Franco-Nevada Corp.
November 21, 2013
(FNV-T: C$43.35)
Chris Lichtenheldt, CFA / (647) 253-1128
[email protected]
BUY, Medium Risk
Dundee target: C$50.00
Scott Morrison / (416) 350-3392
[email protected]
Premium performance comes with a premium price
Recommendation
Rating:
Target:
Risk:
2013 EPS
2014 EPS
New
Last
BUY
C$50.00
Medium
0.95
0.94
-
Gold-focused royalty and streaming company…
Company Data
Price (11/20/13):
52-Week Range:
Market Capitalization ($MM):
Enterprise Value ($MM):
Shares Outstanding - Basic (MM):
Shares Outstanding - Diluted (MM):
2013E Dividend Yield:
Avg Daily Volume (3 Mos) (000s):
Cash ($MM):
Debt ($MM):
Working Capital ($MM):
Fiscal Year end
NAV
US$/sh
24.89
23.24
Price Deck:
Spot Gold:
C$43.35
C$33.05-58.67
US$6,092
US$5,302
146.9
157.7
1.7%
811
US$790
US$0
US$891
Decemeber 31
P/NAV
LT Gold:
1.67x
1.78x
$1325/oz
$1244/oz
EPS
2012 A
2013 E
2014 E
Q1
Q2
Q3
Q4
FY
P/E
0.31
0.24
0.31
0.32
1.19
35.0x
2012
2.22
18.6x
A
A
A
A
A
0.28
0.22
0.24
0.23
0.95
43.7x
0.22
0.23
0.24
0.24
0.94
44.1x
A
A
2013 E
2014 E
1.92 E
21.5x
1.92 E
21.6x
CFPS
FY
P/CF
A
A
A
E
E
E
E
E
E
E
All Figures in US$ Unless Otherwise Noted
Source: Bloomberg, Company reports, DCM Estimates
Notes: EPS is adjusted, Avg Volume solely for TSX listing
FNV: Price/Volume Chart
Franco-Nevada (“Franco”) is a gold-focused royalty and streaming company listed
on the TSX and NYSE under "FNV", with a market capitalization of $6.1 billion.
Franco has a portfolio of 369 royalty and streaming agreements, including both
producing and non-producing mineral and oil & gas assets, and an industryleading balance sheet with Q3 2013 working capital of $891MM and no debt.
We view Franco’s portfolio as high-quality, with revenue derived from assets
carrying an average cash operating margin of 35% during Q3 2013, and with 94%
of Franco’s revenue derived from assets with a cash operating margin of more
than 20% (Dundee estimates). Furthermore, we forecast 2013 gold equivalent
production of 228kozs could grow by +40% to 328kozs in 2017.
…with a long history of outperformance
Franco IPO'd in December 2007, but also traded publicly for more than 18 years
before being acquired by Newmont Mining in early 2002. Both the old Franco and
the new company have a track record of consistent outperformance. In 21 of 24
years it has been a publicly-listed company (1984-2001, 2008-2013), Franco has
outperformed the gold producers; and in 18 of 24 years, it has outperformed the
price of gold. With its insulated cost structure, superior operational diversity,
higher margins, and free exploration upside, we expect Franco to continue
outperforming the average gold producer over the long-term. Furthermore, with
growing production and a dividend yield of 1.7%, we also expect Franco to
continue outperforming the price of gold over the long-term.
Franco is expensive relative to producers, but has a superior business model
We estimate Franco trades at a 2014 P/CFPS multiple of 24.3x and a P/NAV
multiple of 1.78x (based on spot $1,244/oz gold), reflecting premiums of 137%
and 24%, respectively, versus our gold-producer coverage. Franco is not an
"inexpensive" stock, but we believe the company has a superior business model
and is a suitable investment for investors looking for high-quality exposure to
gold prices.
Source: Factset
Company Description
Franco-Nevada is a gold-focused royalty and
streaming company. With its 369 royalties and
streams, Franco-Nevada offers exceptional
geographical and operational diversity and has
a long track-record of outperforming gold
prices and gold equities.
Initiating with a Buy rating and C$50.00 price target
We derive our C$50.00 price target using a 50% weighting applied to our 24x
P/CF valuation of C$47.55 and a 50% weighting to our 2.04x P/NAV valuation of
C$53.06. Our multiples are based on Franco's historical premiums to the gold
producing peers (detailed within). Offering exceptionally high-quality exposure to
gold prices, we are initiating coverage of Franco-Nevada with a Buy rating.
Please see Disclosures and Disclaimers at the end of this report.
A division of Dundee Securities Ltd.
Dundee Capital Markets is a registered trademark of Dundee Corporation, used under license.
Franco-Nevada
November 21, 2013
Contents
Executive summary - Expensive, but worth it ...................................................................................................................................3
A history of outperformance ..............................................................................................................................................................8
Company description ......................................................................................................................................................................11
High-quality asset portfolio .............................................................................................................................................................14
Growing production profile and earnings ........................................................................................................................................15
Strong balance sheet ......................................................................................................................................................................17
Comparable valuation .....................................................................................................................................................................18
Valuation: Buy, C$50.00 Price target ..............................................................................................................................................23
Appendix 1 - Key assets .................................................................................................................................................................24
Appendix 2 - Management ..............................................................................................................................................................27
Appendix 3 - Risks ..........................................................................................................................................................................28
Appendix 4 - Asset summary table .................................................................................................................................................31
Appendix 5 - Royalties & Streams explained ..................................................................................................................................33
Note: All price data as of November 20, 2013. Wherever we refer to "spot" gold prices, a price of $1,244/oz was assumed
unless otherwise noted.
DUNDEE CAPITAL MARKETS Page | 2
Franco-Nevada
November 21, 2013
EXECUTIVE SUMMARY - EXPENSIVE, BUT WORTH IT
Franco-Nevada is a gold focused royalty and streaming company listed on the TSX and NYSE
under "FNV", with a market capitalization of $6.1 billion. Franco-Nevada ("Franco") currently
has a portfolio of 369 royalty and streaming agreements, including both producing and nonproducing mineral and oil and gas assets. The company also has a strong balance sheet with
working capital of $891M and no debt as at September 30, 2013.
Gold-focused
royalty/streaming company
Growing production from a high-quality asset base
We forecast a gold equivalent production CAGR of 10% from 2013 to 2017, from 228kozs in
2013 to 328kozs by 2017 (lower left). The most significant contributors to this growth are
Cobre Panama, and Detour Lake, which more than offset production declines at various
other assets. To measure the quality of this production, we look at the cash operating
margin of the assets which make up Franco's streaming and royalty agreements. We view
Franco's portfolio as relatively high-quality, with 94% of revenue during Q3 2013 derived
from assets with an operating margin of more than 20% (lower right).
94% of Q3 revenue came from
assets with cash margins of
+20%
Q3/13 revenue curve by margin of underlying asset
70%
400
350
10% CAGR, excluding
New Prosperity
300
250
200
150
100
50
0
2013E
2014E
2015E
2016E
2017E
Estimated cash operating margin
Gold Equivalent Ounces (kozs)
Production profile (gold equivalent ounces)
60%
50%
40%
30%
20%
10%
0%
-10%
0%
20%
Cobre Panama
60%
80%
100%
-20%
-30%
GEO
40%
Cumulative revenue
Q3 2013
Q2 2013
New Prosperity
Notes: See page 13 for detailed footnotes regarding our calculations for the chart on the above right. Source: Company reports, DCM Estimates
Below we outline our key operating and financial forecasts over the 2013-2017 timeframe.
Despite our forecast decline in average gold prices in 2014 versus 2013, we forecast EPS and
CFPS to be roughly flat as the company grows production. We expect growing production,
earnings and cash flow after 2014.
Key operating and financial forecasts: forecast growth in production and earnings (Dundee price deck)
US$MM, unless otherwise noted
2013
2014
2015
2016
2017
Revenue
$400
$407
$438
$473
$522
Production (gold equivalent ounces - GEO, kozs)
228
232
246
280
328
$80
$79
$80
$80
$415
Franco Guidance - GEO, kozs
Oil and Gas Revenue
Franco Guidance
215-235
$75
+$65
EBITDA
$320
$334
$365
$391
EBITDA Margin (%)
80%
82%
83%
83%
79%
Net Income (adjusted)
$143
$142
$157
$164
$176
EPS (diluted, adjusted, US$ per share)
$0.95
$0.94
$1.04
$1.09
$1.16
CFPS (diluted, pre-working capital, US$ per share)
$1.92
$1.92
$2.10
$2.24
$2.40
NAV (US$ per share)
$24.89
Source: Company reports, DCM Estimates
DUNDEE CAPITAL MARKETS Page | 3
Franco-Nevada
November 21, 2013
Below we outline Dundee's commodity price forecasts. These forecasts drive our financial
forecasts within our price target calculation outlined above. However, throughout this
report we also present some forecasts based on "spot" gold prices. We note any instances in
which spot gold prices have been applied.
Dundee commodity price forecasts
2009A
2010A
2011A
2012A
2013E
2014E
2015E
2016E
2017E
Silver (US$/oz)
$14.69
$20.23
$35.25
$31.13
$24.17
$22.88
$23.83
$23.00
$22.00
Gold (US$/oz)
$972
$1,224
$1,570
$1,668
$1,423
$1,373
$1,430
$1,375
$1,325
Zinc (US$/lb)
$0.75
$0.98
$0.99
$0.88
$0.86
$0.90
$1.00
$1.00
$0.90
Lead (US$/lb)
$0.78
$0.98
$1.09
$0.93
$0.97
$1.00
$1.00
$1.00
$0.90
Copper (US$/lb)
$2.34
$3.42
$4.00
$3.61
$3.24
$3.30
$3.50
$3.50
$2.75
WTI Oil (US$/bbl)
$61.77
$79.52
$95.07
$94.14
$99.00
$95.00
$90.00
$90.00
$90.00
Source: DCM Estimates
As stated earlier, Franco has an extensive portfolio containing nearly 370 assets, therefore
providing significant operational diversity. We note, however, the company's 6 largest assets
account for 33% of our NAV.
Top 6 assets in portfolio (measured as % of total NAV)
Weyburn 11%
Well diversified portfolio with
some key assets
Goldstrike 6%
MWS 5%
Stillwater 4%
Rest (363 assets
plus balance sheet)
67%
Detour 4%
Palmarejo 3%
Source: DCM Estimates
Franco's history - consistent outperformance
Franco has a record of
significantly outperforming
Franco has a long track record of exceptional value creation (lower left, page 5). We also
looked at this data including the "Old Franco" (full years traded 1984-2001) and then further
segmented this track record into three categories: 1) years when gold prices were down, 2)
years when gold prices were flat, and 3) years when gold prices were up. Franco has
consistently outperformed both the price of gold and the gold equities.
DUNDEE CAPITAL MARKETS Page | 4
Franco-Nevada
November 21, 2013
Franco-Nevada has consistently outperformed gold producers and the gold price
Average price performance
Indexed to 100 at IPO
1000
100
10
1
80%
70%
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
Gold down
(9 Years)
New Franco-Nevada
XAU Index
Gold flat
(6 Years)
Gold up
(9 Years)
Gold
New and old Franco
Gold
XAU Index
Notes: 1) "XAU Index" refers to the Philadelphia Gold and Silver Index; 2) "Gold up" is defined as >3%, "Gold flat" is defined as -3 to 3% and "Gold
down" is defined as <-3%; 3) The performance chart on the right includes performance from the "Old Franco" which was a public company until
acquired by Newmont in 2002; 4) 2013 performance is YTD only, all other years are full calendar years; 5) Within the performance chart on the
right, the averages exclude the years 1984-1987 as Franco's performance exceeded 800%. Source: Bloomberg, DCM research.
Relative valuation - Premium, but not as high as it may seem
Premium is not as high as it
looks when actual results
are used instead of forecasts
Franco has historically traded at a significant premium to the gold producers when looking
at forward P/CF multiples (lower left). However, this premium is not as significant if we
replace the forward estimates with actual results (lower right). In other words, Franco has a
better track record of achieving the forecast cash flows than its gold producing peers, which
helps to justify the premium.
Historical forward-looking P/CF multiples based on forecasts (L) and based on actual results (R) (2010 to present)
20
20
18
18
16
16
5.1x P/CF premium
7.6x P/CF Premium
14
14
12
12
10
10
8
8
6
6
FNV
Sr. Golds
FNV
Sr. Golds
Notes: Charts based on Bloomberg data beginning in 2010. Chart above left based on forward twelve month Bloomberg estimates. Chart above
right we replace the forecast cash flows with the actual resulting cash flows. Source: Bloomberg, DCM research
Premium warranted
While not as significant as forward estimates make it appear, Franco still trades at a
noticeable premium. We believe this premium is warranted as Franco has: 1) no direct
capital cost inflation risk, 2) nominal operating cost inflation risk, 3) better operational
diversity (operating risk spread across 45 producing mineral assets and 137 oil and gas
assets), 4) higher margins and, 5) "free" exploration upside potential.
DUNDEE CAPITAL MARKETS Page | 5
Franco-Nevada
November 21, 2013
Franco also trades at a
premium to SLW and RGLD
Franco also trades at a premium to its royalty peers Silver Wheaton (SLW-T, Buy, C$29PT)
and Royal Gold (RGLD, not covered). We note the premium relative to SLW is 9 points when
looking at P/CF, but only about 2 points when looking at EV/EBITDA as Silver Wheaton has
net debt totaling $978MM, whereas Franco currently has a net cash position of $790MM.
Franco also trades at a premium to our gold producers and silver producers under coverage.
We also note Franco's P/CF premium is currently higher than the historical average, as the
company underwent a re-rating in early 2012 and has since maintained a higher premium.
Franco is not an "inexpensive" stock, but we believe the company has a superior business
model, when compared to the producers, and is a suitable investment for investors looking
for high-quality exposure to gold.
Comparable tables
Company
Rating
Target
Price
Share Price
NAV at
Price
P/NAV at
P/NAV Spot
P/CF at Deck
Deck(1)(2)(3)
(1)(3)(5)
(CY)(2)(4)
(2) (3)
(4)(5)
Deck
(C$)
(C$)
P/CF at Spot
(CY)
2013E
2014E
Franco-Nevada (FNV CN)
Buy
$50.00
$43.35
24.89
1.67x
1.78x
21.5x
21.6x
22.0x
Silver Wheaton (SLW CN)
Buy
$29.00
$21.85
16.82
1.24x
1.48x
13.5x
12.5x
13.9x
Royal Gold (RGLD US)*
na
N/R
$46.24
na
na
na
16.2x
13.1x
16.2x
Gold Producers (avg)
na
na
na
na
1.02x
1.44x
8.8x
8.1x
9.1x
Silver Producers (avg)
na
na
na
na
1.18x
1.83x
8.6x
11.2x
9.1x
Notes: Royal Gold numbers are based on consensus
Source: DCM Estimates, Bloomberg
(1) NAV is based on 5% discount rate
(2) Calculated at price deck gold forecasts: 2013=$1,423/oz, 2014=$1,373/oz, 2015=$1,430/oz, 2016=$1,375/oz long-term=$1,325/oz.
(3) P/NAV adjusted at spot FX rates.
(4) Ratios equal to or less than 0 or greater than 100 are not displayed
(5) Spot silver and gold prices, forward curve base metals, spot fx
2013E
2014E
24.3x
14.8x
13.1x
10.2x
15.6x
EV/EBITDA
at deck
(CY)
Share price performance in percentage
2014E 3 Month
15.9x
13.9x
8.3x
6.8x
10.1x
-11.3%
-22.9%
-25.8%
-26.3%
-22.2%
YTD
-23.7%
-39.1%
-43.2%
-49.9%
-37.0%
2 Year
3.5%
-34.3%
-39.5%
-56.2%
-41.2%
5 Year
201.7%
542.6%
55.8%
112.8%
334.4%
Notes: 1) Figures for Royal Gold (not covered) based on Bloomberg consensus estimates; 2) "Gold Producers" and "Silver Producers" based on
Dundee's gold and silver equities under coverage. Source: Bloomberg, DCM Estimates
Balance sheet - positioned for opportunistic acquisitions
At the end of Q3 2013, Franco had $790M in cash, $52M in short-term investments, $70M in
long-term investments and no debt. With its cash, investments and undrawn credit facility of
$500M, we forecast the company has roughly $1.3 billion of available capital (after giving
consideration to post-Q3 acquisitions).
Cobre Panama payments of
$1bln over next few years
We expect additional
acquisitions
We expect the net cash levels to decrease over the coming years as Franco makes payments
on Cobre Panama (assuming the deal structure is unchanged after First Quantum's review of
the project). Furthermore, while we expect the company would need to dip into a net-debt
position to fund its share of Taseko's New Prosperity project, we currently exclude New
Prosperity from our forecasts due to permitting challenges that we believe could halt
advancement for the foreseeable future.
With this strong balance sheet, we believe Franco will continue to add to its portfolio.
Management's strategy is to invest at the bottom of the cycle in long-life assets with
exploration upside. While the large deals, such as the $1 billion Cobre Panama stream,
garner the most attention from the market, it is often the smaller, less scrutinized deals that
ultimately drive the most value-creation over the long-term. For example, a $3MM
investment in Goldstrike has resulted in more than $700M of royalties paid to-date; and a
$2MM loan led to a 2% NSR royalty on Detour Lake, that we now value at $148MM. We
expect Franco to continue to opportunistically deploy capital in smaller transactions ($075MM), which could continue to create value over the long-term.
DUNDEE CAPITAL MARKETS Page | 6
Franco-Nevada
Positive net cash under
various gold price
assumptions
November 21, 2013
Cash flow and balance sheet movements based on spot gold (sensitivities dashed)
1,200
1,000
800
600
400
200
0
-200
-400
-600
Operating cash flow
Investing cash flow
Financing cash flow
Net cash
Gold at $1,500 per oz flat
Gold at $1,100 per oz flat
Note: We assume only 94% of production if gold were at $1,100/oz, in line with our margin analysis (see
page 13), based on spot gold of $1,244, other than sensitivities. Source: DCM Estimates, company reports
Dividend - currently yielding 1.7%
2013 payout ratio of 38%
Based on the company's quarterly dividend of US$0.18/share, we forecast FNV shares are
currently yielding approximately 1.7%. Based on spot gold prices for the remainder of the
year, we forecast the 2013 payout ratio (measured as cash dividends as a percentage of cash
flow from operations) will be 38%, which we believe is sustainable.
Buy rating and C$50.00 Price Target
We derive our C$50.00 price target using a 50% weighting applied to our 24x P/CF valuation
of $47.55 and a 50% weighting to our 2.04x P/NAV valuation of C$53.06. Offering
exceptionally high-quality exposure to gold prices, we rate FNV Buy.
Blended P/CF, P/NAV
methodology
Our 24x P/CF multiple is based on Franco's 2-year average P/CF premium to the producers of
10.7 points, plus our current target multiple for the gold producers of 13.0x. To arrive at our
blended P/NAV multiple of 2.04x, we apply a 3.0x P/NAV multiple to the gold assets and a
1.0x P/NAV multiple to all other assets. Our 3.0x multiple on the gold assets is based on
Franco's 2-year P/CF multiple premium to the producers, in percentage terms, of roughly
130%. We apply this 130% premium to our current median target P/NAV multiple for gold
producers of 1.3x. We believe Franco's historical P/CF premium is a good proxy for a target
P/NAV premium as both metrics are ultimately based on cash flows.
Price Target Buildup: C$50.00 price target and Buy rating
Multiple
NPV
FTM CFPS
P/NAV (Precious metals), 5% discount rate
3.00x
C$13.52
C$40.57
P/NAV (oil/gas+base metals), 8% discount rate
1.00x
C$6.16
C$6.16
Balance sheet items
1.00x
C$6.33
C$6.33
Total
2.04x
C$26.02
P/CF
24.0x
C$1.98
C$ Price Target (rounded to nearest dollar)
Target
Weighting
Total
C$53.06
50%
C$26.53
C$47.55
50%
C$23.77
C$50.00
Source: DCM Estimates
End of executive summary
DUNDEE CAPITAL MARKETS Page | 7
Franco-Nevada
November 21, 2013
A HISTORY OF OUTPERFORMANCE
Can Franco-Nevada's outperformance continue?
Franco-Nevada has a long track record of exceptional value creation. In the charts below we
illustrate Franco's performance relative to the Philadelphia Gold and Silver Index
("XAU") and to the price of gold. We show performance of both the "Old Franco" (prior to
being acquired by Newmont in 2002) and the new Franco-Nevada Corporation which was
spun out of Newmont in December 2007. The "Old Franco" included a number of the same
executives as the new Franco, most notably Pierre Lassonde (now Chairman) and David
Harquail (now CEO).
Both the Old and New Franco-Nevada consistently outperform gold producers and the gold price
1000
Indexed to 100 at IPO
1000
100
Old Franco
10
1
100
10
1
Franco-Nevada
XAU Index
New Franco-Nevada
Gold
XAU Index
Gold
Note: "Old Franco" indexed to 100 in 1990; from 1985 to 1990 Old Franco's share priced increased more than 1000%, so we had to re-index the
chart in 1990 just so the other lines didn't appear perfectly flat. Source: Bloomberg
Given the impressiveness of this long-running record of outperformance, we further
dissected this track record looking for circumstances under which Franco underperformed
its peers, or the price of gold. We segmented each year of Franco's existence into one of
three categories: 1) gold prices down (<-3%), 2) gold prices flat (-3% to +3%), and 3) gold
prices up (>+3%). As it turns out, Franco consistently outperformed both the price of gold
and gold equities, illustrating that Franco in fact offers better gold leverage in the long-term.
FNV tends to outperform no
matter the direction of gold
prices
Average price performance
Franco has tended to outperform no matter the direction of gold (averages shown)
80%
70%
60%
50%
40%
30%
20%
10%
0%
-10%
-20%
-30%
Gold down
(9 Years)
New and old Franco
Gold flat
(6 Years)
Gold
Gold up
(9 Years)
XAU Index
Notes: 1) "Gold up" is defined as >3%, "Gold flat" is defined as -3 to 3% and "Gold down" is defined as <-3%,
years used are 1988-2001, and 2008-2013. 2) Averages exclude the years 1984-1987 as Franco's
performance exceeded 800% over that period. Source: Bloomberg
DUNDEE CAPITAL MARKETS Page | 8
Franco-Nevada
November 21, 2013
We acknowledge that future performance will not necessarily mimic past performance, but
instead is based on the fundamentals going forward (mine-lives, quality of deals, asset
quality, exploration success, balance sheet strength etc.). Nevertheless, the charts in this
section clearly demonstrate a strong business model with a proven track-record. Franco
appears to have established a business model capable of consistently outperforming its
producing peers over the long-term.
How does the market perceive Franco's deals following announcement?
The market's reception to
Franco's deals are mixed
initially…
As is the case with any company possessing a strong balance sheet (see page 17 for more
detail on the balance sheet), there is always a risk the company elects to deploy its capital in
investments that the market believes carry an insufficient return on capital, or unfavorable
risk profile, or both. In order to gauge Franco's track-record for engaging in deals that satisfy
the market (at least initially), we looked at Franco's share price performance in the 10
trading days following the announcement of several transactions over the past few years
(note we focused on transactions for which there was a separate press release). Franco
outperformed both the gold equities and the price of gold.
Relative performance 10 days following deal announcement
20.0%
15.0%
10.0%
5.0%
0.0%
-5.0%
-10.0%
-15.0%
-20.0%
-25.0%
Midas Gold
(May 2013
$15M)
Lake Shore
(Feb 2012
$35M)
Kirkland
(Oct 2013
$50M)
Weyburn
(Jan 2012
$55M)
Franco
Gold
Lumina
(Sept 2011
$66M)
Weyburn
(Nov 2012
$400M)
Gold Wheaton Cobre Panama
(Dec 2010
(Aug 2012
$830M)
$1,000M)
XAU Index
Source: Factset, Company reports
…but favourable over the
long-term
Management has acknowledged that Franco's deals can often appear 'fully-valued' as
management is willing to pay a full price if they view promising exploration potential. To
measure the long-term success of Franco's acquisition strategy, we again point to the
company's long-term track-record of outperformance detailed previously.
How do we perceive Franco's deals?
In order to answer this question we calculated the IRR on two of Franco's recent deals under
various commodity price assumptions.
DUNDEE CAPITAL MARKETS Page | 9
Franco-Nevada
November 21, 2013
Cobre Panama estimated IRR's
Kirkland Lake estimated IRR's
9%
8.0%
8.5%
12.0%
10.7%
8%
9.9%
10.5%
10.7%
11.2%
10.0%
7%
6%
5.0%
5%
5.0%
8.0%
4.0%
6.0%
4%
3%
4.0%
2%
2.0%
1%
0%
DCM Price Deck
Current Spot
Consensus LT Spot prices day Consensus LT
prices
of announcement prices day of
announcement
0.0%
DCM Price Deck Current Spot
Consensus LT Spot prices day Consensus LT
prices
of
prices day of
announcement announcement
Notes: 1) DCM commodity price forecasts are shown on page 4; 2) Spot prices include $1,244/oz gold; 3) Consensus prices taken from Bloomberg; 4)
Spot prices the day of the announcement include $1,620/oz and $1,345/oz gold for Cobre Panama and Kirkland Lake, respectively. Source: DCM
estimates, Bloomberg, Company reports.
Cobre Panama deal looked
better under gold prices at
the time
Based on long-term consensus commodity prices at the time of the transaction, both deals
appeared to offer an IRR 8% or higher. However, assuming today's spot gold prices, the
Cobre Panama deal appears less attractive as we calculate an IRR of 4%. We believe the
minimum expectation is that a deal appear accretive under reasonable commodity price
assumptions at the time of the announcement (i.e. spot prices or long-term consensus
prices at the time of the deal). However, for a resource company to create significant value
for the long-term investor, deals ideally need to be entered into at (or near) the bottom of
the cycle. With the benefit of hindsight, we know the Cobre Panama deal was not entered
into at the bottom, but given the exceptionally long-life of the asset (+40 years) the ultimate
return will be determined over coming decades.
DUNDEE CAPITAL MARKETS Page | 10
Franco-Nevada
November 21, 2013
COMPANY DESCRIPTION
$6.1Bln gold-focused royalty
company
Franco-Nevada is a gold focused royalty and streaming company listed on the TSX and NYSE
under "FNV", with a market capitalization of $6.1 billion. Franco-Nevada ("Franco"
hereafter) currently has a portfolio of 369 royalty and streaming agreements including both
producing and non-producing mineral assets and producing oil & gas assets. As at the end of
Q3 2013, the company had working capital of $891M and no debt. In addition to its gold and
energy assets, Franco also holds interests in platinum group metals and other resources.
Below we elaborate on Franco's business mix.
~78% of 2013 revenue from precious metals
~78% precious metal
revenue, rest oil & gas and
base metals
On November 13, 2012, Franco purchased an additional 11.71% NRI in the Weyburn oil unit,
operated by Cenovus. With this added oil exposure, we expect the company to generate
roughly 19% of 2013E revenue from oil & gas. We expect the oil division's contribution to
Franco's consolidated revenue to decrease over the next few years as gold revenue
increases. We forecast oil & gas revenue, as a percentage of total revenue, to decline to
roughly 15% by 2017 as Franco's gold stream with Cobre Panama ramps-up. Once fully
ramped-up, we believe Cobre Panama could amount to roughly 20% of consolidated
revenue.
2013E Revenue breakdown by type
2017E Revenue breakdown by type
15%
19%
5%
3%
78%
Precious metals
Base Metals
Oil and Gas
80%
Precious metals
Base Metals
Oil and Gas
Source: DCM Estimates
Panama to grow from 0% to 30% of NAV
With respect to NAV breakdown, Franco offers an attractive political risk profile with nearly
75% of the company's NAV located in jurisdictions considered to be of lower political risk
(Canada, U.S., Mexico, Australia). We note the NAV breakdown on the lower left includes
our current carrying value of roughly zero for Cobre Panama. This is due to the fact Franco's
$1 billion of outstanding payments completely offsets the value we carry for all future
revenues from the asset (based on our long-term gold price of $1,325/oz and discount of
5%). As Franco makes its $1 billion in payments to First Quantum, our NPV for the Cobre
Panama stream approaches $1 billion, at which point 30% of our NAV will be situated in
Panama, as shown in the following chart on the lower right.
DUNDEE CAPITAL MARKETS Page | 11
Franco-Nevada
November 21, 2013
Current NAV breakdown
Q1 2017 NAV breakdown - Cobre Panama grows to 30% of NAV
Canada
15%
Canada
11%
USA
Mexico
38%
10%
2%
0%
4%
2%
USA
27%
8%
Mexico
Australia
Australia
Panama
Panama
Mauritania
5%
Exploration
Mauritania
30%
19%
Exploration
Other
27%
Other
2%
1%
Source: DCM Estimates
50% of NAV to come from
politically stable jurisdictions
We note that Panama ranks in the lowest quartile of the Fraser Institute's "Policy Potential
Index" (PPI), which serves to dilute the quality of Franco's portfolio. However, in 2017 we
still forecast roughly 50% of Franco's NAV will come from USA, Canada, Mexico and Australia
combined.
66% of assets have +10 year lives; majority of NAV from producing assets
Based on current reserves combined with our forecast for current resource conversion at
the mines, we calculate an average mine life of roughly 21 years for Franco (weighted by
NAV), with 66% of the company's assets carrying a mine life of more than 10 years. Based on
the normal course of mine depletion, we forecast that by the end of 2016, a smaller number
of Franco's assets will fall into the +20 year category, however this trend may be offset by
continued exploration success.
2013 asset life estimate - producing
End of 2016 asset life estimate - producing
10%
15%
10%
34%
44%
29%
37%
22%
<10 yrs
10-15 yrs
15-20 yrs
20+ yrs
<10 yrs
10-15 yrs
15-20 yrs
20+ yrs
Note: Weyburn has a life of 37+ years, which significantly increases the weighted average mine life of 21 years stated above. Source: Company
reports, DCM Estimates
Project pipeline can offset
production declines over the
long-term
As is true with every mining company, Franco needs to establish a pipeline of exploration
and development stage assets that will someday replace the revenue from existing assets. In
order to address this need, Franco has royalty agreements on more than 27,000 square
kilometers over properties that are either in exploration or advanced development. While it
is difficult to predict if/when, and to what degree, these properties may ultimately generate
returns for Franco, with more than 27,000 square kilometers of land contained in 154
DUNDEE CAPITAL MARKETS Page | 12
Franco-Nevada
November 21, 2013
different exploration assets, the odds are favourable that some of these properties will
ultimately move into production. During a recent presentation, David Harquail (CEO) stated
he believed 1 in 20 early stage properties can ultimately become 'big wins'.
Land positioning by development stage - in km2
Current NAV broken down by stage of development
3,362
21%
2,879
11,380
2,943
19,672
Producing mineral
Exploration mineral
Exploration oil and gas
79%
Advanced mineral
Producing Oil and gas
Operating
Development
Note: Exploration and producing oil and gas land packages combined amount to a total land position of 6,241km2; for the sake of the above chart
we assumed each oil and gas land claim is the same size. Source: Company reports
Measured in kilometers square, the majority of Franco's land package consists of nonproducing assets; however the majority of our value is naturally attributed to producing
assets. Moreover, the majority of the 21% attributable to development value is comprised of
Cobre Panama, Rosemont and Agi Dagi - all of which are near-production assets (with Agi
Dagi and Rosemont still needing permits).
As stated earlier, Franco has an extensive portfolio containing nearly 370 assets, therefore
providing significant operational diversity. We note, however, the company's 6 largest assets
account for 33% of our NAV.
Top 6 assets in portfolio (measured as % of total NAV)
Weyburn 11%
Well diversified portfolio with
some key assets
Goldstrike 6%
MWS 5%
Stillwater 4%
Rest (363 assets
plus balance sheet)
67%
Detour 4%
Palmarejo 3%
Source: DCM Estimates
DUNDEE CAPITAL MARKETS Page | 13
Franco-Nevada
November 21, 2013
HIGH-QUALITY ASSET PORTFOLIO
We look at the operating margin of Franco's counterparties
Franco has ~80% EBITDA
margins…
...but it's more important to
look at the margins of the
assets themselves
94% of Franco's revenue
comes from assets with +20%
cash operating margins in Q3
2013
When it comes to judging asset-quality for producing companies, we would typically look at
cash outlays at the various operating mines to determine the health and resiliency of the
cash operating margin. In the case of Franco's asset portfolio, the margins Franco realizes
are high (~80% EBITDA margins), but do not help us gauge the 'break-even' commodity price
at which the underlying asset would no longer generate operating cash and, in turn, be at
risk of closure.
Therefore, in order to assess the health of the underlying assets that ultimately drive
Franco's cash flows, we have constructed a production curve which illustrates the cash
operating margin of the underlying assets that make up Franco's royalty portfolio.
Unfortunately, due to disclosure limitations at the various assets, we were unable to
compile "all-in sustaining costs"; however, we believe cash operating costs are still useful as
they represent the majority of the costs required to operate a mine over the short and
medium term.
For example, when looking at the below chart, in the most recently reported quarter (Q3
2013), Franco's revenue was derived from assets with an average cash operating margin of
35%, and 94% of Franco’s revenue was derived from assets with a cash operating margin of
more than 20%. In the quarter prior (Q2 2013), margins were slightly higher on average due
to the drop in average gold prices from $1,420/oz in Q2 to $1,330/oz in Q3.
We believe this margin curve analysis can also be useful in determining the potential 'shutdown' point for various portions of Franco's revenue stream. For example, if we look at the
line representing Q3 2013, we can approximate that if gold prices were to drop 20% (i.e.
from the average price of $1,330/oz in Q3 to $1,064/oz) roughly 6% of Franco's revenue
would be at risk as it would be coming from assets that are no longer generating operating
cash.
Q3/13 revenue curve by margin of underlying asset
Average cash operating
margin of 35%
Estimated cash operating margin
70%
60%
50%
40%
30%
20%
10%
0%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
-20%
-30%
Cumulative revenue
Q3 2013
Q2 2013
Notes: 1) To construct the curve we used the disclosed cash cost figure from the operator in all cases where
such disclosure was available. If cash cost disclosure was not available, we used the disclosed EBITDA margin
for the consolidated division in which that particular asset resides. For example, costs for the Sudbury assets
are based on KGHM's international EBITDA (or adjusted EBITDA if EBITDA not available) 2) For Franco’s
streams and/or royalties that are grouped into the “other” category, or in which cases data was unavailable
(which together total 9% of Franco’s consolidated revenue in Q3 2013), we assumed the operating margins
of those various royalties are distributed proportionately over the entire curve. 3) We note this is based on
historical figures, and therefore does not forecast the operator's ability to lower costs in the event of a metal
price downturn; 4) This curve also excludes "sustaining capital" which may or may not be necessary to
sustain operations over a short period of time. Source: company reports, DCM estimates.
DUNDEE CAPITAL MARKETS Page | 14
Franco-Nevada
November 21, 2013
Furthermore, based on our model for Cobre Panama, we believe this curve will improve
slightly as this project moves into production over the coming years.
Q3/13 estimated margin curve if Cobre Panama were in production
We don't expect the curve to
change much when Cobre
Panama begins
Estimated cash operating margin
70%
60%
50%
40%
30%
20%
10%
0%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
-20%
-30%
Cummulative revenue
Q3 2013
With Cobre Panama
Notes: See notes from the previous figure. Cost estimates for Cobre Panama are based on Dundee Capital
Markets model and not necessarily based on company guidance. Source: DCM Estimates, Company reports
GROWING PRODUCTION PROFILE AND EARNINGS
10% production CAGR from 2013 to 2017
Between 2013 and 2017 we expect 10% compound annual growth in "gold-equivalent"
production. The most significant contributor to this growth is Cobre Panama which more
than offsets production declines at other assets. We note, however, the Cobre Panama
project is undergoing a complete review, and therefore forecasts for this project could
materially change in the future (we discuss this topic in greater detail in Appendix 1).
If Taseko Mine's New Prosperity project is ultimately permitted and goes into production by
2017, for example, we believe the production CAGR over this same timeframe could be 15%;
however we do not include the project in our forecasts given ongoing permitting challenges.
Production profile (gold equivalent ounces) - mining assets
We exclude new prosperity
from our production forecasts
Gold Equivalent Ounces (kozs)
400
350
10% CAGR, excluding New Prosperity
300
250
200
150
100
50
0
2013E
2014E
GEO
2015E
Cobre Panama
2016E
2017E
New Prosperity
Source: DCM estimates
DUNDEE CAPITAL MARKETS Page | 15
Franco-Nevada
November 21, 2013
Below we outline our key operating and financial forecasts over the 2013-2017 timeframe.
Despite our decline in forecast average gold prices in 2014 versus 2013, we forecast EPS and
CFPS will be roughly flat as the company grows production. We expect growing production,
earnings and cash flow after 2014.
Key operating and financial forecasts (based on Dundee commodity price forecasts)
US$MM, unless otherwise noted
2013
2014
2015
2016
2017
Revenue
$400
$407
$438
$473
$522
Production (gold equivalent ounces - GEO, kozs)
228
232
246
280
328
$80
$79
$80
$80
$415
Franco Guidance - GEO, kozs
215-235
Oil and Gas Revenue
$75
Franco Guidance
+$65
EBITDA
$320
$334
$365
$391
EBITDA Margin (%)
80%
82%
83%
83%
79%
Net Income (adjusted)
$143
$142
$157
$164
$176
EPS (diluted, adjusted, US$ per share)
$0.95
$0.94
$1.04
$1.09
$1.16
CFPS (diluted, pre-working capital, US$ per share)
$1.92
$1.92
$2.10
$2.24
$2.40
NAV (US$ per share)
$24.89
Source: DCM Estimates
Historically more royalties than streams, but this is changing
Production breakdown by type
350
Gold Equivalent Ounces (kozs)
Cobre Panama will increase
the amount of gold from
"streams"
In terms of gold-equivalent-ounces (GEOs), we forecast roughly 44% of Franco's 2014
production will come from streams and this could grow to roughly 52% by 2017 as Cobre
Panama is a streaming agreement. Given streaming-agreements have an ongoing cost per
ounce associated with them, we expect Franco's EBITDA margin to decline very slightly over
the coming years - however both streams and royalties generally offer high margins when
compared to producing assets and, most importantly, are generally not exposed to
unexpected increases in costs.
300
250
200
150
100
50
0
2013E
2014E
Royalty ounces
2015E
2016E
2017E
Stream ounces
Source: DCM Estimates
DUNDEE CAPITAL MARKETS Page | 16
Franco-Nevada
November 21, 2013
STRONG BALANCE SHEET
$891M working cap and no "debt" - but $1bln owing to First Quantum
$1.3billion of available
capital
Available cash will decrease
as payments on Cobre
Panama are made
Cash balance could dip
further with additional
transactions
As of the end of Q3 2013, Franco had $790M in cash, $52M in short-term investments and
another $70M in long-term investments. Franco's total working capital amounted to $891M
and the company has a further $500M in undrawn credit and no debt on the balance sheet.
Altogether, Franco currently has access to roughly $1.3 billion of available capital (including
Q4 transactions up to November 21st). While we expect Franco's balance sheet to remain
relatively strong, we expect the net cash levels to decrease over the coming years as the
company makes its Cobre Panama payments.
Based on the current deal structure, Franco would be making its initial $100M payment on
Cobre Panama either in late 2013 or early 2014 and we forecast the total agreed payments
of $1 billion would be made by the end of Q2 2016. However, on its Q3 2013 results
conference call, management indicated they would not be making payments until after First
Quantum's full review of the project has been completed (expected by the end of 2013).
Therefore we now model the first payment will occur in Q1 2014. If Taseko Mines receives
its permit on the New Prosperity project, Franco would likely make payments totaling
$350M over 2015/2016; however given permitting challenges we currently do not include
these payments within our forecasts.
Based on the current spot gold price of $1,244/oz, we believe Franco's net cash position
could decline from $790MM at the end of Q3 2013 to a low of $188MM in Q2 2016. We do
not expect the company to dip into a net-debt position unless the New Prosperity project
advances or if the company consumes its cash on transactions or if gold prices drop below
$1,100 (or a combination of both). Given Franco's stated desire to remain low/no-debt, we
believe the company is unlikely to do large deals at this point in time. Instead, we expect the
company to continue engaging in smaller transactions such as the recent $50MM Kirkland
Lake royalty acquisition.
Cash flow and balance sheet movements based on spot gold (sensitivities dashed)
1,200
1,000
Strong balance sheet even
under $1,100/oz gold
800
600
400
200
0
-200
-400
-600
Operating cash flow
Investing cash flow
Financing cash flow
Net cash
Gold at $1,500 per oz flat
Gold at $1,100 per oz flat
Note: We assume only 94% of production if gold were at $1,100/oz, in line with our margin analysis (see
page 14) Based on spot gold of $1,244, other than sensitivities. Source: DCM Estimates, company reports
Dividend - current yield of 1.7%
Based on the company's quarterly dividend of US$0.18/share, we forecast FNV shares are
currently yielding around 1.7%. Based on spot gold prices for the remainder of the year, we
forecast the 2013 payout ratio (measured as cash dividends as a % of cash flow from
DUNDEE CAPITAL MARKETS Page | 17
Franco-Nevada
November 21, 2013
operations) will be 38%. This will represent a significant increase over the 2008-2012 period
which ranged from 17-25%. However, even at spot gold prices going forward, we believe the
payout ratio will remain below 45%. The payout rate continues to be affordable for Franco
and management remains committed to the dividend.
COMPARABLE VALUATION
Franco trades at a significant premium…
Franco has historically traded at a significant premium to its gold producing peers. To
illustrate this premium, we outline the average P/CF multiple point difference between
Franco and its gold producing peers from the beginning of 2010 (this data is based on
Bloomberg consensus forward-twelve-month cash flow per share forecasts.
Consensus FTM P/CF multiple premium (Franco minus average gold producer)
18.0
16.0
Average 10.7x pts
14.0
12.0
FNV underwent a re-rating in
2012
10.0
8.0
6.0
4.0
2.0
Average 6.2x pts
0.0
FNV-Sr Gold (Spread)
2010-2012 Average
Average since 2012
Note: Gold producers used in this analysis include: ABX, G, NEM, K, AEM, IMG, YRI, ELD, NEM and spreads
are based on a simple average of these companies. Source: Bloomberg
As can be seen above, this premium gapped higher in early 2012 due to continued
disappointments from the gold producers (capex blowouts, production misses etc.) followed
by a decline in gold prices, under which Franco's business model is more resilient. The
average premium since the start of 2012 has been roughly 10.7 points, which is what we
apply within our price target methodology (detailed later in this report).
…but it's not as high as it looks
As noted above, Franco trades at a noticeable premium relative to the gold producers when
looking at forward estimates. However, this apparent premium is not nearly as significant
when looking at the actual results. In other words, Franco has a better track record for
achieving the forecast cash flows than its gold producing peers.
Historically, the P/CF
premium appears to be 7.6
points…
In order to illustrate this difference between the perceived premium and the actual
premium, we compared P/CF multiples based on forward looking estimates to P/CF
multiples based on the actual results for that period. Specifically, using available Bloomberg
data beginning in 2010, we first looked at the forward price to cash flow multiples (i.e. share
price divided by forecast cash flows over the coming twelve months). This is a
representation of the perceived P/CF multiples for Franco and for the gold producing peer
group. When looking at this data, it appears Franco trades at a P/CF multiple of 18.7x vs. the
gold producers at 11.1x, or a premium of 7.6 points.
DUNDEE CAPITAL MARKETS Page | 18
Franco-Nevada
November 21, 2013
P/CF multiples based on forecast cash flows; Franco appears to carry a 7.6 point premium
20
18
16
7.6x P/CF Premium
14
12
10
8
6
FNV
… but this premium is only 5.1
points when looking at actual
results…
Sr. Golds
Notes: "Sr. Golds" includes ABX, G, NEM, K, AEM, IMG, YRI, ELD, NEM. Data differs slightly from above chart
as this chart includes different time frames due to data availability. Source: Bloomberg, DCM Estimates
Next, we replace the forecast cash flows for each period of time with the actual cash flows
for that period. Here we see that Franco was actually trading at a P/CF multiple of 19x vs.
the gold producers of 13.9x, or a multiple point difference of only 5.1x. Again, this is because
the gold producers, on average, delivered cash flow per share figures considerably below
expectations.
P/CF multiples based on actual cash flows; Franco actually carries a 5.1 point premium
20
18
5.1x P/CF premium
16
14
12
10
8
6
FNV
Sr. Golds
Notes: "Sr. Golds" includes ABX, G, NEM, K, AEM, IMG, YRI, ELD, NEM. Source: Bloomberg, Company reports
Next we summarize the implied premium when looking at forward estimates versus the
premium when looking at actual results.
DUNDEE CAPITAL MARKETS Page | 19
Franco-Nevada
November 21, 2013
Implied vs. actual FNV valuation premium
8
7.6x
7
6
5.1x
5
… so Franco has a better track
record for achieving results
vs. the gold producers
4
3
2
1
0
Implied multiple premium
Actual multiple premium
Source: Bloomberg, company reports, DCM Estimates
We believe this 5.1 historical multiple point premium for Franco is warranted for the
following reasons: 1) no direct capital cost inflation risk, 2) nominal operating cost inflation
risk, 3) better operational diversity (operating risk spread across 45 producing mineral assets
and 137 oil and gas assets), 4) higher margins and, 5) "free" exploration upside potential (i.e.
Franco does not contribute to exploration expenditures, but does benefit from discoveries).
We believe this premium is warranted as gold producers, on average, have a relatively poor
track record for achieving planned targets, as demonstrated by the above charts.
Franco trades at a premium on most other metrics as well
Franco also trades at a
premium to the other
royalties
Due to its strong track record and diversified asset portfolio, Franco trades at a premium to
its producing peers (both gold and silver), and Franco also trades at a noticeable premium to
Silver Wheaton (SLW, Buy C$29.00PT) and Royal Gold (RGLD, not covered), which are similar
to Franco as both are precious metal royalty/streaming companies.
2014E P/CF (based on Dundee price deck)
2014E EV/EBITDA (based on Dundee price deck)
20x
25x
21.6x
15.9x
20x
13.9x
15x
15x
13.1x
12.5x
10.1x
11.2x
10x
10x
8.3x
6.8x
8.1x
5x
5x
0x
0x
FNV
RGLD
SLW
Silver
producers
Gold
producers
FNV
SLW
Silver
producers
RGLD
Gold
producers
Note: Consensus estimates used for RGLD as the stock is not covered by Dundee Capital Markets. Source: DCM Estimate, Bloomberg
We note the premium relative to SLW is more than 9 points when looking at P/CF, but only
about 2 points when looking at EV/EBIDTA. This is mainly due to the fact Silver Wheaton has
net debt totaling $978MM, whereas Franco currently has a net cash position of $790MM.
DUNDEE CAPITAL MARKETS Page | 20
Franco-Nevada
November 21, 2013
P/NAV (based on Dundee price deck)
1.75
2014E P/E (based on Dundee price deck)
1.67x
45x
39.8x
40x
1.50
1.24x
1.25
35x
1.18x
1.02x
30x
1.00
25x
0.75
20x
23.2x
21.4x
17.7x
15x
0.50
14.4x
10x
0.25
5x
0.00
0x
FNV
SLW
Silver
producers
Gold producers
FNV
RGLD
Silver
producers
SLW
Gold
producers
Note: P/NAV not available for RGLD, P/E for RGLD based on Bloomberg estimates as the stock is not covered by Dundee Capital Markets.
Source: DCM Estimates, Bloomberg
When looking at P/NAV, we note Franco trades at a 0.43 multiple point premium to SLW.
Both companies have similar business models and both have excellent track records of
outperforming the underlying commodity and outperforming their respective producing
peers. It is important to recognize, however, that Franco has not always traded at such a
significant premium, and in fact traded at a discount to Silver Wheaton prior to 2012.
FNV's premium compared to
SLW has expanded over the
past couple years…
Franco's FTM P/CF premium over SLW (FNV P/CF minus SLW P/CF)
12.0
10.0
8.0
6.0
4.0
2.0
0.0
-2.0
-4.0
-6.0
-8.0
-10.0
-12.0
Average 6.2 pts
Average -0.5 pts
FNV SLW Spread
Average 2010-March 21, 2012
SLW tax audit
becomes
known
Average since March 22, 2012
Note: current spread differs slightly from above chart as this chart is based on Bloomberg data and the
above chart is based on DCM estimates. Source: Company reports, Bloomberg, DCM Estimates
…we believe this is mainly
due to SLW's ongoing tax
audit
We believe this recent valuation gap between Franco and Silver Wheaton exists for three
main reasons (in order of significance): 1) the investment community is concerned about
Silver Wheaton's ongoing tax audit; 2) Franco has a stronger balance sheet with its net cash
position of $790MM versus Silver Wheaton's net debt position of $978MM; and 3) silver's
additional volatility relative to gold has deterred some investors.
While we will not go into full details regarding Silver Wheaton's ongoing tax audit within this
report, we will summarize the situation by saying we believe the worst-case outcome would
be full taxation for Silver Wheaton (albeit we believe this is a low-probability event).
However, we note any legislative changes calling for full taxation of SLW would likely impact
DUNDEE CAPITAL MARKETS Page | 21
Franco-Nevada
November 21, 2013
Franco as well - although to a much lesser degree given Franco has fewer tax-sheltered
streaming deals.
We believe FNV has less tax
risk than SLW
Given Franco's premium relative to Silver Wheaton has expanded due to taxation, we
believe it is prudent to assess the valuation of both of these companies under a scenario of
full taxation. Below we show our forecast "current" and "full-tax" P/NAVs for Franco and
Silver Wheaton.
Franco-Nevada premium over Silver Wheaton drops if we assume "full taxation" for both
4% premium
2.0x
1.67
1.5x
P/NAV
1.67
35% premium
1.60
1.24
1.0x
0.5x
0.0x
Current
Full-tax
FNV
SLW
Note: Based on Dundee price deck, shown on page 15. Source: DCM Estimates, Bloomberg
Our methodology for calculating these "full-tax" scenarios include applying a 26% tax rate to
all assets that are currently structured to pay an ongoing tax rate of less than 3% (i.e. taxsheltered assets). Based on this structure, we expect the impact to Franco's NAV would
effectively be zero; we believe this for two reasons: 1) 226 of Franco's 232 mineral
agreements are set up as royalties (not "streams"), which are already taxed, and 2) based on
the spot gold price of $1,244/oz, the $1 billion of payments on Cobre effectively shelters
Franco from tax until year 2029 anyway.
Franco has less taxable
stream- revenue
Comparable tables
Company
Rating
Target
Price
Share Price
(C$)
(C$)
NAV at
Price
P/NAV at
P/NAV Spot
P/CF at Deck
Deck(1)(2)(3)
(1)(3)(5)
(CY)(2)(4)
Deck(2) (3)
P/CF at Spot
(CY)
(4)(5)
2013E
2014E
2013E
2014E
Franco-Nevada (FNV CN)
Buy
$50.00
$43.35
24.89
1.67x
1.78x
21.5x
21.6x
22.0x
Silver Wheaton (SLW CN)
Buy
$29.00
$21.85
16.82
1.24x
1.48x
13.5x
12.5x
13.9x
Royal Gold (RGLD US)*
na
N/R
$46.24
na
na
na
16.2x
13.1x
16.2x
Gold Producers (avg)
na
na
na
na
1.02x
1.44x
8.8x
8.1x
9.1x
Silver Producers (avg)
na
na
na
na
1.18x
1.83x
8.6x
11.2x
9.1x
Notes: Royal Gold numbers are based on consensus
Source: DCM Estimates, Bloomberg
(1) NAV is based on 5% discount rate
(2) Calculated at price deck gold forecasts: 2013=$1,423/oz, 2014=$1,373/oz, 2015=$1,430/oz, 2016=$1,375/oz long-term=$1,325/oz.
(3) P/NAV adjusted at spot FX rates.
(4) Ratios equal to or less than 0 or greater than 100 are not displayed
(5) Spot silver and gold prices, forward curve base metals, spot fx
24.3x
14.8x
13.1x
10.2x
15.6x
EV/EBITDA
at deck
(CY)
Share price performance in percentage
2014E 3 Month
15.9x
13.9x
8.3x
6.8x
10.1x
-11.3%
-22.9%
-25.8%
-26.3%
-22.2%
YTD
-23.7%
-39.1%
-43.2%
-49.9%
-37.0%
2 Year
3.5%
-34.3%
-39.5%
-56.2%
-41.2%
5 Year
201.7%
542.6%
55.8%
112.8%
334.4%
Notes: Estimates for Royal Gold (not covered) are based on Bloomberg estimates. Source: Bloomberg, DCM Estimates
DUNDEE CAPITAL MARKETS Page | 22
Franco-Nevada
November 21, 2013
VALUATION: BUY, C$50.00 PRICE TARGET
We derive our C$50.00 price target using a 50% weighting applied to our 24x P/CF valuation
of C$47.55 and a 50% weighting to our 2.04x P/NAV valuation of C$53.06.
Blended P/CF, P/NAV
methodology
Our 24x P/CF multiple is based on Franco's 2-year average P/CF premium to the producers of
10.7 points, plus our current target multiple for the gold producers of 13.0x. To arrive at our
blended P/NAV multiple of 2.04x, we apply a 3.0x P/NAV multiple to the gold assets and a
1.0x P/NAV multiple to all other assets. Our 3.0x multiple on the gold assets is based on
Franco's 2-year P/CF multiple premium to the producers, in percentage terms, of roughly
130%. We apply this 130% premium to our current median target P/NAV multiple for gold
producers of 1.3x. We believe Franco's historical P/CF premium is a good proxy for a target
P/NAV premium as both metrics are ultimately based on cash flows.
Price Target Buildup
Multiple
NPV
P/NAV (Precious metals), 5% discount rate
3.00x
C$13.52
C$40.57
P/NAV (oil/gas+base metals), 8% discount rate
1.00x
C$6.16
C$6.16
Balance sheet items
1.00x
C$6.33
C$6.33
Total
2.04x
C$26.02
P/CF
24.0x
C$ Price Target (rounded to nearest dollar)
FTM CFPS
C$1.98
Target
Weighting
Total
C$53.06
50%
C$26.53
C$47.55
50%
C$23.77
C$50.00
Source: DCM Estimates
Offering exceptionally high-quality exposure to gold prices, we rate Franco-Nevada a Buy.
DUNDEE CAPITAL MARKETS Page | 23
Franco-Nevada
November 21, 2013
APPENDIX 1 - KEY ASSETS
Cobre Panama – A long life, low cost, expandable asset; but awaiting clarity on plans
Copper project owned by First
Quantum
Cobre Panama is an open-pit copper project located in Pamana, owned by First Quantum,
and is currently in development with initial production expected in 2016. With a current
reserve-life of 40 years, Cobre Panama offers substantial leverage to long-term copper
prices (for FM shareholders) and gold prices (for FNV shareholders). Based on Dundee
forecasts, we believe Cobre Panama will fall in the 1st quartile of the copper cash cost curve
once in production, making Cobre Panama an attractive asset.
Franco-Nevada announced a $1 billion streaming deal in August 2012 on Cobre Panama
(owned by Inmet at the time). We forecast the deal entitles Franco to an average of 86.1k
ounces of gold equivalent over the first 11 years of the project.
Cobre Panama Stream levels
Deliver period 1
Delivery period 2
Delivery period 3
~years 1-11
~years 12-31
~Beyond original mine plan
Gold
Au Delivered
Average attributable AuEq
production of 86kozs over
first 10 years
Delivery terms
0 to 808kozs
808kozs to 1,716kozs
Greater than 1,716kozs
120 oz per 1MM lbs Cu
81 oz per 1MM lbs Cu
63.4% of Au in Con.
0 to 9,842kozs
9,842 to 29,731kozs
Greater than 29,731kozs
Silver
Ag delivered
Delivery terms
1,376 oz per 1MM lbs Cu 1,776 oz per 1MM lbs Cu
62.1% of Ag in Con.
GoldEq (60:1 ratio)
AuEq delivered
0 to 972kozs
972 to 2,212kozs
Greater than 2,212kozs
Delivery terms
143 oz per 1MM lbs Cu
111 oz per 1MM lbs Cu
~63% of AuEq in Con.
86.1kozs
65kozs
Average AuEq delivered (Dundee forecast)
Source: Company reports, Dundee estimates
Franco has protection built in
to the deal
Unlike most streaming deals, which are based on a percentage of the gold or silver produced
at the mine, the precious metal streams in this deal are tied proportionately to production
of the primary metal - copper in this case - for the first 31 years of production. This structure
provides protection against any disappointments in gold/silver production from the mine,
and serves to better align Franco's interests with the natural production incentives the
operator has. Other clauses written into the deal that protect Franco shareholders include:
1) Franco's stream is secured by a pledge of First Quantum's interest in MPSA, the project
operator, and 2) Franco is entitled to top-up payments if the mill capacity expansion to
240,000 tpd is delayed beyond year 10 (initial capacity is 160,000 tpd).
Potential for changes to the deal's structure?
Frist Quantum views the deal
as "unfortunate"
We believe its possible deal
terms could be revisited
Following First Quantum's acquisition of Inmet, which closed in April 2013, the Cobre
Panama agreement is now between Franco and First Quantum. Based on comments made
by Philip Pascall (First Quantum's Chairman), we believe First Quantum would rather not
have this deal with Franco. Within a letter addressed to Inmet shareholders dated January
9th 2013, Philip stated "…the streaming transaction announced on August 20, 2012, forward
sells the precious metals stream from Cobre Panama, resulting in an unfortunate loss of
opportunity and an increase in the cost of copper production."
With its acquisition of Cobre Panama, First Quantum has undertaken a full review of the
project in order to maximize its economics. The conclusion of this review is expected before
the end of 2013. First Quantum's update on Cobre Panama will be a key issue to watch as it
could have implications to Franco's stream. Given First Quantum's statements regarding its
distaste for the streaming agreement, we believe it is possible the companies could
potentially renegotiate some of the terms of the deal.
DUNDEE CAPITAL MARKETS Page | 24
Franco-Nevada
November 21, 2013
Franco has not yet made payment on the transaction. Based on the current terms, Franco is
set to begin making payments after First Quantum has spent $1 billion on the project.
Thereafter, Franco will contribute $1.00 of every $4.00 spent on Cobre Panama until Franco
has contributed $1 billion. We expect Franco's payments to begin in early 2014, unless the
terms are altered.
New Prosperity - not included in our forecasts, but could add $1.50/share to our NAV
We exclude New Prosperity
from our forecasts…
…so it could add $1.50/shr to
our NAV is permit is granted
Taseko’s New Prosperity project, located in British Columbia, Canada, is a permitting-stage
asset on which Franco holds a streaming agreement. The agreement would see Franco
purchase 22% of gold produced for $400/oz. With estimated annual gross production of
~300kozs over the first 5 years, Franco's share would be ~66kozs. The capital payments
required by FNV would be $350MM and are only owed if the project is permitted. However,
we note permitting of this project is challenged.
Permitting at New Prosperity remains a significant risk for this project as the permit was
already denied once in 2010 over environmental concerns. This led to a redesign of the mine
which was submitted to the government for review. Most recently, on October 31st 2013,
the government panel reviewing the project again declared that New Prosperity will result in
significant adverse environmental impacts. On November 5th, Taseko responded with a
press release stating the panel had relied upon the wrong design and Taskeo intended to
challenge aspects of the panel's findings. The panel's opinion has been submitted to the
Federal Minister of the Environment, who has a maximum of 120 days to decide if it will
allow the project to proceed. We do not currently ascribe any value to this project within
our valuation; however if the permit is granted we believe this could increase our operating
NAV by roughly 8.3%, or $1.50/share.
Weyburn - a 50 year operating history with decades to go
FNV's most important oil &
gas asset
Weyburn is a Cenovus operated light/medium oil producing asset located in Saskatchewan.
Weyburn is a long-life asset, commencing production in 1963 with current reserves out to
2050 (Dundee forecast). Following several transactions, Franco-Nevada now holds a 0.44%
ORR, a 2.26% WI, and an 11.7% net royalty interest (NRI - similar to NPI) on the asset. The
11.7% net royalty interest was added in November 2012 at a cost of C$400MM. Weyburn is
now the largest contributor to Franco's Oil & Gas Division.
Weyburn is the most important oil & gas asset
Source: company investor day presentation
DUNDEE CAPITAL MARKETS Page | 25
Franco-Nevada
Numerous expansions have
extended Weyburn's life
November 21, 2013
Over its production history, Weyburn has undergone numerous expansions. Most recently a
CO2 Enhanced Oil Recovery (EOR) project was undertaken in the year 2000. The project
injected C02 at high pressure, which acts as a solvent to wash oil from between pore spaces
in the rock, thereby increasing production. The injection also reduces viscosity so the oil
flows more easily and also causes the oil to swell and expand out of spaces.
Weyburn - historical production
Could see another expansion
before 2022
Source: Company presentation
The production profile of this asset is expected to peak in 2022, however we believe the
asset could undergo another CO2 injection to offset natural production declines. Any such
injection could result in a capital call to Franco which we have not yet built into our model
given the timing and levels of required capital are uncertain. Therefore, we currently model
a production decline after the year 2022 with current reserves depleted in 2050.
DUNDEE CAPITAL MARKETS Page | 26
Franco-Nevada
November 21, 2013
APPENDIX 2 - MANAGEMENT
David Harquail, President & CEO - Mr. Harquail has been the President and CEO of FrancoNevada since its IPO in 2007. Previously Mr. Harquail held senior positions within Newmont
and Newmont Capital, including Executive Vice President of Business Development and
Exploration, and has worked within the Franco-Nevada group of companies since 1987. He
has a degree in geological engineering from The University of Toronto, and an MBA from
McGill.
Pierre Lassonde, Chairman - Mr. Lassonde was the president of Newmont Mining from
2002-2006, and previously was the co-founder and co-CEO of the original Franco-Nevada. He
served as the Chairman of the World Gold Council, and currently serves as a director. He
holds a degree in Electrical Engineering from Ecole Polytechnique and an MBA from The
University of Utah, and honorary PhDs from both University of Utah and The University of
Toronto.
Sandip Rana, CFO - Mr. Rana joined Franco-Nevada in 2010, prior to this he worked with the
Four Seasons Hotel as a Vice-President, Corporate Finance. Additionally, he held treasurer
and Controller roles at the original Franco-Nevada through the 1990s and up to 2002. He is a
Chartered Accountant, and holds a Bachelor of Business Administration degree from the
Schulich School of Business.
Geoff Waterman, COO - Mr. Waterman has a long history of working within Franco-Nevada,
Old Franco, and Newmont. His time includes his current role as COO, previously he was VP,
Oil and Gas at Newmont Capital, and was VP Oil and Gas at the Old Franco, and was
Controller of Old Franco ('92-'99). Prior to this, he was an Auditor from 1988-1992 with
Coopers and Lybrand. Mr. Waterman holds a Bachelor's degree in economics from Trent
University.
Paul Brink, SVP Business Development - Mr. Brink joined Franco-Nevada in 2006, and has
played a significant role in the mergers and acquisitions subsequently entered into by the
company. He previously held the role of Director of Corporate Development at Newmont,
and additionally was VP, Investment Banking at BMO Nesbitt Burns Inc. He holds a
Bachelor's degree in Mechanical Engineering from the University of Witwatersrand and a
Master's degree in Management Studies from Oxford.
DUNDEE CAPITAL MARKETS Page | 27
Franco-Nevada
November 21, 2013
APPENDIX 3 - RISKS
Mine closures under lower metal prices
Margins at underlying assets
have dropped
While Franco enjoys industry-leading profit margins, the same is not always true for the
underlying assets from which Franco derives its revenue. Furthermore, the health of the
underlying assets is not apparent by assessing Franco's financials; we must look at the
margins of the underlying mines. With the 22% drop in gold prices during 2013, the margins
on many of the underlying assets have dropped materially, driving heightened concerns
around potential mine closures.
To assess this risk we have constructed a production curve illustrating the cash operating
margin of the underlying assets that make up Franco's royalty portfolio. For example, when
looking at the below chart, in the most recently reported quarter (Q3 2013), 94% of Franco's
reported revenue was derived from assets that had an operating margin of more than 20%.
Q3/13 Estimated margin chart for royalties
70%
Estimated cash operating margin
We believe FNV's portfolio is
very resilient, but if prices
drop materially, so could
production and revenue
We believe this margin curve analysis can also be useful in determining the potential 'shutdown' point for various portions of Franco's revenue stream. For example, if we look at the
line representing Q3 2013, we can approximate that if gold prices were to drop 20% (i.e.
from the average price of $1,330/oz in Q3 to $1,064/oz) roughly 6% of Franco's revenue
would be at risk as it would be coming from assets that are no longer generating operating
cash. [Notes: due to disclosure limitations, the below chart excludes sustaining capex which
could result in a higher break-even gold price. Conversely, this chart is based on historical
figures, and therefore does not forecast the operator's ability to lower costs in the event of a
further metal-price downturn].
60%
50%
40%
30%
20%
10%
0%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
-20%
-30%
Cumulative revenue
Q3 2013
Q2 2013
Notes: 1) to construct the curve, we use the disclosed cash cost figure from the operator in all cases where
the disclosure was available. If cash cost disclosure was not available, we used the disclosed EBITDA margin
for the consolidated division in which that particular asset resides. For example, costs for the Sudbury assets
are based on KGHM's international EBITDA (or adjusted EBITDA if EBITDA not available); 2) For Franco’s
streams and/or royalties that are grouped into the “other” category or assets which report on a semi-annual
basis (which total 9% of Franco’s consolidated revenue in Q3/Q2 2013), we assumed the operating margins
of those various royalties are distributed proportionately over the entire curve; 3) We note this is based on
historical figures, and therefore does not forecast the operator's ability to lower costs in the event of a
metal-price downturn. Source: company reports, DCM estimates.
7% of our NAV is made up of projects that are not yet permitted
These projects include: Courageous Lake, Goldfields, Agi Dagi, Perama Hill, BruceJack,
Golden Meadows, Gurupi, Relincho, Rosemont, and Taca Taca. It is difficult to predict the
timing and the outcome of these permitting processes, therefore there is some risk to our
DUNDEE CAPITAL MARKETS Page | 28
Franco-Nevada
November 21, 2013
NAV if these projects fail to obtain permits. The most significant permitting risk is associated
with New Prosperity, which we do not include in our NAV at this time.
Uncertainty around Cobre Panama's timeline
Cobre Panama
timeline/forecasts could
change
Following First Quantum's acquisition of Inmet in March of 2013, First Quantum indicated it
would be revisiting development plans for the project sometime before year end 2013.
While Franco's capital commitments are fixed at $1 billion, the company could be negatively
impacted by any delays in the timing of production.
Other risks as per Franco's disclosure
The below paragraphs are excerpts from Franco's 2012 Annual Information Form. For full
detail on these risks please see Franco's 2012 Annual Information Form starting on page
89.
Changes in the market price of the commodities that underlie the royalty, stream working
and other interests will affect the profitability of Franco-Nevada and revenue generated
therefrom.
The operations of the properties in which Franco-Nevada holds an interest is generally
determined by third party property owners and operators, and Franco-Nevada has limited
decision making power as to how these properties are operated, and the operators' failure to
perform could affect the revenues generated by Franco-Nevada.
Franco-Nevada will have limited access to data and disclosure regarding the operation of
properties, which will affect its ability to assess the royalty's/stream's performance.
Franco-Nevada depends on its operators for the calculation of royalty/stream payments. It
may not be able to detect errors and payment calculations may call retroactive adjustments.
Several royalties/streams are significant to Franco-Nevada and any adverse development
related to these properties will affect the revenue derived from the royalty/stream.
Franco-Nevada is dependent on the payment of royalties/streams by the owners and
operators of the relevant properties and any delay in or failure of such royalty/stream
payment will affect the revenues generated by the asset portfolio.
Certain royalty/stream interests and working interests are subject to rights in favour of
others or third parties that could adversely affect the revenues generated from the asset
portfolio.
The asset portfolio includes a number of royalty interests based on net profits, and the
revenue derived from such royalty interests is dependent upon factors beyond the control of
Franco-Nevada that may have an adverse effect on the overall revenues generated by the
asset portfolio.
Franco-Nevada may enter into acquisitions or other material royalty or streaming
transactions at any time.
Franco-Nevada may experience difficulty attracting and retaining qualified management and
technical personnel to efficiently operate its business.
Increased competition for the royalty/stream interests and resource investments could
adversely affect Franco-Nevada's ability to acquire additional royalties, streams and other
investments in mineral and oil and natural gas properties.
Royalty/stream and other interests may not be honoured by operators of a project.
There may be unknown defects in the asset portfolio.
Current global financial conditions continue to be challenging.
DUNDEE CAPITAL MARKETS Page | 29
Franco-Nevada
November 21, 2013
Franco-Nevada's revenue, earnings, the value of its treasury and the value it records for its
assets are subject to variations in foreign exchange rates, which may adversely affect the
revenue generated by the asset portfolio or cause adjustments to the recorded value of
assets.
The ability to pay dividends will be dependent on the financial condition of Franco-Nevada.
Certain of Franco-Nevada's directors and officers serve in similar positions with other public
companies, which could put them in a conflict position from time to time.
Franco-Nevada can provide no assurance that it will be able to obtain adequate financing in
the future or that the terms of such financing will be favourable and Franco-Nevada may
have to raise additional capital through the issuance of additional equity, which could result
in dilution to Franco-Nevada's shareholders.
If Franco-Nevada expands its business beyond the acquisition of royalty/stream interests,
Franco-Nevada may face new challenges and risks which could affect its profitability, results
of operations and financial condition.
Potential litigation affecting the properties in which Franco-Nevada holds its royalty/stream
interests could have an adverse effect on Franco-Nevada.
DUNDEE CAPITAL MARKETS Page | 30
Franco-Nevada
November 21, 2013
APPENDIX 4 - ASSET SUMMARY TABLE
Asset Name
Agi Dagi
Operating
company
Alamos Gold
Agreement % of Franco
type
Op NAV
Asset description
Royalty
0.8%
Located in Turkey, Agi Dagi is planned to be an open pit,
heap leach operation which includes the higher grade
Camyurt satellite deposit. The operation is expected to
produce 176 koz/a over a estimated 9 year mine life.
Environmental permit approval is expected in 2014.
Royalty
1.3%
Located in Nevada, Bald Mountain is currently operating, as
a heap leach operation. We expect current steady state
production of around 163kozs per year, with a strip ratio of
3.0:1x and a reserve grade of 0.017oz/t
Bald Mountain
Barrick
Cerro San Pedro
New Gold
Royalty
0.3%
Cobre Panama
First Quantum
Stream
-0.4%
Cooke 4
Gold One
International
Stream
1.7%
Detour Lake
Detour Gold
Royalty
5.2%
Edikan
Perseus Mining
Royalty
1.4%
Golden Highway
St. Andrews
Goldfield
Royalty
2.3%
Golden Highway is the string of open-pit and underground
mines including Holt, Holloway, and Hislop. Production from
the Golden Highway is expected to be 95-105koz in 2013,
with all-in cash costs of US$1,210.
Gold Quarry
Newmont
Royalty
3.7%
Goldstrike
Barrick Gold
Royalty
8.1%
Gold Quarry is an open-pit operation located in Nevada
operating since 1985. Franco believes that its royalty is
expected to provide ~11,250ozs of gold per year.
Located in Nevada, Goldstrike is a large open pit and
underground operation which we expect to produce an
average of 847kozs per year, at an average cash cost of
$540/oz over a remaining 12 year mine life.
Hemlo
Barrick Gold
Royalty
1.0%
Hemlo is a combined open pit and underground operation
located east of Thunderbay. Production is expected to
average ~210kozs over an estimated 4 year mine life.
Mesquite
New Gold
Royalty
0.6%
Mt. Keith
BHP
Royalty
0.6%
Musselwhite
Goldcorp
Royalty
0.7%
Mesquite is an open-pit heap leach operation located in
Imperial County, California. We currently expect average
production of 125koz over a 16 year mine life. Total cash
costs are expected to average $872/oz over LOM, with a
strip ratio of 2.7:1.
In operation since 1993, Mt. Keith, located in Western
Australia is an open pit, nickel sulphide operation. The mine
life of the operation is estimated at 13 years, and produces
roughly 35-40kt of nickel in concentrate. Mine production
was scaled back in early 2012, with stockpiled ore being
processed.
Musselwhite is an underground carbon in pulp operation
located in Opapamiskan Lake, Ontario. We expect
production to average 260kozs of gold with an average
cash cost of ~770/oz over LOM.
Located in Cerro San Pedro Mexico, CSP is an open pit,
heap leach operation, which is expected to produce an
average of 143kozs of gold over the next 3 years with a
strip ratio of 1.3:1. Production is expected to be complete in
2017.
The Cobre Panama Project is an open pit, conventional
floatation operation, located in Panama. Construction is
currently underway, and most recent plans anticipate 260kt
of copper per year at a cash cost of $0.94/lbs copper over
LOM with a strip ratio of 0.58:1.
Cooke 4 is adjacent to Gold One International's Cooke 1-3
underground operations and Randfontein Surface
operation, located in Westonaria, South Africa. Gold One
purchased the property from First Uranium, and currently
plans to mill Cooke 1-3 ore through the Cooke 4 mill
(200/100tpm gold/uranium ore capacity).
Detour Lake is an open pit, carbon in pulp operation,
currently in ramp-up, located ~185km Northeast of
Cochrane. Detour Lake is expected to produce 657koz/yr
over a 21.5 year mine life, at a total cash cost of $749/oz,
with a strip of 3.7:1.
Edikan, located in Ghana is an open-pit gold mining
operation which is expected to produce on average 216koz
over an 11 year mine life. Costs are estimated to be
~900/oz over the LOM.
Country/metal/minetype/process/production
Turkey
Gold
Open pit
Heap leach
176kozs/yr avg
Nevada
Gold
Open -pit
Heap leach
163kozs/yr
Mexico
Gold
Open-pit
Heap leach
143kozs/yr
Panama
Cu/Au/Ag/Mo
Open-pit
Flotation
60Mtpa tonnage
266ktpa copper
South Africa
Gold/Uranium
Underground
Dual gold & uranium process
74kozs/yr avg
Terms
2% NSR
0.875-5% NSR/GR, depending on which
area of the deposit is being mined
1.95% GR
~Years 1-11: 120/1,376 oz Gold/silver per
1MM lbs Cu. ~Years 12-31: 81/1,776 oz
Gold/silver per 1MM lbs Cu. ~Years >31:
63.4% of gold and 62.1% of silver. Ongoing
payments of $400/oz gold and $6.00/oz
silver
7% of gold produced for ongoing payments
of $400/oz (subject to inflation adjustment)
Ontario
Gold
Open pit
Gravity/CIL
657koz/yr
Ghana
Gold
Open pit
CIL
216koz/yr avg
Timmins Ontario
Gold
Open-pit/underground
CIL
95-105kozs 2013
Nevada
Gold
Open-pit
Nevada
Gold
Open-pit, underground
CIL
~847koz/yr avg
Ontario
Gold
Open-pit, underground
CIP
~210koz/yr avg
California
Gold
Open-pit
Heap Leach
~125koz/yr
Australia
Nickel
Open-pit
Flotation
35-40t Ni in con. Avg
2% NSR
Ontario
Gold
Underground
CIP
~260koz/yr avg
5% NPI
1.5-3% NSR
0.25-15% NSR, depending on which area of
the deposit is being mined, and depending
on the gold price
7.29% NSR
2-4% NSR, 2.4-6% NPI, royalty levels
depend on area being mined
3% NSR, 5% NPI on portions
0.5-2% NSR
0.25% NPI, 0.375% GR
DUNDEE CAPITAL MARKETS Page | 31
Franco-Nevada
November 21, 2013
Asset Name
MWS
Operating
company
AngloGold
Agreement % of Franco
type
Op NAV
Asset description
Stream
5.9%
Originally purchased from First Uranium, the MWS stream
covers 25% of gold production from the tailings recovery
project. After AngloGold Ashanti purchased the operation,
the agreement was amended to include AngloGold's tailings
processed through the plant, but now gold received by FNV
is maximized at 312.5kozs.
Stream
0.0%
New Prosperity is a planned copper gold mine currently in
permitting stage. Production is expected to average
~230oz/yr over a 30+ year mine life. We do not expect to
see a final permitting decision until H1 2014.
New Prosperity
Taseko
Palmarejo
Coeur Mining
Stream
4.6%
Located near Temoris Mexico, Palmarejo is a combined
open-pit and underground operation. Currently we expect
production to continue through 2023, with average gold
production of 89kozs/year.
Perama Hill
Eldorado Gold
Royalty
0.5%
Phoenix
Rubicon
Royalty
0.7%
Robinson
KGHM
International
Royalty
0.2%
Rosemont
Augusta
Resources
Royalty
3.4%
Stillwater complex Stillwater Mining
Royalty
5.5%
Located in Thrace Greece, Perama Hill is planned to be an
open-pit gold mine, producing an average of 110koz gold
per year. A low strip ratio of 0.29:1 over an estimated 8 year
mine life is expected. PH is expected to receive its EIS perit
approval by year end.
Located in Red Lake, Ontario, the Phoenix project is
expected to be an underground mine, with production
starting in 2014 and it is expected to produce 165kozs of
gold per year at an average cash cost of ~600/oz (as per
PEA). Average M&I grade is 8.52g/t gold.
Located near Ely, Nevada, Robinson is a Cu, Au, and Mo
mine which we expect to produce ~125Mlbs/yr of copper
per year. We do not expect KGHM to exceed 130Mlbs/yr
copper, or 60kozs of gold production, which limits the
royalty income to a 0.225% NSR on base metals.
Located in Arizona, the Rosemont project is currently in
permitting stages, and is expected to produce 243Mlbs of
copper per year, at a 1.9:1 strip ratio, over its 21 year mine
life. The company expects cash costs to average $1.02/lb
copper over the LOM. Still in permitting
Stillwater is a PGM operation which operates two mines, in
Montana, Stillwater and East Boulder. Production in
2013/2014 is expected to be 500kozs of PGM, increasing to
600kozs longer term.
Subika
Newmont
Royalty
3.7%
Sudbury precious
metals
KGHM
International
Stream
5.8%
Tasiast
Kinross
Royalty
1.8%
Country/metal/minetype/process/production
South Africa
Gold
Tailings
maximum of 312.5koz total
British Columbia
Cu/Au
Open-pit
Flotation
70ktpd
230koz/yr avg
Mexico
Silver/Gold
Open-pit, underground
CIL
89kozs/yr avg
Greece
Gold/Silver
Open-pit
CIL
110koz/yr avg
Red Lake
Gold
Underground
Gravity seperation and CIL
165kozs/yr
Nevada
Cu/Au
Open-pit
Flotation
Arizona
Cu/Au/Ag/Mo
Open-pit
Flotation
243mlbs/yr
Montana
PGM
Underground
Flotation
500kozs in 13/14
Terms
25% stream of all gold production, capped
at 312.5kozs
22% of gold production from New
Prosperity, with ongoing payments of
$400/oz gold (subject to 1% inflation
adjustment). Upfront payment of $350MM is
required by Franco.
50% of gold production from Palmarejo,
with ongoing payments of $400/oz gold
(subject to 1% inflation adjustment).
2% NSR
2% NSR
NSR of 0.225% on all base metals. NSR of
10% of all gold over 60koz produced per
year. A price participation royalty is paid
when there is production greater than
130Mlbs/year.
1.5% NSR
5% NSR
Located in Ghana, this royalty covers most of the Subika
open-pit at the Ahafo mine. Additionally, Newmont is
developing an underground mine at the Subika pit which is
expected to be covered by the royalty.
The Sudbury basin stream covers all of the gold and PGM
production from KGHM's 3 operations. 1 of the assets
(Podolsky) has been put on care and maintenance, while
the McCreedy mine is currently mining nickel rich ore rather
than copper/precious metal rich ore. Levack is currently
accessing Glencore Xstrata's Craig infrastructure which
should provide more flexibility going forward.
Ghana
Gold
Open pit and underground
Mill
Ontario
Ni/Cu/Co/PGM
Underground
Flotation
2% NSR
Located in Mauritania, Tasiast is expected to produce an
average of ~300koz/yr over the remaining LOM. This
assumes the mill is not substantially expanded. We expect
~$900/oz cash costs over the LOM, and we anticipate
production through 2033.
Mauritania
Gold
Open pit
Dump leach/mill
300kozs/yr - no expansion
2% NSR
Ongoing payments of $400/oz gold
equivalent (subject to 1% annual inflation).
Note: This list does not include all of Franco's assets; it includes only assets which have separately disclosed revenue (i.e. are currently material to
Franco's earnings) or assets with no current revenue, but may someday (i.e. material growth projects). Source: DCM Estimates, Company reports
DUNDEE CAPITAL MARKETS Page | 32
Franco-Nevada
November 21, 2013
APPENDIX 5 - ROYALTIES & STREAMS EXPLAINED
Franco-Nevada's portfolio of agreements can be broken down into three main categories:
Royalties, Streams and Working Interests. In this section we explain each of these
agreements. This section is based on an explanation provided in Franco-Nevada's "2013
Asset Handbook".
Royalties
Royalty agreements reflect an economic interest in the ongoing production of a particular
property. These economic interests can be tied directly to the revenue generated at the
asset, or can alternatively be tied to other levels of profitability.
Firstly, Revenue-based Royalties are tied to the value of the production or net proceeds
received by the operator with defined deductions as specified by the royalty contract. Some
forms of revenue-based royalties in the mining and oil & gas industries include: “NSR” (Net
Smelter Return Royalty); “ORR” (Overriding Royalty); “GR” (Gross Royalty); and, “FH”
Freehold or Lessor Royalty.
Secondly, Profit-based Interest Royalties are based on the operating profit as defined in the
royalty contract. Often, royalty payments only begin after the operator has recovered its
capital costs. The net profits interest royalty (“NPI”) is the most common form of these
royalties. Similar to an NPI, a net royalty interest (“NRI”) is paid net of operating and capital
costs.
Royalties often result in a more direct interest in the asset, which could result in the interest
being more secure than streams in the event the operator were to file for bankruptcy.
Streams
Streams are metal purchase agreements that provide, in exchange for an upfront payment,
the right to purchase all or a portion of one or more metals produced from a mine at a
preset price, typically well below the prevailing spot price at the time of the deal. Streams
are well suited to co-product production providing incentive to the operator to produce the
gold. Streams are not considered to be royalties because of the ongoing cash payment
required to purchase the physical metal; however streams share the key characteristic of
eliminating exposure to unforeseen cost-inflation. Streams are also often considered to be a
"passive" investment that may result in the ability to be sheltered from taxes.
Working Interests
Working Interest (“WI”) holders have an ownership position in the property and operation
and hence are liable for cash calls on their share of capital, operating and environmental
costs usually in proportion to their ownership percentage. Working interests are not
considered to be royalties because of their ongoing funding requirements although, for
profitable and low-capex operations, they can be economically similar in their calculations to
NPIs.
An example of the financial impact of each different structure is provided in the table below.
This example makes the following assumptions: 1) a gold price of $1,600/oz; 2) the stream
interest cost per ounce of gold is set at $400/oz; 3) "all-in" operating and sustaining capital
cost of $895/oz for the developed NPI/WI (1).
DUNDEE CAPITAL MARKETS Page | 33
Franco-Nevada
November 21, 2013
Economic impact of Royalty vs. Stream vs. NPI/WI
Realized Price ($/oz)
Applicable Costs ($/oz)
Margin for Calculation ($/oz)
NSR, Stream or NPI %
Revenue to FNV ($/oz)
NSR Equivalent
NSR
Stream
Developed NPI/WI
(1)
Undeveloped
NPI/WI (2)
A
B
$1,600
$0
$1,600
$400
$1,600
$895
$1,600
$1,131
C=A-B
D
E=CxD
F = E / $64
$1,600
4%
$64
100%
$1,200
4%
$48
75%
$705
4%
$28
44%
$469
4%
$19
29%
1.00 oz
1.33 oz
2.27 oz
3.41 oz
Alternatively
Ounces required to equal a 1% NSR
(1) For applicable costs for a developed NPI or WI, Barrick Gold Corporation's ("Barrick") 2012 all-in sustaining cash cost measure was assumed, as
Barrick represents the largest gold company by production and reserves, as well as the operator at five of Franco-Nevada's assets. Excluded from
the all-in sustaining measure are general and administrative costs as Franco-Nevada also has such costs which have not been reflected in the
applicable cost for NSRs or streams.
(2) For applicable costs for an undeveloped NPI or WI, Franco-Nevada has adopted similar assumptions to those listed above. To reflect the cost of
developing a new mine, Franco-Nevada has, for illustrative purposes, assumed Barrick's depreciation per ounce for 2012 of $236 per ounce.
Source: company reports, 2013 Franco-Nevada asset handbook
In conclusion, comparison shows the most leverage to the gold price is provided by an
undeveloped NPI/WI followed by the Developed NPI/WI, then the stream, and lastly the
NSR. However, with no ongoing costs to Franco-Nevada, the NSR theoretically provides
more down-side protection to the price of gold; although the downside is ultimately
determined by the profitability of the underlying asset, which we discuss earlier in this
report.
DUNDEE CAPITAL MARKETS Page | 34
Franco-Nevada
November 21, 2013
Franco Nevada: Forecasts at Dundee Price Deck
Rating
Risk
Target Price
Share Price
BUY
Medium
$50.00
$43.35
Basic Shares (MM)
Diluted Shares (ITM / FD) (MM)
Basic Mkt Cap (US$MM)
Enterprise Value (US$MM)
OPERATING STATISTICS
GEO production (kozs)
2012A
230
2013E
228
2014E
232
2015E
246
2016E
280
381
96
59
33
17
19
14
11
6
6
314
79
38
34
19
21
12
9
6
7
2
315
71
35
27
19
15
10
7
13
6
4
340
70
36
29
20
16
11
8
15
8
-
364
44
36
28
20
15
13
7
15
8
5
41
25
16
75
58
17
80
62
18
79
61
17
80
62
18
Precious metals revenue
Palmarejo
Sudbury
MWS
Stillwater
Gold Quarry
Golden Highway
Marigold
Detour
Tasiast
Musselwhite
Oil and gas revenue (US$ MM)
Weyburn
Other
Asset information
Minelife breakdown
NAV by asset stage
15%
21%
34%
29%
10-15 yrs
22%
15-20 yrs
20+ yrs
Operating
NET ASSET VALUE (US$)
NAV
/Share
Minesite Assets
Goldstrike
$231
Palmarejo
$130
Detour
$148
Cobre Panama
-$12
Sudbury
$80
Other mineral assets
$1,824
Oil and gas
$440
Minesite assets
$2,841
Balance Sheet and other
$918
Total
$3,759
2013E Revenue by Metal
$1.53
$0.86
$0.98
-$0.08
$0.53
$12.11
$2.90
$18.83
$6.09
$24.89
Development
Target Build Up
NAV Valuation (C$)
Per share
Multiple
Precious metals $13.52
3.00x
Other ops
$6.16
1.00x
Balance sheet
$6.36
1.0x
Total
Cashflow Valuation (C$)
Per share
Multiple
FTM CFPS
$1.98
24.0x
Target Weightings
P/NAV Weighting
50%
P/Cashflow Weighting
50%
Target Price ($C/share, rounded)
NAV by Geography
Value
$40.57
$6.16
$6.36
$53.09
Value
$47.55
$26.55
$23.77
$50.00
Canada
19%
15%
Precious
metals
base
metals
3%
USA
Mexico
10%
Australia
2%
oil and
gas
Panama
0%
4%
5%
78%
38%
Mauritania
Exploration
Other
27%
Dundee Capital Markets
Chris Lichtenheldt
647-253-1128
[email protected]
BALANCE SHEET
US$MM, Year-end Dec.
Assets
Cash*2
Other Current Assets
Current Assets
Non-current Assets
Total Assets
Liabilities
Current Liabilities
Long Term Debt
Other non-current Liabilities
Total Liabilities
Total Shareholder Equity
INCOME STATEMENT
US$MM, Year-end Dec.
Total Revenue
% Precious metals
% Base metals
% Oil and Gas
Operating Costs
G&A
Business Development
Other
EBITDA
Depreciation
EBIT
Net Interest Expense
Unusual/Other Items
EBT
Taxes
EPS (Reported) ($/sh)
EPS (Adjusted) ($/sh)
Average shares (MM)
2012A
2013E
2014E
2015E
2016E
632
247.5
879
2,365
3,244
765
147.9
913
2,307
3,220
456
147.9
604
2,685
3,289
276
147.9
423
2,953
3,376
415
147.9
563
2,910
3,473
46
57
Other
Net Income (Reported)
Net Income (Adjusted)
79%
<10 yrs
147.1
150.9
$6,092
$5,302
$
$
-
-
-
-
38
95
3,149
50
96
3,124
69
115
3,174
90
137
3,239
46
114
161
3,312
2012A
427
89%
1%
10%
59
15
3
86
265
127
138
1
2013E
400
78%
3%
19%
56
11
3
10
320
125
195
1
2014E
407
77%
3%
20%
53
13
3
3
334
125
209
-
2015E
438
78%
4%
18%
52
14
3
4
365
135
230
-
2016E
473
77%
6%
17%
60
15
3
4
391
146
244
-
155
52
181
53
203
61
227
69
242
78
102.6
171.0
127.7
143.2
142.1
142.1
157.5
157.5
164.4
164.4
0.72
1.19
143.1
46
$
$
0.87
0.95
146.9
46
$
$
0.96
0.94
147.2
$
$
1.07
1.04
147.5
$
$
1.11
1.08
147.7
CASH FLOW STATEMENT
US$MM, Year-end Dec.
Net Income (Reported)
Depreciation
Other
Operating Cash Flow
Operating Cash Flow ($/sh)
Working Capital Changes
Cash from Operations
Capital Expenditure
Net Investments
Investing Cash Flow
Common Share Dividends
Debt Additions
2012A
102.6
126.7
91.7
321.0
2.22
(14.7)
306.3
(509.1)
(150.2)
(659.3)
(77.9)
-
2013E
127.7
125.2
37.4
290.4
1.92
(11.0)
279.4
(139.1)
94.4
(44.7)
(102.0)
-
2014E
142.1
125.4
22.5
290.0
1.92
290.0
(503.3)
(503.3)
(95.4)
-
2015E
157.5
135.4
25.3
318.2
2.10
318.2
(403.2)
(403.2)
(95.6)
-
2016E
164.4
146.3
28.1
338.7
2.24
338.7
(103.3)
(103.3)
(95.7)
-
Equity Financing
Other Net Financing
Financing Cash Flow
Foreign Exchange
Change In Cash
Cash Balance
Free Cash Flow
Adj. Free Cash Flow *1
257.9
(77.9)
180.0
10.6
(162.4)
632
(280.7)
(202.8)
7.8
(103.5)
(95.7)
(5.7)
133.2
765
38.2
140.2
(95.4)
(95.4)
(308.7)
456
(308.7)
(213.3)
(95.6)
(95.6)
(180.6)
276
(180.6)
(85.1)
(95.7)
(95.7)
139.7
415
139.7
235.4
2012A
35.0x
18.6x
2013E
43.7x
21.5x
1.67x
16.6x
2%
0%
2014E
44.1x
21.6x
2015E
39.8x
19.7x
2016E
38.2x
18.6x
15.9x
(4%)
0%
14.5x
(1%)
0%
13.6x
4%
0%
VALUATION DATA
CONSOLIDATED GOLD PRODUCTION PROFILE
90
80
250
70
200
60
50
150
40
100
30
20
50
MM$
Gold Equivalent ounces (kozs)
300
P/E
P/CF
P/NAV
EV/EBITDA
Adj. FCF Yield *1
Dividend Yield
INPUT PRICES
20.0x
(3%)
2012A
2013E
2014E
2015E
2016E
Key Commodities
Gold (US$/oz)
Silver (US$/oz)
Oil (US$/bbl)
1,668
31.13
94.14
1,423
24.17
99.00
1,373
22.88
95.00
1,430
23.83
90.00
1,375
23.00
90.00
Key Currencies
CAD/USD
USD/MXP
1.00
13.15
0.97
12.73
0.95
13.00
0.93
13.00
0.93
13.50
10
-
2012A
2013E
2014E
Gold Equivalent Ounces (LHS)
2015E
2016E
Oil and Gas Revenue (RHS)
(1) Adj FCF = Operating Cash Flow - Capex
(2) Negative cash implies financing need
Source: Company reports, Bloomberg, Dundee Capital Markets estimates
DUNDEE CAPITAL MARKETS Page | 35
Franco-Nevada
November 21, 2013
Franco Nevada: Forecasts at Spot Gold
Rating
Risk
Target Price
Share Price
BUY
Medium
$50.00
$43.35
Basic Shares (MM)
Diluted Shares (ITM / FD) (MM)
Basic Mkt Cap (US$MM)
Enterprise Value (US$MM)
OPERATING STATISTICS
GEO production (kozs)
2012A
230
2013E
227
2014E
229
2015E
244
2016E
277
381
96
59
33
17
19
14
11
6
6
309
78
38
34
19
21
12
9
6
7
2
281
64
34
25
19
14
8
7
12
6
3
293
60
35
25
20
14
8
7
13
7
-
326
40
34
25
20
14
10
7
14
7
3
41
25
16
73
56
17
78
61
17
82
64
18
83
65
18
Precious metals revenue
Palmarejo
Sudbury
MWS
Stillwater
Gold Quarry
Golden Highway
Marigold
Detour
Tasiast
Musselwhite
Oil and gas revenue (US$ MM)
Weyburn
Other
Asset information
Minelife breakdown
NAV by asset stage
15%
19%
34%
29%
<10 yrs
10-15 yrs
22%
15-20 yrs
Operating
NET ASSET VALUE (US$)
NAV
/Share
Minesite Assets
Goldstrike
$207
Palmarejo
$113
Detour
$138
Cobre Panama
-$111
Sudbury
$69
Other mineral assets
$1,719
Oil and gas
$455
Minesite assets
$2,591
Balance Sheet and other
$920
Total
$3,510
2013E Revenue by Metal
$1.37
$0.75
$0.91
-$0.73
$0.46
$11.42
$3.00
$17.17
$6.10
$23.24
Development
Target Build Up
NAV Valuation (C$)
Per share
Multiple
Precious metals $11.68
3.00x
Other ops
$6.27
1.00x
Balance sheet
$6.37
1.0x
Total
Cashflow Valuation (C$)
Per share
Multiple
FTM CFPS
$1.78
24.0x
Target Weightings
P/NAV Weighting
50%
P/Cashflow Weighting
50%
Target Price ($C/share, rounded)
NAV by Geography
Value
$35.04
$6.27
$6.37
$47.68
Value
$42.84
$23.84
$21.42
$45.00
Canada
19%
16%
Precious
metals
USA
Mexico
11%
base
metals
3%
Australia
2%
oil and
gas
Panama
-4%
39%
4%
5%
79%
Mauritania
Exploration
Other
28%
Dundee Capital Markets
Chris Lichtenheldt
647-253-1128
[email protected]
BALANCE SHEET
US$MM, Year-end Dec.
Assets
Cash*2
Other Current Assets
Current Assets
Non-current Assets
Total Assets
Liabilities
Current Liabilities
Long Term Debt
Other non-current Liabilities
Total Liabilities
Total Shareholder Equity
INCOME STATEMENT
US$MM, Year-end Dec.
Total Revenue
% Precious metals
% Base metals
% Oil and Gas
Operating Costs
G&A
Business Development
Other
EBITDA
Depreciation
EBIT
Net Interest Expense
Unusual/Other Items
EBT
Taxes
EPS (Reported) ($/sh)
EPS (Adjusted) ($/sh)
Average shares (MM)
2012A
2013E
2014E
2015E
2016E
632
247.5
879
2,365
3,244
759
147.9
907
2,309
3,216
419
147.9
567
2,697
3,264
197
147.9
345
2,979
3,324
304
147.9
452
2,948
3,399
46
57
Other
Net Income (Reported)
Net Income (Adjusted)
81%
20+ yrs
147.1
150.9
$6,092
$5,302
$
$
-
-
-
-
38
95
3,149
49
96
3,120
67
113
3,151
87
133
3,191
46
110
156
3,243
2012A
427
89%
1%
10%
59
15
3
86
265
127
138
1
2013E
394
79%
3%
19%
56
11
3
10
314
123
191
1
2014E
372
76%
3%
21%
54
12
3
3
300
115
185
-
2015E
394
74%
5%
21%
54
13
3
3
321
122
199
-
2016E
436
75%
6%
19%
61
14
3
4
354
135
219
-
155
52
176
52
180
57
197
64
217
73
102.6
171.0
124.3
139.8
122.7
122.7
132.6
132.6
144.5
144.5
0.72
1.19
143.1
46
$
$
0.85
0.93
146.9
46
$
$
0.83
0.81
147.2
$
$
0.90
0.88
147.5
$
$
0.98
0.95
147.7
CASH FLOW STATEMENT
US$MM, Year-end Dec.
Net Income (Reported)
Depreciation
Other
Operating Cash Flow
Operating Cash Flow ($/sh)
Working Capital Changes
Cash from Operations
Capital Expenditure
Net Investments
Investing Cash Flow
Common Share Dividends
Debt Additions
2012A
102.6
126.7
91.7
321.0
2.22
(14.7)
306.3
(509.1)
(150.2)
(659.3)
(77.9)
-
2013E
124.3
123.3
37.1
284.6
1.89
(11.0)
273.6
(139.1)
94.4
(44.7)
(102.0)
-
2014E
122.7
114.6
20.9
258.2
1.71
258.2
(503.2)
(503.2)
(95.4)
-
2015E
132.6
121.7
23.2
277.5
1.83
277.5
(403.4)
(403.4)
(95.6)
-
2016E
144.5
135.0
26.3
305.8
2.02
305.8
(103.4)
(103.4)
(95.7)
-
Equity Financing
Other Net Financing
Financing Cash Flow
Foreign Exchange
Change In Cash
Cash Balance
Free Cash Flow
Adj. Free Cash Flow *1
257.9
(77.9)
180.0
10.6
(162.4)
632
(280.7)
(202.8)
7.8
(103.5)
(95.7)
(5.7)
127.5
759
32.5
134.6
(95.4)
(95.4)
(340.4)
419
(340.4)
(245.0)
(95.6)
(95.6)
(221.5)
197
(221.5)
(125.9)
(95.7)
(95.7)
106.6
304
106.6
202.3
2012A
35.0x
18.6x
2013E
44.8x
22.0x
1.78x
16.9x
2%
0%
2014E
51.0x
24.3x
2015E
47.3x
22.6x
2016E
43.5x
20.6x
17.7x
(4%)
0%
16.5x
(2%)
0%
15.0x
3%
0%
VALUATION DATA
CONSOLIDATED GOLD PRODUCTION PROFILE
90
80
250
70
200
60
50
150
40
100
30
20
50
MM$
Gold Equivalent ounces (kozs)
300
P/E
P/CF
P/NAV
EV/EBITDA
Adj. FCF Yield *1
Dividend Yield
INPUT PRICES
20.0x
(3%)
2012A
2013E
2014E
2015E
2016E
Key Commodities
Gold (US$/oz)
Silver (US$/oz)
Oil (US$/bbl)
1,668
31.13
94.14
1,407
23.68
96.90
1,244
19.86
93.33
1,244
19.86
93.33
1,244
19.86
93.33
Key Currencies
CAD/USD
USD/MXP
1.00
13.15
0.97
12.73
0.95
13.00
0.93
13.00
0.93
13.50
10
-
2012A
2013E
2014E
Gold Equivalent Ounces (LHS)
2015E
2016E
Oil and Gas Revenue (RHS)
(1) Adj FCF = Operating Cash Flow - Capex
(2) Negative cash implies financing need
Source: Company reports, Bloomberg, Dundee Capital Markets estimates
DUNDEE CAPITAL MARKETS Page | 36
Franco-Nevada
November 21, 2013
Disclosures & Disclaimers
This research report (as defined in IIROC Rule 3400) is issued and approved for distribution in Canada by Dundee Securities
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DUNDEE CAPITAL MARKETS Page | 37
Franco-Nevada
November 21, 2013
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© Dundee Securities Ltd. Any reproduction or distribution in whole or in part of this research report without permission is
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Informal Comment: Informal Comments are analysts’ informal comments that are posted on the Dundee website. They generally
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DUNDEE CAPITAL MARKETS Page | 38
Franco-Nevada
November 21, 2013
Mineral Exploration Watchlist: Dundee Capital Markets has not initiated formal continuing coverage of Mineral Exploration
Watchlist companies. The companies will have recommendations and risk ratings as per our regular rating system, see Explanation
of Recommendations and Risk Ratings for details. Risk ratings will be either Speculative or Venture. Speculative Risk rated
companies are those companies that have published National Instrument 43-101 or JORC compliant resources or reliable historic
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form the basis of a discounted cash flow analysis. Venture Risk rated companies are those companies that are generally at an earlier
stage of exploration and/or development, where no material resource estimate, historic or compliant, exists. No price targets will
be set for Mineral Exploration Watchlist companies as there are limited financial metrics upon which to base a reasonable valuation.
Valuation methodologies and models will not be provided for Mineral Exploration Watchlist companies. Dundee clients should
consult their investment advisor as to the appropriateness of an investment in the securities mentioned.
Oil & Gas Exploration Watchlist: Dundee Capital Markets has not initiated formal continuing coverage of Oil &
Gas Exploration Watchlist companies. The companies will have recommendations and risk ratings as per our regular rating
system, see Explanation of Recommendations and Risk Ratings for details. Risk ratings will be either Speculative or Venture.
Speculative Risk rated companies are those companies that have published National Instrument 51-101 or SPE compliant
resources or reliable historic resources and/or economic evaluations for material project(s) that could reasonably form the
basis of a discounted cash flow analysis. Venture Risk rated companies are those companies that are generally at an earlier
stage of exploration and/or development, where no material resource estimate exists, or there is significant uncertainty with
respect to firm drilling timing and prospects. No price targets will be set for Oil & Gas Exploration Watchlist companies as
there are limited financial metrics, or resource information available, upon which to base a reasonable valuation. Dundee
clients should consult their investment advisor as to the appropriateness of an investment in the securities mentioned.
Presentations do not include disclosures that are specific to analysts and specific to companies under coverage. Please refer to
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under coverage.
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IIROC Rule 3400 Disclosures and/or FCA COBS 12.4.10 Disclosures: A link is provided in all research reports delivered by electronic
means to disclosures required under IIROC Rule 3400. Disclosures required under IIROC Rule 3400 for sector research reports
covering six or more issuers can be found on the Dundee Capital Markets website at www.dundeecapitalmarkets.com in the
Research Section. Other Services means the participation of Dundee in any institutional non-brokered private placement exceeding
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disclosure 5% or more) of any class of the issuer’s equity securities, our calculations will exclude managed positions that are
controlled, but not beneficially owned by Dundee Capital Markets.
A Research Analyst/Associate involved in the preparation of this research report has visited certain material operations of the
following issuer(s): Franco-Nevada Corp. Chris Lichtenheldt viewed Franco-Nevada's Detour Lake and Palmarejo assets. Scott
Morrison viewed Franco-Nevada's Detour Lake asset.
The Research Analyst/Associate and/or Dundee Capital Markets has been partially reimbursed for expenses or partial expenses
were paid for by the following issuer(s) for travel to material operations of the issuer(s): Franco-Nevada Corp.
Explanation of Recommendations and Risk Ratings
Dundee target: represents the price target as required under IIROC Rule 3400. Valuation methodologies used in determining the price
target(s) for the issuer(s) mentioned in this research report are contained in current and/or prior research. Dundee target N/A: a price
target and/or NAV is not available if the analyst deems there are limited financial metrics upon which to base a reasonable valuation.
DUNDEE CAPITAL MARKETS Page | 39
Franco-Nevada
November 21, 2013
Recommendations: BUY: Total returns expected to be materially better than the overall market with higher return
expectations needed for more risky securities. NEUTRAL: Total returns expected to be in line with the overall market. SELL:
Total returns expected to be materially lower than the overall market. TENDER: The analyst recommends tendering shares to
a formal tender offer. UNDER REVIEW: The analyst will place the rating and/or target price Under Review when there is a
significant material event with further information pending; and/or when the analyst determines it is necessary to await
adequate information that could potentially lead to a re-evaluation of the rating, target price or forecast; and/or when
coverage of a particular security is transferred from one analyst to another to give the new analyst time to reconfirm the
rating, target price or forecast.
Risk Ratings: risk assessment is defined as Medium, High, Speculative or Venture. Medium: securities with reasonable liquidity
and volatility similar to the market. High: securities with poor liquidity or high volatility. Speculative: where the company's
business and/or financial risk is high and is difficult to value. Venture: an early stage company where the business and/or
financial risk is high, and there are limited financial metrics upon which to base a reasonable valuation.
Investors should not deem the risk ratings to be a comprehensive account of all of the risks of a security. Investors are
directed to read Dundee Capital Markets Research reports that contain a discussion of risks which is not meant to be a
comprehensive account of all the risks. Investors are directed to read issuer filings which contain a discussion of risk factors
specific to the company’s business.
Medium and High Risk Ratings Methodology: Medium and High risk ratings are derived using a predetermined methodology
based on liquidity and volatility. Analysts will have the discretion to raise but not lower the risk rating if it is deemed a higher
risk rating is warranted. Risk in relation to forecasted price volatility is only one method of assessing the risk of a security and
actual risk ratings could differ.
Securities with poor liquidity or high volatility are considered to be High risk. Liquidity and volatility are measured using the
following methodology: a) Price Test: All securities with a price <= $3.00 per share are considered high risk for the purpose of
this test. b) Liquidity Test: This is a two-tiered calculation that looks at the market capitalization and trading volumes of a
company. Smaller capitalization stocks (<$300MM) are assumed to have less liquidity, and are, therefore, more subject to
price volatility. In order to avoid discriminating against smaller cap equities that have higher trading volumes, the risk rating
will consider 12 month average trading volumes and if a company has traded >70% of its total shares outstanding it will be
considered a liquid stock for the purpose of this test. c) Volatility Test: In this two step process, a stock’s volatility and beta are
compared against the diversified equity benchmark. Canadian equities are compared against the TSX while U.S. equities are
compared against the S&P 500. Generally, if the volatility of a stock is 20% greater than its benchmark and the beta of the
stock is higher than its sector beta, then the security will be considered a high risk security. Otherwise, the security will be
deemed to be a medium risk security. Periodically, the equity risk ratings will be compared to downside risk metrics such as
Value at Risk and Semi-Variance and appropriate adjustments may be made. All models used for assessing risk incorporate
some element of subjectivity.
SECURITY ABBREVIATIONS: NVS (non-voting shares); RVS (restricted voting shares); RS (restricted shares); SVS (subordinate
voting shares).
DUNDEE CAPITAL MARKETS Page | 40
Franco-Nevada
November 21, 2013
Dundee Capital Markets Equity Research Ratings
77%
68%
% of companies covered by Dundee Capital Markets
in each rating category
66%
55%
44%
% of companies within each rating category for which
Dundee Capital Markets has provided investment
banking services for a fee in the past 12 months.
34%
28%
33%
25%
22%
11%
4%
0%
0%
Buy
Neutral
Sell
As at September 30, 2013
Source: Dundee Capital Markets
DUNDEE CAPITAL MARKETS Page | 41