Franco-Nevada (TSX: FNV), valued at a market cap of $39 billion, is a leading gold-focused royalty and streaming company. Franco-Nevada doesn’t operate mines but instead collects royalties and streams from a diverse portfolio of 430 assets spanning approximately 66,800 square kilometres.
An asset-light model has allowed the TSX stock to return 236% to shareholders over the past decade after adjusting for dividends, while the TSX index has returned just 130%.
As past returns shouldn’t matter much to current investors, let’s see if FNV stock is a buy, sell, or hold in 2025.
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How did Franco-Nevada perform in Q3 of 2024?
In the third quarter (Q3) of 2024, Franco-Nevada reported revenue of $275.7 million, down from $309.5 million in the year-ago period. However, revenue increased 14% year over year if we exclude contributions from the non-operational Cobre Panama mine.
Franco-Nevada’s unique business model continues to demonstrate its value proposition in the current high gold price environment. In Q3, it reported a cash cost of $290 per gold equivalent ounce (GEO), compared to $304 per GEO in the year-ago period.
With gold prices averaging significantly higher year-over-year, Franco-Nevada generated margins of approximately $2,200 per ounce in Q3 — a 35% increase compared to last year, outpacing the 28% rise in gold prices.
“In a rising commodity price environment, Franco-Nevada benefits fully as the cost per GEO sold will not increase significantly,” Chief Financial Officer Sandip Rana explained during the call.
This widening margin highlights the inherent leverage in Franco-Nevada’s business model. Unlike traditional miners, the company’s costs remain relatively fixed regardless of commodity price movements, allowing shareholders to capture more upside when gold prices rise.
What’s next for FNV stock?
Despite the strong financial performance, Franco-Nevada adjusted its 2024 guidance due to operational challenges at several key assets and the mathematical impact of record gold prices on GEO calculations.
It expects total GEOs sold for 2024 to be between 445,000 and 465,000, down from the original guidance of 480,000 to 540,000. Interestingly, the reduction in GEO guidance does not translate to lower revenue expectations. Franco-Nevada now forecasts 2024 revenue between $1 billion and $1.1 billion, higher than projected when providing original guidance in March 2024.
The status of the Cobre Panama mine, currently in “preservation and safe management” mode, remains a key driver of Franco-Nevada’s future growth. The mine was a major contributor to Franco-Nevada’s portfolio before operations were suspended amid protests and regulatory challenges.
Franco-Nevada’s chief executive officer, Paul Brink, noted that the newly elected president of Panama has indicated a willingness to discuss reopening the mine, with discussions likely to begin in early 2025. The administration is arranging an international experts’ audit of the mine, which Brink called “a good practical step to dispel some of the misconceptions about the mine.”
Franco-Nevada remains in a strong financial position with $2.3 billion in available capital and zero debt as of September 30, 2024. It maintains a diversified revenue stream, with 77% of Q3 revenue from precious metals and 81% from the Americas.
Is the TSX gold stock undervalued?
Analysts tracking Franco-Nevada stock expect earnings per share to expand from $3.2 in 2024 to $4.04 in 2025. So, the stock is priced at 50 times forward earnings, which is quite steep. Bay Street also expects it to grow free cash flow from $332 million in 2024 to $1.08 billion in 2025.
A widening cash flow base allows the company to pay shareholders an annual dividend of $1.52 per share, which translates to a forward yield of 1.1%. Moreover, these payouts have more than tripled in the last 13 years.
Franco-Nevada’s annual dividend expense is roughly $300 million, indicating a payout ratio of less than 30%. This suggests that the TSX stock has enough room to increase these payouts in 2025.
Franco-Nevada continues to offer lower-risk exposure to gold price movements, with potential upside from new asset acquisitions and the possible reopening of Cobre Panama. While operational challenges at key assets have impacted GEO guidance, the company’s ability to expand margins in a rising gold price environment underscores the resilience of its business model.
