Precious metals investors like Franco-Nevada (NYSE: FNV) because of its exposure to gold and silver without the associated hassles of actually running a mining operation. Rather than mining its own gold, Franco-Nevada instead provides financing to miners in return for various types of interests in their operations. Back in November, CEO David Harquail and his management team talked with investors about Franco-Nevada's recent results and future prospects, and in doing so, the company gave an interesting look at what's ahead. Below, we'll look at four things that Franco-Nevada management said and what it means going forward.
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1. The Antamina mine has done very well
I think we're having a fantastic year in terms of the silver production. We don't have anything to show at this stage that it'll continue into next year.
Because of its role as a passive investor in mining operations, Franco-Nevada is subject to the ups and downs in the fortunes of its mining partners. Antamina is a good example. Franco-Nevada obtained a silver stream from Teck Resources (NYSE: TECK) on production from the Peruvian mine in exchange for providing $610 million in October 2015, and Franco-Nevada expects that annual silver from the deal will average around 2.8 million to 3.2 million ounces. 2016 went very well for the streaming company, but Franco-Nevada warned that it had already expected at least somewhat above-average performance during the first couple of years of the deal. As a result, the company is trying to rein in expectations for 2017, all the while hoping that Antamina will keep outperforming well into the future.
Antamina mine. Image source: Teck Resources.
2. Franco-Nevada moves further into oil and gas
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We have entered into an agreement to purchase a package of royalties located in the Stack shale play in Oklahoma's Anadarko Basin for a total purchase price of $100 million.
Franco-Nevada has historically focused on precious metals, but it also believes in the promise of the oil and gas industries in providing opportunities for growth as well. In November, the company announced that it would obtain a royalty interest on assets in the emerging Stack area. The company said that although the royalties cover an area of about 17,000 acres and provides for a 7.15% royalty rate, the net impact of various pooling and unitization arrangements among the operators involved actually gives Franco-Nevada a roughly 1.6% royalty rate on a wider area of about 75,000 acres. If the new play works out as well as anticipated, then the move could be a nice diversifier for Franco-Nevada going forward.
3. Franco-Nevada wants to get bigger
We continue to stress the scalability of our business model. ... There has been a significant increase in revenue year over year, with a slight increase in cost.
The nice thing about the streaming business model is that as long as returns exceed the cost of capital, a company can continue to grow by entering into new arrangements with mining partners. Franco-Nevada has already worked hard to boost its exposure with a variety of deals, and it has also kept its corporate administration costs relatively constant. Doing that helps boost margin and makes the company even more profitable, and Franco-Nevada doesn't see that changing anytime soon.
4. Franco-Nevada is thinking about new ways to profit
In terms of the bulk sector, both the base and the bulks have been beaten up certainly relative to gold, and so in those categories in particular, if we can invest in good cash-flowing assets and establish mines with long lives, those would be attractive.
Even within the mining sector, Franco-Nevada has looked beyond precious metals at various times in the past. Some considerations included not only base metals like copper and zinc but also bulk commodities like coal and potash. The company noted that those areas have suffered even more than precious metals in the commodity downturn in recent years, but that can actually present opportunity for streaming specialists if industry participants want financing. Franco-Nevada hopes that it can take advantage of increasingly favorable conditions to get a deal under its belt in the bulk and base area in the next year.
Franco-Nevada is moving in a lot of different directions, but they all have one goal in mind: boosting profit. By keeping its eye on the prize, Franco-Nevada thinks it can keep growing into 2017 and beyond.
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