On Mar 16, 2020, we issued an updated research report on
Franco-Nevada Corp ( FNV Quick Quote FNV - Free Report) . The company is well-poised for growth backed by its healthy and diversified portfolio of streaming and royalty agreements and a debt-free balance sheet. Backed by its continued focus on cost management, the company continues to deliver improved margins. However, lower grades at Antapaccay mine and the recent dip in gold prices remain concerns. Diversified Business Model
Franco-Nevada Corporation operates as a gold-focused royalty and stream company with additional interests in silver, platinum group metals ("PGM"), oil & gas and other resource assets. One of the inherent strengths of its business model is the diversification of its portfolio. The Cobre Panama mine contributed 13% to revenues in 2020 followed by Antapaccay and Candelaria, which accounted for 12% and 10%, respectively — a total of 35%. It has operator diversification as well with no single operator accounting for more than 13% of its revenues in 2020. The company has royalties and streams on several properties mined by some of the most reputable mining companies in the world.
Cost Management to Boost Margins
Driven by its efforts to cut down costs, Franco-Nevada’s cash costs per GEO (Cost of sales, less depletion and oil and gas costs, divided by gold equivalent ounces) was at $292 in 2020, witnessing a CAGR of 9% over the 2016-2020 timeframe. During this time frame, its margins have witnessed a CAGR of 9%. The company continues to add to its portfolio without adding accruing overhead. Its General & Administrative costs have been relatively stable and averaged $5 million to $8 million per quarter for the past 13 years. For 2020, G&A expenses were around 2.8% of revenues, lower than 3.4% of revenues in 2019.
Solid Balance Sheet, Acquisitions Bode Well
Franco-Nevada is financially strong and has a debt-free balance sheet, which is commendable. As of Dec 31, 2020, the company had total available capital of $1.9 billion. Recently, the company hiked its quarterly dividend by 15.4% to 30 cents per share, marking the 14th consecutive year of dividend increase. The company recently acquired new precious metals stream on the Condestable copper mine in Peru and a portfolio of natural gas royalties in the Haynesville play in Texas.
Upbeat Performances at Mines to Continue
Franco-Nevada sold a record 521,564 GEOs in 2020 as its portfolio continues to perform well. In 2021, the company expects attributable royalty and stream sales in the range of 555,000 GEOs to 585,000 GEOs from its mining assets. Sales from the Cobre Panama project is expected between 105,000 GEOs and 125,000 GEOs as the mine continues to ramp up, higher than the 76,348 GEOs in 2020. Sales in 2021 from Candelaria are also expected between 65,000 GEOs and 75,000 GEOs compared with 59,655 GEOs in 2020, as the mine has completed its mill optimization project. Sales of silver ounces from Antamina is projected to be 3.0-3.2 million ounces of silver, up from 2.8 million ounces sold in 2020.
However, sales from the Antapaccay mine in Peru is expected in the range of 55,000 GEOs to 65,000 GEOs, down from 65,901 GEOs in 2020 due to planned lower grades. Further, per reports, Glencore recently suspended its Antapaccay copper operations in Peru on account of a road blockade by local communities. If this continues, it will impact Franco-Nevada’s results. The company expects existing portfolio to produce between 600,000 and 630,000 GEOs by 2025. The outlook assumes that the Cobre Panama project will have expanded its mill throughput capacity to 100 million tons per year during 2023. Uncertainty Regarding Pandemic a Concern
Franco-Nevada's mining operators faced the unfavorable impact of the coronavirus pandemic with temporary suspension of operations and production curtailment last year. Resurgence of cases might lead to the actions again, consequently impacting Franco-Nevada’s operations and results.
Recent Drop in Gold Prices a Woe
Gold prices gained 25% in 2020 fueled by apprehensions regarding the coronavirus pandemic. This led to record revenues for Franco-Nevada in 2020. However, gold prices have dipped 9% so far this year and dropped below $1,800 per ounce lately on successful vaccine rollout and massive stimulus package. The company’s guidance for 2021 assumes gold prices of $1,750 per ounce. If gold dips further, this might put the guidance at risk and also impact the company’s revenues.
Franco-Nevada’s shares have gained 18.5% over the past year compared with the
industry’s rally of 45.3%. Zacks Rank & Stocks to Consider
Franco-Nevada currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the basic materials space include
Impala Platinum Holdings Limited ( IMPUY Quick Quote IMPUY - Free Report) , Fortescue Metals Group Limited ( FSUGY Quick Quote FSUGY - Free Report) and BHP Group ( BHP Quick Quote BHP - Free Report) , each sporting a Zacks Rank #1 (Strong Buy), at present. You can see . the complete list of today’s Zacks #1 Rank stocks here
Impala Platinum has an expected earnings growth rate of 195.9% for the current fiscal year. The company’s shares have surged 84% in the past year.
Fortescue has a projected earnings growth rate of 84.3% for the current fiscal year. The company’s shares have soared 182% in a year’s time.
BHP Group has an estimated earnings growth rate of 65.6% for the current fiscal year. The company’s shares have appreciated 75% over the past year.
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