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: 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. Further, the revenue from the diversified segment increased to USD 96.0 million as compared to USD 51.7 million in Q1FY21. The total GOE (Gold Equivalent ounce) sold was 178,614 ounces in Q1FY22, which is higher than 175,737 the GOE sold in Q1FY21.

Source: Company presentation

• Industry beating profitability margins: During Q1FY22, the group reported increased revenues, which were supported by the higher average realized prices across the gas and oil asset base, leading to improved profitability margins as compared to the industry median.

Source: Refinitiv, Analysis by Kalkine Group

• Debt-free: Besides operating in the capital-intensive industry, the group is carrying zero debt on its books, which makes the company a leader in that segment when compared to its industry peers. In the current scenario of rising interest rates, the company can grow on the organic cash generated rather than spending on servicing the debt.
  

Risks associated with investment

The group’s major revenue portion 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 millions of USD)

Source: Company Filing

• The group reported an increase in revenues by approx. 9.7% to USD 338.8 million during Q1FY22, versus the revenue of USD 308.9 million in Q1FY21. The increase in the revenue was majorly derived from the higher realized oil and gas prices from the energy asset and sales from the Vale royalty.
• During Q1FY22, the gross profit increased to USD 220.6 million as compared to USD 197.1 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 is optimistic for FY22 and stated the annual guidance of total GEO (Gold equivalent ounce) sales is between 680,000 GOE and 740,000 GOE, and the sales of the precious metal is estimated in the range of 510,000 GOE to 550,000 GOE. The group is debt-free and reported an increase in the cash flows from operation to USD 230.6 million in the reported period (Q1FY22) against the cash flows from the operation of USD 224.3 million in pcp, along with an increase of 34% in the cash and cash equivalent balance during Q1FY22.  On the valuation front, the stock is measured on the Price / Earnings based relative valuation multiple and we have considered Endeavour Silver Corp., Nomad Royalty Company 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 179.44 on June 14, 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 June 14, 2022). Analysis by Kalkine Group

Note- The reference data has been partly sourced from REFINITV

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