Dec 13, 2009

Franco- Nevada - Building A Royalty Warchest

Newmont (NEM) mining did investors a huge favor by spinning off what is now Franco-Nevada (FNNVF.PK), a royalty company focused mainly on gold, with additional interests in Oil & Gas, Platinum, and Base metals. While Royal Gold (RGLD) garners more investor and media attention, Franco-Nevada has more upside potential, especially given the current valuations. Franco failed to take part (at least to a meaningful degree) in the $150 rally in gold over the past two months, while Royal Gold is sitting close to its 52-week high, sporting a rather rich valuation. Part of the reason may be due to the fact it only trades on the TSX or Pink Sheets, but Franco-Nevada is and looks like it will continue to be a superior free cash flow machine.

Don't get me wrong, Royal Gold is a great company as well, but it lacks depth in its royalty portfolio as well as depth in its soon-to-come online, medium and long term royalty pipeline (relatively speaking). Franco made a gutsy, albeit brilliant, investment in Coeur d’Alene’s (CDE) Palmarejo mine (as Coeur d’Alene was flirting with bankruptcy not that long ago, going on to be an amazing turnaround story for 2009).

What I think gives Franco the upper hand is its more or less recent spree of acquisitions, and more importantly, the 750 million available to fund additional growth (600 million in cash and short term investments + 150 million undrawn debt facility). It was not until today that I realized Franco made not one but two acquisitions recently. Not only does Franco have great leverage to the price of gold, but as key flagship streams ramp up production and/or come online over the short, medium and long term, its war chest will transform it into an enormous free cash flow generator. Franco’s Oil & Gas royalties (which account for 12-15% of income) also offer investors some exposure to oil & gas (which should rise past its 2008 highs as inflation sets in).

Current Flagship Royalties:

  • Goldstrike
  • Palmarejo
  • Gold Quarry
  • Stillwater
  • Marigold
  • Robinson
  • Oil & Gas, others

Near Term Growth Pipeline – 2010 – 2011:

  • Holt
  • Holloway
  • Hollister
  • Hemlo
  • Tasiast - 30% increase in reserves and updated production not included
  • Palmarejo – Expected to add 25 million in 2010 and 30-40 in 2011

2012+ Pipeline:

  • Hemlo – 2nd royalty
  • Detour
  • Others - Includes several of what may prove to be flagship streams from the likes of Great Basin Gold (GBG), Kirkland Lake Gold (KGILF.PK) and others
  • 131+ exploration interests In gold royalties

Envelope Back Pros and Cons:













Oil & Gas
























Gold Price Assumption






Oil Price






Not only does Franco-Nevada have a diversified royalty portfolio, but it will continue to become increasingly diversified with excellent growth in attributable gold production. It also has several potential catalysts with its exploration interests and the high likelihood of multiple value-adding acquisitions. Take advantage of the stigma that plagues many Pink Sheet stocks before Franco debuts on another major stock exchange. Some other notable attributes worth mentioning:

  • $5.50/share in net cash (or 20% of the current market cap)
  • 33% year/year increase in dividends paid
  • Royalty revenue from gold will increase to 80-85% of total revenue with Oil and Gas accounting for almost all the rest
  • Over 300 royalty interests in total

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