Franco-Nevada: Royalties in gold

This company earns royalties from producers without incurring each miner's risks.

By TheStockAdvisors Jul 31, 2013 8:57AM

Gold (© Stockbyte/SuperStock)By Ian Wyatt, Top Stock Insights


I don't know if the mining sector has bottomed. Cheap assets can always get cheaper. Nevertheless, I'm going to recommend you dip a conservative toe back in the gold market with one of the lowest risk gold investments I know.


Franco-Nevada (FNV) has a market cap of $5.8 billion. It's a unique form of gold mining company that represents a great value in today's market. It's not an explorer, or a major, or even a mid-tier producer. It's a completely different business model altogether.


Franco-Nevada is a gold royalty and streaming business. The company is based in Toronto, Ontario and was spun out from Newmont Mining (NEM) in December 2007, five years after the two companies merged.


The beauty of holding royalty interests is that Franco-Nevada avoids various risks associated with developing and operating gold mines.


This fact is reflected in the company's share price, which has significantly outperformed both gold and the gold mining index over the past four years. With a seasoned and capable management team running the show, I see no reason for this trend to change.


So how does the royalty and streaming model work? In exchange for an initial investment, which helps a miner fund exploration or mine development, Franco-Nevada receives the rights to a portion of future gold production. This royalty is usually around 2% of the extracted gold.


Although it only has about 20 full-time employees, Franco-Nevada has tremendous reach in the mining industry, with a diverse portfolio of 348 total assets, including 46 producing assets, 28 in an advanced stage of development (likely to generate revenue in the next five years), and another 137 promising exploration assets.


You can think of these non-producing assets as perpetual call options that could pay off handsomely down the road. And FNV also has 137 producing oil and gas assets.


Another big positive for the company is that its interests are largely in stable areas of the world, including the U.S., Canada, and Australia. Its precious metals interests include royalties from some of the biggest companies in the business, including Barrick Gold (ABX), Goldcorp (GG) and Kinross Gold (KGC).


Franco-Nevada's cash flow and profit generation potential over the next several years is considerable.


We'll get another update in the very near future, when FNV reports second quarter 2013 results on August 7. I expect there could be some minor write-downs, and a slight decline in revenues, as compared to the same period in 2012.


Yes, trying to time a bottom is impossible to do. But we don't have to be perfect to make money ... we just need to be close. Right now, it's looking like gold has found support and FNV, with a very attractive reward vs. risk profile, is a great way to add exposure.


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