Franco-Nevada Corp. (FNV, Financial) – the Canadian precious metal royalty and streaming company, one of the best-known players in the industry – released its financial results for the second quarter of fiscal 2017.
With an adjusted EPS of 25 cents and an adjusted to one-time charges net profit of $46.1 million, Franco-Nevada beat expectations by 1 cent and produced a positive surprise of 20% since analysts forecasted the company would close the quarter with an EPS of 24 cents.
Source: Yahoo Finance
Actual EPS – adjusted to one-time charges – for the second quarter represents a 15.3% increase from the comparable quarter of fiscal 2016.
Adjusted earnings are backed on revenue that for the quarter in question came in at $163.6 million, an 8.4% increase year over year.
Franco-Nevada beat expectations on quarterly revenue by $4.25 million.
Revenue for the second quarter is shared between gold, silver, platinum, palladium and other mineral assets for $154 million or 94.1% of Franco Nevada’s total quarterly revenue and Oil & Gas assets for $9.6 million or 5.9%.
While the adjusted EBITDA increased by 4.1% from $120.5 million in the second quarter of 2016 to $125.5 million in the second quarter, the margin – calculated as quarterly total revenue divided by quarterly EBITDA – slightly decreased by 3.2 percentage points from 79.9% in the second quarter of 2016 to 76.7% in the comparable quarter this year. The decrease is likely associated with a small decline in the gold price – the largest factor in determining Franco-Nevada’s profitability – that in the second quarter was $1,257 on average per troy ounce versus an average price of $1,259 per troy ounce in the comparable of fiscal 2016, given that:
- The profit-based royalty – which accounted for about 6.2% of Franco-Nevada’s total quarterly revenue – was higher compared to the second quarter of 2016.
- The total volume of gold equivalent ounces sold increased by 8.6% from 112,787 ounces in the second quarter of 2016 to 122,541 ounces in the second quarter of 2017.
- Revenues from Oil & Gas assets were higher year over year thanks to “higher prices and production levels as well as the recent additions of the STACK and Midland royalty portfolios within the last year,” the company reports.
The profit-based royalty is based on the underlying mining operation’s income and therefore – contrary to royalty and stream payments/deliveries – it is adjusted for the mining company’s operating costs, which in general were probably lower in the second quarter compared to the second quarter of 2016.
Despite a lower margin, Franco-Nevada closed the quarter with an upside in the cash flow from operations: $126.5 million in the second quarter of 2017 versus $103.5 million in the comparable quarter of fiscal 2016. This is because, being a royalty and streaming company, Franco-Nevada economics are not charged with those operating costs that are associated with mining the precious metal. This means that even when the precious metal trades low, Franco-Nevada always takes approximately 95% benefit from the price of the operators’ underlying commodity.
This element together with the fact that the company runs its business on a well-diversified portfolio of activities – by a geographic, commodity, class of revenue and project’s stage point of view – makes Franco-Nevada one of the best options in the precious metal industry for an investor who wants to have his or her portfolio exposed to the volatility of the commodities market.
Franco-Nevada derives its income from 47 producing assets in the precious metals and other minerals segment and 61 producing assets in the oil and gas industry. The company aims to increase the percentage of producing assets in the oil and gas industry as mineral reserves are running out in North America. The Canadian royalty and streaming company’s pipeline currently accounts for 192 exploration projects in the gas and oil industry while concerning precious metals and other minerals Franco-Nevada is engaged in the advancement of 40 mineral ventures and 173 exploration projects.
In addition, during the second quarter of fiscal 2017 Franco-Nevada added about $356.3 million in proceeds from the exercise of share purchase warrant to its treasury of $1.714 billion, of which $507.6 million is the amount of cash on hand, $106.7 million is the value of securities held by the company and $1.1 billion is the line of available credit. Figures are as of June 30.
Franco-Nevada is a debt-free company that distributes an annual dividend of 92 cents through quarterly payments of 23 cents to its shareholders for a dividend yield of 1.22%. The company has increased its annual dividend every year since 2007.
Franco-Nevada is currently trading around $75.30 with a market capitalization of $13.557 billion, a price-book (P/B) ratio of 3.22, a price-sales (P/S) ratio of 20.85 and an EV/EBITDA ratio of 27.28.
GuruFocus gives the company a financial strength rating of 9 out of 10 and a profitability and growth rating of 8 out of 10.
The recommendation rating is 2.7 out of 5, and the average target price is $74.34.
Disclosure: I have no positions in Franco-Nevada.
