Spotlight Franco-Nevada: Innovating Gold Production

by Bryce Coward and Stephen Vanelli, Knowledge Leaders Capital

Franco-Nevada is the world’s largest gold royalty and streaming company. This means the firm invests in gold and mines, but indirectly, the idea being to provide investors with exposure to gold prices and gold exploration while limiting the risks of investing directly in mining companies. Management summed it up in its most recent annual report this way: “In a world confronted by political volatility and financial market instability, we believe making Franco-Nevada a lower risk gold investment that pays dividends and has leverage to gold is the right strategy.”

The company accomplishes this objective via royalties and streaming. Royalty arrangements invest in a mine in exchange for a percentage of revenue from that site for the life of the mine. Via its streaming deals, Franco-Nevada purchases the right to buy gold assets at reduced prices in the future. This model is designed to reduce investor risk, for example, eliminating unexpected expenses at the mines or protecting from the impact of rising commodity prices.

Growth comes from new investments, and this is where Franco-Nevada’s innovation strategy is apparent. The firm first conceived of its royalty and streaming model in 1985 and has since been refining it. As a result, the model has become an intangible asset. For this Knowledge Leader, we believe the intellectual property and organizational capital embedded in acquiring royalties and streams is rolled up in the firm’s acquisition-related investing cash flow.

Franco-Nevada site map, source: Franco-Nevada website

Franco-Nevada owns one of the largest and most diverse portfolios of mines, including 16 in the United States, 21 in Canada, 14 in Latin America and 25 in the rest of the world. It aims to generate 80% of revenue from precious metals including gold, silver and platinum. The majority of revenue comes from Latin America. In the fourth quarter of 2019, 68% of revenue was sourced from gold, 9% from silver and 10% from the platinum group metals—a group of six elements used in industrial, medical and electronic products. Less than 20% of revenue comes from energy assets. The company has additional interests in 206 exploration-stage mining properties around the world and spanning gold and other minerals, which may or may not see activity in the future.

According to a Bloomberg report last month, “the pandemic has created some headwinds, mainly around doing on-site due diligence for new investments. But Franco-Nevada has been able to work around that with ‘installment deals’ that are subject to doing that work once it’s safe.” In addition, “the company’s biggest investment, in First Quantum Minerals Ltd.’s Cobre Panama mine, was shut for most of the second quarter,” but was due to reopen in July, according to the same article.

Cobre Panama site, credit: First Quantum Materials

Last year, the firm detailed progress toward its ESG (environmental, social and governance) efforts, committing to the “Responsible Gold Mining Principles” established by the World Gold Council, in which Franco-Nevada plays a leading role. This year, the firm was ranked by Sustainalytics—an agency that rates company sustainability—as No. 1 of 104 companies in the precious metals industry group and No. 1 of 74 companies in the gold subindustry group.

The company was founded in 1983 and began focusing on royalties two years later. Franco-Nevada went public in December 2007, and considers competitors to be other investors in gold, including gold bullion ETFs. Headquartered in Toronto, Canada, the firm aims to consistently maintain a low overhead, employing only 38 people.

As of 6/30/20, Franco-Nevada was held in the Knowledge Leaders Strategy.

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