Golden Reincarnation and Franco-Nevada (TSE:FNV)
April 27, 2010 12:15 PM
Whether you’re a gold bull or bear, there’s one gold issue that should be on investors’ radar at all times. It’s a stock that has outperformed the rest of the gold sector because it’s neither a keeper of bullion nor a miner – nor is it strictly even a gold play. What you’re buying when you acquire this company is quite simply some of the best brains in the resource business.
Franco-Nevada Corporation (TSE:FNV) is the brainchild of Pierre Lassonde (and a few others), who founded the original company back in 1982, and operated it until 2002, when they sold it to American mining giant, Newmont, for a massive profit.
One of the first ever companies to adopt the royalty resource model, Franco was an instant and smashing financial success. Here is a picture of Lassonde & Company’s genius at work during the days of the ‘Old Franco’ – from the IPO through to the Newmont takeover.
Do you need any more convincing?
Plainly put, while gold took over ten years to drop from roughly $500 to $250, Franco Nevada stock jumped from under a dollar to better than $30.
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Meet the New Franco
In 2007, Lassonde decided to jump back into the game. Same idea. Same name. But with a slightly more diverse approach.
The new Franco-Nevada is still focused on acquiring gold royalties, but has chosen to diversify into a number of platinum group miners, as well. Altogether, ten new royalty interests have been added to the portfolio since the company’s re-inception three years ago, including assets in the oil and gas field and a number of pipeline investments. Best of all, nearly all of the company’s holdings are domiciled in North America, meaning investors take on virtually no political risk whatsoever.
Here’s a resource map of Franco’s global holdings:
Franco Nevada possesses approximately 50 separate resource assets – the bulk of which are found in Canada, the United States, Mexico and Australia.
Let’s check trading now in the new Franco Nevada, against the rest of the gold majors, since Lassonde got back to work. First up is a chart of the Philadelphia XAU Gold Index.
Clearly, the new Franco is as much an overachiever as his older brother was. But what happens next is a story unto itself.
Over the last year, gold bullion notched new all-time highs and then backed off. But Franco shares have been stalled at highs achieved more than a year ago. They’ve since been banging their head against resistance in the $31 – $32 range. Any move above this level on good volume would certainly indicate a breakout. But is it too early to jump on board now?
That’s the $64,000 question!
We say there may be a better approach to gold, gold shares and Franco-Nevada altogether. It looks like this.
On the Toronto Stock Exchange, warrants are traded on great number of resource (and other) companies. And it so happens that Franco Nevada lists two separate warrants, one expiring 2012, the other 2017.
The nearer term warrants are interesting to us at the moment for two reasons:
- They’ve backed off significantly in the last quarter, from $6.50 to below $4.00, and
- Relative to the stock, they have never been so depressed.
Take a look at the following chart, which depicts Franco-Nevada’s 2012 warrants over their entire lifespan, as pitted against the underlying stock
As you can see, the biggest moves in the warrants (in black) occurred when the difference between them and FNV stock (in gold) reached 30+%. We are now seeing a split approaching 50 percentage points between the two. In short, the warrants have never been cheaper relative to the underlying stock since trading in the two commenced back in 2007.
Look now at the trading in the 2017 expiry warrants.
This vehicle only came into being in October of last year, but because of its remaining lifespan and recent trading pattern, it appears perhaps the best way to play Franco-Nevada, if not the entire Gold sector altogether.
Important: know that if you buy either of the Toronto-listed warrants, you’re dealing with securities that can be very thinly traded. Unfortunately, you’ll have to consider limit orders if circumstances dictate, in order not to overpay for the action.
Take good care,
Matt McAbby
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