FNV: Major New Acquisition Boosts Gold Revenues

Adrian Day's Global Analyst (12/19/2010)
"Franco-Nevada is our favorite royalty company, one of our top low-risk ways of participating in the resource sector, and indeed, one of our favorite companies in any sector. We favor the royalty model because the company is not involved in the costs and risk of mine operations; thus a company like Franco can consistently have a pre-tax margin of around 90%.

In a transaction announced last week, Franco is buying Gold Wheaton, a smaller goldstreaming company. . . Franco is paying a combination of shares and cash, including an all-cash purchase of a block of almost 40% of the company from Quadra FNX, owner of the Canadian mine on which Gold Wheaton holds a streaming deal. The combination will boost cash flow immediately; and it will increase cash flow from precious metals. Once the transaction is complete, over 85% of Franco’s revenues will derive from precious metals. The PGM dividend will now be larger than Franco’s legacy oil & gas. . . .The growth profile is tremendous. Precious metals royalty revenue will go from just over $100 million at the end of last year to over $350 million by 2015, a combination of the GLW acquisition (over $100 million), higher prices, and new Franco assets. Even before the GLW deal, Franco’s gold royalty revenue had jumped 50% from last year. . . Franco is one of our very top companies, and though not inexpensive on a current earnings basis, the growth profile, as well as management and balance sheet, lead us to say that if you do not own it, you should buy it now."

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