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Franco Nevada (FNV.TO)

December 22, 2009 Company Profiles, Gold Stocks 1 Comment

Franco Nevada is another one of my favorites in the royalty company sector. It has top management, a solid balance sheet, and a rock solid business plan. Franco Nevada merged with Newmont (NEM), and then was reborn in a spin off two years ago. The stock has nearly doubled since the IPO and is on sound footing for further gains as this gold bull progresses. Royalties are a great business to be in, and Franco Nevada has royalties in both producing and exploration companies. 85% of Franco Nevada’s revenue is free cash flow.

The following is the Corporate Profile from Franco Nevada’s web page.

Franco Nevada (FNV.TO)

Corporate Profile

Our Business

Franco-Nevada is a gold-focused royalty company with additional interests in platinum group metals, oil & gas and other assets. We are the leading gold royalty company as measured by gold revenues, number of gold royalties and margins. The majority of our revenues are derived from a diversified portfolio of high-quality royalty properties located in the United States, Canada and Australia. The Company also holds a pipeline of assets which have the potential to generate future royalty revenues but which are currently under development or in the exploration phase. As at March 26, 2009, we estimate that the royalty portfolio consists of over 300 royalty interests diversified over a range of commodities and stages from exploration through to operating.

Our royalty portfolio generates high-margin free cash-flow with lower exposure to operating and capital costs than operating companies. The portfolio also provides us with direct leverage to commodity prices and the exploration potential of world-class ore deposits and mineral exploration trends where we have existing royalty interests. Management has proven successful in both acquiring and managing our portfolio of assets and we intend to utilize our free cash-flow to grow the portfolio and to pay dividends. We believe that a portfolio of royalty interests provides our shareholders with a higher risk adjusted return through the commodity cycle than direct operating interests.

Our History

The royalty portfolio was assembled starting in 1985 by Franco-Nevada Mining Corporation Limited (“Old-Franco”) and predecessor companies. In 2002, Old Franco was acquired by Newmont Mining Corporation (“Newmont”). A number of Old Franco employees remained with Newmont and managed the royalty portfolio as well as created additional royalties on the property portfolio of Newmont and Normandy Mining. In late 2007, a team including some Old Franco employees formed Franco-Nevada Corporation and on December 20, 2007, acquired certain of Newmont’s mineral royalties, oil and gas royalties and working interests, an equity interest in Falconbridge Dominicana, C. Por A. (“Falcondo”) and other properties and interests (collectively known as the “Royalty Portfolio”), completed an initial public offering (“IPO”), completed a bank debt facility and listed on the Toronto Stock Exchange. On December 31, 2007, we applied a portion of the proceeds from the exercise of the underwriters’ over-allotment option to completely repay the Royalty Portfolio acquisition debt. In March 2008, we raised additional equity in order to grow the royalty portfolio and we continue to actively pursue and acquire new royalty assets for the portfolio.

Our Company and How We Operate

Franco-Nevada is a Canadian company headquartered in Toronto with additional offices in Denver, Reno and Perth, Australia, all of which are used to manage our royalty portfolio and pursue new investment opportunities. Franco-Nevada shares trade on the Toronto Stock Exchange under the symbol “FNV” and are part of the S&P/TSX Composite Index.

Warrants trade under the symbol “FNV.WT”. Our shareholders consist of mostly large generalist institutional funds in Canada, the United States, Europe and Australia. Management and directors are significant shareholders, and are dedicated to the sustainable maximization of the Company’s share price, holding 6.0% of the common shares, or 8.2% on a fully diluted basis, as at March 26, 2009.

We currently operate with a small organization of up to twenty full-time employees and contractors. Our management team is made up of experienced and proven professionals some of whom have been continuously associated with our royalty and investment portfolio for over 20 years. We operate with a flat management structure similar to that of a small merchant bank. As we do not have any material operational responsibilities, our focus is on new investments and our flat management structure allows many of our team members to take multidisciplinary roles for corporate development opportunities. Our board of directors includes directors associated with Old Franco and the board has significant experience in mining, oil and gas and corporate finance.

Our Vision and Business Model

Our vision is to be the leading resource royalty company dedicated to the maximization of shareholder value. We believe we can achieve this through sound management of our current portfolio and through accretive transactions using a long-term perspective. Our business model is to grow the royalty portfolio with acquisitions of high quality, high margin assets limiting our downside exposure but retaining the full upside potential of higher commodity prices and/or new exploration discoveries.

Our growth strategy is predicated on increasing net asset value (“NAV”) on a per share basis, as we strongly believe that sustainable growth in per share NAV will be reflected in growth in our share price. Accordingly, NAV accretion per share is one of our key acquisition metrics. We are firm believers that maintaining a strong precious metals focus will allow us to preserve our premium valuation however we will remain vigilant for opportunities in all resources. Maintaining and managing a diversified, high-margin portfolio with low overheads provides the strong free cash-flow required to fuel organic growth. We believe in maintaining a strong balance sheet to allow us to be opportunistic in any environment. We do not hedge any of our commodity exposures.

Royalties can either be acquired, the so called “legacy” royalties usually come from land owners, or created, from companies that want to raise the capital to start mining the property. Franco Nevada buys both, and two recent major gold royalty purchases provide an example for each.

In the fourth quarter of 2008 Franco Nevada acquired a legacy royalty of 7.29% on a portion of Barrick’s Gold Quarry mine in Nevada. They followed that with a first quarter purchase of 50% of the gold revenue stream from Coeur d’ Alene’s new Palmarejo silver-gold mine in Mexico. Before these two transactions, approximately 50% of Franco Nevada’s revenue was from gold. These two transactions have boosted the precious metals share of its revenue to 80%. The remaining 20% is comprised of oil, gas and base metals revenues.

Franco Nevada has stated that they want to keep their precious metals revenue at a minimum of 75% or so going forward. Franco Nevada’s gold royalty revenues make it the leading gold royalty company, with a market cap over C$3 billion. With over 300 royalties in all stages of development and 80% of its revenue is from mines in the U.S., Canada and Australia, Franco Nevada has limited political risk to factor in to its operations.

Franco Nevada’s balance sheet is strong and offers them the opportunity to make more acquisitions as the opportunities arise because they have over $700 million of available capital, and an un-tapped credit facility of $150 million.

Franco Nevada Bucks The Trend

As I write this, gold is down and Franco Nevada is up .63 at $26.88.Â It is encouraging to see buying coming in at these levels, which may mean that we are approaching the bottom of the current correction in the price of gold. Only time will tell if this is the end of the correction, but make no mistake, this is the time that you should be adding to your portfolio. Volume is light because of the holidays and the stocks can have very volatile price swings. If you can catch a drop in Franco Nevada, you will be substantially rewarded when the gold bull resumes after this short term correction.

Till next time, good luck and good trading!