Will Gold Stocks Rally in 2024?

Down almost 30% from all-time highs, Franco-Nevada is a gold mining stock trading at a discount to consensus price target estimates.

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Gold prices surged over 13% in 2023 as demand for the yellow metal rose by 3% last year to 4,899 metric tons, according to data from the World Gold Council. The figure includes purchases from central banks as well as demand from industries, jewelry makers, and investors.

At the time of writing, gold prices are trading at US$2,146 per ounce, which is close to all-time highs despite elevated interest rates. As commodities, including gold, don’t offer any yield to investors, they have an inverse relationship with bonds.

In 2023, investor demand for gold plunged to a decade low of 945 tons. However, geopolitical tensions and a volatile macro economy meant the weakness was offset by demand from central banks, as countries are looking to hedge against inflation and reduce their exposure to the U.S. dollar.

Global central banks purchased 1,037 tons of the yellow metal, with China leading the way with 225 tons. As interest rates are positioned to move lower in the next 12 months, gold prices might continue to gain pace, making royalty stocks such as Franco-Nevada (TSX:FNV) enticing investment options right now.

An overview of Franco Nevada stock

Valued at $22 billion by market cap, Franco-Nevada is among the largest gold-focused royalty and streaming companies in North America. Its portfolio consists of 419 assets covering 66,000 square kilometre. Gold accounts for 55% of Franco-Nevada’s revenue, followed by silver at 11% and iron ore at 4%.

Armed with a diversified portfolio of cash flow-producing assets, the royalty stock has more than tripled investor gains in the past decade after adjusting for dividends. Its robust business model provides investors with gold price and exploration optionality while limiting exposure to cost inflation.

In October 2023, the Supreme Court of Panama signed a verdict stating the mining concession associated with Franco Nevada’s Cobre Panama mine was unconstitutional and ordered the mine to shut down.

In 2022, the Cobre Panama mine generated US$223 million in sales and was among the company’s four major primary assets.

Is Franco-Nevada stock a good buy right now?

Despite its outsized gains, FNV stock trades 29% below all-time highs, allowing you to buy the dip and benefit from market-beating gains when investor sentiment improves. Moreover, Franco-Nevada is debt-free, allowing it to deploy free cash flow to expand operations and pay shareholders a dividend.

As stated above, Franco-Nevada’s partner company was forced to halt operations at Cobre Panama, a mine that accounts for 20% of total revenue. This made investors nervous and drove share prices lower. Despite the near-term headwinds, the company’s business remains robust, as it ended 2023 with a debt-free balance sheet and US$1.4 billion in cash.

Franco-Nevada emphasized the rest of its long-life businesses still generate industry-leading cash flow as it ended 2023 with an adjusted earnings before interest, tax, depreciation, and amortization margin of 83%.

Franco-Nevada added multiple royalty interests in 2023 on gold mines and projects in Canada, Chile, Australia, and the United States. With US$2.4 billion in available capital, Franco-Nevada generated US$1 billion in operating cash flow and increased its quarterly dividend by 5.88% to $0.36 per share. The royalty heavyweight has raised dividends for the 17th consecutive year, increasing the yield on cost for Canadian investors to 12.9%.

Priced at 37 times forward earnings, FNV stock trades at a discount of 25% to consensus price target estimates.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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