Franco-Nevada Strong on New Mines Amid Volatile Gold Prices

On Jun 12, we issued an updated research report on Franco-Nevada Corporation FNV. The company appears to be on a promising long-term trajectory, aided by its healthy portfolio of streaming and royalty agreements. However, volatile gold prices are a concern.

Franco-Nevada’s shares have appreciated 12.0% in the past year compared to the industry’s growth of 14.2%.

Momentum in Oil & Gas Portfolio to Stoke Growth

Performance of Oil & Gas remains robust, with revenues of $21 million recorded in the first quarter of 2019, up from the year-ago quarter’s $19 million. This stemmed from higher oil prices and increased production from the U.S. assets. During the quarter, energy revenues benefited from the company’s investment in the Royalty Acquisition Venture with Continental. Moreover, drill activity is higher and drilling productivity has been better than expected.

Backed by better-than-anticipated contribution from its previously-acquired U.S. assets and higher oil prices, Franco-Nevada projects revenues between $70 million and $85 million from its energy assets in 2019.

Strategic Relationship With Continental Resources A Key Catalyst

Last October, Franco-Nevada contributed $214.8 million to close its transaction with Continental Resources, Inc., in order to acquire the Oil & Gas mineral rights in the SCOOP and STACK plays of Oklahoma — two of the most economic and attractive plays in North America. The company has also committed, subject to satisfaction of agreed upon development thresholds, to spend up to $300 million over the next three years to acquire additional mineral rights through a newly-formed entity. This represents a new business-development opportunity for Franco-Nevada. It gets an acquisition vehicle, which provides the ability to acquire assets at the grassroots level or directly from individual owners.
Cobre Panama Project & Candelaria Mine Bode Well

Franco-Nevada has completed its $1-billion commitment for the Cobre Panama project. During the January-March period, Cobre Panama began its initial production and expects to produce 140,000-175,000 tons of copper in the current year. The company forecasts milling operation at an annualized rate of 72 million tons per year, by the end of this year. It also expects this project to reach its mill throughput capacity of 100 million tons per year in 2023. For the ongoing year, the company anticipates to produce 20,000-40,000 ounces gold from the Cobre Panama project. The Candelaria mine operation is likely to benefit in the second half of 2019 from more than $1 billion in fleet purchases, stripping and development. The company expects improvement in gold and silver deliveries from Candelaria in the second half of 2019.

Franco-Nevada remains optimistic about attributable royalty and stream production to total 465,000-500,000 Gold Equivalent Ounces (GEOs) from its mining assets for 2019.

Poised Well for the Long Term

Franco-Nevada strives to generate revenues from precious metals over the long haul. With precious metals generating around 88.4% of revenues during the March-end quarter, the company has the flexibility to consider diversification opportunities outside of the precious metals’ space and increase exposure to other commodities while maintaining its long-term target.

Furthermore, Franco-Nevada appears to be on a promising long-term trajectory backed by a sound portfolio of streaming and royalty agreements put in place years ago. With more mines coming online in the next several years, it will benefit from higher levels of precious metal sales and higher prices.

The company had previously guided a solid growth outlook till 2023, forecasting production in the range of 570,000-610,000 GEOs by 2023. With the continued development of its U.S. oil & gas assets, the company expects energy assets to contribute 16-17% of revenues by 2023. Moreover, the company has planned expansion or start-up of a number of smaller mines over 2019, and more than 50% expansion of Stillwater by 2021. Furthermore, Franco-Nevada’s balance sheet remains debt free.

Concern Over Volatile Gold Prices

The prices of precious metals, particularly gold, are a determining factor for profitability for Franco-Nevada. Gold prices have been affected by the trade tussle between the United States and China, interest-rate hikes and a stronger dollar in the past year. During the first quarter, average prices of gold and silver were down. Even though gold prices have been trending higher lately, the volatility remains a concern. In addition, the company’s GEOs may be affected by commodity-price volatility.

Franco-Nevada Corporation Price and Consensus

Franco-Nevada Corporation Price and Consensus

Franco-Nevada Corporation price-consensus-chart | Franco-Nevada Corporation Quote

Zacks Rank & Stocks to Consider

Franco-Nevada currently carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the Basic Materials space are Materion Corporation MTRN, Flexible Solutions International Inc FSI and AngloGold Ashanti Limited AU, all currently sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Materion has an expected earnings growth rate of 27.3% for 2019. The company’s shares have gained 13.9% in the past year.

Flexible Solutions has a projected earnings growth rate of 342.9% for the current year. The company’s shares have surged 151.5% in a year’s time.

AngloGold has an estimated earnings growth rate of 90.6% for the current year. Its shares have rallied 74.1% in the past year.

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