GOLD RISES ITS PRICE SUBE EL PRECIO DEL ORO

GOLD RISES ITS PRICE  SUBE EL PRECIO DEL ORO

A UNIQUE WAY TO PLAY THE REBOUND IN GOLD

by Jay Peroni on October 24, 2013

http://ftmdaily.com/daily-briefing/a-unique-way-to-play-the-rebound-in-gold/

This little known Canadian company provides exposure to rising gold prices and allows investors to pocket healthy dividend payments along the way.

by Jay Peroni, CFP

Many of my clients have several goals in mind when they come to see me – they want inflation protection, they want growth, they want income, and, oh yeah, they want to beat the market too! In search for “the perfect investment” we come to the disappointing realization that no such investment exists.

Whenever we purchase an investment, there is some level of risk such as market, inflation, currency, foreign, or even business risk. How we deal with these risks and how we position on assets in lieu of these risks determines our success or failure as investors.

With gold prices finally starting to see some light at the end of the tunnel, now is as good of a time as any to once again look at precious metals. Precious Metals Expert, Tom Cloud, recently gave us some reasons to consider gold now:

1. U.S. Economy Downgrade Fears. We’ve seen Fitch Rating Service now has the U.S. on their downgrade list.

2. China Calls for Replacement of the Dollar as World’s Reserve Currency

3. Gold and Silver Prices are a Gift for Investors

4. American Debt Crisis Looms

Aside from the short-to-intermediate reasons for owning gold, many are also aware that gold can provide an inflation hedge, a way to diversify away from the dollar, a safe haven, and should play a part in nearly every investor’s portfolio.

For investors who are already convinced about the long-term prospects for gold, you mostly likely are on board and may already own physical gold, gold ETFs, or maybe even some mining stocks. While these investments can be great, what happens if you need income?

Many investors are not aware of a potential way for you to have exposure to gold, generate some income, beat the market, and grow your assets above and beyond inflation. Sounds impossible, right?

I recently added Franco-Nevada Corporation (NYSE:FNV) to the FTM P.A.C.E. Portfolio. I believe it has the potential to deliver all of those incredible benefits. It has done this for the past six years and I have no reason to believe this trend will stop now.

Franco-Nevada: One Way to Play Gold Mining

Franco-Nevada is a gold focused royalty and streaming company with additional interests in platinum group metals and other resource assets. It is headquartered in Toronto, Canada. The majority of its revenues are generated from high margin assets in North America as its portfolio provides exposure to some of the largest gold discoveries in the world.

Best yet, Franco-Nevada is generating free cash flow and paying dividends! It is a gold investment that works to produce capital gains and income. The past 5 years, shown in the chart below, are living proof. [go to the website above]

Over the past five years, Franco-Nevada’s share price has outperformed the price of gold and all relevant equity benchmarks. It also provides dividends (1.6% current yield) along with more upside potential than a gold ETF, with less risk than an operating gold mining company.

Its business model benefits from rising commodity prices and new discoveries while limiting exposure to operating and capital cost inflation. Franco-Nevada is also in great financial shape, as it has substantial cash, no debt, and is generating free cash flow that is being used to expand its portfolio and to pay dividends.

Franco-Nevada has risks as well. It does not operate mines, develop properties or conduct exploration. Instead, it owns and continues to grow a large, diversified portfolio of royalties and streams that expose Franco-Nevada to the exploration and price optionality inherent with geologically favorable properties. Royalties and streams are not subject to operating or capital cash calls, making this a free cash flow business. As an investor I look for stability, growth potential, and I love to collect dividend checks along the way. Franco-Nevada provides all of these possibilities.

The majority of mineral properties owned by Franco-Nevada have government or private royalties associated with them. The original property owners, prospectors, or exploration companies typically create these private royalties. They often sell their property rights to a more senior company capable of developing and operating a mine on the property. The most common royalties are a simple percentage of the value of the future production from the property, typically 1 to 5%.

The company’s streams are metal purchase agreements that provide, in exchange for an upfront payment, the right to purchase all or a portion of the gold or silver from a mine at a preset price. While streams have similar exploration and price optionality to royalties, they are not considered to be royalties because of the ongoing cash payment required to purchase the physical metal. Streams provide a good incentive for the mine operator to continue producing (knowing he can always sell the gold at a fixed price), as well as a great planning tool for Franco-Nevada, as the company knows exactly what price at which it can purchase the resource.

5 Reasons I like Franco-Nevada

1. Operations efficiency: It uses a first in, last out approach. This effectively frees it of the need to directly fund mining capital expenditures and other costs, making its business a truly free cash flow business. It typically participates at the revenue line of operations and is not directly impacted by operating cost inflation. This allows its margins to fully benefit from rising commodity prices.

2. High margins with low overhead: This enables it to generate cash through the entire commodity cycle and pay attractive dividends.

3. Expanding growth: It currently has a perpetual discovery option on over 200 properties and 40,000 square kilometers of land without the cost of managing exploration or development directly.

4. Scalability, diversification, and risk reduction: Its business is scalable, allowing the acquisition of more interests than an operating company can effectively manage. A more diversified portfolio reduces overall risk.

5. Strong management and structured focus: Management has the benefit to be able to focus on growth, as it does not have responsibility for day-to-day operational or development decisions.

Bottom Line

Since its IPO in December 2007, Franco-Nevada’s business model has established a nearly six year track record of outperforming both gold and gold operating companies. It has been able to increase dividends in each of the past five years and is one of the few gold companies to pay a dividend on a monthly basis. So if you are looking for a gold related investment that provides a great combination of growth and income, Franco-Nevada Corporation (NYSE:FNV)    may be worth your consideration.

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Disclaimer: Investing involves risk. Always do your own due diligence and consult a trusted financial professional before making any investing or financial decisions. Jay Peroni is a Certified Financial Planner and is part of our Christian Financial Advisor Network. Jerry Robinson does own shares of Franco-Nevada Corp as a part of our FTM P.A.C.E. Portfolio.

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