Franco-Nevada (FNV) Rides on Buyouts & Cost-Control Efforts
Franco-Nevada (FNV) is poised to benefit from its diversified business portfolio, debt-free balance sheet, cost-cutting efforts and acquisitions.
On Aug 30, we issued an updated research report on Franco-Nevada Corp FNV. The company is well poised to grow on a healthy and diversified portfolio of streaming and royalty agreements, and a debt-free balance sheet. It continues to deliver higher margins, given its continued focus on cost management. However, uncertainty regarding the pandemic’s impact on the company’s mining operators and volatility in gold prices remain concerns.
The company recently reported adjusted earnings of 96 cents per share in second-quarter 2021, up 100% from the prior-year period. Additionally, the bottom line surpassed the Zacks Consensus Estimate of 94 cents. The company generated revenues of $347 million in the reported quarter, reflecting year-over-year growth of 78%. The top-line figure, however, missed the Zacks Consensus Estimate of $362 million.
Diversified Portfolio Bodes Well
Franco-Nevada operates as a gold-focused royalty and stream company with additional interests in silver, platinum group metals ("PGM"), oil & gas and other resource assets. One of the inherent strengths of its business model is the diversification of its portfolio. Cobre Panama, Guadalupe stream, Antapaccay and Antamina contributed to the company’s revenue performance during the reported quarter. The Cobre Panama contributed 19% to revenues in the second quarter followed by Candelaria, which contributed 10%. The company has royalties and streams on several properties mined by some of the most reputable mining companies in the world.
Cost-Cutting Actions to Bolster Margins
Given the company’s continued focus on cost cuts, Franco-Nevada’s cash costs per GEO (gold equivalent ounces) sold came in at $260 in the first-half of 2021, down 9% from the prior-year period. Its general & administrative costs have been relatively stable and have averaged $5-$8 million per quarter for the past 13 years. For 2020, G&A expenses were 2.8% of revenues, lower than the 3.4% of revenues in 2019.
Solid Balance Sheet & Acquisitions Driving Growth
Franco-Nevada is financially strong and has a debt-free balance sheet, which is commendable. The company generated $469.5 million in operating cash flow in the first half of 2021, up from the $345.4 million witnessed in the prior-year period. The company now has an available capital of $1.4 billion.
In April, Franco-Nevada acquired 57 million of Vale S. A’s VALE outstanding Participating Debentures for $538 million and accrued 9.9% equity investment in Labrador Iron Ore Royalty Corporation. These investments are accretive to the company’s cash flow and provide exposure to mines producing high-grade iron-ore products. Previously, the company had acquired new precious metals stream in the Condestable copper mine in Peru and a portfolio of natural gas royalties in the Haynesville play in Texas.
Upbeat Guidance to Aid Growth
Franco-Nevada now expects to achieve current-year GEO sales near the higher end of its guided range of 590,000 GEOs and 615,000 GEOs, up from the prior estimate of 580,000 GEOs to 615,000 GEOs. The upbeat guidance reflects strong performance of the company’s mining assets. Driven by the recovery in energy prices, Franco-Nevada now expects to generate revenues of $155-$170 million from Energy assets, up from the previous projection of $115-$135 million.
Uncertainty Regarding Pandemic Lingers
Franco-Nevada's mining operators faced the unfavorable impact of the coronavirus pandemic with the temporary suspension of operations and production curtailments last year. Resurgence of cases might lead to the same scenario this year, consequently hurting Franco-Nevada’s results.
Volatility in Gold Prices a Woe
Gold prices have lost 4% of its value, year to date. Gold prices had even dropped below $1,700 an ounce earlier this year on the successful vaccine roll-outs and massive stimulus packages. Even though gold prices have picked up and are currently trading above $1,800 per ounce on concerns over the new Delta COVID-19 variant, this volatility in prices is a concern for the company.
Franco-Nevada’s shares have gained 14.8% so far this year, as against the industry’s decline of 9.8%.
Image Source: Zacks Investment Research
Zacks Rank & Stocks to Consider
Franco-Nevada currently carries a Zacks Rank #3 (Hold).
Better-ranked stocks in the basic materials space include Avient Corporation AVNT and Veritiv Corporation VRTV, each sporting Zacks Rank #1 (Strong Buy), currently. You can see the complete list of today’s Zacks #1 Rank stocks here.
Avient has a projected earnings growth rate of 75% for 2021. The company’s shares have soared 92% in the past year.
Veritiv has an estimated earnings growth rate of 215% for the current year. Over the past year, the company’s shares have soared 340%.
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