Franco-Nevada Corporation (TSX: FNV) is a precious metals-focused royalty and investment company. The company owns a diversified portfolio of precious metals and royalty streams, which is actively managed to generate the bulk of its revenue from gold, silver, and platinum.

Key Highlights:

• Increased revenue and adjusted EBITDA: For Q1FY22, the company reported an increase in revenue to USD 338.8 million as compared to the revenue, of USD 308.9 million in Q1FY21. The total GOE (Gold Equivalent ounce) sold was 178,614 ounces in Q1FY22, which is higher than the GOE sold 175,737 in Q1FY21. The increase in the revenue was primarily driven by the higher average gas and oil prices. The group reported an increase in the adjusted EBITDA of USD 287 million in the similar period (Q1FY22) as compared to the adjusted EBITDA of USD 263 million in Q1FY21.

Source: Company presentation

• Industry beating profitability margins: In Q1FY22, the group reported increased revenues, clubbed with higher average realized prices across the gas and oil asset base, which supported the company to outpace the profitability margins as compared to the industry median.

Source: Refinitiv, Analysis by Kalkine Group

• Acquisition Update: Recently the group acquired Caserones royalty, for approx. USD 37.4 million. The company is also optimistic about its another acquisition of Castle Mountain royalty worth USD 6.0 million. Hence, post addition of 2.65% net smelter returns royalty (NSR) on the Castle Mountain land position, the company has 4.65% NSR on the Pacific Clay claims.

• Strong liquidity: The group stated an increase in its cash flows from operations to USD 230.6 million during Q1FY22 as compared to the cash from the operating activities of USD 224.3 million in Q1FY21. The group witnessed an increase in the cash and cash equivalents to USD 722.7 million in Q1FY22, 34% higher than the USD 539.3 million during Q4FY21. The strong liquidity helps the company to meet its day-to-day operational expenses along with carrying out the expansionary plans as well.

Risks associated with investment

The group’s major revenue is driven by the commodities and any sustained price decline can impact the revenues severely. Further, the risk of changing laws, decline in demand of commodities, rising interest rates which could slow down the mining operations, and inflationary cost pressure, can also dampen the company’s financials. 

Financial overview of Q1FY22 (Expressed in thousands of USD)

Source: Company Filing 

• During Q1FY22, the group reported an increase in revenues to USD 338.8 million versus the revenue of USD 308.9 million in Q1FY21. The increase in the average realized gold price to USD 1,874/oz in Q1FY22 as compared to USD 1,794/oz in Q1FY21, was one of the major driving factors for the increased revenue in Q1FY22. Also, the rise in higher realized gas and oil prices during Q1FY22 pushed the revenue towards the north.

• The gross profit for Q1FY22 increased to USD 220.6 million as compared to USD 197.1 million in Q1FY21.

• The operating income during Q1FY22 was reported at USD 212.0 million which is higher than the operating income of USD 191.5 million in Q1FY21.

• The group reported an increase in net income for Q1FY22 at USD 182.0 million against USD 171.5 million in Q1FY21.
  

Valuation Methodology (Illustrative): Price to Earnings based

Analysis by Kalkine Group

Stock Recommendation:

The group reported an increase in the revenue to USD 338.8 million in Q1FY22 as compared to the revenue of USD 308.9 million in Q1FY21, also the adjusted EBITDA surged to USD 287 million in the same period (Q1FY22) vs the adjusted EBITDA of USD 263 million in Q1FY21. Further, the company gave the production guidance for FY22 of the total GEO sales to be 680,000 oz to 740,000 oz whereas the precious metals GEO sales are estimated to be between 510,000 oz to 550,000 oz.  On the valuation front, the stock is measured on the Price / Earnings based multiple and we have considered Osisko Gold Royalties Ltd., Sandstorm Gold Ltd., etc. as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Hold” rating on the stock of FNV at the last closing price of CAD 178.00 on May 19, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as of May 19, 2022). Analysis by Kalkine Group

Note- The reference data has been partly sourced from REFINITV

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