Many investors get nervous about the prospect of having to deal with mining operations and their inherent uncertainties. For them, companies like Franco-Nevada (NYSE: FNV) that focus on royalty and streaming interests rather than engaging in mining activity themselves are particularly attractive. Franco-Nevada has continued to do well in 2017, and following its most recent earnings report, CFO Sandip Rana talked with investors about Franco-Nevada's prospects both in the near term and further out into the future.
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1. Franco-Nevada continues to diversify
We continue to stress the scalability of our business model. ... There has been a significant increase in revenue over the last six years. Costs have also increased over this time frame, but the largest cost component is the stream.
Franco-Nevada hasn't been content simply to let its initial emphasis on gold and silver streaming arrangements be its only way of capitalizing on favorable trends in the natural resources sector. Instead, new agreements have diversified the company's exposure. In particular, strong performance in palladium was a noteworthy contributor to Franco-Nevada's revenue growth during the quarter, as rising prices paid off for the streaming company. Oil revenue has also continued to rise, in part because of more favorable pricing and in part because of the addition of new oil-related assets. By remaining open to investing in different types of assets, Franco-Nevada can navigate changing markets more efficiently.
2. Exercise of warrants added to Franco-Nevada's cash
We continued to maintain our strong balance sheet, which was further strengthened during the quarter with the exercise of [warrants] resulting in proceeds to the company of 475 million Canadian dollars.
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Franco-Nevada likes to have money available for streaming and royalty deals, and the company got a cash infusion as a result of past deals it had made. In the past, when Franco-Nevada made streaming deals, it would sometimes include warrants to purchase Franco-Nevada stock at a future date. For instance, Taseko Mines (NYSEMKT: TGB) took 2 million warrants in a 2010 streaming agreement, while Lumina Royalty received about 760,000 warrants. These warrants were set to expire in mid-2017, calling for holders to pay 75 Canadian dollars for each share of Franco-Nevada stock. Those warrants got exercised since the stock price exceeded the price specified in the warrant. The result was some mild dilution, but Franco-Nevada will still benefit from the greater amount of cash on its balance sheet.
3. Oklahoma is a key focus for Franco-Nevada
[On the STACK 2 acquisition,] it's a similar type of land as the original STACK acquisition. It's one of the newest and the most prospective place in the U.S. tight oil space, and we're expecting it will be growing over time.
Franco-Nevada agreed at the end of June to spend $27.8 million to purchase an additional portfolio of assets in the Sooner Trend, Anadarko Basin, Canadian and Kingfisher Counties play in Oklahoma. The so-called STACK area was one in which Franco-Nevada has invested in the past, but the company saw an opportunity to expand its exposure to this high-profile area. With the deal set to close in November, investors can expect even more growth in the company's oil assets, which Franco-Nevada has already identified as a more promising route for expansion than gold and silver under current conditions.
4. Funding current projects will also be important
One thing we do know is we have to continue to fund Cobre Panama. ... Other than that, we'll just continue to explore the market on both the mineral side and the oil and gas side.
The Cobre Panama project is one of the world's largest copper, gold, silver, and molybdenum projects, with expectations that production will ramp up in late 2018. Franco-Nevada has anticipated that it would need to provide more funding to help the project, and that laid the groundwork for the company's announcement earlier this month that it would add to its streaming agreement. Under the new deal, Franco-Nevada will pay $178 million in exchange for a more favorable margin on the first roughly 300,000 ounces of gold and 4.8 million ounces of silver. The move doubles down on the project, but Franco-Nevada is optimistic that the payoff warrants the risk associated with Cobre Panama.
Franco-Nevada is in full growth mode, and it's looking everywhere it can to find the best deals for its investors. As long as it's successful in doing so, shareholders can look for better business performance in the months and years to come that should hopefully flow down to share price gains.
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