Franco-Nevada: Buy the Drop

Franco-Nevada (FNV) shares have dropped to the tune of 13% in 2015 due to weakness in the commodity markets. In fact, due to the end-market weakness, Franco-Nevada’s adjusted net income dropped to $22.9 million, down 36% from the year-ago quarter.

Franco-Nevada reported satisfactory top line growth and extremely stable cash flows despite declining commodity prices primarily, driven by the company’s highly diversified mine portfolio and strong liquidity on its balance sheet with no debt, allowing it to continue with its operations profitably.

Increasing production could be a tailwind

However, the continued weakness in the average gold price globally, declining 7.4% on a year-over-year basis, has created a headwind for the company.
However, the quantity of Gold Equivalent Ounces (“GEOs”) which were realized for the quarter grew 28.3% on a year-over-year basis. This growth in GEOs was somewhat offset by the weaker global commodity pricing environment.

There is a stable year-over-year GEOs production pattern of the company with GEOs for the second quarter of 2015 at approximately 83 million of mineral assets, up 28% from $64.7 million of GEOs in the second quarter of 2014. The significant year-over-year growth in GEOs is mainly due to enhanced productions at Gold Quarry, Bald Mountain and Marigold.

Franco-Nevada is trying its best to improve its gold production at each of the key gold mines and is observed to have significantly increased its gold production over last year. But, this production expansion is somewhat offset by the weak global commodity pricing environment, eating up the margins of the gold mining major.

Optimizing the operations

Franco-Nevada is keen on optimizing its operations by maximizing high-quality gold production while minimizing costs through planned implementation of new low-cost ore mining technology and getting rid-off non-core expenditures. The gold mining major is successfully managing to deliver year-over-year continued improved margins with impressive top line growth and controlled overall costs.

The revenue distribution of Franco-Nevada both by commodity and by geography with 88% of revenue contribution achieved from precious metals and approximately 82% of top line growth gained from Americas.

Moreover, the reserve update of Candelaria with approximately 24 percent growth in open pit mineral reserves compared to December 2013. The company has also made final payment of $7.5 million to Lundin linked with the expansion and estimates further reserve and resource update during the third quarter of 2015.

In addition, Franco-Nevada enhanced its production profile over the next four year period with about 26% expansion forecasted for GEOs over the fiscal years 2016 till 2019. The impressive gold reserves Franco-Nevada which are increasingly growing on year-over-year basis are delivering significant revenue streams for the quarter and extremely well-diversified both by commodity and geography.

However, RBC has lowered its price forecast for both gold and silver till 2018 including, lowering its 2018 gold estimate by 7% to $1,300/oz and its 2018 silver estimate by 12% to $19/oz. However, RBC is still bullish on several gold and silver stocks in spite of the lowered price estimates.

Franco-Nevada has strategically acquired royalty rights in the Ring of Fire mining district of Ontario. Also, true Gold Mining Inc. declared to have resumed development at its Karma project and forecasts its initial gold pour by the end of first quarter of 2016. Franco-Nevada is making planned progress for its Cobre Panama stream deal with the First Quantum Minerals Ltd. which is expected to be agreed upon a payment of $275.0 million.

Conclusion

In my opinion, investors should purchase equity in Franco-Nevada since it has an impressive profit margin of 16.74%. Moreover, Franco-Nevada has a strong cash position of $610.80 million and no debt as of now. Thus, due to its strong fundamentals and other positives, Franco-Nevada looks like a good investment.
Published on Oct 5, 2015
By Harsh Singh Chauhan

Copyrighted 2016. Content published with author's permission.

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