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Franco-Nevada Has a Golden Opportunity

Dan Caplinger, The Motley Fool

After a 15-year bull market that started near the turn of the millennium, the gold market has largely been treading water over the past several years. That has led Franco-Nevada (NYSE: FNV) to turn some of its attention away from gold- and silver-streaming deals and instead look for promising financing opportunities in the oil and gas exploration and production market. Even with the strategic shift, Franco-Nevada still gets the vast majority of its revenue and profit from precious metals, and that's unlikely to change in the near future.

Franco-Nevada expects to release its third-quarter financial results on Monday, Nov. 6, and analysts following the streaming company expect declines in both revenue and net income. Yet with recent strength in precious metals, the future could look brighter for the natural resources financing specialist. Let's take an early look to see what Franco-Nevada investors should be watching for in its coming report.

Stats on Franco-Nevada

Analyst EPS Estimate

0.25

Change From Year-Ago EPS

(17%)

Revenue Estimate

$165.5 million

Change From Year-Ago Revenue

(3.8%)

Earnings Beats in Past 4 Quarters

4

Data source: Yahoo! Finance.

What's ahead for Franco-Nevada's earnings?

Investors have had mixed views in recent months about Franco-Nevada's earnings prospects. They've boosted their estimates for the current year, but they've made small reductions in their expectations for earnings in 2018. The stock has continued to do well, rising 9% since mid-July.

Franco-Nevada's second-quarter results were generally positive. Sales were up 8%, helping to send adjusted pre-tax operating earnings higher by about 4%. Production climbed significantly, with especially large gains in gold and platinum group metals. Revenue from oil and gas assets was up a quarter compared to levels from 12 months previously, and recent deals to boost Franco-Nevada's exposure to key energy-production areas in Oklahoma and Texas point to even greater prospects for that segment of the company's business.

One way that Franco-Nevada is still boosting its exposure to precious metals is by fulfilling existing funding commitments. For instance, it increased its stake in the Cobre Panama project, one of the largest repositories of lucrative metals in the world, with key resources like copper, gold, silver, and molybdenum. Franco-Nevada is providing more financing for the project in exchange for an even bigger streaming interest. With further capital calls likely in the future, Franco-Nevada has a strong relationship with its partners in Cobre Panama.

Six gold bars in a pyramid stack.

Going beyond gold?

One massive opportunity that many investors have neglected could be playing out right now. In the platinum group metals complex, the price of palladium has gone through the roof, soaring from about $600 per ounce a year ago to nearly $1,000 per ounce today. Franco-Nevada's exposure to platinum and palladium comes largely from its streaming agreement with Stillwater, which was purchased by Sibanye Gold (NYSE: SBGL) earlier this year. Even with palladium prices at high levels, Sibanye has seen pressure because of the way that it had to finance its acquisition. If Sibanye's stock remains at a discounted price, the mining company could turn to Franco-Nevada for further financing in connection with Stillwater-related assets. That in turn could give Franco-Nevada even more favorable exposure to platinum group metals prices.

Franco-Nevada's strategy thus far has been popular not just among growth investors but also with those who like to get income from their investments. The stock has made dividend increases for 10 straight years, a feat that looks even better when you consider that many precious metals stocks don't bother making dividend distributions at all.

When Franco-Nevada releases its earnings report, investors will want to focus on whether the company can continue to take advantage of all its opportunities for growth. With oil and gas rebounding and with the recent rise in palladium prices, Franco-Nevada has to be smart about choosing the best investments -- and then make its money work as hard as possible for shareholders.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.