Franco-Nevada: A Setback Called Cobre Panama
Streaming and royalty companies provide a viable gold alternative while mitigating many of the risks associated with mining. One distinguishing feature of Franco-Nevada Corp. (NYSE:FNV) is that it expanded its portfolio to include energy (oil, natural gas and natural gas liquids in the United States).
I have been an Franco-Nevada shareholder for many years, and I consider the company one of the safest around, even after the recent Cobre Panama setback
However, this unfortunate experience in Panama has demonstrated the company is not completely immune to the risks associated with mining. In fact, there is a strong link between the company and the miners associated with it that cannot be overlooked.
The company's asset diversification is the ultimate protection. However, Franco-Nevada must control the capital expenditure attributed to one single project and avoid overspending on assets, presenting contentious issues in a risky jurisdiction.
Unfortunately, Cobre Panama was a costly mistake, and the company is paying dearly, as are its shareholders, who saw the stock plummet in a matter of weeks.
Third-quarter results summary
The Toronto-based miner released third-quarter results on Nov. 8 that exceeded analysts' expectations. It posted adjusted earnings of 91 cents per share, or net income of $175.1 million. Franco-Nevada also declared a quarterly dividend of 34 cents per share.
Revenue was$309.5 million for the quarter, up 1.7% from the prior-year period but down 6.2% sequentially.
The company's royalties and streams focus primarily on gold, representing approximately 64.5% of the total revenue, as shown in the chart for the quarter.
Also, this quarter, the production of gold equivalent ounces attributed to gold was 103,641 GEOs. The company said in the press release:
"Precious metal revenue accounted for 77.8% of our revenue (64.5% gold, 10.2% silver, and 3.1% PGM). U.S. revenue was sourced at 88.0% from the Americas (28.7% from South America, 28.4% from Central America and Mexico, 15.9% from the U.S., and 15.0% from Canada)."
Franco Nevada presents an excellent debt profile, with a new record in total cash of $1.29 billion and no debt. Liquidity is now $2.3 billion.
Finally, the company's cash flow from operations was $236 million, while capital expenditures were $165.4 million, resulting in a $70.6 million positive free cash flow, down from $229.2 million a year ago.
The recent closure of Panama's Cobre Panama Copper Mine is a major setback
On Nov. 29, we learned the Supreme Court of Panama ruled that Law 406, approved on Oct. 20, authorizing the mining concession for 20 years between Panama and Sociedad Minera Panama, was unconstitutional. As a result, the mine was forced to close. It was a huge setback and had a huge economic impact for the country as well. A press release noted:
"According to government figures, its proceeds accounted for 3.5% of Panama's GDP in 2021. The mine also employed 8,000 people directly and created indirect employment for tens of thousands more."
Cobre Panama generated $223 million in revenue for Franco-Nevada in 2022, making it one of its four primary assets. The two-open-pit mine produced 112,734 metric tons of copper in the third quarter, accounting for about 40% of First Quantum's (TSX:FM), a partner of Franco-Nevada's, revenue in 2022.
The chart below shows how quickly First Quantum and Franco Nevada dropped due to the news. The first blow came when protests and blockades disrupted ore delivery, and the second came when the Supreme Court ruled the concession was unconstitutional.
The copper mine is expected to last more than 30 years, with the streamer investing $1.36 billion in its construction, as shown in the company's recent presentation:
Following the closure of the Cobre Panama copper mine, Franco-Nevada was forced to lower its 2023 guidance.
Gold equivalent production in the third quarter of 2023
The total gold equivalent production was 160,848 GEOs in the third quarter, up 8.8% year over year and down 4.5% sequentially.This amount includes the energy segment, which has been converted into GEOs. However, production from gold, silver and platinum group metals was 125,337 ounces.
The company has benefited this quarter from rising gold prices and increased GEOs from its precious metal assets. However, the energy sector was weaker year on year due to lower gas and oil prices than the previous year's highs.
Newly adjusted 2023 guidance
On Nov. 20, Franco-Nevada adjusted its 2023 guidance to reflect the cessation of Cobre Panama operations. The number of precious metal GEOs dropped to 480,000 to 500,000 (excluding energy and others) from a previous range of 490,000 to 530,000, and the total production dropped to 620,000 to 640,000 GEOs from 640,000 to 700,000 GEOs previously.
Technical analysis
Note: The chart is adjusted for the dividend.
Franco-Nevada forms a descending channel pattern with resistance at $112.5 and support at $106.25. At 31, the relative strength index is blinking a buy signal.
The falling or descending channel patterns are bearish in the short term, but often form within longer-term uptrends as the pattern continues. A breakout often follows the descending channel pattern.
One possible strategy is to hold a medium to long-term position in Franco-Nevada and trade last in, first out with 40% to 55% of your holdings while you wait for a higher final price target.
Selling gradually between $111 and $115, with higher resistance at $122.5, seems reasonable. If support cannot hold, adding between $108.50 and $105.50 with lower support, which might be found at $103, would be advantageous.
Warning: For the TA chart to remain current, it must be updated often. The above chart may be valid for up to one or two weeks. Keep in mind that the TA chart is simply a tool to assist you in choosing the best course of action. The future is promised to no man.
This article first appeared on GuruFocus.
