Market news and an update from Franco-Nevada.
Market News
China’s consumer and producer prices both declined in July for the first time since November 2020, a sign of deflation pressure amid weakening demand. CPI dipped 0.3% from a year earlier while PPI retreated for a 10th consecutive month, sliding 4.4%. “China is in deflation for sure,” said Robin Xing at Morgan Stanley. “The question is how long.” The statistics bureau attributed the CPI decline to the high base of comparison, saying the dip is likely to be temporary.
Shares in Hong Kong and mainland China were lower – Hang Seng (-0.2%); Shanghai Composite (-0.6%) – as investors digested the data and Japan also retreated (Nikkei 225, -0.4%). However, US equity futures rose, with a 0.2% increase expected at the open this afternoon, while the FTSE 100 is currently trading 0.7% higher at 7,582. Benchmark Treasuries advanced, with the 10-year currently yielding 4.01%. Sterling trades at $1.2770 and €1.1634.
Oil edged lower – Brent Crude is $86 a barrel – after closing at the highest since mid-April and ahead of the EIA report on US stockpiles. Copper rebounded from the lowest close in almost a month as investors bet on more Chinese stimulus. Other base and precious metals also advanced. Gold trades at $1,930 an ounce.
A US plan to restrict investment into China will probably apply only to Chinese firms that get at least half their revenue from sectors such as quantum computing and AI, people familiar said. That would allow US PE and VC firms to put money into conglomerates that may have AI divisions but get most of their sales elsewhere.
Italy issued a clarification of its new tax on banks’ windfall profits, saying it would be capped at 0.1% of the firm’s assets. Lenders who have increased the interest rates they offer to depositors “will not have a significant impact,” the finance ministry said. The announcement of the 40% additional levy by Giorgia Meloni’s government sent Italian bank stocks tumbling yesterday.
Source: Bloomberg
Commodity News
Yesterday evening, Franco-Nevada Corporation released Q2 results which were impacted by the decline in price of the group’s diversified assets. The group also nudged down its full-year guidance. In response, the shares were little changed.
Franco-Nevada is the leading gold-focused royalty and streaming company with the largest and most diversified portfolio of cash-flow producing assets. The group does not operate mines, develop projects, or conduct exploration. Instead, it owns and continues to grow a large, diversified portfolio of royalties and streams. An investment in Franco-Nevada’s shares is expected to provide a dividend yield and exposure to commodity price and exploration optionality while limiting exposure to cost inflation and other operating risks. In the short term, financial results are primarily tied to the price of commodities and the amount of production from the group’s portfolio of assets.
As a capital-light, non-operating company, the business is very scalable. The group currently has a diversified portfolio of 428 assets covering c. 66,000 km2. This is made up of 116 producing assets, 42 advanced assets, and 270 explorations assets. By commodity, the split is precious metals (79% of revenue), other mining (5%), and energy (16%). In 2022, the royalty ounce mine life was 34 years, while many of the big streaming contracts are for 40 years.
Revenue is generated from various forms of agreements, ranging from net smelter return (NSR) royalties, streams, net profits interests, net royalty interests, working interests and other types of arrangements.
During the second quarter, revenue fell by 6.4% to $330m, just below the market expectation of $334m. Although the business benefitted from the group’s core assets returning to normal production and deliveries caught up from the disruptions in Q1, revenue was impacted as lower commodity prices for the group’s diversified assets more than offset the increase in revenue from precious metal assets.
Total gold equivalent ounces (GEOs) sold (including energy) fell by 12% to 168,515, with precious metals GEOs up 0.3% to 132,033 and diversified assets GEOs down 39% to 36,482. With Cobre Panama and Antapaccay operating at full production levels following the temporary disruptions in early 2023, both assets generated strong deliveries in Q2.
The average commodity prices during the quarter were as follows: $1,978/oz gold (up 6% versus last year), $24.18/oz silver (+7%), $1,028/oz platinum (+7%), $112/t Iron Ore (-22%), $73.78/barrel WTI oil (-32%), and $2.32/mcf Henry Hub natural gas (-69%).
Franco-Nevada currently operates a very small organisation and, as a result, margins are high – 83.5% at the EBITDA level in the quarter. Adjusted EBITDA fell by 8% to $275.6m. EPS fell by 7% to 95c, above the market forecast of 90c.
The capital-light business model also means free cash flow generation is strong with limited future capital commitments and cash calls. The company maintains a strong balance sheet to minimise financial risk and so it can make investments during commodity cycle downturns. The group ended Q2 with no debt and $2.3bn in available capital, of which $1.3bn was cash and cash equivalents.
Franco-Nevada uses its free cash flow to expand its portfolio and pay dividends.
Business development remains very active. Cobre Panama’s CP 100 Expansion is on-track for the year-end and initial contributions from royalties should start to flow from several new mines (Magino, Séguéla, and Salares Norte). So far this year, the group has also made several acquisitions, including three royalty interests in Chile.
The aim is to pay a sustainable and progressive dividend regardless of the gold price outlook and the group has increased the payout in each of the last 16 years. The current quarterly dividend is 34c, equivalent to an annual yield of c.1%.
The group now expects total gold & GEO sales for the year to be at the low end of its guidance range provided in March this year: 640k-700k, with precious metal gold & GEO sales of 490k-530k.
The shares are listed on the Toronto and New York stock exchanges. They currently trade on a premium driven by built-in optionality, a lot of which comes from the debt in the royalty portfolio, and a track record for generating attractive returns.
Source: Bloomberg