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Franco-Nevada: The Gold Star Royalty/Streaming Company - Part 2

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RB Equity


  • This is part two of the article presenting royalty streaming companies as a preferred way to add gold exposure to a portfolio.
  • The business models of Franco-Nevada and Wheaton Precious Metals are analyzed and compared with one another.
  • Of the two leading entities in this space, Franco-Nevada appears to be the clear winner going forward despite a 25% higher enterprise value.

In this part two, I will go into a little more detail on Franco-Nevada (NYSE:FNV) and Wheaton Precious Metals (WPM) businesses. In part one, I presented the arguments for royalty/streaming companies as an efficient way to include gold and precious metal exposure in portfolios. The main reason being their asset-light business, with highly resilient cash flow streams.

When compared head-to-head, I prefer FNV and have recently initiated a position I intend to grow gradually through the next few months. However, alternative-approach readers may consider employing this to divide desired exposure equally between the two and simply hold both leaders.

Royalty vs Stream

There are two main type of contracts in these companies' asset portfolios, Royalties or Streams. Both have a few things in common, an upfront cash outlay in exchange for a future slice of production and a direct relationship between revenues and the prevailing spot price of gold, silver and other PMs.

Royalties (or Net Smelter Return, “NSR,” royalty) are a percentage of the net value/revenue the miner gets from metal sales. The “net” part refers to the netback calculation of price after adjusting for transportation, insurance, etc. to reach the smelter facility. Typically, royalties are between 1% and 5% of revenue, and once established, they require no recurring payments to maintain.

Streams, the other type of contract, are an advanced purchase on future production. After the upfront payment (deposit), the stream owner still has to pay, usually a low amount per ounce, to receive its share of production. In the case of gold, for example, currently selling for around $1,700/ounce, the typical stream payment is around $400/ounce.

Streams may have some tax benefits depending on jurisdiction; however, it should be obvious that for the same percentage of production, a royalty offers better economics than a stream. FNV provides the following example:

ChartData by YCharts

ChartData by YCharts

This article was written by

RB Equity profile picture
Striving to compound knowledge. Long-time fan of Warren and Charlie. Always invert. "To finish first, you must first finish". Investing own and family funds for +20 years. Senior finance roles at public and private corporations for most of that time.

Analyst’s Disclosure: I am/we are long FNV. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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