CA - Franco-Nevada: Net Cash Keeps Growing

2023-03-20 11:50:59 ET

Summary

• During the fourth quarter of 2022, Franco-Nevada Corporation generated $320.4 million, down from $327.7 million in the same quarter a year ago and up 5.3% sequentially.
• Franco-Nevada stated that it sold 129,642 gold equivalent ounces in 4Q22 (not counting the Energy segment), significantly down from 138,799 GEOs in the same quarter a year ago.
• I suggest buying Franco-Nevada Corporation between $138.15 and $132, with potential lower support at $128.

Introduction

The Toronto-based Franco-Nevada Corporation ( FNV ) released its fourth quarter and full-year 2022 results on March 15, 2023.

Note: I have been covering FNV quarterly on Seeking Alpha since March 2017. This article is an update of my preceding article , published on November 8, 2022.

Franco-Nevada owns 419 assets worldwide (an increase of 6 since 3Q22):

Portfolio Additions (from the press release):

• Acquisition of Gold Royalties – Australia After year-end, on February 22, 2023, we acquired a portfolio of five primarily gold royalties from Trident Royalties Plc, which includes a 1.5% NSR on Ramelius Resources’ Rebecca gold project located in Western Australia, for total consideration of $15.6 million.
• Acquisition of Additional Royalty on Eskay Creek On December 30, 2022, we acquired an additional 0.5% NSR on Skeena’s Eskay Creek gold-silver project for total consideration of $21.0 million (C$28.5 million). We now hold a 1.5% NSR over Eskay Creek, covering most of the project’s land package, including the known Mineral Resource.
• Financing Package with Argonaut Gold on the Magino Gold Project As previously announced, on October 27, 2022, we acquired a 2% NSR on Argonaut Gold Inc.’s (“Argonaut”) construction-stage Magino gold project for a purchase price of $52.5 million. We also completed a private placement with Argonaut of $10.0 million (C$13.6 million).

1 - 4Q22 and Full-year 2022 Quick Snapshot

Franco-Nevada came out with adjusted quarterly earnings of $0.86 per share, or $164.9 million. The company generated $320.4 million in the fourth quarter, down 2.2% from last year's same quarter, in line with expectations.

Metals production in GEOs was lower than a year ago, with 183,886 GEOs sold compared with 182.543 GEOs last year. One positive is that the Cobre Panama concession contract has been renegotiated.

CEO Paul Brink said in the conference call:

The renegotiation of the Cobre Panama concession contract over the last few months and the brief production halt caused some sleepless nights. It was a relief I am sure for everyone last week, when First Quantum and the government reached agreement on a refreshed contract. We hope it moves swiftly through public consultation and parliamentary approval.

The slight downside in revenue was due to lower Precious Metal and Iron Ore asset prices, partly compensated by the company’s Energy assets boosted by higher realized oil and gas prices. This quarter's energy revenues were high, reaching $82.7 million.

Below are the revenues per segment in the fourth quarter of 2021:

The company is highly dependent on the gold price, representing 55.6% of the total revenues in 4Q22. The energy sector is growing significantly and now represents 25.8%. However, the Energy revenues for 1Q23 will be substantially lower and may hurt the bottom line even if higher gold and silver prices may offset some of the loss.

2 - Stock Performance

As I have indicated for years, Franco-Nevada is one of my most significant long-term investments in the streaming sector, followed closely by Wheaton Precious Metals ( WPM ). I also own a smaller long-term position in Sandstorm Gold Ltd. (SAND).

The company's fundamentals are pristine, with no debt and a cash position of $1,196.5 million, up strongly quarter over quarter.

FNV has followed its competitor Wheaton Precious Metals, closely. FNV is down 12% on a one-year basis, whereas WPM is down 8%. Meanwhile, Osisko Gold Royalties Ltd (OR) has outperformed the group and is up 5% on a one-year basis.

3 - Investment Thesis

Franco-Nevada Corporation presents a low-risk profile, with 90% of assets located in the Americas, which is excellent support from a long-term investment perspective. It is my leading investment in the streamer group.

FNV has total cash of $1,196.5 million as of December 31, 2022, and above all, no debt.

However, Franco-Nevada is highly dependent on commodity prices and fluctuates widely. Thus, It is critical to stay on the lookout continuously.

Gold is the primary metal for FNV, which is "on fire" due to lower inflationary pressures and a bank crisis that could destabilize the financial market.

On the heels of Silicon Valley Bank’s collapse earlier this month, 186 more banks are at risk of failure even if only half of their depositors decide to withdraw their funds, a new study has found.

Gold bullion closed at $1,990 per ounce on Friday last week and may strengthen even further while the contagion from the first three American banks spreads to Credit Suisse and others. This situation is considered an unattended consequence of the FED's hawkish move, which will probably increase by 25 points this week.

However, the gold euphoria can quickly fall into despair. We have witnessed such a turn of fortune many times before.

Thus, I recommend short-term trading LIFO 50% of your position and keeping the remainder for a much higher target. Unfortunately, FNV is not paying a significant dividend to consider the stock friendly.

This dual strategy has been my dominant strategy recommended in my marketplace, "The Gold and Oil Corner," It is the best way to maximize your gain over a long period.

Franco-Nevada - A Solid Balance Sheet and Production in 4Q22, The Raw Numbers

Data Source: Company document .

* Estimated by Fun Trading.

Note: More historical data starting in 2015 are available for subscribers only.

Analysis: Revenues, Earnings Details, Free Cash Flow, Debt, And Production Details

1 - Revenues were $320.40 million in 4Q22

Adjusted EBITDA in 4Q22 decreased 2.7% from 4Q21 to $262.4 million.

Oil and gas assets added $82.7 million to Franco-Nevada's overall quarter results.

2 - Free Cash Flow Was $154.3 million i n 4Q22

This quarter, the company earned $154.3 million in free cash flow and a trailing 12-month free cash flow of $858 million.

Franco-Nevada announced that its Board of Directors had declared a quarterly dividend of $0.34 per share in 4Q22. The dividend is still too low, with a yield of 1.3%. With net cash of over $1.1 billion, the company should double its dividend at the least.

3 - The Company Has No Debt And $1,196.5 million in cash as of December 31, 2022

Franco-Nevada continues to deliver another perfect financial profile, with cash and cash on hand of $1,196.5 million in 4Q22 and no debt. The graph below shows how fast cash is increasing rapidly.

Also, Franco-Nevada has $2.2 billion in available capital as of December 31, 2022.

4 - Production in Gold Equivalent Ounces was 129,642 GEOs in 4Q22 and 183,886 GEOs, including The Energy Assets

Franco-Nevada stated that it sold 129,642 gold equivalent ounces in 4Q22 (not counting the Energy segment), significantly down from 138,799 GEOs in the same quarter a year ago.

The total production, including the energy segment, was 183,886 GEOs, up slightly from 182,543 GEOs in 4Q21.

Gold represented 55.8% of the total output in 4Q22, including energy.

Details per segment are presented below:

• $1,729/oz gold
• $21.20/oz silver
• $971/oz platinum
• $1,940/oz palladium
• $98/tonne Fe 62% CFR China
• $82.65/bbl WTI oil
• And $6.09/mcf Henry Hub natural gas

5 - Guidance 2023 and 2027 Outlook

The company also indicated a 2027 Outlook of 760K-820K GEOs, consistent with the 2026 outlook shown in the preceding quarter.

Technical Analysis And Commentary

Note: The chart has been adjusted for the dividend.

FNV forms a descending channel pattern with resistance at $144 and support at $134. The descending channel pattern was now showing after a strong breakout last week. RSI is now 64, which is overbought but could indicate further upside.

The dominant strategy I regularly promote in my marketplace, "The Gold and Oil Corner," is to keep a core long-term position and use about 50% to trade LIFO FNV while waiting for a higher final price target for your core position.

I suggest buying FNV between $138.15 and $132 with potential lower support at $128. Conversely, it is reasonable to take profits between $143.75 and $148 with higher resistance at $151.

However, despite the strong performance in gold and silver that I have explained earlier, I see two potential issues with FNV in the first quarter of 2023.

The energy segment is weak and will show significantly lower revenues that the metals price increase may not offset.

Also, the Cobre Panama situation, which occurred on February 23, 2023, has been quite concerning for Franco-Nevada. However, the problem is now resolved and will affect only 1Q23.

CFO Sandip Rana said in the Q4 conference call :

As we look to Q1 2023, we do expect a delay in precious metal deliveries from Cobre Panama due to the temporary production curtailment that did occur. We expect to have a stronger Q2. Antapaccay delivered less ounces than prior year, but was in line with our expectations for the quarter and the operator at Guadalupe mined less ounces on lands to which our stream applies resulting in lower GEOs delivered.

Thus, we should expect a weak first quarter of 2023, and it is vital to use those up days to take some profit off.

Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.

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