Gold streaming and royalty giant Franco-Nevada Corporation (NYSE: FNV) was able to salvage its top and bottom lines last year because of investments it made in oil and natural gas. That's a good thing, because it was a really bad year on the gold and silver side of its operations. Here's what went wrong in 2018 and why the company's gold production is about to get a big boost.
A tough year
At the start of 2018, Franco-Nevada was calling for gold equivalent ounce production of between 460,000 and 490,000 ounces. The top end of that range was slightly lower than the roughly 497,700 ounces the company received from its streaming and royalty deals in 2017. Unfortunately, the final tally in 2018 was just 448,000 ounces, below even the low end of 2018 guidance.
Image source: Getty Images.
The production drop led to a nearly 10% reduction in revenues from the company's gold investments. The Candelaria mine was one of the biggest drags, as the processing of lower-grade materials led to lower-than-expected production. This is one of the company's largest mine relationships, accounting for 9% of adjusted EBITDA in 2018. There was also a reduction in output from the Antamina mine, but that drop was expected. The rest of the portfolio performed roughly as projected.
Luckily for Franco-Nevada, the company's oil and natural gas revenues came in much higher than originally projected, nearly doubling from $47 million in 2017 to $86 million in 2018. That number, meanwhile, was well above the early-year expectation of $50 million to $60 million. Strong oil prices were a huge benefit here, allowing this division to largely offset the weakness on the precious metals side of the business and salvage the year. Adjusted EBITDA was up just a little under 1% -- not great, but much better than what would have happened if Franco-Nevada hadn't used the oil downturn to expand its reach in the energy space.
What's 2019 look like?
The bad news in 2019 is that Franco-Nevada doesn't expect a repeat performance on the energy front. Based on its current projections, revenue from the oil and natural gas side of things is going to be flat to slightly lower in 2019. That's largely driven by the expectation of lower oil prices. Longer term, however, management is still very positive on this business. Production growth is projected to materially increase results over time here, with the expectation of a near doubling of revenues by 2023. But that won't help 2019.
Another negative for 2019 is that production from Antamina is expected to remain low. The Fire Creek, Karma, and Guadalupe mines are also projected to be relatively weak performers this year. But some very important positives do back the company's projection of gold equivalent ounce production of between 465,000 and 500,000 ounces in 2019.
|Franco-Nevada's Past Results and 2019 Projections|
|Gold equivalent ounce Production||497,745||448,000||465,000 to 500,000|
|Oil revenues||$47 million||$86 million||$70 million to $85 million|
Data source: Franco-Nevada Corporation.
Production from Candelaria is expected to pick up as the year progresses and the mine starts to process higher-grade ore. Management is also projecting higher production from its Tasiast, Subika, Brucejack, and Cerro Moro investments (helping to offset weakness in other smaller assets). But most importantly, the company's large Cobre Panama investment will start to add to results.
At this point Franco-Nevada is projecting between 20,000 and 40,000 gold equivalent ounces from Cobre Panama in 2019. At the top end, that would be equal to roughly 9% of 2018 production. That's up from nothing in 2018, with the mine producing first ore in Feb. 2019. That, coupled with the puts and takes in the rest of the portfolio, should push production higher year over year.
But the really exciting piece of this story is that it will last into 2022, as production continues to ramp up at Cobre Panama. So there will be a big boost this year, but additional benefits for the next few years as well. And Franco-Nevada doesn't have to pay a dime for this production growth because it has already fully funded the streaming deal.
That's one of the big benefits of the streaming model, in which a company like Franco-Nevada provides miners cash up front in exchange for the contractual right to buy precious metals at reduced rates in the future. In this case, miner First Quantum used that up-front cash to build out Cobre Panama. And now that the construction phase is over, Franco-Nevada and its shareholders get to reap the benefits for years to come. And, it seems, just in time to offset expected weakness in the energy business.
Looking to the new year
Although 2019 probably won't be Franco-Nevada's best year ever, it should be a solid one. Perhaps more importantly, if results come in as currently expected, it will further prove out management's diversification focus. In the end this streaming and royalty giant is looking to be a low-risk way for investors to add precious metals exposure to their portfolios. Diversification is a key factor in that, but so, too, is investing in the future. Last year was all about diversification; 2019 will be more about the benefits of investing in development projects like Cobre Panama.
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