5 Takeaways from Franco-Nevada’s 2014 Guidance

Franco-Nevada (NYSE:FNV) has recently released its earnings report for the last quarter of 2013 and its outlook for 2014. Based on this report, the company was able to meet analysts’ expectations for the fourth quarter: Its net earnings per share, after controlling for impairment charges was $0.21, and its net sales were $100 million. But not all is well: Franco-Nevada’s sales dropped by 6.1% during last year; its operating profitability fell from 50% in 2012 to 40.5% in 2013. Looking forward, Franco-Nevada’s annual guidance could affect its valuation over the year. Here are five takeaways from this outlook. 

  1. Higher production: In 2014 , the company expects to increase again its production by more than 5.5%, year over year. Total metals production is projected to reach 255 thousand gold equivalent ounces; last year, the company was able to exceed its guidance by over 7% mainly due to new acquisitions in the last several months of 2013 including a portfolio of 20 royalties from Barrick Gold (NYSE: ABX) and a royalty agreement with Kirkland Lake; the company has made several additional deals at the beginning of 2014, which are expected to increase further its sales in the coming months (e.g. a gold purchase and royalty agreement with Klondex Mines, which will start to deliver gold at the middle of the year). These acquisitions will keep Franco-Nevada reaching its 2014 goal and perhaps even exceeding it; they could offset the decline in the price of gold compared to last year; the company also has the funds to enter new royalty contracts: It basically has no debt, over $770 million in cash and an unused $500 million unsecured credit;
  2. Assumptions on precious metals prices: The company has updated its assumptions on gold and other precious metals. The price of gold is set at $1,300 per ounce, which is inline with several other gold companies such as Barrick Gold . Conversely, other gold companies such as  Goldcorp  were more conservative and kept the price of gold on $1,200 per ounce. If the price of gold falls to the $1,200 mark, Franco-Nevada will have to revise its assumptions, which could reduce the value of its assets (royalty agreements);
  3. Little progress in the company’s oil and gas operations: Franco-Nevada doesn’t expect to increase its revenue from oil and gas during 2014: Its revenue is projected to reach $65 million this year; in 2013, the revenue was $67 million ;
  4. Profitability: The main factors affecting the company’s profit margin is its production mixture (e.g. the share of gold out of total production), royalty contacts, and precious metals and oil prices. For now the main metal the company sells is still gold. But if the company were to purchase new contracts related to other commodities, this could affect its profitability. The lower prices of gold and other precious metals compared to previous years are likely to reduce its profit margin; down the line, this could also reduce the company’s dividend payment. But for now, Franco-Nevada increased its dividend paycheck by 11%;
  5. Look out for Barrick Gold: Even though Franco-Nevada has recently purchased royalty agreements from Barrick Gold , the latter still faces financial difficulties, which resulted in a 13% decline in its production to an average of 6,250 thousands of ounces during 2014. Since Franco-Nevada relies on Barrick Gold delivering gold; thus, any potential delays in delivery, which could rise due to Barrick Gold’s conditions, could slightly reduce Franco-Nevada’s production level mainly in the U.S;

Final note

Franco-Nevada presented a reasonable 2014 outlook, which includes modest growth in production. Furthermore, the company has the resources to enter new contracts in the coming months in order to meet this projection. But it could also face some difficulties including lower profitability, decline in precious metals and oil prices, little growth in oil and gas operations, and potential delays from struggling gold producers. These factors could impede its progress and adversely affect its valuation during the year.

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