Franco-Nevada Corp. (TSX: FNV) is a precious metals-focused royalty and investment company with a diversified portfolio of precious metals and royalty streams. The company generates its majority of revenues from gold, silver, and platinum.

Key highlights  

• Record annual gold production & Revenues: For FY21, the company reported an increase of 9.1% in its annual production of precious metals to 558,397 ounces as compared to 511,677 ounces, in FY20. The Gold production increased marginally to 420,535 from 405,033 in pcp. The revenue from the metals for FY21 stood at USD 995.7 million vs 910.7 million in FY20. The total revenues of the company increased by 27% to USD 1.30 billion in FY21 as compared to pcp.   

Source: Company filings

• Improved Cash flows & Zero debt: For FY21, the company reported an increase in cash flow from operating activities to USD 955.4 million vs USD 803.9 million in the pcp. The company is currently debt-free for the year ending FY21.

• Increased Dividends: The company declared a dividend of USD 1.16 per share, whereas the total dividends declared stood at USD 221.4 million out of which USD 179.6 million was paid in cash and the remaining, USD 41.8 million were paid in common share under the Dividend Reinvestment Plan.     

• Improved profitability margins:For Q4FY21, the company reported a gross margin of 61.4% as compared to the industry median of 52.7%. For a similar period, its EBITDA margins were 82.3% vs the industry median of 39.8%. The net profit margin for Q4FY21 was 67.4% as compared to the industry median of 15.0%.

Source: Refinitiv, Analysis by Kalkine Group 

Risks associated with investment

The company is exposed to the volatility of the gold prices and any sustained unfavorable movement in the gold, can hamper the financials in the near term. Further challenges included the hedging cost and foreign exchange volatility which could also impact the financials of the company. 

Financial overview of FY21 (Expressed in millions USD)

Source: Company Filing 

• For FY21, the company reported an increase in revenue to USD 1,300.0 million as compared to USD 1,020.2 million in pcp. The increase was primarily from rise in the quantity of gold sold of 728,237 ounces at an average realized sales prices of USD 1,800 per ounce in FY21 as compared to 573,347 ounces at an average realized gold prices of USD 1,770 per ounce in the FY20.

• The Gross profit for FY21 was USD 822.1 million vs USD 620.4 million in the pcp. 

• The operating income for the FY21 stood at USD 860.7 million vs USD 336.5 million in the pcp. There was a one-time reversal gain of impairment of USD 68.0 million in FY21, as compared to the impairment charges of USD 262.1 million in FY20, which lifted the operating income in FY21.

• The Net Income for FY21 was reported at USD 733.7 million vs the USD 326.2 million in pcp. 
  

Valuation Methodology (Illustrative): Price to Earnings based multiples

Analysis by Kalkine Group 

Stock recommendation 

The improving gold demand and rising prices are a strong catalyst for the company to enhance production in the coming quarters, and higher prices will boost the average realized prices of gold sold. For FY22, the company is estimating its annual production in the range of 680,000 to 740,000 Gold Equivalent Ounce (GEO's). Additionally, the firm has provided short term outlook for next five years where it is expected to increase gold production in the range of 765,000 to 825,000 GEOs by 2026. On the valuation front, the stock is measured on the Price to Earnings based multiples  Cashflow multiple bases, and we have considered Agnico Eagle Mines Ltd., Cameco Corp. etc.as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Hold” rating at the closing market price of CAD 196.77 on March 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 on March 14, 2022). Source: REFINITIV, Analysis by Kalkine Group

Disclaimer

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