Gold for immediate delivery continues to decline. On the London Bullion Market, the precious metal closed at $1171.25 per troy ounce at 10:30 a.m. (Greenwich Mean Time) and decreased 0.10%, or $1.25 per troy ounce, from the closing price of $1,172.500 per troy ounce yesterday.
November was a difficult month for the gold industry, as shown in the graph below. Two of the most important gold stock indexes, representing the gold industry as a whole, the SPDR Gold Trust (GLD, Financial) and the VanEck Vectors Gold Miners ETF (GDX, Financial) fell by 9% and 16%:
With gold prices continuing to decline, the odds of finding good buying opportunities in the gold industry are increasing. Many investors see the best way to gain exposrue to the industry is through gold and silver royalty and streaming companies.
One of these gold royalty and streaming companies is Franco-Nevada Corp. (FNV, Financial), a leader in the industry due to its large portfolio of assets situated in the Americas, Africa, Southeast Europe and Australia. Ă‚ Also, its pipeline of projects has potential to further expand the business.
Approximately 95% of Franco-Nevada's revenue comes from precious metals, with gold being the leading revenue source. Approximately 5% of total revenue comes from oil and gas. Recently, Franco-Nevada purchased oil and gas royalty assets in the U.S. for a total consideration of $100 million.
In the third quarter of 2016, led by increasing gold and silver prices, Franco-Nevada’s revenue was $161.7 million, a 74% increase on a year over year basis.
The Federal Reserve's move to keep interest rates low has put pressure on the precious metal, increasing prices since the beginning of the year. This has been true for gold and silver as the price increased by nearly 19% and 30% on a year over year basis.
For the third quarter of 2016, gold accounted for 66% of the company’s total revenue while silver accounted for 21%. The contribution from platinum group metals was 7%. Approximately 83% of the company’s total revenue came from assets situated in the Americas (34% from North America and 49% from South America).
The company produced 121,562 ounces of the precious metals in the third quarter, a 46.6% increase on a year over year basis. However, costs and expenses increased due to higher depletion and cost of sales. Concerning the oil and gas segment, the company reported stable production levels and prices in its quarterly report.
Investing in Franco-Nevada allows shareholders to protect their investment’s value during market downturns, which is typical of any investment in the gold industry. At the same time, it reduces the risk associated with mining.
Thanks to increasing precious metal prices, Franco-Nevada could increase 67% on a year over year basis. The cash generated by operations was $121.6 million in the third quarter.
A portfolio composed of highly productive assets makes Franco-Nevada a free cash flow generator. The company can use this cash to further bolster its portfolio and distribute dividends to shareholders.
As of the third quarter, the company had $277.6 million in cash on hand and securities that can be readily converted into cash, an 86% increase from the previous quarter.
Franco-Nevada is debt free. However, the company can raise funds needed to enhance the quality of its asset base from a line of unsecured credit of $1 billion. The maturity of this credit has been extended to November 2020.
The company pays a quarterly dividend of 22 cents to its shareholders. The next dividend will be paid on Dec. 22. The dividend yield is 1.51%.
Yesterday, Franco-Nevada Corp. closed at $57.05, down 38 cents (or -0.66%) from the previous close. A volume of 748,194 shares were traded on the New York Stock Exchange yesterday. This compares to an average of 805,330 shares traded over the last 10 trading days and an average of 849,210 shares traded over the last three months.
Franco-Nevada has a market capitalization of $10.19 billion and 178.25 million shares outstanding.
Analysts recommend to hold this stock and the average price target is $68.29 per share versus a market price of $57.05. The price ranges between a low of $45.14 per share and a high of $82 per share.
The stock is trading at 2.43 times its book value and 21.91 times its Ebitda. Adjusted Ebitda of $142.2 million, or 80 cents per share, was reported. This is an 83.5% increase on a year over year basis and is a new record for the company.
The stock was slightly less volatile than the stock market (beta market = 0.68) and more volatile than gold (beta gold = 1.47) over the last 12 months.
Being characterized as one of the lowest betas gold when compared to its peers, the stock may plunge less sharply than the industry as gold contiunes to fall.
During the third quarter of 2016, First Eagle Investment (Trades, Portfolio) reduced its position in Franco-Nevada by 0.58%.
Disclosure: I have no positions in Franco-Nevada Corp. (FNV, Financial).
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