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Franco-Nevada's Q1: The Industry Leader Became Too Expensive


  • Franco-Nevada sold 134,941 toz of gold equivalent in Q1.
  • A $207.4 million impairment charge of the energy assets resulted in a net loss of $98.8 million.
  • The remaining debt was repaid, and Franco-Nevada is debt-free now.
  • The Q2 results will be notably worse compared to Q1, due to the coronavirus-related mine closures and weak energy prices.
  • After the recent steep share price growth, the shares have become very expensive.

Franco-Nevada Corp. (NYSE:FNV) reported its Q1 2020 financial results on May 6, just like Royal Gold (RGLD) and Wheaton Precious Metals Corp. (WPM). But the company's Q1 was less impressive compared to its main peers. And the Q2 results will be even worse, as the impacts of the coronavirus-related mine closures, as well as the oil price collapse, will be fully felt.

In Q1, Franco-Nevada sold 134,941 toz of gold equivalent, which is 10.6% more than in the same period of the previous year but 12% less than in Q4 2019. The decline was caused especially by gold sales that equaled 117,698 toz in Q4 but only 105,751 toz in Q1. The results should be even worse in Q2, as two of Franco-Nevada's key assets, Cobre Panama and Antamina, together responsible for nearly 25% of the company's attributable gold equivalent production, remain suspended. Also 11 of the smaller assets had to reduce or completely halt production; however, 5 of them have already restarted their operations. As a result, Franco-Nevada withdrew its 2020 attributable production guidance.

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

Franco-Nevada's average realized gold price increased to $1,583/toz (compared to $1,480 in Q4), and the average realized palladium price increased to $2,248/toz (compared to $1,800 in Q4). The average realized platinum price of $903/toz remained almost unchanged compared to Q4 ($907/toz), and the average realized silver price even declined to $16.9/toz (compared to $17.31 in Q4). In total, the revenues equaled $204.5 million, which is 34% more than in Q1 2019 but almost 7% less than in Q4 2019. The major portion of revenues, 69.4%, was generated by gold sales, followed by energy sales (11%), PGMs (9.4%), silver (9.2%), and other metals (1%).

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

Although the company's operating cash flow

This article was written by

Peter Arendas profile picture

Peter Arendas is an associate professor at the University of Economics in Bratislava. He has over 15 years of investing experience. Peter specializes in covering small and mid-cap companies in the resource sector with an in-depth insight into the precious and industrial metals royalty & streaming industry.

Peter is the leader of the investing group Royalty & Streaming Corner where he offers in-depth analysis of long-only investment ideas, actionable research, model portfolios, discussions of the latest news, and direct access for questions in chat. Learn More.

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.

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Comments (24)

applyberry profile picture
Your not wrong that FN is a little pricy for it present numbers reported this quarter. The what the market is pricing is FNs having paid off their debt can take huge advantage using dirt cheep debt as gild rises. There is a 30 percent chance that gold will hit 3000 within 1.5 years. If this should happen FN would triple from here because of their leverage capacity.
Peter Arendas profile picture
Yes, if gold really goes to $3,000, FNV will keep on growing. The problem is that many other companies, the cheaper ones, will grow even more.
I noticed you also wrote an article on WPM which you also believe is overpriced. I have a lot of FNV & WPM. I'd like to trim my positions but not my overall exposure to precious metal miners. I looked at GOLD & NEM and I think they are both very pricey. What companies do you think are currently fairly valued (or better yet undervalued)? I would appreciate your listing a few if you don't mind.
Peter Arendas profile picture
The majority of gold miners had a nice run-up over the recent weeks, but there are still some names that are not too expensive. From the bigger names, for example, Kinross or Equinox. Some of them are even cheap, but you must be prepared for increased risks: Gran Colombia Gold, RNC Minerals, Roxgold, Eldorado Gold.
Hadi1 profile picture
Thanks for the good article. To me FNV at this valuation doesn't make sense, specially with the energy exposure of their portfolio, which they interpret it as a well diversification!
Vangel profile picture

Compared to what? FNV is very cheap when you compare it to the S&P 500 or most companies that are in it. It may be expensive relative to the smaller royalty companies like EMX, OR, or silver companies like SSRM. But those are far riskier.
Peter Arendas profile picture
Based on the ratios, FNV is more expensive not only compared to the smaller royalty companies but also compared to its main peers, compared to the gold producers, and I'm pretty sure that S&P 500 doesn't include many companies with price-to-operating cash flow above 40 and price-to-revenue close to 30.
Vangel profile picture
@Peter Arendas

" I'm pretty sure that S&P 500 doesn't include many companies with price-to-operating cash flow above 40 and price-to-revenue close to 30."

So? You do realize that the business model is very different, don't you? Or that the royalty companies have ALWAYS had very different ratios because of the difference?

Royalty companies get royalties because they gave money to miners who pay them those royalties. That is where the revenues come from. And because there is little in the way of capital needed for depreciation when compared to your typical S&P company that revenue and cash flow is available to the shareholders.

In the case of FNV, it bought a royalty for around $4 million when it first started out in the royalty business. That investment has paid the company more than $1 billion so far and is still paying off nearly forty years later. Anyone using your metrics would have avoided FNV yet it has been one of the best investment opportunities since its formation.
FNV is like a gold mining ETF but without the built in cost of mining. It will also be the go to asset for institutional money wanting into the gold space. Their premium may be present for most of this bull market with some pullbacks of course.
I thought FNV looked expensive when I bought it@25, but I am so glad I went ahead and bought. I won't sell any till gold is at least $3000.
JJ Butler profile picture
I can't buy at these levels...
But long any long terms shares held placed in the not for sale aisle.
Vangel profile picture
@JJ Butler

Will you buy at twice the price? Three times? Or use your money to purchase stocks that will underperform because you want to diversify good holdings by adding riskier bad ones?
You didn't mention that FNV chairman Pierre Lassonde resigned the other day. How will this affecy the stock price?
Peter Arendas profile picture
I don't think that this will have any meaningful impact.
Adrian Day profile picture
This has been well telegraphed by the market. He became Chairman Emeritus to make room for David Harquail as chairman after he stepped down as CEO. Together with Paul Brink, new president and CEO, the three make a strong team, and Pierre Lassonde is still involved. Mr. Brink has the Franco DNA in his blood and I am not expecting any changes because of this.
alessandro molinari profile picture
Franco Nevada has always been more expensive than peers. it is not overrated, it is listed on a premium basis. the discussion should focus on whether the peer award is justified. there are some elements to consider in order to evaluate this: diversification, the safety of the jurisdictions, the quality of the mines, the governance, the past management of the company in choosing which royalty to acquire, the ESG criteria. you should make a prospect and give values on these criteria to peers. or perhaps it is a coincidence that the historical share price of franc nevada was higher than the peers, with an annualized return of 20%. in the mining world other examples of listed and discounted companies are bhp / rio tinto versus glencore. would you have preferred to be a shareholder of BHP or Glencore? if some companies are listed on premium there is a reason. it can be argued whether this is justified or not
Peter Arendas profile picture
I agree, the premium valuation of Franco is a long-term phenomenon. The problem isn't that Franco is more expensive than Wheaton or Royal. My point is that all three companies are too expensive.
I would probably agree with the conclusion for the short term. Agree that the upward movement in gold (and gold equities, especially FNV) will continue at least for the next 18 months, but as you know, markets don’t move in a linear fashion, so some sort of pullback is inevitable
Vangel profile picture
Agreed with the analysis but not the conclusion. When currencies die the demand for companies like FNV will go much higher. The rising gold price will cause reserves to explode and will eventually reward shareholders. This is a keep and forget holding.
sliman21 profile picture
All true. It is the go to name for large institutions that want a gold stock with no mining risk.
Peter Arendas profile picture
I see your point. When we talk about market sentiment, there is no reason why FNV couldn't go even higher. But if you take a look at the valuation, further growth is irrational. I wrote a similar comparison in the discussion to my Wheaton Precious Metals article, I will adapt it to Franco-Nevada here:
In Q1, Franco-Nevada generated an operating cash flow of $195.2 million. Annualized, it equals $780.8 million. But the market capitalization is $27.3 billion right now. It means that if Franco-Nevada decided to distribute the whole operating cash flow to its shareholders (which is obviously impossible), you would have to wait for nearly 35 years to get your investment back. Without taking into account any time value of money. It means that right now, at the current price, Franco-Nevada can still be a good speculation, as the share price may keep on growing due to the momentum and positive sentiment. But as an investment, buying the shares at the current price doesn't make much sense.
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