Franco-Nevada Takes Its Cobre Panama Hit

Broken story or buying opportunity?

When a bad thing happens to a good company, its investors have two choices. One is to declare the story broken, sell the stock, and move on. The other is to analyze the bad news to see if the impact is already reflected in the share price. If the market has overreacted, the stock might be worth holding or maybe even buying.

Several of our portfolio companies are in this kind of spot. The biggest of them is Franco-Nevada (FNV), which until very recently was the acknowledged king of the royalty space. (For some background on royalty companies, see The Only Gold Stocks You Really Need.)

Over the past few years, FNV spent about $1.3 billion to acquire precious metals streams from the massive Cobre Panama copper mine — which, to be fair, looked like a safe bet. The mine’s contract had been renewed by the Panamanian government, production was robust and rising, and copper had great long-term prospects. This single mine complex was projected to generate 20% of FNV’s future revenue.

Then protests broke out over Cobre Panama’s environmental impact and the government closed the mine, causing Franco-Nevada’s market cap to plunge by about $8 billion from its November high.

Which takes us to the question that opened this post: Is FNV a broken story, or was its price decline overdone? The company’s recent Q4 earnings report and year-ahead guidance provide some answers. So let’s run the numbers.