Franco-Nevada Corporation: A Solid Q4, But Tough Comps Ahead (NYSE:FNV)

Simply over three months in the past, I wrote on Franco-Nevada Company (NYSE:FNV), noting that whereas the corporate continued to report file outcomes, it will be up towards tough comps in H1-23 that might weigh on share worth efficiency. This was as a result of it was benefiting from multi-year highs for oil (USO) and palladium (PALL) in H1-2022, and these traits had since reversed. Not solely that, there was more likely to be additional draw back probably forward for each commodities, on condition that there was nonetheless no signal of capitulation in oil or palladium as of This autumn. Since then, pure gasoline costs (UNG) have additionally declined violently, resulting in weaker pricing in extra segments of Franco-Nevada’s enterprise. So, whereas the latest energy within the gold worth is a constructive, softness in different segments will partially offset this profit.

The excellent news is that Franco-Nevada’s portfolio continues to be rock-solid. And uncertainty associated to Cobre Panama has subsided after a quick scare. Lastly, we have seen a number of constructive developments throughout its portfolio and several other belongings are inching nearer to first manufacturing (Tocantinzinho, Seguela, Magino, Salares Norte, Greenstone, Posse) whereas different belongings are positioned to ship significant natural development (Macassa, Detour Lake, Tasiast, Cobre Panama). Though these developments enhance the funding thesis, I count on weaker Q1/Q2 outcomes as Franco-Nevada laps sturdy pricing for all commodities within the year-ago interval, suggesting buyers ought to see a possibility to enter the inventory at decrease costs in the event that they’re affected person.

All figures are in United States {Dollars} until in any other case famous.

This autumn & FY2022 Outcomes

Franco-Nevada launched its This autumn and FY2022 outcomes final week, reporting quarterly attributable gross sales of ~183,900 gold-equivalent ounces [GEOs], a 1% improve from the year-ago interval. Sturdy quarters from Marigold, Sudbury, Hemlo, and Tasiast (albeit very simple year-over-year comps) aided with the stable end to 2022, however essentially the most vital contribution was from its power portfolio which benefited from increased common realized costs on a year-over-year foundation. On a full-year foundation, Franco-Nevada delivered into the excessive finish of its FY2022 GEO steerage, reporting gross sales of ~730,000 GEOs, a marginal improve year-over-year and above its steerage mid-point of 710,000 GEOs. Nonetheless, its valuable metals portfolio wasn’t to thank, with decrease contribution from a number of belongings.

Digging into the valuable metals portfolio a little bit nearer, income from valuable metals dipped to 70.7% in This autumn 2022 (This autumn 2021: 76.1%), and we noticed decrease contributions from Antapaccay (decrease grades), Cobre Panama (cargo timing), Guadalupe-Palmarejo (much less manufacturing attributable to royalty floor), Karma (safety points that resulted in suspension since Q2 2022), Brucejack (suspension associated to work associated fatality), and Goldstrike. The impression to income and money circulate was exacerbated by decrease common realized gold and silver costs within the interval, which slid to $1,729/oz (This autumn 2021: $1,795/oz) and $21.20/oz (This autumn 2021: $23.32/oz), respectively. Whereas we can’t see a cloth enchancment in attributable GEO gross sales this yr from its valuable metals phase, a number of belongings are within the wings and slated for business manufacturing by year-end 2024, and are as follows:

• Seguela (Cote d’Ivoire)
• Greenstone (Ontario, Canada)
• Magino (Ontario, Canada)
• Salares Norte (Chile)
• Posse (Brazil)

Happily, though its valuable metals and iron ore segments noticed decrease income on a year-over-year foundation in FY2022 (impacted by decrease contributions and or decrease costs), its power phase picked up the slack in an enormous method. This was evidenced by income from its oil phase of $156.0 million (44% development year-over-year), and its pure gasoline/pure gasoline liquids phase of $177.6 million (75% development year-over-year). This was pushed by considerably increased costs for WTI ($94.23/barrel vs. $67.91/barrel) and Henry Hub ($6.51/mcf vs. $3.72/mcf) and elevated manufacturing from its SCOOP/STACK, Permian, and Weyburn royalty belongings. The end result was that annual income hit a file excessive of ~$1.32 billion regardless of a mediocre yr from its valuable metals phase, whereas working money circulate hit a brand new file of ~$1.0 billion.

Maybe essentially the most spectacular statistic when viewing the above chart of annual income and working money circulate is that Franco-Nevada has completed this 104% development in working money circulate regardless of lower than a 4% improve in its share rely in the identical interval. This highlights the great thing about the royalty/enterprise mannequin when it will get to this scale, with Franco-Nevada in a position to do all of its transactions with a mixture of money circulate and debt whereas many smaller names like Metalla (MTA) and Gold Royalty Company (GROY) that proceed to dilute shareholders so as to add new royalties. The truth is, Franco-Nevada put vital capital to work final yr and added the next amongst vital belongings:

• 2.0% NSR on the Magino Mission ($52.5 million)
• 0.50% NSR on Eskay Creek ($21.0 million) – complete NSR now 1.5%
• 0.46% NSR on Caserones ($37.4 million)
• 2.0% NSR on Pacific Clay claims at Citadel Mountain ($6.0 million) – complete NSR now 4.65%
• 2.0% NSR on Spences Bridge Gold Belt claims ($6.0 million)
• 12.5% gold stream, which declines to 7.5% after 300,000 ounces of gold delivered ($250 million)

To summarize, Franco-Nevada had a stable yr general with file income and working money circulate regardless of a weaker yr for its valuable metals phase as a result of decrease manufacturing at key belongings and decrease silver costs. From an enormous image standpoint, Franco-Nevada has augmented its long-term development profile with new royalty/streaming additions, and a few of these new additions may start contributing meaningfully by as early as Q3 of this yr (Magino, Seguela). Assuming its bets on Eskay Creek repay, this is also a really stable contributor long-term with this having the potential to be a ~400,000 GEO every year asset in its first few years and probably sustaining a 320,000 ounce every year manufacturing profile previous the primary 10 years given latest exploration success.

Lastly, whereas there was uncertainty round Cobre Panama which contributed 17% of Franco-Nevada’s annual income in FY2022 (with elevated contribution because it heads in the direction of a 100 million tonne every year throughput charge), this has since been resolved. As reported by First Quantum (OTCPK:FQVLF), a brand new Proposed Concession Contract is in place (20-year time period) as of March eighth, and processing operations have resumed following a quick suspension of operations on February twenty third. That is actually a really constructive growth for Franco-Nevada on condition that whereas it will nonetheless preserve a robust money circulate profile with Cobre Panama suspended, that is the corporate’s largest single contributor and shedding it in a prolonged dispute would put a extreme dent in annual money circulate and earnings per share. Let us take a look at the 2023 outlook:

2023 Outlook

Waiting for FY2023, Franco-Nevada has guided for annual GEO gross sales of 670,000 on the mid-point (FY2022: ~730,000 GEOs), with the excessive finish of steerage implying a 4% decline in annual GEO gross sales. There are three causes for this sharp decline which are unlucky. For starters, the delayed first gold pour at Salares Norte (the asset may produce as little as 20,000 ounces this yr) will impression 2023 attributable GEO gross sales. Second, Franco-Nevada has chosen to be conservative on Cobre-Panama in 2023 as a result of momentary restriction of focus shipments which may lead to decrease attributable GEO gross sales vs. GEO manufacturing for Franco-Nevada this yr. On the constructive facet, the ramp as much as 100 million tonnes every year is on observe for year-end (exit charge), pushing copper manufacturing on the asset to north of 400,000 tonnes every year.

Lastly, and maybe the toughest to foretell, Franco-Nevada has assumed decrease power costs this yr and far decrease palladium costs, impacting its GEO manufacturing from its non-gold/silver phase. The steerage assumes a median worth of $80.00/barrel for WTI oil, $3.00/mcf for Henry Hub pure gasoline, and $1,500/ozfor palladium, all effectively beneath FY2022 costs of $94.23/barrel, $6.51/mcf, and $2,107/oz, respectively. Relying on if costs are in a position to get better, these estimates may really find yourself not being conservative sufficient, with palladium futures presently sitting greater than 30% beneath steerage ranges at $1,415/oz.

Given the decrease contributions this yr from belongings like Antamina (decrease grades), Hemlo (much less manufacturing from royalty lined floor), and Candelaria plus what’s more likely to be decrease power costs year-over-year, Franco-Nevada is up towards robust comps and is more likely to see decrease money circulate per share and annual EPS in FY2023. Primarily based on present estimates, FY2023 annual EPS is anticipated to say no over 5% to $3.40 per share (FY2022: $3.64 per share) and whereas the latest energy within the gold worth may assist to buffer this decline, I do not see it making up for the shortfall in power costs. That is very true on the subject of Q1 and Q2 2023 when the corporate was already having fun with sturdy metals costs.

As proven above, common quarter-to-date metals costs of $22.60/oz, $1,869/oz, $76.70/barrel, and $2.90/mcf evaluate (silver, gold, oil, pure gasoline) evaluate unfavorably to Q1 2022 costs of $24.00/oz, $1,874/oz, $94.29/barrel, and $4.57/mcf, respectively. These comps do not get a lot simpler in Q2 2022, with realized costs of $22.64/oz, $1,872/oz, $108.41/barrel, and $7.49/mcf, respectively, and that ignores decrease commodity costs in smaller segments like palladium/iron ore. So, whereas Franco-Nevada had a stable This autumn/FY2022 report, it is now up towards robust comps and will have two weak studies on deck, probably resulting in some softness within the inventory.

It is essential to notice that this can be a 2023 concern and we must always see a rise in valuable metals manufacturing in 2024 with a number of new mines coming on-line (Tocantinzinho, Greenstone, Seguela, Salares Norte, Posse). That stated, the will increase in manufacturing from these belongings might be partially offset by the cap being hit at Concord’s (HMY) Mine Waste Options (312,500 ounce cap on manufacturing per the 2022 modification settlement, with ~265,000 ounces delivered up to now). This might be a reasonably heavy blow for Franco-Nevada on condition that it is having fun with its 25% gold stream which represents almost ~25,000 ounces every year with a really engaging price of simply ~$460/oz.

Longer-term, and regardless of the impression of the MWS cap and Candelaria (40% vs. 68% after 720,000 ounces of gold and 12.0 million ounces of silver delivered), Franco-Nevada expects to see annual GEO gross sales improve to 760,000 to 820,000 GEOs, pointing to ~12% development vs. FY2022 ranges on the prime finish of steerage. I’d argue that this determine is conservative on condition that I’d count on Franco-Nevada to proceed to deploy at the least $500 million every year into producing and growth stage royalties. Nonetheless, this development profile leaves rather a lot to be desired within the base when in comparison with names like Osisko Gold Royalties (OR) that might double attributable manufacturing from FY2022 ranges by 2030. Therefore, from a development and worth standpoint, I see Osisko Gold Royalties because the extra engaging buy-the-dip candidate of the 2 corporations.

Let us take a look at Franco-Nevada’s valuation and see whether or not the robust comps forward and weaker yr are priced into the inventory:

Valuation & Technical Image

Primarily based on ~192 million shares and a share worth of $145.00, Franco-Nevada trades at a market cap of ~$27.8 billion, giving it one of many richest valuations sector-wide, with some premium being justified given its high-margin enterprise with appreciable diversification (113 producing belongings). Nonetheless, as I’ve famous in previous articles, though this diversification and inflation-resistant enterprise mannequin is very engaging and the premier option to get publicity to valuable metals costs, valuation issues. The truth is, Joel Greenblatt goes so far as saying that “there isn’t a investing with out valuation” and I could not agree extra with this assertion, particularly when it pertains to names in a cyclical sector the place draw back volatility in commodity costs could make pinning down truthful worth tougher.

In Franco-Nevada’s case, we are able to see that the inventory has traditionally traded at ~25.8x money circulate (~28.4x for its 10-year common), a really wealthy a number of once we think about that the most effective gold miners have traditionally traded at multiples beneath 12.0x money circulate. And even when we are able to agree {that a} ~150% premium from a money circulate a number of standpoint relative to the top-3 gold producers is justified, Franco-Nevada stays costly relative to the place it is traded traditionally. The proof lies within the inventory buying and selling at ~28.8x ahead earnings estimates ($5.04), a slight premium to its 10-year common a number of on a trailing-twelve-month foundation. Maybe a money circulate a number of of 30.0 is a extra truthful a number of given the elevated range and optionality (113 producing/419 complete belongings vs. 107/339 in 2017). Nonetheless, even at this a number of, truthful worth for the inventory would are available in $151.20 per share.

I’ve in comparison with its portfolio to 2017 on condition that that is the midpoint of the 10-year common interval when assessing the place it has traditionally traded (2012-2022) from a money circulate a number of standpoint. Franco Nevada’s relative valuation is not any extra engaging from a P/NAV standpoint both, with it buying and selling at an enormous premium to its peer group at ~2.40x P/NAV and within the higher portion of its historic vary (1.20x P/NAV to three.20x P/NAV).

Though this truthful worth estimate factors to five% upside from present ranges or a 6% complete return when together with its dividend for arguably the most secure title sector-wide, I require a minimal 25% low cost to truthful worth to justify beginning new positions in large-cap cyclical shares, and ideally nearer to 30%. Even making use of the low finish of this required margin of security to Franco-Nevada’s truthful worth estimate, Franco-Nevada’s perfect purchase zone would are available in at $113.40 or decrease, that means it will want to say no a lot additional to turn into engaging from a valuation standpoint. Clearly, there isn’t any assure that the inventory pulls again by this magnitude, however with over 100 shares within the sector and over 7,000 shares buying and selling on the US Market, I’ve by no means discovered worth in chasing any inventory since there are all the time different alternatives on the market if one is affected person.

Lastly, if we have a look at the technical image, Franco-Nevada is sitting within the higher portion of its 3-year vary and simply shy of resistance at $147.30, with no main help till $113.00. This interprets to a reward/threat ratio from a technical standpoint of 0.07 to 1.0, with $2.30 in potential upside to resistance and $35.00 in potential draw back to help. On condition that neither the technical nor elementary setup highlights Franco-Nevada being in a low-risk purchase zone, I do not see any option to justify chasing the inventory right here above US$145.00.

Abstract

One could be hard-pressed to discover a safer option to get publicity to the valuable metals house than Franco-Nevada and whereas a number of up and comers like Osisko Gold Royalties have very spectacular portfolios concentrated in lower-risk jurisdictions, they lack the diversification and appreciable free money circulate era to deploy in the direction of new royalty/streaming belongings that Franco-Nevada provides to buyers. That stated, I want to purchase when a sector is hated which generally implies that constituents inside the sector are buying and selling at dirt-cheap valuations, and the latest nice instance of that was when gold was hanging out beneath $1,700/oz, and the Gold Miners Index (GDX) was making new lows with even seasoned and constant gold buyers puking up positions.

At this time, we do not have a remotely comparable setup, so I see persistence as the most effective plan of action. That stated, if FNV have been to say no beneath US$114.00, I’d strongly think about including the inventory again to my portfolio, on condition that it is arguably the most effective risk-adjusted option to get publicity to the sector, assuming one pays the best worth.