Gold Is Rebounding, Time to Look at Franco Nevada

Marginal gold miners go bust when the price dips below $1,300.

That’s horrible news for many small miners — it’s also bad for big miners that need to cut marginal projects.

But it’s good news for the future price of gold…

If what you’re reading sounds familiar, that’s because it is!

Back in April, after gold’s drop, we had talked about the long-term fundamentals for gold and some reasoning for gold’s eventual leg higher.

The cure for low prices is low prices, as you know. And with marginal miners shuttering operations and bargain hunters (from the East) coming out of the woodwork, it appears gold has found a foothold at $1,300.

Today we’re seeing even more evidence that the price per ounce is catching a bid, so why not check in with one of our favorite gold rebound plays!?

Our Favorite Turnaround Gold Play

“For a turnaround play it may be worth a look” I told you back in April.

Our timing was spot on, too. Shares of Franco-Nevada (FNV) are up 25% since mid-April.

Remember, Franco-Nevada isn’t your average gold miner. They don’t have regular mine costs like the big gold producers we follow. Instead, Franco-Nevada is a “streaming” company. Meaning after they put money into getting a project off the ground they take a cut of future production.

With many of those streaming deals set up over the years, Franco-Nevada can just sit back and collect checks as other companies produce metal. In other words, if you think gold is set for a rebound, this pony will provide a huge upside compared to your average cost-laden miner.

Since we covered Franco Nevada in April, there are a few points to be made.

First, the gold market has started to establish a foothold above $1,300. If the metal can hold this perch it could be the beginning to the next uptrend.

From the company’s standpoint things are moving a long surprisingly well, considering gold’s pullback in 2013. Of note, they just released mid-year numbers.

Here’s how our in-house analyst Dan Amoss puts it:

Franco-Nevada has been a top gold royalty stock. FNV invests shareholders’ capital upfront to acquire royalties on specific gold mines. Then, they receive a predetermined percentage of the mine revenue over its entire future operating life. Margins are very high, and capital spending requirements are very low.

Last week, FNV reported a good second quarter. It generated $145 million in cash flow in the first six months of 2013. Management invested $62 million in new royalties over the same time frame, paid $52 million in dividends and still has a $797 million war chest of cash to reinvest in new royalties on attractive terms. Financing for promising junior gold mines remains tight, and FNV is one of the few large companies with excess cash to invest.

There are many moving parts in FNV’s portfolio. Through temporary setbacks in some royalty properties and great success at others, this management team has proven its ability to create shareholder value. Management reaffirmed 2013 guidance: royalty and streaming revenue of 215,000-235,000 gold equivalent ounces and $55-65 million in oil and gas revenue.

Franco-Nevada should emerge from this gold mining stock bear market in a much stronger position. It’s sowing the seeds for future returns. The stock contains the bonus option value of future discoveries at the mines in which it holds royalty interests. FNV stock, an excellent gold-leveraged investment, is attractive at current prices

Looking at the chart action for Franco-Nevada shares, the $45-mark is an important threshold. Back in early 2012 the $45-level acted as strong resistance. But after prices broke to the upside, in the middle of the year, there was a quick march to the $60 level.

If you want to take a bargain position today around $43, keep an eye on the $45 pivot point. If prices remain resilient above $45, a quick 33% won’t be far away.

Keep your boots muddy,

Matt Insley
Original article posted on Daily Resource Hunter

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