Franco-Nevada Corporation (TSX: FNV) is a gold-focused royalty and investment firm which possess varied portfolio of valuable metals, royalty stream and working interests.  The company is having properties at various stages from production to early exploration in the United States, Canada and Australia.

Key Highlights 

• Improved Energy guidance for 2021: In 2021, the company expects energy revenue in the range of USD 195 million to USD 205 million due to the increase in oil and gas prices. However, the guidance for the royalty and stream sales reported as 590,000 to 615,000 gold equivalent ounces (GEOs) mainly from the Cobre Panama GEO deliveries and Vale royalty.

Source: Company Presentation

• Diversified Long Life Portfolio: The company owns diversified royalty and streaming portfolio by asset which includes Mining Streaming, Mining Royalty and Energy Royalty. This diversified business model aided in generating remarkable margins. Additionally, the company’s business favoured from the strengthened commodity prices especially gold.
  

Source: Company Presentation

• Debt Free Balance Sheet: The company has sound balance sheet and sufficient liquidity to support its business objectives in the coming fiscal year. As on 30 September 2021, the company has available capital of USD 1.6 billion with no debt on book, which is commendable. Additionally, the cash flow from operating activities increased to USD 676.4 million in 9M 2021 v/s USD 557.6 million during 9M 2020.
  

• Solid Operating Matrix:  The year to date (YTD) 2021 total GEO’s sold by different assets of the company stood at 462,926 GEOs and total revenue recorded at USD 824.8 million versus 374,088 GEO’s in YTD 2020 with revenue of USD 715.7 million. Furthermore, the company is continuously increasing its revenue while minimizing the general expenses. As a result, it is earning healthy EBITDA margins and net income. This kind of performance is palpable.
  

• Progressive & Sustainable dividends: On 27 January 2022, the company announced quarterly dividend of USD 0.32 per share payable on March 31, 2022, an increase of 6.7% from the earlier USD 0.30 per share quarterly dividend and leading to 15^th consecutive annual increase for the shareholders of the company.
  

Risks associated with investment 

The Company’s financial performance is mostly dependent on the price of gold, which directly affects their profitability and cash flow. Any drawdown in the gold prices would impact the group’s performance. 

Financial Highlights (In USD Million)

Source: Company Reports 

• Revenue in Q3 2021 stood at USD 316.3 million versus USD 279.8 million in Q3 2020 due to higher metal prices and an increase in GEOs sold.
• On the back of higher revenue, the gross profit increased to USD 201.3 million during Q3 2021, against USD 182.5 million in Q3 2020.
• The group posted net income of USD 166.0 million, against USD 153.9 million in Q3 2020, partially offset due to higher income tax worth USD 30.2 million.
  

Valuation Methodology (Illustrative): Price to Earnings Based

Source: REFINITV, Analysis by Kalkine Group 

Stock recommendation 

With record precious metals prices throughout the year and the recovery of energy prices in the second half of the year, the group generated record financial results. Furthermore, it expects strong growth in 2021 and over the next five years, driven by the ongoing Cobre Panama ramp-up, the two newly acquired assets and broad organic growth across the portfolio. Moreover, the group has a robust operating matrix under which it is increasing its revenue which is appreciable. The group also holds solid liquidity of USD 1.6 billion, with no debts on the book is a key positive.

Therefore, based on the above rationale and valuation, we recommend a “Hold” rating at the closing price of CAD 173.97 as on February 09, 2022. We have considered Nomad Royalty Company Ltd, Osisko Gold Royalties Ltd.  the peer group for the comparison.

1-Year Price Chart (as on February 09, 2022). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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