On May 13, we issued an updated research report on Franco-Nevada Corp FNV. 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. The company continues to deliver improved margins, aided by its continued focus on cost management. However, uncertainty regarding the pandemic’s impact on the company’s mining operators and decline in gold prices remain concerns.
The company recently reported adjusted earnings of 84 cents per share in first-quarter 2021, up 47% from the prior-year quarter. Additionally, the bottom line surpassed the Zacks Consensus Estimate of 79 cents. The company generated revenues of $309 million in the reported quarter, reflecting year-over-year growth of 28%. The top-line figure, however, missed the Zacks Consensus Estimate of $313 million.
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. Antamina, Cobre Panama, and Hemlo contributed to the company’s revenue performance in the recently-reported quarter. The Cobre Panama contributed 17% to revenues in the first quarter followed by Antapaccay, which contributed 11%. It has operator diversification as well with no single operator accounting for more than 17% of its revenues in the March-end quarter. The company has royalties and streams on several properties mined by some of the most reputable mining companies in the world.
Cost-Cutting Actions to Drive 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) came in at $252 in the March-end quarter, down 18.2% from the prior year quarter. Its general & administrative costs have been relatively stable and averaged $5-$8 million per quarter for the past 13 years. For 2020, G&A expenses were 2.8% of revenues, lower than the 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. The company generated $224.3 million in operating cash flow in the first quarter, up from the $195.2 million witnessed in the prior-year quarter. The company’s board hiked the quarterly dividend by 15.4% to 30 cents per share. This marks the 14th consecutive annual dividend increase.
Last month, Franco-Nevada acquired 57 million of Vale S.A’s VALE outstanding Participating Debentures for $538 million. Moreover, it accrued 9.9% equity investment in Labrador Iron Ore Royalty Corporation. These investments are accretive to the company’s cash flow and provide exposure to mines producing high-grade iron-ore products. Previously, the company had acquired new precious metals stream in the Condestable copper mine in Peru and a portfolio of natural gas royalties in the Haynesville play in Texas.
Upbeat Guidance to Aid Growth
Franco-Nevada now expects attributable royalty and stream sales in 2021 in the range of 580,000 GEOs and 615,000 GEOs from its mining assets, indicating an increase from the 555,000 to 585,000 GEOs estimated previously. The upbeat guidance reflects acquisition of the Vale’s Royalty Debentures. The company anticipates the existing portfolio to produce between 630,000 to 660,000 GEOs by 2025, suggesting an increase from the 600,000 to 630,000 GEOs projected earlier. Franco-Nevada expects to generate additional revenues of $115-$135 million from Energy assets.
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 hurting Franco-Nevada’s operations and results.
Drop in Gold Prices a Woe
Gold prices have dipped 4% so far this year on the successful vaccine roll-outs and massive stimulus packages. The company’s guidance for 2021 assumes gold prices of $1,750 per ounce. If gold dips below this level, this might put the guidance at risk and also impact the company’s revenues. Some prominent companies in the Mining – Gold sector like B2Gold (NYSE:BTG) Corp BTG and Alamos Gold (NYSE:AGI) Inc. AGI are also likely to impacted by lower gold prices.
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