Franco-Nevada Corp. (FNV:TSX; FNV:NYSE, US$143.88) reported first-quarter earnings slightly better than expected, with Gold Equivalent Ounces (GEOs) up over 10% compared with a year ago. It has withdrawn its full year guidance due to the covid-related shutdown of some of its mines; about 30% of its production has been affected, primarily at Cobre Panama and Antamina. The timing of the restart in Panama is uncertain, though work is ongoing towards a restart. Another 11 assets had announced stoppages, though five of those have since resumed activities. Franco has also been hurt by the low oil price and consequent reduced production, and the company took some write-downs on its oil assets. G&A costs were less than 3% of revenues in first quarter.
Looking ahead with confidence
In two signs of confidence however, Franco paid off its remaining $80 million in debt; the company has always been debt averse. And it increased its quarterly dividend by a penny to 0.26, for its 13th consecutive annual dividend increase. Both these moves contrast with most mining companies that have drawn down on the credit facilities and cut their dividends.
The pipeline is "healthy," with Franco looking at a wide range of assets including opportunities in base metals and bulk materials. A particular opportunity is with base metals producers, hurt by lower prices, looking to monetize precious metals by-product. Various government restrictions make on-the-ground due diligence difficult, and in the near term, we would expect smaller transactions to close first.
Debt free again, with cash available
Franco now has $200 million in cash with $1 billion undrawn on its revolver, and it has increased to $300 million the amount authorized under its "ATM," the ability to issue small amounts of shares "at the market," more than sufficient for any near-term transactions.
As previously announced, Pierre Lassonde has now became chairman emeritus, David Harquail chairman, and Paul Brink CEO. We have discussed this previously.
The stock fell to under $90 in March, so it has had a very strong recovery, moving to all-time highs. Trading at 5.6x book, a price-to-cash flow of 40x, well above even Franco's historically rich valuations. Historical norms, Franco is not cheap. But it belongs in every gold investor's portfolio.
Debt cut as one third of production affected by shutdowns
Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE, US$43.38) reported in line with expectations, with operating cash flow up 50% on last year. It also reduced its debt, by $159 million, ending the quarter with $127 million in cash and $716 million outstanding on its revolver. It also has a $300 million ATM to raise equity. It did not update its full-year guidance, but 35% of its production has been affected by covid-shutdowns, including at Peñasquito.
The stock, at $24 in mid-March, has also experienced a strong recovery. Now trading at 3.7x book, and a price-to-cash flow of 35x, it also is not cheap.
Taking different approach, with growth ahead
Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX, US$136.43) reported earnings, up 24% on year ago, slightly above expectations. It generated cash flow of $100 million, ending the quarter with $94 million in cash and $105 million in debt. After quarter end, it drew down $200 million on its revolving credit facility "as a precautionary measure." In line with the other major royalty/streaming companies, about 30% of its production has been affected by mine shutdowns. Mt Milligan and Rainy River are returning to normal production levels, with only Peñasquito of its major assets still shut. Alone of the three, it has not withdrawn its 2020 guidance but had no update.
Construction work at Khoeomacau in Botswana, the company's next major asset, continues, though at a reduced scale because of local restrictions. Royal has made its third construction contribution, and production is still scheduled for mid-2021. Like the others, it did not update its full year guidance.
From under $70 in March, the stock has also had a very strong move, now trading at 4x book, and 28x cash flow. Though not cheap, it is comparatively better value.
All three large royalty and streamers reported strong earnings. All have strong management, solid balance sheets, available cash, diversity of revenue, and deep pipelines. But all three stocks are expensive. As mentioned above, as the gold price moves higher, more and more investors, particularly generalists, will turn to the royalty companies that have strong records of delivering. So while this may be a good time to trim if one wants to be a trader, a year or two from now, the stocks will, I believe, be higher. Franco is, in my mind, the best company, while Royal is the least overvalued.
Originally posted on May 10, 2020.
Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is "Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks."[NLINSERT]
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