Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) fell further after the Panamanian government ordered the closure of the Cobre Panama mine following a Supreme Court ruling that the revised contract on the mine was unconstitutional. Franco's stream on the mine was its largest asset, representing about 15% of the company's NAV and around 22% of its revenues. Mine operator First Quantum had already said it was suspending operations in the face of ongoing protests and a port blockade.
The Court gave no near reasons for why the contract was deemed unconstitutional and, therefore, no clear path toward fixing it. First Quantum has initiated both local and now international arbitration. Based on other such arbitrations, analysts indicate that the international arbitration should go in the company's favor, though it may be years before a final decision; Franco would share in any settlement on a pro-rata basis. It is worth noting that the company has already received back in revenue some 47% of the investment it made.
We May Have To Wait for Resolution
Given the Panamanian government is a lame duck, with elections scheduled for May, no new negotiations are likely until then. There are signs that the new government may be more market-friendly, and given the damage to the local economy, the closure of the mine — one of the largest tax generators and employers in the country — the mine will be a major issue in the election campaign.
A new government may allow the mine to restart and renegotiate the contract in an amenable manner. Whether that would lead to renewed protests is unknown, but perhaps the new government would be willing to provide the necessary security for the mine and its staff. Franco's stock has more than wiped out the entire value of the stream in the last month since the latest episode began, even as peers have seen strong advances.
The company's rock-solid balance sheet, with $1.3 billion in cash and no debt — indicate that the company can and will survive the blow, while the rest of its portfolio is extremely broadly diversified. The company has 115 producing assets, the largest of which, after Cobre Panama, accounts for 12% of total revenues, as well as over 300 non-producing assets, some at the advanced development stage.
Cobre Worth More Than Zero to Franco
So, in any scenario, it seems that the stock decline is overdone. Why, then, has the stock been so weak, and might it continue? I suspect that this episode has tarnished Franco's invincible reputation somewhat, particularly among generalist investors who form the bulk of the company's share registry.
Franco was seen as a high-quality alternative to bullion, and this episode may make some generalist investors give up on gold stocks (for the time being). So here would be some follow-through, particularly in the midst of tax-loss selling season, towards the end of the year. A generalist fund manager probably does not want to have to defend Franco to his board, so out it goes.
I can see no other reason for the extreme weakness — down 22% in one month while other gold stocks are up (peer Wheaton by 14%). Franco, for the first time, now has a smaller market cap and is less expensive on valuation metrics than Wheaton. Franco has a market cap of $20.6 billion vs. $21.8 billion and is trading at a p/e of 31 times, a price-to-book of 3.1x, and a price-to-free cash flow of 48.5x compared with Wheaton at 44x, 3.2x and 51 times respectively. It may take some time to burnish Franco's reputation again.
But for investors who can look beyond next week, Franco is a Strong Buy.
Record Financials for Orogen
Orogen Royalties Inc. (OGN:TSX.V) reported another quarter of record revenues, primarily from royalty revenue from the First Majestic's Ermitaño mine, which saw increased production, strong gold grades, and improved recoveries. Its prospect generation business remains profitable with option payments and other fees. Royalty revenue of $1.6 million in the quarter is up 41% from the previous quarter.
G&A expenses remained fairly constant, up 7% on a year ago but down 10% on the prior quarter, for a net income of $675,989, up over five-fold from a year ago. The company ended the quarter with working capital of $17 million. The balance sheet strength and ongoing revenue put Orogen in a position to make acquisitions, while AngloGold advances the Silicon project in Nevada over which Orogen has a royalty.
For a junior royalty generator, Orogen is in an enviable position and is a Buy.
Farewell Nova Royalty
Nova Royalty Corp. (NOVR:TSX.V) has been delisted this evening following the completion of its acquisition by Metalla Royalties.
Shareholders will receive 0.36 of a Metalla (Canada) share in the coming days. We will add Metalla to our "Current Positions" table and plan on a comprehensive review of the combined company shortly.
TOP BUYS this week in addition to the above include Hutchison Port Holdings Trust (HPHT:Singapore), Altius Minerals Corp. (ALS:TSX.V), and Lara Exploration Ltd. (LRA:TSX.V).
We are holding off buying most gold stocks now, given the recent runup, awaiting a possible pullback.
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- As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of [Franco-Nevada Corp., Orogen Royalties Inc., and Altius Minerals Corp].
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