Nevada
Franco-Nevada: A Better Q3 Outlook With Rebound In Energy Prices (NYSE:FNV)
It’s been a tough four-month stretch for the Gold Miners Index (GDX), with the sector reverting from a brief period of outperformance vs. the S&P 500 (SPY) with a double-digit year-to-date gain to a negative year-to-date return, with several developers down over 30% year-to-date. Fortunately, the royalty/streaming names have provided somewhat of a sanctuary from the selling pressure, with Franco-Nevada (NYSE:FNV) up 4% for the year while Royal Gold (RGLD) has been relatively flat. The outperformance can be attributed to these companies being shielded from the sticky inflationary pressures because of their superior business model and also being immune to the recent rise in oil prices which could once again pinch margins in Q3 (albeit not to the same effect as Q2 through Q4 2022). In this update, we’ll look at Franco-Nevada’s upcoming Q3 results and any recent developments, and whether the ~20% correction has offered a low-risk entry point in the stock.
All figures are in United States Dollars unless otherwise noted.
Upcoming Q3 Results
Franco-Nevada will its Q3 results by the first week of November, and while the setup still wasn’t great heading into the quarter with weaker palladium (PALL), natural gas (UNG), and oil prices (USO) offsetting the strength in precious metals, the company has got some help from oil prices, which have soared ~35% off their Q2 lows and traded up to new yearly highs. This has left Franco-Nevada in a unique position, given that while some miners will have to work against higher energy prices in the quarter, Franco-Nevada is insulated from these costs and simultaneously a beneficiary of higher oil prices (oil made up ~12% of revenue in 2022) because of its energy segment. Notably, these prices are now back above its $80/barrel WTI assumption for 2023 and its five-year outlook, reverting to a slight tailwind from a headwind in the first half of the year amid the downside volatility in oil prices.
As for the precious metals front which makes up ~75% of its total revenue, the company has the opposite setup, lapping very easy year-over-year comps on gold and silver. This is because gold and silver prices correctly sharply in Q3 2022 and averaged $1,728/oz and $19.22/oz, respectively, but prices should average closer to $1,930/oz and $23.40/oz in Q3, assuming they don’t collapse to finish quarter-end. The result would be a 12% higher gold price and a 22% higher silver price, translating to a meaningful improvement in the company’s revenue from the $304.2 million reported in Q3 2022. And based on consensus estimates of ~$332 million for Q3 2023, we should see revenue up 9% year-over-year, a significant improvement sequentially from [-] 15% in Q1 and [-] 7% in Q2.
So, is there any bad news?
While the recovery in oil prices is a positive for this portion of Franco-Nevada’s business, sentiment for oil is heading back towards nosebleed territory, with four bulls for every one bear over the past two months. As shown in the below chart, this has typically led to a correction in oil prices, with the most recent sell signal occurring on May 26th, 2022 at ~$114.00/barrel, just one week before oil would peak at ~$122.00/barrel, with a two-month and four-month forward return following the signal of [-] 17% and [-] 32%, respectively. Obviously, this time could be different, but this suggests that while Franco-Nevada will benefit from higher oil prices in Q3, we could see some giveback in Q4 2023 and Q1 2022 given that sentiment sell signals typically result in at least four months of selling pressure to adequately reset sentiment levels. To summarize, while the tailwind in Q3 is certainly a positive, I’m less optimistic about oil staying above $90.00/barrel sustaining the $90.00/barrel level short-term.
Recent Developments
Moving over to recent developments, it’s been a relatively quiet quarter for Franco-Nevada in terms of deal-making, but the company continues to see progress at construction-stage or recently completed royalty assets. These include a scope change and solid progress at the Valentine Project in Newfoundland that could pull ounces forward in the mine plan (3.0% NSR), the imminent declaration of commercial production at Magino (2.0% NSR) in Ontario, the declaration of commercial production at Seguela (2.0% NSR) in Cote d’Ivoire, and solid progress at Greenstone (2.0% NSR) and Posse (1.0% NSR), which are set to reach commercial production within 12-18 months. While none of these projects are massive in scale from an attributable ounce standpoint to Franco-Nevada, they combine for a meaningful contribution, and are expected to lift Franco-Nevada’s attributable production to ~800,000 gold-equivalent ounces [GEOs] in FY2027.
Among larger projects, Gold Fields noted that it is confident in its ability to pour first gold in Q4 of this year at Salares Norte, with the 1.0% NSR (assumes buyback is exercised) representing an incremental ~$8.5 million per annum in contribution based on the asset’s ~450,000 GEO production profile in its first seven years. Meanwhile, construction at Tocantinzinho is also progressing on schedule (51% complete), with the project expected to reach commercial production in H2 2024. And while this asset may not rival Salares Norte in scale with ~196,000 ounces in the first five years, the deliveries are expected to be much more significant due to the large streaming deal on this asset, with ~12.5% of gold produced or ~24,500 GEOs per annum at 20% of spot until 300,000 ounces have been delivered.
Elsewhere among organic growth projects, Island Gold is inching closer towards doubling its production in 2026 (0.62% NSR), and Agnico Eagle (AEM) continues to work on increasing production from its Kirkland Lake Camp (#4 Shaft integration and Amalgamated Kirkland) where Franco-Nevada holds a 1.5% NSR, with an additional 2.0% NSR at Amalgamated Kirkland and other areas west of the Macassa Mine. As noted in Agnico’s most recent update, the Macassa mill is expected to reach full capacity of 1,650 tonnes per day by mid-2024, with the asset no longer mine-constrained given the graduation to a more productive shaft (6.5 meter in diameter with two skips). Notably, this shaft in addition to de-risking the operation and increasing hoisting capacity also allows for better underground working conditions (improved ventilation), but lower unit costs and more effective exploration east of the South Mine Complex, benefiting Agnico Eagle and also those holding royalties on the mine, like Franco-Nevada.
To summarize, while it’s been a volatile year for commodity prices which has created some noise in Franco-Nevada’s attributable ounce production and financial results, there is a path to much higher production from key assets, with other opportunities including a potential expansion to 950,000+ ounces per annum at Detour Lake (higher throughput + underground), and meaningful production from other assets in the development pipeline yet to begin construction like Eskay Creek, Stibnite, and Copper World. So, while Franco-Nevada may have had a tough H1 which was impacted further by a temporary rift between the Panamanian Government and First Quantum at Cobre Panama, organic growth in stages over the next several years should allow Franco-Nevada to continue reporting record financial results on an annual basis going forward and increasing its dividends to shareholders.
Let’s dig into the valuation below and see whether investors are getting a margin of safety for this growth:
Valuation
Based on ~193 million fully diluted shares and a share price of US$142.00, Franco-Nevada trades at a market cap of ~$27.4 billion. This is one of the highest market capitalizations sector-wide and it’s certainly justified with the company having ~116 producing assets (47 precious metals), making it the most diversified precious metals royalty/streaming company globally. That said, the company continues to trade at a premium multiple, trading at over 28x FY2023 cash flow per share estimates, a slight premium to its historical multiple. And even if we use a premium multiple of 30.0x cash flow given the company’s unrivaled position (greater scale and superior diversification across assets and jurisdictions) and FY2024 estimates of US$5.45, this translates to a fair value of US$163.50.
This upside case may interest some investors given that Franco-Nevada is arguably the lowest-risk name in the sector with industry-leading margins, diversification, and a rock-solid balance sheet. However, I am looking for a minimum 25% discount to fair value to justify buying large-cap names in commodity sectors, pointing to an ideal buy zone of US$122.65 or lower. This suggests that there still isn’t a margin of safety in place for the stock. And from a relative value standpoint, Sandstorm Gold Royalties (SAND) may not match Franco-Nevada’s quality, but it has significantly improved its portfolio with better diversification, an increased weighted-average mine life, and larger scale, yet trades at one-third of Franco-Nevada’s valuation at less than 10x FY2024 cash flow per share estimates. So, given that I prefer to buy hated companies trading at deep discounts to fair value, I continue to see SAND as the better reward/risk setup, even if it carries a higher risk (weaker balance sheet).
Summary
Franco-Nevada was on track to lap much easier comps in Q3 given the softness in gold and silver prices in Q3 2022, but it was still going to come up against an elevated oil price for its energy segment with prices sitting below $70.00/barrel heading into the quarter. However, the rebound in energy prices has improved this outlook, with oil averaging ~$79.00/barrel in Q3 vs. $73.78/barrel in Q2, and gold and silver prices are also much higher year-over-year. That said, while the outlook is better, sentiment on oil is now overheated short-term, and while FNV may positioned for a better Q3 than expected at the onset, I don’t see nearly enough margin of safety at current levels to justify owning the stock. In summary, while I see FNV as a top-5 name from a quality standpoint sector-wide, I continue to see better bets elsewhere in the sector.
Nevada
'We have a DUI problem in the valley': Nevada State Troopers arrest 182 Las Vegas drivers for DUIs in December
LAS VEGAS (KTNV) — It’s a problem that data shows only seems to be getting worse in Southern Nevada — people driving under the influence of alcohol or drugs.
Local law enforcement agencies hold DUI enforcement blitzes throughout the year, that’s nothing new, but perhaps none are more notorious in Las Vegas than the ones held on New Year’s Eve — one of the most dangerous times to be on valley roadways.
This year was no different.
In a 24-hour period from noon this New Year’s Eve to noon on New Year’s Day, Nevada State Police (NSP) Troopers arrested 49 drivers for DUI statewide, a whopping 36 of those were right here in Clark County.
“We do have a DUI problem, impaired driving throughout the valley,” said Trooper Shawn Haggstrom.
Haggstrom said new data shows there were 182 DUI arrests in Las Vegas alone in the month of December.
“I think it’s staggering,” Haggstrom said. “If you think about it, that’s five or six DUI arrests every day.”
Five or six DUI arrests a day can make a difference, because when it comes to fatal crashes: “the two largest contributing factors here in Nevada are speed and impairment,” Haggstrom said.
We know 2024 was a particularly deadly year on our roads, too, with 412 deaths statewide — 293 of those happened right here in Clark County, a 13.6% increase from 2023.
“Even one fatal is too much,” Haggstrom said. “It doesn’t just affect that person that’s gone–that’s a family member, that’s a dad, a cousin, a brother, a friend.”
That’s why as we start a new year, Trooper Haggstrom reminds all of us not to drink and drive.
“Don’t take that risk,” Haggstrom said. “Because once you get in that vehicle, it’s like a 5,000 pound bullet — you can end up killing somebody or seriously injuring somebody.”
Law enforcement around the valley plan to continue working together on DUI blitzes several times in 2025, so make sure you’re planning ahead, identifying a designated driver or using ride shares.
Haggstrom’s message to drivers is simple: “Drive sober, or get pulled over.”
Crime & Court on Channel 13
Nevada
7 Perfect Destinations for a Long Weekend in Nevada
When people think of this unique state, they often only picture Las Vegas, gambling, and nightlife, but there’s so much more! Nevada is the 7th largest state and is also known for its rocky mountains, mining history, and iconic desserts. It gets its name from “Sierra Nevada,” which translates to “snow-covered mountains” due to there being 314 named mountain ranges. This state was founded in 1864 during The Civil War and is nicknamed “Silver State” as it is considered the second-largest producer of silver. Come spend one of your long weekends in one of these picturesque towns!
Elko
With a population of 20,500, this vacation spot gives visitors a chance to experience city living while still having stunning nature views. Whitecap mountains surround the town and give it picturesque scenery. Start your first day off by walking around the elaborate city and visiting the Northeastern Nevada Museum to learn about the local history and wildlife and to see some art exhibits. Spend the next day immersing yourself in nature and hiking part of The Ruby Crest Trail or part of the Ruby Mountains, which is a remote wilderness hiking experience located in the Humboldt-Toiyabe National Forest. This is one of the most popular trails located around Elko and features rocky mountains overlooking lakes. On your way to this trail, stop by the South Fork State Recreation Area to see views that will ingrained in your memory forever.
On the last day, head over to the Western Folklife Center to learn about cowboys, their history, and the American West. Afterward, stop by the Riparian Hot Spring to soothe the muscles and experience naturally warm waters and a peaceful atmosphere. This spot is great for individuals looking to experience ultimate relaxation with being enveloped in the sounds of nature. Stay at the Rodeway Inn Elko Downtown Area for only $50 a night or the Hampton Inn Elko for $103 a night.
Boulder City
Only 26 miles from the most popular city in Nevada, known as Las Vegas, this spot is perfect for individuals still wanting to be around the bustling scene but wanting to experience a small-town feel. With only a population of 14,000, this city features rows of historic homes, a historic district, and constant scenery of red rocky mountains. Upon arrival, head over to the north end of the city to visit the overlook points known as the Mountain View and Lake Mead View Point. This shows a breathtaking view of forests, rocky mountains, deserts, lakes, and unique formations.
During your visit, stop by two excellent museums that are offered in the area. The Nevada State Railroad Museum has donated trains from the famous Virginia and Truckee Railroad. You can even take a 45-minute train ride! The Boulder City-Hoover Dam Museum is free to enter and tells the story of the men and women who braved the desert to build Hoover Dam and settle Boulder City. Both of these museums are essential when visiting. For hiking and to see the incredible sandy landscapes, check out the Bootleg Canyon Park Trailhead, River Mountain, or the Historic Railroad Hiking Trail. To relax, Boulder Beach and Goldstrike Hot Spring are essentials! After packed-filled days, head back to the Boulder Dam Hotel for around 100 dollars a night!
Winnemucca
This town was named after Chief Winnemucca, who was a part of the Northern Paiute Tribe and a war chief and translates to “one moccasin” (since he always had one shoe on) or “The Giver” due to his daughter’s participation in advocating for fair treatment. Most tourists travel to this town to hike Winnemucca Mountain, which has an elevation of 6,760 feet and an out-of-this-world view. Travel only 10 mins outside of the city to visit the Winnemucca Sand dunes or 20 mins to the Water Canyon Recreation Area for hiking. Stop by the free modern brick building known as The Humboldt Museum to see remains from the ice age 13,000 years ago, art, vintage automobiles, and to learn about the history of American Indians and mining. End the day at the Econo Lodge Inn and Suites for only 52 dollars a night!
Baker
This very small town is close to the Utah border and is the last stop before the “Loneliest Road in America,” which is a 408-mile-long highway of complete isolation. Baker is ideal for individuals looking to go on a nature retreat! Only 5 miles from the entrance of the well-known Great Basin National Park, this town attracts a lot of people looking to explore all parts of this unique park. Hike one of the four mountain peaks with 360 views (or all if you’re up for the challenge) that includes Wheeler Peak (elevation of 13,000), Pyramid Peak (elevation of 12,000 feet), Lincoln Peak (elevation of 11,600) or Granite Peak (elevation of 11,218). Stop at the Lehman Caves and take a guided tour to see more than 300 rare and unique shield formations. While there, check out the Mather Overlook to view white cap mountains from the ground.
Take a drive through the Wheeler Peak Scenic Drive to view the world’s oldest trees, which are nearly 5,000-year-old bristlecone pines. Lastly, take a walk to view the Lexington Arch, which is made of limestone and created by strong weather forces that have been working for centuries. Stay at the Stargazer Inn or End Of The Trail in between the busy days!
Virginia City
Southwest of Reno, Virginia CIty is home to Victorian buildings that were built in the 19th century during a mining boom. There are three museums in the area to focus on keeping the history alive. To learn more about mining and what it was like to live during the heyday, stop by The Way It Was Museum. The Historic Fourth Ward School And Museum is the last four-story school building of its time and has interactive exhibits. This has a preserved classroom from 1876 that allows visitors to sit and experience what it would be like to go to school back then. Lastly, The Comstock Firemen’s Museum teaches about The Great Fire Of 1875 and gives a glimpse of the men who fought it.
The Chollar Mine Tour takes you deep underground to see how the miners of the Gold Rush extracted 17 million in gold and silver, which made this city famous. For hiking, take the trek up Mt. Bullion or Mt Davidson for beautiful scenery. Stay at the Silverland Inn for 81 dollars a night or The Virginia City Bed and Breakfast.
Tonopah
Tonopah was nick-named “Queen Of The Silver Camps” due to its success in the mining industry in the 1900’s. It is known for world-class stargazing and vast desert landscapes. To learn about mining, take a step into the Tonopah Historic Mining Park to explore more than 100 acres of history, tunnels, caves, and artifacts. Stop by the Old Tonopah Cemetery to view a well-preserved desert cemetery from 1901. From pioneers, old miners, and politicians, learn about the 300 people who are buried there and the thrilling stories behind each of their lives. For a challenge, spend a day hiking Brougher Mountain for an overlook of the town, rocky formations, and desert. Stay at the infamous Clown Motel or at the Mizpah Hotel for direct access to downtown.
Ely
Ely is a four-season mountain town where art and outdoor adventures thrive. Brace yourself to be surrounded by white-capped mountains in this town of nearly 4,000! Named in 1878, it was originally a stagecoach station along The Pony Express and became one of the top 10 producers of U.S. copper for 15 years. To learn more about the impact of mining and its general history, visit White Pine Public Museum. After, walk over to the Nevada Northern Railway Museum to take a train ride through the nearby landscape that you will be sure to remember forever. Drive 25 minutes to Ward Charcoal Ovens State Historic Park to see six beehive-shaped charcoal ovens that used to process silver. This 700-acre park also has astonishing hikes and remarkable views. After each eventful day, come back to either the Magnuson Hotel Ely for only $54 a night or at the Ramada By Wyndham Ely for $78 a night!
Spend Your Next Long Weekend In Nevada
Nevada is the driest state in the nation, with an average of 10 inches of precipitation a year! This will guarantee beautiful weather throughout your stay while you hike one of the challenging or easy mountains, lay out on a beach, take a walk through the forest, or explore the scenic towns. Whether it’s a smaller town like Baker to visit Great Basin National Park, a city like Elko, or a historic town like Virginia City, this state has it all. Plan your next long weekend in one of these beautiful towns!
Nevada
LETTER: Nevada House Democrats buck their party
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