Franco-Nevada (NYSE:FNV) has done a good job recently of expanding its reach. After focusing almost exclusively on streaming agreements with mining partners in gold and other precious and base metals, the company decided recently to boost its exposure to oil and gas considerably. That’s proven to be an important move, as weaker gold production has been offset by better performance in its growing energy portfolio.
After its recent earnings report, Franco-Nevada’s executive team talked with investors about the results and their ideas about the company’s future. Even though the share price has fallen slightly during 2018, the company remains confident that better times lie ahead.
Antamina mine, on which Franco-Nevada is a streaming partner with Teck Resources. Image source: Teck Resources.
1. It’s all about the long haul
I’m looking forward to the growth in our future numbers, especially as we get into 2019. Depending on how you measure it, we believe the duration of our portfolio is at least 20 to 30 years. — CEO David Harquail
It’s easy for short-term investors to get trapped by the details of any given quarterly report. For instance, gold production for Franco-Nevada dropped by more than 15,000 ounces, or roughly 12%, and that could have led some to conclude that problems in the streaming specialist’s portfolio of assets could extend into the future. But CEO David Harquail notes that with greater commitments to mines that are only now starting to come into their own, Franco-Nevada has much stronger growth prospects than some of its recent numbers would suggest. As you’ll see below, if things go well for the company’s partnerships regarding mines with immense potential, Franco-Nevada will start seeing the impact over the next year or two.
2. Franco-Nevada’s portfolio has huge growth potential
The portfolio continues to exceed our expectations. The streams on the four large copper mines — Antamina, Antapaccay, Candelaria, and Cobre — are all ahead of our deal assumptions, either through actual planned production output or reserve expansions, and in many cases, both. — COO Paul Brink
Of Franco-Nevada’s mining assets, the Cobre Panama project has gotten the most attention lately. Yet the company is happy with all of its efforts to bolster production growth over the long run, and some of the mines that have largely flown under investors’ radars lately are actually essential to the streaming giant’s future. For instance, Brink said the Candelaria mine actually has seen the greatest reserve expansion of the four big copper mines, and that should bode well for Franco-Nevada’s growth in the years to come.
3. Macroeconomics are supporting both of Franco-Nevada’s focus areas
Franco is perfectly positioned as we move into an inflationary environment. Both because we’re not materially exposed to mining cost inflation, and because we benefit from oil price inflation. — Brink
Franco-Nevada is proud of the extent to which it’s quickly ramped up its oil and gas exposure, and the timing has proven to be fortuitous. Crude prices have soared in 2018, hitting multiyear highs even as gold and other precious metals remain under pressure. Even better, the company still sees promising opportunities in energy, with higher prices thus far not having affected deal quality. That could bode even better for the long run for Franco-Nevada.
4. Franco-Nevada’s succession plan
We take succession planning very seriously. The time to make preparations is before you need them. … Yesterday, the board appointed Paul Brink as president and chief operating officer. We expect this will broaden Paul’s experience so that he can fulfill the expectations that he be our next CEO. — Harquail
Harquail has been CEO at Franco-Nevada since the listing of the stock in the U.S. in 2007, but at 61, the executive isn’t afraid to consider what the future will bring. Having assumed the chair of the World Gold Council, Harquail is at the top of his game, and he’s signaling that he’s ready to think about next steps for himself and the company. Paul Brink has been with Franco-Nevada since 2006, and like Harquail, the COO has past experience with other giants in the gold mining industry. Brink is a solid pick for successor, and it’ll be interesting to see how long Harquail remains before passing over the reins.
Franco-Nevada has potential
Franco-Nevada investors haven’t been entirely comfortable with the way the stock has performed to begin 2018, but fundamentally, the business remains sound. With tailwinds starting to emerge in key areas, Franco-Nevada could be a timely pick for those looking to expand their exposure to natural resources more broadly.