Why Franco-Nevada Is a Solid Buy

Increasing gold prices have propelled Franco-Nevada [stock_market_widget type="inline" template="generic" color="default" assets="FNV.TO" markup="(TSX: {symbol} {currency_symbol}{price} ({change_pct}))" api="yf"] stock close to its 52-week highs, with shares of the streaming specialist rising nearly 28% in the past six months. However, the company’s latest quarterly and annual results have dented investor confidence thanks to certain operational issues.

So it won’t be surprising to see Franco-Nevada’s impressive run on the stock market coming to an end. Let’s take a closer look at the reasons why the company is not in great shape at the moment.

What Ails Franco-Nevada?

Franco-Nevada’s revenue fell to $653.2 million in 2018 from $675 million in the preceding year. The lower output was the result of a 7.3% decline in the gold equivalent ounces sold by the company last year.

Franco-Nevada sold 447,902 gold equivalent ounces in 2018 as compared to 497,745 ounces the previous year. For the fourth quarter of 2018, the company’s gold equivalent ounces sold fell at a much steeper rate of more than 12% as compared to the prior-year period.

Franco-Nevada gets close to 77% of its revenue from gold streams, so it was in a good position to take advantage of the recent uptick in gold prices. But low-grade ore at the Candelaria mine in Latin America and lower production at the streaming areas covered under agreement at the Guadalupe-Palmarejo mine weighed on its production profile.

But the recent stock price action shows that investors are upbeat regarding a turnaround at the company, probably because of what management is promising going forward.

Better Times Ahead?

Franco-Nevada anticipates its royalty and streaming production to range between 465,000-500,000 gold equivalent ounces this year. This means that the company’s production will rise in the high-single digits at the mid-point of that guidance range. But more importantly, Franco-Nevada promised investors that its production profile will pick up the pace going forward.

According to CEO David Harquail:

Franco-Nevada’s largest investment, Cobre Panama, has now begun milling ore. Along with improved production from a number of our key assets, we expect very good growth in our gold equivalent ounces over the next five years. We are also seeing an increasing number of gold investment opportunities and have already added several smaller gold royalties this year.
The company’s bottom line growth is expected to pick up the pace in the coming five years.

More specifically, Franco-Nevada anticipates production between 570,000 and 610,000 gold equivalent ounces by 2023, assuming a gold price of $1,300 per ounce. The good part is that gold prices are hovering above that level right now, and could soar higher in the future as gold discoveries have been drying up.

In such a scenario, buying a gold streaming company like Franco-Nevada looks like a smart move as it gets its gold ounces from streaming agreements it strikes with companies that produce the yellow metal as a by-product. Also, Franco-Nevada’s outlook clearly indicates that it is on track to take advantage of the potential increase in gold prices going forward.

The good part: Analysts expect the same as the company’s bottom line growth is expected to pick up the pace in the coming five years. So there’s enough reason to believe that Franco-Nevada stock is capable of delivering more upside in the long run.

Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects. Address: 682 Indian Road, Toronto, Ontario, M6P 2C9. Phone: 416-721-8257.


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