There's more than one way to make money from the gold market, and Franco-Nevada (NYSE: FNV) has taken full advantage of the opportunities that providing financing for mining companies can offer. The streaming and royalty specialist participates in the successes of its miner partners without having to endure the headaches of operating mines itself; that can be an extremely lucrative model when things go well.
Continue Reading Below
As investors prepare for Franco-Nevada's first-quarter financial report on Tuesday, they're hoping that the company has kept its growth trajectory strong. Yet as the company implements a new business strategy, it could see more volatility from another corner of the commodities market. Let's look at Franco-Nevada, and what the market expects from it this time around.
Stats on Franco-Nevada
Source: Yahoo! Finance.
Can Franco-Nevada's earnings keep powering higher?
Analysts have had mixed views about Franco-Nevada's earnings prospects in recent months -- they've boosted their first-quarter projections by 10%, but reduced their full-year expectations from the company. The stock has been generally flat, with a modest decline of 2% since mid-February.
Franco-Nevada's fourth-quarter results showed just how well the company has been executing on its core strategy lately. Revenue was up 28%, outpacing the expectations of those following the stock. Although it suffered a net loss in GAAP terms, its adjusted net income soared by more than 80%. Record deliveries of gold-equivalent ounces helped to fund Franco-Nevada's dividends, and the streaming specialist benefited from the major gold deals it completed in 2016. Predictions of solid growth in the gold arena also boded well for the company's overall outlook.
Image source: Franco-Nevada.
It's possible that Franco-Nevada could see an even bigger boost to its gold operations soon. Reports suggest that partner Glencore is looking at selling its mining royalty to the Antamina mine in Peru, on which Franco-Nevada obtained a stake in early 2016. Those familiar with the situation suggest that an outright sale of the broader portfolio of royalty assets could carry a price tag of up to $250 million, and that would potentially allow Franco-Nevada to continue its rapid pace of growth on the precious metals front with another high-profile acquisition.
However, Franco-Nevada believes that it has identified an even more lucrative opportunity than precious metals. The company has historically had some minimal exposure to the energy markets, but now, it believes that focusing on new oil and gas royalty arrangements will offer it greater growth potential than continuing to emphasize precious metals streaming deals almost exclusively. Already, Franco-Nevada has agreed to new royalty deals totaling roughly $210 million, offering exposure in the STACK play in Oklahoma's Anadarko Basin as well as the Midland Shale area of the Permian Basin in West Texas. The company expects to divert further capital toward the energy industry as it finds attractive arrangements with the potential to deliver cash flow and growth over time.
What's far from certain is whether commodity markets will cooperate. Recently, gold prices have declined in light of some signs of stability in the global economy, as well as continued strong U.S. growth and higher interest rates. Moreover, crude oil prices have fallen back below the $50 per barrel mark, suggesting another downturn for the energy arena. That could spur lucrative deals, but it would require Franco-Nevada to take an even longer-term view in assessing its profit potential from new royalty arrangements.
When Franco-Nevada releases its earnings report, keep an eye out to see how the company decides to approach its key strategic opportunities. With so many directions in which it could go, the company is in the enviable position of being able to pick among a number of deals in search of the most potential profit.
10 stocks we like better than Franco NevWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Franco Nev wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of May 1, 2017