Shares of Franco-Nevada Corp (NYSE:FNV) jumped 14.5% in July, according to data provided by S&P Global Market Intelligence. If surging gold and silver prices have attracted investor attention in the precious metals stock, management’s optimism about growth opportunities should leave investors in the stock with a lot to look forward to.
To top that, while the stock has lost some ground so far this month as of this writing, Franco-Nevada just released impressive numbers for its second quarter, with management also issuing fresh full-year guidance after withdrawing the same in April.
Franco-Nevada runs a high-margin gold streaming and royalty business. Put simply, instead of exploring mine assets and extracting metals like a traditional miner, Franco-Nevada buys precious metals from third-party miners at predetermined percentages and significantly discounted prices under streaming and royalty agreements in exchange for funding them upfront. So while the discount means Franco-Nevada’s cost of purchase is far below spot metal prices, it sells at market rates, thereby enjoying wide margins and cash flows.
It is, therefore, easy to explain July’s euphoria around the stock, what with prices of both gold and silver hitting multi-year highs.
Meanwhile, in a July interview with Bloomberg, chairman David Harquail revealed there are lots of opportunities to expand Franco-Nevada’s portfolio in the near future, with the company aiming for streaming and royalty deals worth “at least” $ 500 million this year. The figure could be much higher if base metal miners approach Franco-Nevada with larger financing requirements.
2019 was a record year for Franco-Nevada in terms of sale of gold equivalent ounces (GEOs), revenue, and net income. In its just released second quarter earnings report, Franco-Nevada reported a 3.2% drop in GEOs, as some of the mines it has agreements with were shut due to COVID-19.
However, thanks to a favorable pricing environment, Franco-Nevada’s revenue surged 26.5% in the second quarter: Its gold price averaged $ 1,711 per ounce and silver $ 16.38 per ounce versus $ 1,310 an ounce and $ 14.89 an ounce, respectively, in the second quarter of 2019. Palladium prices were significantly higher as well. Management now expects GEOs to range between 475,000 and 505,000 in 2020 versus 516,438 in 2019 if all mines resume normal operations.
Rising GEOs and precious metal prices present the perfect setting for Franco-Nevada to mint money despite COVID-19 hiccups. Its second quarter numbers reveal what a big difference higher gold and silver prices can make to the company’s top line. Management’s keen eye on potential deals to expand its portfolio provides further impetus for investors to remain invested in Franco-Nevada stock.