Stock Market Smarts: TSX Leaders—Franco-Nevada

Gordon Pape is launching a new series on the stocks that are leading the TSX higher in 2016. First up, Franco-Nevada.

Last Friday, the TSX closed at 14,226.78, up 9.4 per cent from the start of the year. That’s way ahead of New York, Europe, and just about everywhere else.

This wasn’t expected. With the oil in the dumps and the banking sector stagnant, 2016 was expected back in January to be another dreary year on the TSX.

For the first two months, that’s the way it played out. But there were a couple of breaks in Toronto’s favour. The first was the comeback in the gold market. Even though gold has pulled back recently, the S&P/TSX Capped Global Gold Index was ahead 77.6 per cent as of the close on June 3. That shows you how oversold the gold mining stocks were.

Energy was another driver. The price of oil is still way down from its high in 2014 when the crisis began, but it has almost doubled since last winter. That has been a huge boost for energy stocks.

Background: Franco-Nevada is a royalty company in the natural resource sector, primarily gold. This means it buys a share of output of producing mines, limiting investor exposure the downside risks of exploring and developing. The company’s portfolio is mainly focused on gold, but there is some oil, silver, and platinum group metals in the mix. The portfolio is international but the main positions are in Canada, the United States, and Latin America. Franco-Nevada is debt free and uses its free cash flow to expand its portfolio and pay dividends.

Stock performance: The shares closed on Dec. 31 at $63.30. They ended the day on June 3 at $90.13 for a capital gain of 42 per cent year to date.

Why we like it: There is no such thing as a safe gold stock but Franco-Nevada’s business model removes much of the downside risk from the equation. So even when gold tumbled a couple of years ago the stock did not sell off in the way traditional gold producers did.

As well, the company shares the wealth with its investors, with annual dividend increases dating back to the initial public offering in 2007.

Financial results: The company reported record revenue for the first quarter of 2016 at $132 million (Franco-Nevada reports in U.S. dollars). That was up almost 21 per cent from the same period a year ago. About 95 per cent of the revenue was sourced from precious metals (69 per cent gold, 20 per cent silver, and 6 per cent platinum group metals). Over 80 per cent was from Western Hemisphere mines.

Adjusted net income was $28 million ($0.17 per share) compared to $22.9 million ($0.15 per share) one year ago. Free cash flow provided by operating activities was $99.1 million, an increase of almost 43 per cent from the year ago number of $69.4.