Long-Term Royalty Volumes Will Depend On Cobre Panama And Critical Minerals Permitting

Catalysts

About Franco-Nevada

Franco-Nevada is a gold focused royalty and streaming company with a diversified portfolio of precious metal and energy assets.

What are the underlying business or industry changes driving this perspective?

• Although higher gold prices and reserve price assumptions could unlock more mineable ounces on primary gold and copper gold assets, an extended period of extreme price strength may encourage operators to high grade and front load production. This would pull forward GEO deliveries and constrain longer term revenue growth.
• Despite the growing recognition of the importance of critical minerals in North and South America and early permitting progress at projects like Copper World, Stibnite Gold and Autazes, regulatory resets or changes in political priorities could delay build decisions and defer expected royalty conversion to cash flow. This could limit medium term revenue and earnings expansion.
• While the company is targeting roughly 50 percent GEO growth over five years including a potential Cobre Panama restart, any protracted slippage in environmental audits, fiscal renegotiations or workforce remobilization would reduce expected volumes and keep net margins more dependent on commodity prices than on sustainable volume growth.
• Although Franco-Nevada has built a sizeable pipeline through six recent acquisitions and its role as a financial partner to developers such as G Mining Ventures and Discovery, inflation in mine construction and operating costs could compress operators’ project returns. This may lead to scaled back mine plans and fewer high quality streaming opportunities, tempering future revenue and adjusted EBITDA growth.
• Despite strong organic growth potential from newly ramping operations like Tocantinzinho, Greenstone and Salares Norte, depletion charges tied to recently acquired high cost per ounce assets may continue to rise faster than incremental GEO volumes. This would weigh on net income growth even if topline revenue remains robust.

Assumptions

This narrative explores a more pessimistic perspective on Franco-Nevada compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Franco-Nevada's revenue will grow by 19.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 60.1% today to 61.0% in 3 years time.
• The bearish analysts expect earnings to reach $1.6 billion (and earnings per share of $8.28) by about December 2028, up from $919.8 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $2.1 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 28.9x on those 2028 earnings, down from 45.0x today. This future PE is greater than the current PE for the US Metals and Mining industry at 21.5x.
• The bearish analysts expect the number of shares outstanding to grow by 0.12% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.14%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A prolonged period of exceptionally high gold prices could drive operators to lower cutoff grades, expand reserves and accelerate mine plans, potentially unlocking substantial new royalty and streaming volumes for Franco-Nevada and supporting structurally higher revenue and earnings over the long term.
• If Cobre Panama successfully restarts on the time lines suggested by the Panamanian government and delivers the roughly 50 percent growth in gold equivalent ounces that management is targeting over five years, the resulting step change in production base and cash flow could justify a materially higher valuation multiple and lift earnings meaningfully above current levels.
• Sustained regulatory tailwinds for critical minerals in North and South America, including faster permitting for projects like Copper World, Stibnite Gold, Arthur and Autazes, may convert a deep project pipeline into long lived cash generating assets and drive long term growth in royalty revenue and adjusted EBITDA.
• Franco-Nevada’s strategy of acting as a financial banker to best in class developers such as G Mining Ventures and Discovery, combined with a strong balance sheet and over 1.8 billion dollars of available capital, could allow the company to secure high return deals during volatile markets and compound net income well above market expectations.
• Continued exploration success and mine extensions at cornerstone assets such as Western Limb, Gold Quarry, Hemlo and Musselwhite, coupled with higher reserve price assumptions, may materially lengthen asset lives and increase attributable ounces, supporting durable growth in revenue and maintaining high net margins over multiple cycles.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Franco-Nevada is CA$266.58, which represents up to two standard deviations below the consensus price target of CA$340.59. This valuation is based on what can be assumed as the expectations of Franco-Nevada's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$453.17, and the most bearish reporting a price target of just CA$266.58.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be $2.6 billion, earnings will come to $1.6 billion, and it would be trading on a PE ratio of 28.9x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of CA$295.69, the analyst price target of CA$266.58 is 10.9% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.