Franco-Nevada Looks to Build Momentum for 2017

By Dan Caplinger Markets Fool.com

Investors have watched happily as Franco-Nevada (NYSE: FNV) has seen its unusual business structure produce good returns in recent years. The precious metals and energy streaming and royalty specialist has been able to do reasonably well even under tough conditions in the commodities markets. As investors prepare for Franco-Nevada's fourth-quarter financial report on March 22, they expect a big jump in revenue and earnings from year-ago levels, and they're hoping for positive signs from the company about its future.

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Let's take an early look at Franco-Nevada to see what investors are expecting to see from the streaming and royalty company.

Stats on Franco-Nevada

Analyst EPS Estimate

$0.21

Change From Year-Ago EPS

40%

Revenue Estimate

$154.5 million

Change From Year-Ago Revenue

27%

Earnings Beats in Past 4 Quarters

4

Data source: Yahoo! Finance.

What's ahead for Franco-Nevada's earnings?

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In recent months, investors have gotten markedly less optimistic about Franco-Nevada's earnings prospects. They've cut their fourth-quarter projections by nearly 10%, and they've made even larger adjustments to their full-year 2017 expectations. That has held the stock's run-up in check, with Franco-Nevada posting gains of just 2% since late December.

Franco-Nevada's third-quarter results were extremely strong, showing record performance from its portfolio of producing assets. The company said that it brought in more than 123,000 gold-equivalent ounces that produced $172 million in revenue, and adjusted net income of $0.30 per share was well above what most investors had expected to see from the company. Franco-Nevada reported encouraging prospects for many of its individual assets, with some new projects having just come on line and others seeing better capacity for increased production for the future. In particular, the Antamina and Antapaccay mines in Latin America were big new contributors to the company's results, and Franco-Nevada sees them continuing to play a key role in the company's overall growth.

The Antamina mine in Peru, in which Franco-Nevada has an interest. Image source: Teck Resources.

Yet since then, the outlook for the precious metals markets has become much cloudier. The Federal Reserve raised interest rates in December, and it said it expects to make three more rate increases during 2017. With the rise in rates, financing costs for investors in precious metals go up, and that has led to decreased interest in the precious metals markets over the past few months. Franco-Nevada doesn't have to see gold prices rise in order to grow its business, as long as its mining company partners continue to produce. Yet rising prices are clearly better for the streaming company, and more lackluster price action in precious metals could discourage miners from growing their output as quickly as they would in a bull market.

Perhaps because of the prospects for precious metals, Franco-Nevada has said that it intends to emphasize oil and natural gas royalty interests as a key strategic move going forward. The company said in November that it had agreed to purchase $100 million in royalty interests in Oklahoma, hoping to capitalize on the lucrative Stack shale play there. With many of the best precious metals mines having already been developed, Franco-Nevada thinks that there could be more promising assets in the energy arena that would create better payouts for investors. Moreover, diversification could help Franco-Nevada, especially if precious metals markets remain subdued while energy continues its rebound.

In the Franco-Nevada earnings report, investors should focus on whether the company's current assets produce as well as they have for most of the past year, as well as on any new acquisitions or agreements the company has in the works. Having gotten a taste of fast growth, Franco-Nevada investors want to enter 2017 on a positive note and have confidence that the company will find new opportunities for the remainder of this year and beyond.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.