FNV: A Precious Metals Streaming Play With Powerful Catalysts

Toronto-based Franco-Nevada Corp. (FNV) finances mines instead of operating them. And I like that a lot. It means Franco collects cash flows from mine production — without such “wildcards” as exploration costs, permitting worries, environmental fallout, or cost overruns

Those are very real problems miners face. But with this strategy, those problems stay with the operator; Franco-Nevada has financial claims on what the miner churns out. It makes money in two ways…

• Royalties: 2% to 5% of a mine’s revenue, usually for the multi-decade life of that operation. 

• Metals Streams: In return for an upfront cash payment to the miner, Franco-Nevada gets the right to buy a percentage of the production, usually at a mere 20% to 30% of the metal’s spot price.

Franco-Nevada Corp. (FNV)

On the royalty front, if a mine produces $1 billion worth of gold, a 3% royalty agreement pays Franco $30 million a year — automatically. On the streaming side, if gold is $2,500 and Franco-Nevada’s stream price is $500 an ounce, the per-ounce margin is $2,000.

Revenue hit $1.82 billion last year — a record result buoyed by the surge in metals prices. Operating cash flow approached $1.49 billion. Once metals resume their surge — as we believe they will — those results could get even better.

Analysts have a one-year target price of $306.33 on Franco-Nevada, a projected gain of 32% from its recent price of $233. And the “high estimate” is $354 — which would be a 52% gain.

That’s just for starters. It’s the “investment leverage” that’ll really pay off: As gold soars in price, Franco’s flow of cash will increase. That’s money it can deploy to strike new deals, pay down debt and — ultimately — return cash to shareholders via buybacks or with dividend payouts.

Recommended Action: Buy FNV.

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Bill Patalon is chief stock picker at Stock Picker’s Corner.