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Resilience Series Part 8: Franco-Nevada
Studying Edelweiss Holdings to learn more about resilience
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So far in this series, we’ve covered:
French barrel-maker, TFF Group
Biscoff famous, Lotus Bakeries
Faroe Island fisheries, Bakkafrost
Swiss plastic creator, EMS-Chemie
French plant extractor, Robertet
Swiss dairy, Emmi Group
Dutch investment company, HAL Trust
Now let’s talk about Franco-Nevada. If you’ve been following along for the whole series, Franco-Nevada makes a lot of sense in the Edelweiss portfolio. Gold, itself, has thousands of years of history (talk about Lindy!), it’s fairly scarce, and it’s not dependent on a particular country or business. Further, Franco-Nevada was founded by amazing people, it doesn’t take on debt, and it has slowly expanded into other mining areas.
The company was founded by Seymour Schulich and Pierre Lassonde (I highly recommend Schulich’s autobiography, called Get Smarter) in 1986. Schulich was working as an oil analyst at a large Canadian asset manager when his firm hired Lassonde, a Frenchman, who was passionate about gold mining. The pair immediately hit it off. The story goes that Schulich would go to Tahoe every year to ski and play poker and he always noticed abandoned mining sites. Armed with Lassonde’s knowledge of mining, they convinced their firm to invest $400,000 in 1982 to buy a gold mine in Nevada and name the operation Franco-Nevada. It was a risky bet and they were soon running out of money so they decided to take the company public. Miraculously, they raised $2 million.
For the next three years, Franco-Nevada tried to find gold 43 times with no success. In an effort to keep the business alive, Schulich used his knowledge of the oil business to come up with the idea of buying a royalty on an existing mine. So he had a local geologist let him know of any firms that would be willing to do that. Soon after that, the geologist’s business partner noticed an ad in the Reno paper by a Dallas oil company who was being pressured by its bank to repay loans. So Schulich offered the company nearly all of their funds for a 13% royalty on 3,416 acres of land that was already producing gold. Immediately, Franco-Nevada had exposure to 44,000 ounces of gold per year. But then a golden opportunity presented itself (yeah, I know, I’ve done better puns). A year later, Barrick Gold bought the land and increased production to 75,000 ounces. And then here’s where things really got crazy. Barrick found the largest gold vein outside of South Africa, called Goldstrike. Pretty soon, production was at 2 million ounces per year, 45x more than when Franco-Nevada bought the royalty just two years prior. I mean, that’s just crazy!
Over the next decade, Barrick would go on to mine 40 million ounces of gold. And meanwhile, Franco-Nevada was raking in 13%, for doing absolutely nothing. That’s the power of royalties. This initial fortune propelled the company and they used the proceeds to buy up more royalties all over the US, Canada, and even Australia.
The next phase of the company was the 1990’s. By this point, the company had already diversified itself into other areas like oil, diamond, iron, silver, and platinum royalties. However, gold accounted for the vast majority. To fend off a passive investment designation that would disable mutual funds from owning stock (since the company only owned royalties), Franco-Nevada had to spend about $1 million per year on exploration activities. Once again, the company struck gold. But this time, they had to figure out how to operate a mine. In the late 90’s, gold prices were crashing as investors were more interested in internet stocks, so Schulich and Lassonde decided to sell this particular mine to Normandy mining, while keeping a royalty and a 20% stake in Normandy, itself. Soon afterwards, Anglo-Gold of South Africa wanted to buy Normandy. To increase the price, Normandy and Franco-Nevada tried to find another bidder and they came upon Newmont Mining. However, Newmont didn’t want to make the bid without access to Franco-Nevada’s clean balance sheet. So a three-way deal was on the table. Newmont ended up buying Normandy and Franco-Nevada for around $3 billion. So that initial $2 million raised in 1982 turned into $3 billion two decades later. Sure, there was quite a bit of luck involved but fortune favors the brave.
In 2007, Newmont decided to spin out its royalty assets so Pierre Lassonde and some members of the original Franco-Nevada launched a Canadian IPO and bought the spun assets for $1.2 billion. The last 15 years has been more of the same – buying royalties with embedded exploration optionality. Since the company has plenty of cash ($1.3 billion currently), mining companies gladly take the upfront cash while paying out a royalty. Franco-Nevada simply benefits from the capital expenditures of the mining companies. It’s truly the best business ever. No capex, low SG&A, and implied call options if the exploration companies find more gold and expand production. That’s why Franco-Nevada’s EBIT margins are over 60%. Free cash flow is affected by mining royalties that the company acquires. For example, in 2021, the company bought Brazilian royalties from Vale for $538 million.
Buying Franco-Nevada is buying royalties on a bunch of different precious metals, with gold accounting for about 65% of total revenue. Oil/gas make up another 15% and silver/other metals top off the rest. A lot of investors like having some exposure to precious metals as a hedge against inflation but Franco-Nevada is a supercharged version of this due to its asset-light business model, clean balance sheet, and diversification. When gold prices crash, the company can buy more royalty stakes because that’s when miners are most vulnerable. If they are rapidly running out of cash, Franco-Nevada’s money is a welcome lifeline. These times of distress are historically when Franco-Nevada has made some of its best deals. And that’s a big piece of what makes this company resilient.
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