Last Tuesday I wrote about the company, saying its gold royalty and streaming business model “… is a winner, especially in this environment, since 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.”
Franco-Nevada’s Q3 earnings showed once again that the company’s business model works through thick and thin. The company earned 24 cents a share, four cents better than expected. While this was down from 36 cents a share in the year-earlier quarter, it was still pretty darn good considering the rugged environment for gold mining right now.
As expected, the drop in gold’s price was the main culprit for the decline in earnings, not a drop in production. Franco-Nevada’s share of gold ounces mined was 57,452 ounces, down just a meager 1.5% from a year earlier. Revenues came in at $98.8 million, just 6% below Q3 2012.
Because of its streaming and royalty business model, revenues for Franco-Nevada are amazingly consistent. Even though gold has fallen by 37% since its 2011 high, FNV’s quarterly revenues are still tracking within a 20% range of their Q4 2011 high.
An interesting side-story overlooked by many investors is FNV’s very nice portfolio of oil and gas assets. In Q3, these assets generated $22.3 million in revenues, a huge jump from just $8.4 million a year ago.
At 22.6% of total revenues this oil and gas business isn’t chump change. And it gives FNV a nice bit of diversification that’s rare in the gold-mining industry.
I expect we’ll be seeing FNV buy up more royalties at attractive prices in Q4 and into Q1 of 2014. As I wrote last week, “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.”
Just recently, FNV acquired a 2.5% royalty from Kirkland Lake Gold (KGI.TO) for $50 million. And early last week it acquired 20 royalties from Barrick Gold (NYSE:ABX) for $20.9 million. With zero debt and over $891 million in cash, FNV is in one of a select few gold companies sitting in a position of strength.
I also like that Franco-Nevada isn’t exposed to a lot of risky jurisdictions. Most of its assets, 83% to be precise, are in North America and Australia – good mining geographies with stable governments.
And the company is extremely shareholder-friendly. It pays a monthly dividend of 6 cents a share, which equates to an annual yield of 1.6% at Friday’s closing price of $44.12. And just this quarter management announced that it has adopted a Dividend Reinvestment Plan (DRIP) beginning with the October 2013 dividend.
Even better, investors who choose to participate in the DRIP will be issued shares thorough FNV’s treasury at a 3% discount to the average market price. That savings should make the DRIP a no-brainer for anybody invested in FNV for the long haul.
I can’t think of a better gold investment in this environment than Franco-Nevada stock. It has a low-risk business model, yet still has upside potential if the price of gold rises. And it’s in a position to add assets to its already well diversified portfolio at extremely attractive prices. The income potential and DRIP discount is the icing on the cake as far as I’m concerned.