The Gold Miners Index (GDX) second quarter earnings season is just around the corner, and Franco-Nevada Corporation (NYSE: FNV). This is because while several other precious metals companies will experience much higher silver prices in Q2, Franco-Nevada’s energy exposure will easily offset this, given the near-parabolic run we’ve seen in oil (USO) and natural gas prices (A G). Given Franco-Nevada’s diversification by asset, diversification by commodity and enviable project pipeline, the company continues to be the top choice for low-risk precious metals exposure and is a buy below 130.00 $.

Just over three months ago, I wrote about Franco-Nevada, noting that while the stock was posting phenomenal results, it was hard to justify chasing the stock above $156.00 per share. Indeed, it was trading at over 2.5x P/NAV and over 40x earnings, which is a high valuation even though it has an almost unmatched business model from a risk perspective. Since then, the stock has held up much better than its peers, but is still down 11% despite a near-parabolic recovery in energy prices. Let’s take a closer look at recent results below and its pre-Q2 setup.

Q1 results

Franco-Nevada released its first quarter results last month, reporting quarterly sales of approximately 178,600 gold equivalent ounces. [GEOs], an increase of 2% over the previous year. This performance was aided by significantly higher attributable GEOs from Iron Ore (Vale Royalty), as well as its energy assets, as well as higher production from Candelaria (enhanced grades), Guadalupe-Palmarejo (higher throughput) , Detour Lake and Harmony’s (HMY) Mine Waste Management Solutions. Unfortunately, this was offset by lower production from several assets including Hemlo, Gold Quarry, Antamina and Antapaccay.

Given the drop in attributable precious metals sales and the sharp increase in energy prices, Franco-Nevada saw only ~72% of its revenue coming from precious metals, compared to ~83% a year ago. year. The decline in precious metals earnings was exacerbated by lower silver and platinum prices during the period, with silver and platinum down 8.6% and 10.3% respectively from a year to year. However, as we can see below, Franco’s energy portfolio took over everything and more, with Franco-Nevada enjoying a WTI price of around $94.00/barrel in the first quarter and a Henry Hub price of $4.57/mcf.

Pending Q2 results, the company won’t get much help from the price of gold, given that it’s only slightly above Q2 2021 levels ($1,870/oz vs. $1,816/oz). Meanwhile, the price of silver has plunged year-over-year, with the price of silver emerging from the ‘silver squeeze’ attempt in the second quarter of 2021 and averaging 26.69 $/oz. However, while it will be difficult for many precious metals names to post positive year-over-year earnings, rising prices in Franco-Nevada’s energy sector will once again take over. in the second quarter of 2022.

Looking at the chart above, we can see that WTI has averaged $107.00/barrel so far this quarter and is expected to average at least $110.00/barrel in the second quarter. This would represent a more than 65% increase from Q2 2021 levels ($66.09/barrel), easily offsetting what is expected to be a roughly 15% drop in the price of silver year over year. other ($22.70/oz vs. $26.69/oz). Meanwhile, the Henry Hub price is up over 100% from Q2 2021 ($2.97/mcf) and continues to rise. As a result, Franco-Nevada should have no problem overtaking tough competitors from last year, with revenue likely to reach similar levels to Q2 2021 despite lower silver and PGM prices.

While this is good news and rising energy prices will provide a significant upside this year, it could create some tough lineups for Franco-Nevada going forward. In fact, we are currently seeing the highest levels of bullish sentiment for oil in years, with more than four out of five market participants bullish on a 3-month rolling basis, as evidenced by the chart below. While this time may be different, assets have generally come under heavy selling pressure when we see these levels of exuberance, with gold having the same issue in Q3 2020 when the consensus that we were heading towards $2,500 /oz.

It’s not a big deal, and we could see precious metals take over and take over after taking over the year so far. Howeverif we don’t see a rise in precious metal prices and they continue to tread water near current levels, Franco-Nevada will face some very tough competition in 2023.

Earnings trend

Looking at the chart above, Franco-Nevada is expected to post another strong year for earnings growth, with annual EPS expected to rise 12% year-over-year to $3.90. This is even more impressive given that the company grew by 30% last year, which translates to an average annual growth rate of EPS of 21% and a compound annual growth rate of EPS of approximately 26.7% since fiscal 2016 ($3.90 vs. $0.94). . However, if we look at current estimates for fiscal 2023, we expect a significant deceleration in earnings growth next year.

Obviously, a pause is to be expected after the company succeeded in doubling annual EPS in three years (estimates of $3.90 vs. $1.82). Still, with the market looking forward and energy prices looking vulnerable after a parabolic run, I think the best course of action is to wait for a deeper pullback to start a position in the stock. Of course, I could be wrong, and energy prices could continue to rise, and precious metal prices could also recover. Yet, with commodities tied to a portion of Franco-Nevada’s revenue contribution (oil/gas) being technically very broad in the short to medium term, it is difficult to rely on this business to similarly perform the next year, and I would say the risk is downside oil and gas prices.

The good news is that Franco-Nevada will see new royalties coming online next year, which will provide a slight boost from a GEO perspective. This includes copper exposure from its recent acquisition of Caserones royalties (~0.45% NSR), some contribution and the under construction Seguela mine in Ivory Coast (1.2% NSR), as well as the expansion of Tasiast. Meanwhile, post 2023, the company has several projects in its pipeline to drive growth, including Mara Rosa, Salares Norte, Castle Mountain, Eskay Creek, Valentine Lake and Greenstone, to name a few. So while 2022 could be a tough year to wrap up if energy prices slow, leading to much weaker earnings growth, the company’s long-term outlook remains strong as ever.

Evaluation

Based on approximately 192 million shares and a stock price of $140.00, Franco-Nevada trades at a market capitalization of approximately $26.9 billion, making it the highest precious metal royalty company with wide margin. As the chart below shows, the stock has historically traded at 56 times earnings due to its strong execution and low-risk business model, and in an era of rising costs, it is not no surprise that it continues to trade at a premium multiple to its peer group. . However, I think a more conservative earnings multiple for the stock is 44, given that it is more difficult for FNV to grow compared to other royalty/streaming peers due to its size. Based on fiscal year 2023 earnings estimates of $3.96, that translates to a fair $174.20.

Although this price target indicates a 23% upside from current levels, I prefer to maintain a significant margin of safety, even if I buy large-cap, low-risk companies. For large cap stocks, I require a minimum 25% discount to fair value to justify starting new positions, resulting in a low risk buy zone on Franco-Nevada of 130, $65 or less. Obviously, there is no guarantee that the title will return to this level. However, I would consider this a low-risk buy point, with a low probability of a double-digit pullback from this zone and potential for double-digit annualized returns. Therefore, if I were looking forward to adding the stock to my portfolio, this is the area I would watch should we see further weakness.

Summary

Franco-Nevada is the benchmark for low-risk exposure to precious metals, and with the recent rise in energy prices, the stock is seeing an acceleration in earnings growth above that of its peers. However, Franco-Nevada lacks significant growth like other royalty/streaming names, and while its diversification across assets and commodities commands a premium, I still don’t see enough of a safety margin to justify paying the stock at $140.00. So while I think Franco-Nevada is a long-term position and a building block for a precious metals portfolio, I continue to see better value elsewhere in the sector. That said, any dip below $130.00 should present a buying opportunity.