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FRANCO-NEVADA CORPORATION – A GOLD ROYALTY PLAY TO PONDER

Franco-Nevada Corporation (FNV)

Gold has kicked off 2016 with the strongest rally in 25+ years,

Franco-Nevada, has a market cap of > $10bln and is up 45% in the last quarter (56% of Barrick’s $18bln market cap and 72% of Goldcorp Inc.’s $13.75bln) . Those looking to basis trade in the gold space, or those vetting new exposure to the precious metals space should dig deep into the 26 page slide deck by Pierre Lassonde, Franco-Nevada’s Chairman, which was just presented at the most recent Grant’s Spring (April) Conference in New York. Much of the information contained was in their March 2016 Corporate presentation, but the manner in which all naysayers are neutered via this enlightening presentation is impressive indeed. For one, few will be aware the degree of demand emanating from Europe, now the largest bar and coin market in the world. China and India are typically all that anyone hears in terms of the demand equation.

The case for FNV versus ETF’s like GLD are perhaps most compelling where a running ETF fee of 0.40% (40bp) is upgraded to an instrument with a dividend of > 1.2%. Like the GLD ETF, FNV investment protects investors from the risk of operating companies as Franco-Nevada achieve their exposure to the space via securing royalty streams. In terms of focus FNV is 95% precious metals (73% gold and 16% silver) and would not likely deviate much from this level to retain “pure play” status. Geographically 84% of their royalty income if from the America’s, lessening the risks inherent in frontier markets. FNV currently carries no debt and when they opportunistically do take on leverage, like the most recent $500mm Precious Metals Stream purchased from Glencore (Antapaccay, Peru gold mine output underlying), it is typically paid back promptly from free cash flow. A total of $1.2bln in facilities are at their avail which allows FNV to scout for the best opportunities in terms of both price and fit with their broad existing portfolio.

Lassonde, Pierre Spring 2016 (1)

As discussed in prior post, the merits of precious metals as a component to a diversified investment portfolio can be argued, but are compelling overall. Personally, I tend to trade in the asset class on a tactical basis, rather than as a core holding. A 10% allocation (via Fidelity Select Gold, FSAGX) in one of my larger accounts allowed other equity beta risk to be retained through a rough Q1 resulting in a 6.45% ytd return (versus 1.9% for the S&P through Friday).

The gold, gold miners, and gold royalty trajectory has been near straight up for a quarter, hence caution is warranted on allocating fresh monies. Both GDX and FNV are up 46% ytd including dividends. FNV is within 4.34% of its all-time high. Even a modest retracement of the recent USD weakness could see gold trade down to sub $1,200 an ounce, which could create an entry point. FNV’s Exodus hybrid score is a neutral 2.32 at present. When the time is right to re-enter, I think I have found my instrument of choice. JCG

Note: Other players in the gold royalty space include Royal Gold Inc. (RGLD) which is about one third the size of FNV and has a matching Exodus hybrid score of 2.36. Osisko Gold Royalty (OR.TO) trades on the TSX (trades in Canadian Dollars) and has a market cap of about US$1.2bln. FNV trades on both the NYSE and the TSX, but with more volume of the USD denominated NYSE counter.

 

 

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