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Deutsche Bank Upgrades Franco-Nevada, Cites Its Proven Low Cost Of Equity

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

“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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Sep 2016Deutsche BankUpgradesSellHold
Aug 2016BarclaysMaintainsEqual-weight
May 2016BMO CapitalDowngradesOutperformMarket Perform

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