Why Franco-Nevada Corp Is a Moderate Buy
Gold price outlook
The wave of pessimism that currently reigns on the financial markets also touches gold, which has lost about 5.6% since Friday, March 6. The drop resulted from headwinds from fears about new coronavirus (Covid-19) epidemic disrupting economies.
As of Thursday, March 12, the precious metal trades at $1,570.70 per troy ounce on the London bullion market and at $1,592.35 per troy ounce on the Comex futures market. Year to date, this price still makes a 3.5-4% gain.
In my opinion, the price will rebound as soon as investors renew their focus on gold as a safe-haven asset against elevated volatility. Additionally, the enactment of further cuts in interest rates will trigger higher prices, as lower yields promote investments in gold and other gold-backed financial instruments.
Franco-Nevada Corporation
Now it is time for investors to take advantage of the future rally in the price of gold by purchasing shares of a publicly traded producer such as Franco-Nevada Corporation (NYSE:FNV), a Canadian gold royalty and stream company that offers a compelling entry point.
Following the 15% fall over the past five days, the share price ($95.65 as of March 12) retracted to late summer 2019 levels and is trading significantly below the 50- and 100-day simple moving average lines, though it is only slightly under the 200-day SMA line.
The share price is situated below the middle point of the 52-week range of $69.16 to $122.65.
As of March, Wall Street sell-side analysts recommend a moderate buy rating for shares of Franco-Nevada Corporation with a price target of $110.37, which represents a 15.4% upside from Thursday's closing price.
A well-diversified portfolio of mineral activities from commodity and geographic standpoints enables the shareholders of this precious metal operator to mitigate the investment risk as the activities are exposed to the dynamics of several markets around the world.
In 2019, total revenue was $844.1 million, up 29.2% year over year, 86.3% of which came from the sale of ounces of gold and gold equivalents (aka GEOs) and 13.7% of which came from the sale of oil, gas and natural gas liquids. The miner is also engaged in the businesses of silver , platinum and other mining assets.
Adjusted net profit of $344.1 million (or $1.82 per share) and adjusted Ebitda of $673.4 million (or $3.59 per share) achieved records thanks to higher precious metal prices and strong performance of activities, which saw 15.3% year over year rise in GEOs. The Cobre Panama large open-pit copper development mineral project was one of the best performing cash flow producing assets.
Geographically, Franco-Nevada Corporation generates 85% of its total revenue in the Americas and 15% internationally (Southeast Europe, Africa and Oceania). Thus, its business is marginally exposed to country risk.
Furthermore, as a gold-focused royalty and stream operator, the balance sheet is unburdened from the sustainment of mining costs, increasing the portion of revenue that drops straight to the bottom line. The cash flow statement benefits a lot from this business structure when the commodities price environment is favourable.
Based on the company's outlook for full-year 2020, Franco-Nevada expects to post a strong free cash flow growth on expected sale of 550,000 to 580,000 ounces of attributable gold equivalent. The energy business will likely contribute yielding total revenues in the range of $80 million to $95 million.
GuruFocus assigns the company a high financial strength rating of 8 out of 10. Currently, Franco-Nevada pays a quarterly dividend of 25 cents per common share, generating a 0.98% forward dividend yield as of March 12. The next payment will be made on March 26 to shareholders of record as of March 12.
The stock has a market capitalization of $18.17 billion.
Disclosure: I have no positions in any security mentioned.
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This article first appeared on GuruFocus.
