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Gold’s comeback may have stalled out with just a 7% rise year-to-date, but a few gold miners have continued to rally heading into the middle of the year.
One of the better performers has been Franco-Nevada (NYSE:FNV), which is up 21% year-to-date. Based on its strong financial performance I expect FNV will end the year even higher, meaning gold investors may want to consider investing in this specialty gold company.
The year hasn’t been all good news for FNV stock though. A March pull-back was initiated by a Q4 loss resulting from asset impairments. These charges were the result of two nickel producing mines that have been placed on hold until the economics make sense to mine them again.
But management has guided for up to a10% increase in gold production in 2014 and a 35% increase by the end of 2019. With a diversified asset base of over 350 projects this gold steaming company is built for the long-haul. The company avoids many risks associated with developing and operating gold mines. Yet investors still get exposure to the upside of commodity price, reserve and production increases.
The business model works like this: In exchange for an initial investment, which helps a miner fund exploration or mine development, FNV gains the rights to a portion of future gold production – a royalty that is usually around 2% of the extracted gold.
Royalty companies such as FNV don’t need to fund exploration, or pay for mine development or closures. The hard work is deciding which projects to buy into, negotiating the terms and figuring out how much to pay. Franco-Nevada has a proven history of doing this well, and I expect that track record will continue. The company’s Q1 2014 results certainly suggest that will be the case.
FNV just increased its dividend for the third time since 2012, and now pays out $0.20 per quarter. That payout means the stock yields 1.7%.
In the quarter gold production was up by 11.8% to 54,571 gold equivalent ounces, in part due to recent acquisitions. All in, gold revenue totaled $70 million in the quarter. Additionally, FNV holds significant oil and gas assets, which generated $18.7 million in revenues in the quarter. These energy assets represent a nice bit of diversification – gold revenues make up 79% of revenue while oil and gas make up 21%.
Franco-Nevada is one of the few dividend-paying gold companies that I like. The royalty and streaming business carries considerably less risk than pure gold mining. That makes dividend payments more reliable, and raises the likelihood of dividend increases over time.
The company has been in a strong position to buy royalty interests given the beaten up share prices of many gold mining stocks. In the last quarter, FNV closed a $135 million deal with Teranga Gold (TGZ.TO) and a $35 million deal with Klondex Mines (KDX.TO).
And just after the quarter closed it acquired a 2% royalty on Yamana Gold’s (NYSE:AUY) Cerro Moro project in Argentina for $19.6 million. And in 2013 FNV acquired a 2.5% royalty on Kirkland Lake Gold’s (KGI.TO) properties in exchange for $50 million.
These acquisitions will help FNV maintain a diversified asset base, which should lead to further gold production increases, cash flow, and dividend payments to shareholders. While no gold company is completely insulated from volatility in the precious metals markets, FNV stock comes about as close as you’ll get to a low-risk gold mining investment.
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