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Franco-Nevada Corp Franco-Nevada Corp. (FNV-T: C$43.35) November 21, 2013 Chris Lichtenheldt, CFA / (647) 253-1128 [email protected] BUY, Medium Risk Scott Morrison / (416) 350-3392 Dundee target: C$50.00 [email protected] Premium performance comes with a premium price Recommendation New Last Gold-focused royalty and streaming company… Rating: BUY - Target: C$50.00 - Risk: Medium - Franco-Nevada (“Franco”) is a gold-focused royalty and streaming company listed 2013 EPS 0.95 - on the TSX and NYSE under "FNV", with a market capitalization of $6.1 billion. 2014 EPS 0.94 - Company Data Franco has a portfolio of 369 royalty and streaming agreements, including both Price (11/20/13): C$43.35 producing and non-producing mineral and oil & gas assets, and an industry- 52-Week Range: C$33.05-58.67 Market Capitalization ($MM): US$6,092 leading balance sheet with Q3 2013 working capital of $891MM and no debt. Enterprise Value ($MM): US$5,302 Shares Outstanding - Basic (MM): 146.9 We view Franco’s portfolio as high-quality, with revenue derived from assets Shares Outstanding - Diluted (MM): 157.7 2013E Dividend Yield: 1.7% carrying an average cash operating margin of 35% during Q3 2013, and with 94% Avg Daily Volume (3 Mos) (000s): 811 of Franco’s revenue derived from assets with a cash operating margin of more Cash ($MM): US$790 Debt ($MM): US$0 than 20% (Dundee estimates). Furthermore, we forecast 2013 gold equivalent Working Capital ($MM): US$891 production of 228kozs could grow by +40% to 328kozs in 2017. Fiscal Year end Decemeber 31 NAV US$/sh P/NAV LT Gold: …with a long history of outperformance Price Deck: 24.89 1.67x $1325/oz Spot Gold: 23.24 1.78x $1244/oz EPS 2012 A 2013 E 2014 E Franco IPO'd in December 2007, but also traded publicly for more than 18 years Q1 0.31 A 0.28 A 0.22 E before being acquired by Newmont Mining in early 2002. Both the old Franco and Q2 0.24 A 0.22 A 0.23 E Q3 0.31 A 0.24 A 0.24 E the new company have a track record of consistent outperformance. In 21 of 24 Q4 0.32 A 0.23 E 0.24 E years it has been a publicly-listed company (1984-2001, 2008-2013), Franco has FY 1.19 A 0.95 E 0.94 E P/E 35.0x 43.7x 44.1x outperformed the gold producers; and in 18 of 24 years, it has outperformed the CFPS 2012 A 2013 E 2014 E price of gold. With its insulated cost structure, superior operational diversity, FY 2.22 A 1.92 E 1.92 E P/CF 18.6x 21.5x 21.6x higher margins, and free exploration upside, we expect Franco to continue All Figures in US$ Unless Otherwise Noted outperforming the average gold producer over the long-term. Furthermore, with Source: Bloomberg, Company reports, DCM Estimates Notes: EPS is adjusted, Avg Volume solely for TSX listing growing production and a dividend yield of 1.7%, we also expect Franco to continue outperforming the price of gold over the long-term. FNV: Price/Volume Chart 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. Initiating with a Buy rating and C$50.00 price target Source: Factset Company Description We derive our C$50.00 price target using a 50% weighting applied to our 24x Franco-Nevada is a gold-focused royalty and P/CF valuation of C$47.55 and a 50% weighting to our 2.04x P/NAV valuation of streaming company. With its 369 royalties and C$53.06. Our multiples are based on Franco's historical premiums to the gold streams, Franco-Nevada offers exceptional producing peers (detailed within). Offering exceptionally high-quality exposure to geographical and operational diversity and has a long track-record of outperforming gold gold prices, we are initiating coverage of Franco-Nevada with a Buy rating. prices and gold equities. 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 Gold-focused has a portfolio of 369 royalty and streaming agreements, including both producing and non- royalty/streaming company producing mineral and oil and gas assets. The company also has a strong balance sheet with working capital of $891M and no debt as at September 30, 2013. Growing production from a high-quality asset base We forecast a gold equivalent production CAGR of 10% from 2013 to 2017, from 228kozs in 2013 to 328kozs by 2017 (lower left). The most significant contributors to this growth are 94% of Q3 revenue came from Cobre Panama, and Detour Lake, which more than offset production declines at various assets with cash margins of other assets. To measure the quality of this production, we look at the cash operating +20% margin of the assets which make up Franco's streaming and royalty agreements. We view Franco's portfolio as relatively high-quality, with 94% of revenue during Q3 2013 derived from assets with an operating margin of more than 20% (lower right). Production profile (gold equivalent ounces) Q3/13 revenue curve by margin of underlying asset 400 70% 10% CAGR, excluding 350 60% New Prosperity 300 50% 40% 250 30% 200 20% 150 10% 100 0% 50 0% 20% 40% 60% 80% 100% -10% Gold Equivalent Ounces (kozs) Ounces Equivalent Gold 0 -20% 2013E 2014E 2015E 2016E 2017E margin operating cash Estimated -30% GEO Cobre Panama New Prosperity Cumulative revenue Q3 2013 Q2 2013 Notes: See page 13 for detailed footnotes regarding our calculations for the chart on the above right. Source: Company reports, DCM Estimates Below we outline our key operating and financial forecasts over the 2013-2017 timeframe. Despite our forecast decline in average gold prices in 2014 versus 2013, we forecast EPS and CFPS to be roughly flat as the company grows production. We expect growing production, earnings and cash flow after 2014. Key operating and financial forecasts: forecast growth in production and earnings (Dundee price deck) US$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 Franco Guidance - GEO, kozs 215-235 Oil and Gas Revenue $75 $80 $79 $80 $80 Franco Guidance +$65 EBITDA $320 $334 $365 $391 $415 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
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