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Gold has staged quite a comeback in 2014, rising 10.8% year-to-date. But a select few gold miners have done even better.
Franco-Nevada (NYSE:FNV) has been a particularly strong performer, rising 13% so far this year. A recent pull-back in the stock has opened up the door for investors to buy a great stock that I expect to reverse course and head higher in the coming weeks.
The pull-back was initiated by a Q4 loss due to asset impairments. The impairments came from two nickel producing mines that have been placed on hold until the economics make sense to mine them again. There is no cash impact from the impairments, and the assets still have value.
With management guiding for as much as a 10% increase in gold production this year and a 35% increase within the next five years, I suggest investors take the above adjustment with a grain of salt and focus on the meat of the investment here. Franco-Nevada is a strong and stable gold streaming company with a diversified asset base of over 350 projects.
The company is one of the few dividend-paying gold companies out there that I like. The royalty and streaming business carries considerably less risk than pure gold mining. I believe that makes dividend payments from a company like Franco-Nevada more reliable, and raises the likelihood of dividend increases over time.
And in fact, Franco-Nevada just announced its latest dividend hike. The 11% increase in the company’s quarterly dividend will bring annual payments up to $0.80, meaning the stock yields 1.7% at today’s price of $46.00. This increase also marks the third dividend hike since 2012.
Franco-Nevada avoids various risks associated with developing and operating gold mines. Yet investors still get exposure to the upside of commodity price, reserve and production increases.
In exchange for an initial investment, which helps a miner fund exploration or mine development, Franco-Nevada receives the rights to a portion of future gold production. This royalty is usually around 2% of the extracted gold.
Royalty companies are not subject to cash calls to fund exploration, development or mine closures. And they do not provide operational or mine development management, so a large and diversified portfolio can be assembled without the need for significant corporate overhead. As I stated earlier, Franco-Nevada owns a royalty interest in more than 300 different projects.
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 believe the current environment offers up several new opportunities.
Hundreds of junior gold miners are sitting on too few dollars to stay in business. With their share prices obliterated, they can’t even tap the equity markets to raise cash. Franco-Nevada can sweep in and buy up assets at fire-sale prices.
A recent royalty purchase was a 2.5% royalty on Kirkland Lake Gold’s (KGI.TO) properties in exchange for $50 million. Kirkland Gold owns some of the best gold properties in Ontario, but the company’s share price has been slashed by more than 50% over the past two years. With little cash and a depressed equity value, one of Kirkland’s few options was to bring in a partner like Franco-Nevada.
I recommended Franco-Nevada to subscribers of my Top Stock Insights advisory service in July. We’re up around 18% since then and I still rate Franco-Nevada as a “buy.” Franco is one of the few gold companies out that offers investors income and growth in one relatively low-risk investment.
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