-Market equity program) sold 549,400 shares worth $53 million.

(Source: Author's own processing, using data of Seeking Alpha and Franco-Nevada)

Along with the Q4 2019 financial results, Franco-Nevada also provided its 2020 production guidance. The company expects attributable gold equivalent production of 550,000-580,000 toz. Moreover, energy interests should generate a further $80-95 million. However, the guidance assumes a WTI oil price of $45/barrel, which seems to be quite optimistic given the current oil market collapse, when the WTI oil price stands at $31/barrel right now. The expected metals prices are more conservative: $1,500/toz for gold, $17/toz for silver, $900/toz for platinum and $2,000/toz for palladium.

The slightly worse news is that Franco-Nevada's growth potential seems to be exhausted. Company management expects that the current portfolio of assets should be able to generate 580,000-610,000 toz of gold equivalent in 2024. Compared to the 2020 guidance, this is only a very modest improvement. Franco-Nevada will have to make some new acquisitions in order to improve its growth profile.

As can be seen in the chart above, despite the great Q4 financial results, the technical picture doesn't indicate anything positive in the near term. The 10% one-day decline dragged Franco-Nevada's share price down, below the 10-day as well as the 50-day moving average. The RSI is slightly above 40, which means that it has still some space left before it reaches the oversold levels. Moreover, it seems like a double-top formation is about to be completed soon. All that is needed is a close below $104. After this, the road to the support near $96, and maybe even at $90, will be clear. Given the current extreme stock market volatility and tendencies to panic sell-offs, these levels can be reached pretty quickly, maybe as soon as in several days. This is why investors should be cautious and patient.

What I like about Franco-Nevada's Q4

• New record high gold-equivalent sales were recorded.
• Also, the company's revenues, operating cash flow and net income reached new record highs.
• The debt declined and the net debt declined to negative numbers (moreover, after the end of Q4, the debt was eliminated completely).

What I don't like about Franco-Nevada's Q4

• The current technical picture looks horrible.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.