As gold prices hover near record highs, Canada’s streaming giant Franco-Nevada (TSX:FNV) offers investors a unique way to play the precious metals market. Despite recent operational challenges that led to reduced 2024 guidance, Franco’s third-quarter (Q3) results showcase the resilience of its business model.
With strong margin expansion and a pristine balance sheet boasting US$2.3 billion in available capital with zero debt, Franco-Nevada continues to demonstrate why streaming companies can outperform traditional miners over time.
But does this translate into a compelling investment case for 2025? Let’s dive deeper.
An overview of Franco-Nevada
From a single royalty stream on the Goldstrike mine in 1986, Franco-Nevada is now a premium streaming company valued at a market cap of $35 billion. In the last two decades, the TSX stock has returned close to 1,400% to shareholders after adjusting for dividend reinvestments.
Instead of operating mines, Franco-Nevada provides funding to mining companies in exchange for the right to purchase gold and other metals at predetermined prices or receive royalty payments. While miners worry about rising costs and operational challenges, Franco-Nevada sits back and collects checks from its growing portfolio of royalties and streams.
Armed with a debt-free balance sheet, Franco-Nevada owns a diverse portfolio of 430 assets. The company has a history of shrewd countercyclical investments. For instance, it scooped up accretive streaming deals during the 2014-2016 commodity downturn. Over the years, Franco has evolved from a pure precious metals company into commodities such as copper, oil and gas, and iron ore royalties.
The bull case for Franco-Nevada stock
Franco-Nevada’s Q3 results showcase why streaming companies are often called the “smart money” of the mining industry. Despite losing Cobre Panama (one of its key revenue sources), Franco reported revenue of US$275.7 million in Q3 of 2024, an increase of 14% year over year. An asset-light model meant it reported an adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of US$236.2 million, an operating cash flow of US$213.6 million, and a net income of US$153.9 million or $0.80 per share.
During its Q3 earnings call, Franco forecast 2024 sales at US$1.1 billion, exceeding its previous estimates, due to elevated gold prices.
In the September quarter, Franco-Nevada made several strategic moves, including acquiring a 1.8% NSR royalty on Newmont’s Yanacocha mine for $210 million. It also partnered with Osisko on the Cascabel copper-gold project stream, provided a US$35 million term loan to EMX Royalty Corporation, and invested US$25 million in G Mining Ventures.
Franco’s capital-efficient business model and robust balance sheet allow it to pay shareholders an annual dividend of US$1.44 per share, translating to a forward yield of 1.1%. Moreover, these payouts have tripled in the last 13 years, enhancing the yield at cost significantly.
What is the target price for FNV stock?
Analysts tracking the TSX stock expect its revenue to rise from US$1.11 billion in 2024 to US$1.6 billion in 2026. Comparatively, adjusted earnings per share is forecast to expand from US$3.2 per share in 2024 to US$4.6 per share in 2026. Further, its free cash flow is projected to improve from US$335 million in 2024 to US$1.1 billion in 2025.
Given its outstanding share count, Franco-Nevada’s annual dividend expense is roughly US$275 million. At the current yield, its payout ratio in 2025 will be lower than 30%, so investors should expect consistent hikes over the next 12 months.
Priced at 27.6 forward earnings, FNV stock is reasonably valued and trades at a discount of 18% to consensus price targets.
