Franco-Nevada’s (FNV) Business Model Continues To Pay Off

The Stillwater mining complex in Montana. Credit: Franco-Nevada Corp.
The Stillwater mining complex in Montana, on which Franco-Nevada has a 5% NSR royalty. Credit: Franco-Nevada Corp.

Franco-Nevada is a diamond in the mining industry, as a steady and profitable royalty and streaming company. In a world of low yields and interest rates, investors are hard-pressed to find the kind of returns that will make them look at their RRSP with pride. Chasing returns also carries significant risk, which Franco-Nevada controls for by not operating mines, developing projects, or conducting exploration. 

Low-Risk, Reponsible Management

The company instead focuses on managing and growing the company’s portfolio and streams, giving them exposure to commodity price optionality and a perpetual discovery option over large areas of profitable and geologically prospective real estate. This low-risk, steady, and high-reward business model is a counterbalance to the hit-and-miss strategies of many other mining companies. The company has limited exposure to many of the risks associated with operating companies because of its capital-light business model. This nimble operation strategy allows it to pivot to new projects, mines, and even supporting the industry when needed. The company engages in exploration efforts as part of advancing a property in advance of taking on an investment. This due diligence is necessary as the company relies on the industry operating responsibly to both reduce risk, and honour the royalty and streaming agreements they make. 

By The Numbers

With the stock price sitting at over $109, the company is more expensive than many of its peers, but this is an investment that gives more than it takes, just as it should be. Their portfolio of precious metals like gold, silver, and platinum group metals, oil, gas, and natural gas liquids allows them to give investors a dividend yield of 0.90%. With an operating margin of 28.18% and a return on equity of 5.18%, this is one of the rare mining companies that consistently turns out results investors can be pleased with. With zero debt, and a fully equity-funded balance sheet, not only are the paper stats solid, but the bottom line fundamentals are strong enough to keep buying the stock as it gains. 

Their recent announcement of a US$0.26 per share dividend to be paid on March 25th, 2021 to shareholders of record on March 11th, 2021 was welcomed warmly by investors. Analysts are estimating 15% growth for 2021, and as the company gears up to report 4Q2020 earnings on March 10th, investors eagerly await a sign that all is well with this steady performer. Whether 2021 will shape up to be as good a year for Franco-Nevada as 2020 was is still yet to be seen, but with restrictions lifting, business activity picking up, and an optimism in the air, new projects and mines will continue to need the company’s services, bringing more dividends for shareholders quarter after quarter. 

Dividends Keep Padding Portfolios

We will continue to watch the dividend payout ratio, as the company must balance paying out less in dividends than it earns; the opposite would make the dividend unstable. Franco-Nevada paid out 74% of its earnings to investors last year, an average level for most businesses, and nothing they need to worry about adjusting. Dividends also used just 27% of the free cash flow it generated, leaving a comfortable margin to continue paying a dividend throughout 2021. As long as earnings don’t drop precipitously, the dividend looks to be stable and is covered by both profit and cash flow. 

*This story will be updated on March 10th after the earnings report.

 

By Matthew Evanoff

I cover the mining industry and the best mining stocks around the world. I write about industry news, individual companies, projects, management, and profiles on industry leaders.

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