Franco-Nevada Corp. (FNV:TSX; FNV:NYSE 71.68) is the bluest of blue-chip gold companies, an originator of the royalty model for the gold industry. Royalties, and their cousin streams, provide exposure to gold mining without the high costs and risks of mining, but with leverage and dividends, unlike bullion. They are my favorite way to invest in the sector for more conservative and longer-term investors, though no one would confuse the leading royalty companies with "Graham and Dodd"-type value investments.
Record revenues
Franco continues to perform well, with record ounces and revenues (up 38%) in its latest quarter, only partly due to the addition of two major streams, from Antamina and Antapaccay copper mines. The balance sheet remains very strong, with debt taken on last year for stream acquisitions now paid off; there is $226 million cash plus $1 billion in available credit lines.
Currently about 94% of the company's revenues come from precious metals (of which 72% is gold). Its large portfolio has seen increased exploration activities as the price of gold has recovered.
But is it cheap?
One could argue that Franco is trading at its fair value, and as large existing holders we would wait for better prices before adding to positions. However, Franco has a habit of providing consistent growth, with fair value constantly increasing. Yes, Franco (they said) was overvalued at $40 in mid-2015 and at $30 in 2011 and at $20 in 2009. I have often said that if one could buy only one gold company, and lock it away, the choice would be Franco without question.
The company has now instituted a DRIP program, available to U.S. holders, whereby dividends can be automatically reinvested, at a 3% discount to the market, making it a great vehicle for long-term investors. The recent drop in the stock price, from an early-July high over $80, presents a good opportunity to add to positions for those underweight.
Methodical, disciplined work generates success
Midland Exploration Inc. (MD:TSX.V 1.15) is our favorite exploration company. Following the prospect-generator model in Quebec, it continues to acquire land, generate prospects, and make joint venture deals.
It has land in all the key areas in the province, with a large land package in the high-potential James Bay area (the site of Virginia's Éléonore discovery). Its partners include companies such as Teck Resources Ltd. (TCK:TSX; TCK:NYSE), Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) and SOQUEM, a subsidiary of Ressources Québec; its latest deal is a 50/50 joint venture with Osisko combining land and expertise (including the former Virginia exploration team) on land in the Cheechoo area (an active area in James Bay). Most of its joint-venture agreements have already been renewed, indicating some success. It has continued making discoveries, such as recently at the nickel and PGE La Flame property, and strong gold showings at its wholly owned Willbob Project in the Labrador Trough. It has also just initiated an aggressive exploration program at the James Bay Éléonore Gold project, which is highly prospective.
Diversification and the necessary cash
In all, Midland has 11 active projects, including eight joint ventures, with a $5 million 2016 exploration budget. With over $15 million the bank, it has a rock-solid balance sheet that puts it in a position to do sufficient initial exploration on its projects to get the best deals from partners, and also to fund opportunities that arise without going back to market.
All in all, with the land, balance sheet, partners, and top management, Midland is well positioned for discovery and success. Few are better positioned, and none with such broad exposure to different metals and different partners.
What kind of investor are you?
With top managements and strong balance sheets, these two companies offer solid cash flow from Franco's royalties as well as leverage from that company's pipeline and Midland's exploration; they offer exposure to a broad range of properties and other companies—Franco with royalties or streams on over 30 producing mines and over 300 projects in various stages of development, with partners including Barrick Gold Corp. (ABX:TSX; ABX:NYSE), Newmont Mining Corp. (NEM:NYSE), Goldcorp Inc. (G:TSX; GG:NYSE) and Glencore International Plc (GLEN:LSE); and Midland with joint-venture or option agreements on eight different properties with a range of partners. They also offer exposure to multiple resources: for Franco, PGMs, oil and copper, in addition to gold; and for Midland, base metals, rare earths and PGMs, as well as gold.
Buy these two and put them away for the duration of the bull market. Some may do better with constant trading from one hot thing to the next, but few will do as well and let you sleep at night. Hitching a ride with the best managements is as close to a sure thing as one gets.
Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is "Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks."
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Disclosure:
1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Franco-Nevada Corp. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. Funds controlled by Adrian Day Asset Management hold shares of the following companies mentioned in this article: Franco-Nevada Corp. and Midland Exploration Inc. I determined which companies would be included in this article based on my research and understanding of the sector.
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