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Franco Nevada - >>> The 3 Best “Royalty” Gold Stocks To Buy Now



Oct 25, 2021


The big question on gold investors’ minds, for good reason, is why gold is not higher given the unprecedented money printing and rising inflation. The second question is, when will it change? asks Adrian Day, a money manager focused on resources sector specialist, a contributor to MoneyShow.com and the editor of Global Analyst. Here he outlines his bullish long-term case for gold, the benefits of royalty streaming companies and his favorite specific investments within the sector.

To some extent, gold has simply been in a long consolidation after the extraordinary move early last year, when gold jumped over 30% from its end-March low to early August high.

The current gold bull market started at the end of 2015, when gold hit $1,051. Gold cycles, both up and down, tend to be long; indeed, the shortest have been the last two, in the 1970s and from 2001 to 2011. And it is not unusual for gold to have mid-cycle corrections, often caused by an extraneous shock.

In the 1970s, gold dropped over 40% in a correction lasting 20 months. In 2008’s credit crisis, it fell nearly 30% in eight months. So far, this pullback has taken 15% off gold’s peak price — a piker by historical standards — and has lasted just 13 months, well within norms for mid-cycle corrections. I would suggest that gold bottomed last March at $1,685, meaning the correction lasted less than seven months.

One major factor holding back gold is the Federal Reserve’s constant threat to start tapering. The Fed has a history of talking more than doing, and, for reasons beyond me, the institution still has credibility.

The fact is that many times in the past gold moved down in advance of Federal Reserve tightening, responding to growing talk, but turned when it actually started to tighten. This is “buy the rumor, sell the news”, only in reverse. Gold acts this way because all-too-often when the Fed does start to act, it is too little too late.

The Fed started raising rates in August 2005, and again in December 2015, after months of discussion. In both cases, gold bottomed the same month rates started being hiked. Similarly in May 2013, when the Fed started talking about tapering, gold slid for the next several months. It was just before Christmas that we saw the first rate hike, and gold bottomed almost to the day.

The recent action has been frustratingly modest and volatile. However, the longer gold meanders in its current trading range, the faster and stronger the eventual move will be. In the meantime, gold investors can accumulate at prices that will appear very good in a few years’ time. They should not wait too long.

The major mining stocks are now extraordinarily inexpensive, with the senior and intermediate gold companies trading in the lowest 25 percentile of their historical valuations, and more-or-less the lowest price-to-free cash flow ever. Given the price of gold, given the strong cash flows, given the improved balance sheets and given the improved discipline among top mining companies, today’s low valuations are a gift.

The major mining companies may be very undervalued, but there is no getting away from the fact that mining is a difficult business and the stocks tend to be very volatile. For the non-specialist, one of the safest ways to invest in the gold space is with the royalty and streaming companies.

These companies, instead of actually mining themselves, invest in other companies and projects in return for a percentage of the revenue. They may invest in producing mines perhaps to fund an expansion, or in development projects or even in exploration.

A royalty typically makes its entire investment upfront and receive a percentage off the top, while a streamer makes ongoing payments in addition to the upfront payments. The benefit of the model is that the royalty or streamer is not responsible for things that change, with the mine or the country.

If mining costs or taxes go up, the mining company has to deal with it but the royalty still gets it cut off the top. Thus, the royalty or streaming company has more assured revenue than the mining company and tends to be a more conservative way of investing in the sector.

Looking at individual royalty streaming stocks, I recently returned from two back-to-back gold conferences in Colorado, where the main attraction was the opportunity for private meetings with company CEOs. Franco-Nevada (FNV) continues to demonstrate why it is a core holding. Nothing in my meeting with Paul Brink, president and CEO for little over a year, changed that opinion. He has, if I may say, really grown into the job following David Harquail, Pierre Lassonde and much earlier Seymour Schulick: big shoes to fill indeed!

Franco has made $800 million in acquisitions so far this year, the largest in iron ore dentures from Vale. This acquisition, plus revenue from energy jumping 78%, means that the contribution from precious metals has dropped under 80%.

Brink pointed out that the Vale debentures had a “catch-up quarter” so on a steady-rate basis, the company’s precious metals revenues remain at 80%. The ongoing expansion at Cobre Panama would also help boost gold revenues. He did say though that the aim would be for the company’s next major acquisition to be in gold.

In our discussion, we focused mainly on the overall royalty/streaming environment as well as Franco’s changing shareholder base. Brink noted that cash was cheap right now, so there was very little distress around. It was the broken balance sheets among major copper producers following the peak in 2012 that enabled Franco to acquire gold by- product streams on some of the world’s largest and long-life copper mines.

Nothing like that exists today and Franco (and other streaming companies) can’t compete, he said, with the current price of debt. The main opportunity now is in assisting single-asset development companies obtaining financing to construct projects.

In that space, royalty and streaming companies are competitive, since the main alternate financing is private equity which can be expensive. Bank debt tends to be heavy on covenants. But, he added, “anything we do now is going to be small.”

I had known that Franco has been becoming more attractive to generalist investors, those wanting some exposure to gold but cautious of big miners with their (mostly) disastrous long-term records.

Franco pitches itself as “the gold investment that works”. But I was surprised to learn that 70-80% of its shareholders now are generalists. This certainly explains why Franco’s stock often moves more with the broad market than with other gold stocks.

Franco has the deepest portfolio of any royalty company, with 403 assets now, of which 60 are producing and 30 are in development. Interestingly, he notes that Franco has about 250 royalties that it does not include in its resource calculations at all. That deep portfolio has hidden gems, assets that had long been “forgotten” and come to the fore with new management or nearby discoveries.

The huge portfolio, and diversification, as well as solid balance sheet, top management, and organic growth all add up to why Franco is a core holding. We have not bought it for a few months now, but it you do not own, the recent price decline (from over $160 at the end of July to the lowest price since April) presents an opportunity.


Osisko Gold (OR) reported a slight miss on its latest quarter, but maintained full-year guidance, with the Eagle Mine ramping up. Headline financial results were less satisfactory, a loss of C$50 million due to a non-cash impairment at an Osisko Development (OD) project.

OR still consolidates results from OD, which distorts reported cash, revenue and costs of the royalty company. Osisko Gold wants to get its ownership of Osisko Development below 50% of shares outstanding so that it no longer needs to consolidate its financials. It expects progress on this goal next year but is in no hurry to sell its shares at depressed levels.

The Osisko Development spin-off brings advantages to Osisko Gold. As a development company, OD clearly has more costs than a royalty company. As we have discussed before, however, OD will be a tremendous benefit to Osisko Gold, since it provides them with a bult-in pipeline of royalties on development assets for which they do not need to contribute.

In the highly competitive world that royalty acquisition and creation is today, this is an advantage that cannot be overstated. OD expects a construction permit on its Cariboo project in British Columbia in the second half of next year following a large-scale drill program. Other projects are advancing, including San Antonio, in Mexico, which should see cash flow next year.

Osisko Gold also reported that it had repurchased almost 1.3 million shares so far this year, and 920.266 of those in August. The company is authorized to buy up to 14 million shares through it’s normal course issuer bid.

Osisko is in a catalyst-rich period, with multiple projects expected to start producing before the end of next year, including the ramp-up at Eagle (to become its second largest earner); start-ups at Santana and San Antonio; and the start up of production from First Majestic’s Ermitaño on which another of our recommended companies, Orogen, also holds a royalty. So, there is significant growth in the 16 months ahead.

Osisko, meaningfully smaller than the Big Three royalties, has virtually all revenue from gold and silver (97% this year); 96% of its Net Asset Value is from these precious metals. For the major royalty and streaming companies, the NAV that is not gold and silver ranges from 8% for Wheaton to 32% for Franco. It also has the best political risk profile of the larger royalty companies.

At the Denver Gold Forum, I had the opportunity to meet new President and CEO Sandeep Singh for the first time; though I had spoken with him on the phone several times, we had not met due to travel restrictions. My confidence in OR has been only enhanced by meeting him and hearing his vision. With strong management, a solid balance sheet, and deep pipelines including several near-term development assets, and a low valuation, Osisko is buy.


Wheaton Precious Metals (WPM) recently held an annual “investor day” which took a broad look at the company. Wheaton focuses on streams on high-quality, low-cost, long-life assets. It released a new 10-year guidance of 830,000 ounces average Gold Equivalent Ounces (GEOs), up from its five-year average of 810,000 GEOs.

According to the company, only some 2% of all mine finance since 2004 comes from streams; of that, Wheaton, which invented the streaming model, holds 40%. It currently has 24 assets, with strong partners, 65% of whom are investment grade, including Newmont (NEM), Barrick (GOLD), Vale (VALE) and Glencore (GLNCY).

Some 90% of its streams are on mines in the lower 50 percentile of the cost curve, 74% in the lowest 25 percentile. CEO Randy Smallwood argues that streams have more leverage that royalties because they carry a per-ounce cost.

Its streams have provided over $2 billion more cash flow than expected when the deals were done, and the gap is beginning to widen again. Its policy is to distribute 30% of cash flow in dividends, making for a dividend that increases with the gold price—from 5 cents per quarter in 2015 to 15 cents in the last quarter.

Of course, this policy can make for a volatile dividend; it was 14 cents in early 2013 before falling for the next two years.

Wheaton has taken a different tack to its balance sheet than other larger royalty and streaming companies, saying that with interest rates so low, it makes sense to use debt to acquire cash-flowing assets. It is, however, debt free today after paying off debt from its strong cash flow.

Wheaton has a $2 billion undrawn debt facility and has not issued equity since 2016. It has recovered $8 billion of the total $9 billion it has invested since inception, with remaining assets valued today at $19 billion.

It is diversified between gold and silver, 50% and 41% by revenue this year. Vale’s Salobo is its largest single asset, accounting for 36% of NAV, a little less of revenue. A fire at the mine, with full operations expected to be resumed before month end, may reduce output for the quarter (accounting for about 2% of Wheaton’s overall revenue).

Salobo’s phase III expansion is currently underway, expected to be completed by the second half of next year; Wheaton’s final payment of $670 million on the expansion is not due until 2023. In addition to the Salobo expansion, two large near-term projects underway are Pampacancha ramp-up (a satellite of the Constancia mine), and the underground at Voisey’s Bay, which just commenced initial mining.

By country, Brazil accounts for 32% of revenue, Mexico and Peru another 21% each. Right now, its sees opportunities in helping finance mine expansions and M&A, deals which are typically smaller than the large balance sheet repairs for base metal companies of 2013-2016.

Wheaton stock has bounced, along with other gold stocks, 11% since the end-September lows, but it’s still down 15% from its June highs, and trading at a discount to Franco-Nevada. We want to own Wheaton long term, and if you do not own it, you can buy now. Otherwise, we will look for a pullback under $40 again to add positions.


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