SUBMIT: Deutsche Bank Upgrades Franco-Nevada To Hold

Royalty or streaming companies are sensitive to interest rates, which would likely remain “lower-for-longer globally,” Deutsche Bank's Jorge Beristain said in a report. He upgraded the rating on Franco Nevada Corp FNV to Hold, while raising the price target from $62 to $74, citing the company’s proven low cost of equity.

The estimated WACC [Weighted Average Cost of Capital] used for Franco-Nevada’s valuation has been reduced from 5.5 percent to 4.5 percent. This is lower than the 5 percent estimated for Silver Wheaton Corp. (USA) SLW “to recognize Franco-Nevada's greater diversity of assets and commodities, and royalty/stream split,” analyst Beristain mentioned.

While Franco-Nevada has a strong business model, this is fairly reflected in the share price.

Strong Performance

Franco-Nevada is on track for a robust production performance this year. Beristain projected production of 445 geos, which is at the high end of the 425-445k geo guidance range.

While reporting its Q2 results, the company had highlighted:

• Production from Barrick’s South Arturo project is due in the back half of this year, and this has now occurred
• Improvements at Kinross’ Bald Mountain project due in 2017-2018 and Tasiast Phase One expansion by 2018
• Musselwhite production at Goldcorp Inc. (USA) GG to increase in 2017-2018
• Potential for Newmont Mining Corp’s NEM Subika to expand, with the decision due in late 2016

“In contrast, the Palmarejo stream reached the minimal delivery in early 3Q16 which will now be less profitable for Franco-Nevada,” the analyst wrote. The company has a $1 billion debt facility available and a $2 billion mixed-shelf in place, which would boost flexibility for potential deals.

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