On Dec 18, we issued an updated research report on Franco-Nevada Corporation FNV. The company appears to be on a promising long-term trajectory given its healthy portfolio of streaming and royalty agreements.
Momentum in Oil & Gas Portfolio to Aid 2018 Results
Performance from Oil & Gas remains robust with revenues doubling to $68 million in the first three quarters of 2018 from $33 million in the prior-year period. This can attributed to stronger oil prices and increased production from the newly added U.S. assets. Drill activity is higher and drilling productivity is better than expected. Additionally, the company witnessed a very strong quarter from Weyburn, which generated $10.6 million in revenues. Backed by better-than-expected contribution from its previously acquired U.S. assets and stronger oil prices, Franco-Nevada now anticipates generating $75-$85 million in revenues from oil & gas for 2018, higher than the previous expectation of revenues of $65-$75 million.
Strategic Relationship with Continental Resources: A Key Catalyst
In October 2018, Franco-Nevada contributed $214.8 million to close its previously announced transaction with Continental Resources, Inc. to acquire Oil & Gas mineral rights in the SCOOP and STACK plays of Oklahoma — two of the most economic and attractive plays in North America. It has also committed, subject to satisfaction of agreed upon development thresholds, to spend up to $300 million over the next three years to acquire additional mineral rights through a newly-formed company. Acquisition of mineral rights is ongoing and Franco-Nevada now expects to fund additional capital contributions of between $35 million and $55 million in 2018 as part of its $300 million commitment.
This represents a new business development opportunity for Franco-Nevada. It gets an acquisition vehicle, which provides the ability to acquire assets at the grassroots level or directly from individual owners. This is a segment of the market previously inaccessible to Franco-Nevada due to a lack of staff or resources to carry out these smaller-scale acquisitions. More importantly, Franco-Nevada benefits from the operator's drill plans, along with their knowledge of local land title and geology.
Poised Well for the Long Term
Franco-Nevada strives to generate 80% of revenues from precious metals over long-term horizon which includes gold, silver and PGM. With around 85% of revenues earned from precious metals year to date, the company has the option to consider diversification opportunities outside the precious metals’ space and increase exposure to other commodities while maintaining its long-term target.
Further, Franco-Nevada appears to be on a promising long-term trajectory thanks to a healthy portfolio of streaming and royalty agreements put in place years ago. With more mines coming online in the next several years, it will benefit from higher levels of precious metals sales and higher prices. The company maintains solid growth outlook till 2022, forecasting production in at 565,000-595,000 GEOs. The Cobre Panama project is expected to be fully ramped-up by 2022 while the first phase expansion of Tasiast is planned for later in 2018 and the second phase in 2020. Moreover, the company plans expansion or start-up of a number of smaller mines over 2018 and 2019, and 50% expansion of Stillwater by 2021. Furthermore, Franco-Nevada’s balance sheet remains debt free.
Shares of the company have lost 5% in the past year, compared with the industry’s decline of 8%.
Franco-Nevada currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Some other top-ranked stocks in the Basic Materials sector include Israel Chemicals Ltd. ICL, The Mosaic Company MOS and Cameco Corporation CCJ.
Israel Chemicals has an expected earnings growth rate of 19.4% for the current year and a Zacks Rank #2. The company’s shares have rallied 36% over the past year.
Mosaic has an expected earnings growth rate of 75.2% for the current year and a Zacks Rank #2. The company’s shares have rallied 24% in the past year.
Cameco has an expected earnings growth rate of 66.7% for the current year and a Zacks Rank #2. Its shares have gained 11.4% in a year’s time.
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