A lot of the time, we might look at a company rising in share price and think, “What’s going on here?” The fear that we’re missing out can be strong, even leading some investors to buy before they truly understand a company’s increase in share price.
That’s what’s happening with Franco-Nevada (TSX:FNV). The royalty and streaming company has seen shares surge 71% in the last year, so what’s going on exactly? Today, let’s take a look at this top gold stock on the TSX and whether it belongs in your long-term portfolio.
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Growing gold
Perhaps the biggest driver for this mining stock is the price of gold. FNV is a royalty and streaming company, so higher metal prices flow straight to the top line without increases in operating costs. This was seen in the second quarter, with record gold prices materially boosting revenue and margins.
In fact, the precious-metal weighting and gold-equivalent ounce (GEO) rose significantly. Precious metals were 82% of revenue in the quarter, with 70% gold alone. When gold outperforms other commodities, FNV’s reported GEO’s translate to higher revenue. GEOs sold were 2% higher, but with the price moves, this still drove a huge increase for the royalty company.
Fantastic quarter
Yet gold wasn’t the only reason driving the jump. The second quarter was outstanding, with revenue jumping 42% year over year to $369.4 million. Operating cash flow surged 121% to $430.3 million and net income 211% to $247.1 million, and adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) were up 65% to $365.7 million.
These quarterly improvements show a business that’s making higher-quality investments. Plus, its strong operating cash flow translated to $1.1 billion in available capital. This allows the gold stock to have more room for mergers and acquisitions and to sustain the dividend. Near-term, the gold stock expects higher GEO deliveries for the second half of the year, reducing risk and supporting the premium price.
Value and income
So the question now is whether the gold stock is still a buy. Here’s what investors will want to consider. First, it offers a strong dividend, though a small yield at 0.71% or $2.10 annually. However, even with low operating risk and high cash flow, the premium looks priced in, trading at 36.4 times earnings and 31 times sales, far higher than that of other miners.
What investors will want to watch are continued higher gold prices, confirmed production and delivery, plus other acquisitions. Risks, however, could be a sustained decline in gold prices, delays from deliveries, or regulatory disputes. These have happened before, and could again.
Bottom line
FNV is a gold stock that seems to be on the rise and only rising higher, for now. It benefits from a class mix of commodity tailwinds and company execution, with record gold prices and high cash-flow leverage. While the quarter delivered record results, there is always the risk of a drop in the price of gold. So if you’re interested, continue to keep this gold stock on your watchlist.
