On Tuesday, I talked about the unique advantage that royalty companies offer – particularly when it comes to playing the recent rally in gold prices.

Well, now it’s time to talk about the best investment in the entire sector: Franco-Nevada Corp. (FNV).

Since going public in 2007, Franco-Nevada has outperformed traditional miners and provided investors with a compounded return of close to 15% per year – despite a collapse in gold prices.

[ad#Google Adsense 336×280-IA]And that number was even higher – closer to 20% – when the company was trading near its 52-week peak of $61.60 per share.

That tops even Warren Buffett’s stalwart Berkshire Hathaway (BRK.A, BRK.B) over the same time period.

The royalty business isn’t complicated, but it requires experienced mining knowledge.

Franco has this knowledge with a small suite of seasoned executives who are tasked with finding mining companies to take stakes in.

With ample cash on hand and a formula for success, the company has managed to stay ahead of its competition and make money in a sector that’s notorious for doing anything but that.

Here’s how…

And the Winner Is…

FNV functions like any other royalty company: It invests upfront money in miners that are at various stages of exploration and production or expansion. And in return, FNV receives a future stream of economic value from what’s produced.

The cost of production is zero after FNV’s initial capital is recovered. So its liability is known at the outset. And the company has no operating interest, because its staff is small. With this low cost structure, any incremental increase in commodities prices goes directly to the bottom line.

However, what really separates FNV from the rest of the royalty sector is that it invests in a variety of different resource plays, ranging from mining to oil and gas. This sets it apart, because most royalty companies focus on just one sector. But by diversifying, FNV is able to smooth out earnings and take advantage of a variety of resources.

So even though its main focus is gold, FNV isn’t tied to a losing proposition when the metal falls out of favor. Yet, it still captures all the upside of a bull run.

In fact, FNV has massive leverage to gold prices – more than any exchange-traded fund (ETF) or gold miner.

As I said, the company has far less overhead and far more diversity than any mining company. And since its income can grow at a faster pace than the underlying appreciation of the metal, it has far more upside than an ETF.

Now, if gold prices go down, the amount for which FNV can sell its share of production is reduced, as well. And if the underlying asset has a problem at a mine or faces political issues, production can be negatively impacted, hence the need for diversification.

As a result, not every mine is a success. However, FNV boasts interests in more than 200 mines or oil fields, and the vast majority are contributing royalties. And that keeps the company from truly getting burned.

Furthermore, even if gold prices go lower, FNV still receives income from gold sales since its costs were laid out in its initial investment. That income is paid in part to shareholders through a dividend that’s significantly higher than most miners at 1.7%.

Bottom line: Franco-Nevada Corp. (FNV) will benefit from any rise in gold prices. And since it has more upside than an ETF and fewer costs than a traditional miner, it offers greater rewards with fewer risks.

So if you believe, like I do, that the price of gold will continue to rebound, FNV is a solid bet.

And “the chase” continues,

Karim Rahemtulla


Source: Oil & Energy Daily