Franco-Nevada Stock’s Pullback Is a Buying Opportunity

After a solid start to the year, Franco-Nevada (FNV.TO) stock has started retreating in the past few days. If you are thinking that the stock’s recent decline has something to do with its mixed second-quarter results, then you would be wrong. Franco-Nevada stock kept climbing in August before the downtrend started at the beginning of the current month.

What has caused this downturn? And should investors take advantage of the recent slip in Franco-Nevada shares? Let’s find out.

Silver price uncertainty has weighed on Franco-Nevada stock

The spot price of silver hit $19.60 per ounce in the first week of September, but a downtrend started soon after and the metal is now trading at just under $18 an ounce. This negative silver price trend seen over the past few days has hurt Franco-Nevada stock.

However, this is an opportunity that investors should not miss as the stock’s rally could resume once again thanks to two reasons.

First, the price of silver could move higher, with analysts pointing out that the metal could eventually hit $20 an ounce in the coming days. The recent pullback in silver prices seems to be the result of profit-taking, as the metal rallied an uncharacteristic 15% in August.

What’s more, silver is still way off its 10-year highs of $32 an ounce, and demand for the metal seems to be on the rise. Silver demand from the solar and the automotive industries is picking up pace, and researchers at GFMS (Gold Fields Mineral Services) believe that the auto industry’s demand for the metal could triple in the long run.

So even though silver prices have taken a breather of late, there’s no reason for Franco-Nevada investors to panic. This brings me to my second reason why the stock is a good bet after its recent pullback. Franco-Nevada gets most of its revenue from selling gold and there’s no weakness on that front.

Gold’s bright prospects make the pullback a buying opportunity

In the second quarter of 2019, Franco-Nevada sold 107,774 gold equivalent ounces. This was a slight increase from the year-ago period’s sales of 107,333 ounces.

Now, investors seem to be forgetting the fact that Franco-Nevada gets 84% of its revenue from gold and gold equivalent assets. Of that, 62% revenue comes from gold and 10% from silver. So selling off the stock based on the price of gold is not a good idea because gold has a greater impact on the overall business.

The good news is that gold has sustained its rally, unlike silver. The yellow metal is trading at more than $1,520 an ounce at present, and Citi estimates that the price can go as high as $2,000 an ounce if the macroeconomic weakness and recession-like conditions continue. As such, Franco-Nevada can witness higher realized pricing in the coming quarters and that will help it deliver improved financial performance.

So it would be a good idea for investors to take advantage of the weakness in Franco-Nevada stock as its recent pullback could prove to be temporary.

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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