Franco-Nevada Corp.

Issue Fall 12


Subtract the inherent risks present in operating gold companies and add more potential benefits than a gold ETF and you get Franco-Nevada Corp. A gold-focused royalty and stream company, Franco-Nevada’s business model limits exposure to operating and capital cost inflation while allowing to it take advantage of rising commodity prices and new discoveries.

“We’ve found that having a royalty position is beneficial because you have no cash calls or tax grabs, and none of the operational headaches,” President and CEO David Harquail says. “Royalty companies like ours have fixed costs and get exposure to any new discovery or expansion at the mine.”

In terms of gold revenues and number of gold assets, Franco-Nevada is the leading gold royalty and stream company. It trades on both the Toronto and New York stock exchanges. Franco-Nevada has considerable cash, no debt and is generating growing cash flow, which it uses to grow its portfolio and boost dividends.

Seeking the Upside
With a history dating back to 1985, the current version of Franco-Nevada came with an IPO in 2007. Franco-Nevada’s strength is maintaining and expanding a diversified portfolio of cash flow-producing assets and interests. The company has positions in some of the largest new gold development and exploration projects in the world. This is the key to Franco-Nevada’s ability to provide exceptional returns to investors.

“Our experience has been that the majority of the performance comes from a small percentage of royalties,” Harquail says. “Predicting the best ones is hard to do. We increase our odds of success by increasing our land exposure on the great mineral trends. Spreading risk over a broad portfolio provides a better risk-adjusted return.”

In addition to gold, Franco-Nevada maintains interests in platinum metals and other resource assets. Headquartered in Toronto with offices in the United States, Australia and Barbados, the company has 20 full-time employees and a flat management structure. Its focus is on new investments and increasing exposure to potential discoveries.

“Once we acquire an asset, we aren’t involved in project development or ongoing operations; the operating company does all that,” Harquail says. “Our business is fairly simple, and our focus is on where to invest next to continue growing cash flow. We can focus on future investments instead of taking care of present operations.”

Currently, Franco-Nevada has close to 350 assets in various commodities and development stages. The focus is for its portfolio to be at least 80 percent comprised of precious metals, which is important to investors. Its gold division includes 170 assets with 39 in production, 20 in advanced stages and potentially productive within five years, and 117 in the exploration stage.

“Our No. 1 concern is having a long-term option on high potential properties,” Harquail says. “We look at the property size, as well as the nature of the geological aspects of the property. We also consider the tenure of the mining lease, how much the operating company is focused on the property and the existing financial commitment. The exploration optionality is the top consideration.”

Filling a Void
The business is evolving. For most of the company’s history, the focus was on buying existing royalties between operators and explorers. Now Franco-Nevada is getting more involved with deals where it finances mines through exploration and development in return for royalties. In effect, it isn’t just buying existing assets anymore; it is buying and creating assets.

“Because of the global financial crisis, many banks have dropped out of financing mines and the equity markets have tightened up,” Harquail says. “That means royalty companies have become extremely important for operators and exploration companies. They need access to capital for projects, especially those that are midstream.”

Because royalty companies like Franco-Nevada are often considered crucial to financing projects, Harquail says the company is seeing opportunities to expand with many high-quality projects and substantial companies. He says it is a major reason why the royalty and stream sector is in a period of growth and likely to grow as the fastest sector in the market.

According to results from the first quarter of 2012, Franco-Nevada’s business model is on the right track. It completed approximately $110 million in new investments during the quarter, while revenue was $105 million, an increase from $73.1 million in first-quarter 2011.

Franco-Nevada’s U.S. gold assets brought in $19.4 million in revenue, while Canadian gold assets generated $9.7 million in revenue. Gold assets in Australia totaled $2.9 million, while its Palmarejo asset in Mexico and MWS asset in South Africa generated revenue of $25.4 million and $10.6 million, respectively. As for its platinum group metals PGM assets, the company generated $13.7 million for the quarter. Oil and gas revenue was $10.5 million.

“Franco-Nevada had another solid quarter with significant growth year-over-year,” Harquail explains. “This growth has allowed us to increase our dividend for the fifth consecutive year since going public. Our goal is to continue to deliver increased overall shareholder returns.” EMI


Franco-Nevada Corp.