Is Franco-Nevada a Buy?

Later this week, Franco-Nevada (NYSE:FNV) will release its annual earnings report and guidance for 2014. In anticipation for its release, let’s take a closer look at the company’s progress in the past year, its revenue in the fourth quarter of 2013, and see the main advantage and disadvantage it has over other precious metals royalties and streaming companies including Royal Gold (NASDAQ: RGLD) and Silver Wheaton (NYSE: SLW).

Reaching the target

One of the main questions the annual earnings report will answer is whether Franco-Nevada met its 2013 guidance. Since the company estimated to sell 225,000 gold equivalent ounces during last year, this means, during the fourth quarter of 2013, the company had to sell around 56,000 GEO to meet this target. Moreover, its quarterly revenue from its oil and gas operations was around $10 million. Based on these numbers, its quarterly revenue plummeted by roughly 30%, year over year. This decline is mainly due to the 26% decline in the price of gold.

Franco-Nevada isn’t the only company to show a plunge in revenue in the fourth quarter, Royal Gold’s revenue tumbled down by 34%. This was due to the drop in the price of gold and the 11% decline in its production volume. Silver Wheaton’s revenue fell by a similar rate.

For the first quarter of 2014, the company’s revenue is likely to pick up mainly due to the rise in prices of precious metals and oil. Further, the company also made a couple of royalty acquisitions in the fourth quarter including the Kirkland Lake property and a portfolio of nearly 20 royalties from Barrick Gold. These purchases are also likely to improve Franco-Nevada’s revenue in the first quarter. Keep in mind, the company’s has more than $840 million in cash and cash equivalent along with $500 million in unsecured credit, which will enable the company to further augment its operations and purchase additional royalty agreements in 2014. Other precious metals royalty and streaming companies are also likely to increase their volume in 2014: Silver Wheaton  will increase its precious metals volume on account of its Sudbury and Salobo mines, which were purchased in early 2013.

Good mix

One of the main advantages Franco-Nevada has over its peers is the wide array of commodities it sells including: gold, platinum, palladium and oil. Even though most of the company’s revenue still derives from gold (nearly two thirds), it sells other commodities that reduce Franco-Nevada’s risk of relying on a single commodity. In comparison, Silver Wheaton mostly relies on silver as it accounts for nearly 80% of its entire revenue, while Royal Gold mostly on gold at a similar rate. Further, both companies, unlike Franco-Nevada, only sell gold and silver.  But this diversity also comes at a cost in Franco-Nevada’s profitability.


In the first nine months of 2013 Franco-Nevada’s profitability reached 48%. In comparison, Royal Gold and Silver Wheaton’s profitability was of 52% and 56% in the first nine months of 2013, respectively. Silver Wheaton is leading the way in this aspect because silver tends to have a higher profit margin than gold. Despite the slightly different among these companies’ profit margins, all three companies still pay very similar dividend. The annual dividend yield of Franco-Nevada is 1.4%, while Royal Gold and Silver Wheaton’s yearly dividend yields are 1.4% and 1.2%, respectively.

Final note

Franco-Nevada’s robust financial situation and resources are likely to enable the company to further increase its operations in 2014. The company sells not only precious metals but also oil. This mix might be among the factors for its lower profit margin than other royalty companies’ profitability. But this also reduces Franco-Nevada’s operational risk by not solely relying on precious metals. These factors make the company an investment worth considering for those who wish to add precious metals to their portfolio.

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Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.