Franco-Nevada is a Golden Opportunity

Back in January, we bought shares of Franco-Nevada (“FNV”) for suitable client accounts.

FNV is a streamer, meaning that it receives a royalty on a bunch of mines that are owned and operated by another company. In other words, FNV receives a percentage of revenue yet isn’t on the hook for paying any of the expenses or cost overruns that often plague a mine. This business model has allowed FNV to accumulate a portfolio of 431 properties, 115 of which are in full production mode. Best of all, they don’t have a penny in debt.

We bought the stock for two reasons.

1. Our research concluded quite convincingly that gold stocks perform strongly as soon as a rate-cutting cycle begins.
2. FNV’s stock price collapsed following a geopolitical event that we believe will eventually reverse.

Gold stocks historically rally following monetary easing. In the four months after a rate-cut in 2007, 2008, 2019, and 2020, the gold stocks not only gained in value but also outperformed both the S&P 500 and S&P/TSX Composite Index about 75% of the time.

Though we expected rates to drop sooner, the market has priced in a cut in the United States this September.

Almost 63% of FNV’s revenue comes from gold. The rest is from oil (11%), silver (10%), gas (4%), and platinum (3%).

Following civilian protests, the Panama government shut down First Quantum’s Cobre Panama mine in November 2023. Because FNV had a royalty on this mine, it suffered as well. FNV’s stock price fell quite drastically from $190 in October to about $145 in December.

As with most sell-offs, it was overdone. After all, Cobre Panama represented 15% of FNV’s net asset value yet its stock price fell 25%.

FNV wrote off the entire value of the asset by the end of last year. However, we thought that was too conservative and believe the government will reverse its decision. Cobre Panama is strategically important to Panama. The mine employs 7,000 people, represents 5% of GDP, and constitutes 75% of the country’s exports. With Cobre Panama open, the country would have achieved 5% growth this year; instead, that’s looking closer to 2.5%.

We bought the stock on January 2 for $149.68 for suitable clients. Today, it’s about $171.13, almost a 14% gain.

On July 1, incoming President Jose Raul Mulino officially took office. The pro-business leader ordered in his first address that an environmental audit take place to determine if the Cobre Panama can safely reopen. We believe this to be the first step towards opening the mine, perhaps some time in 2025.

Upon seeing rate cuts in the US and clarity that Panama will allow Cobre Panama to reopen, we expect FNV’s stock price to rally much higher. Buying a distressed stock whenever bad news creates a stock price overreaction is a great way to achieve positive returns in the long-term.