We recently compiled a list of the 10 Best Gold Mining Companies to Invest in. In this article, we are going to take a look at where Franco-Nevada Corp (NYSE:FNV) stands against the other gold mining stocks.
Gold has reached an all-time high, capping a 20-month rally with a 50% increase. Although the selling pressure from the retail investor would have an adverse affect on gold prices, however, this surge is driven by central banks buying record volumes of bullion mainly due to the desire to reduce dependence on US dollar, conflicts in the Middle East, and strong demand from Chinese consumers amid disappointing local equities, property, and currency markets. Furthermore, Chinese political leaders noticed that financial assets of the Russian government including bonds and reserves got confiscated by Western governments after Russia invaded Ukraine. Christopher Mancini, who co-manages Gabelli Gold Fund says “The Chinese central bank saw that happened and said ‘We don’t want that to happen to us.’ It would make sense for them to want to significantly retire their [U.S.] dollar reserves. With gold, they don’t have to worry about being repaid. We know they have been buying a consistent amount of gold every day.”
Bernard Dahdah from Natixis suggests central banks might continue buying gold due to tensions between the US and China, potentially making prices above $2,300 the new norm. The move to gold also reflects a broader trend of nations reducing their reliance on the U.S. dollar, prompted by the dollar’s use as a geopolitical tool against Russia, leading to gold prices reaching an all-time high of $2,480 per ounce on July 17, 2024. In U.S. the Fed is expected to cut the Fed funds rate, but inflation may remain steady, leading to lower real interest rates. This scenario benefits gold as the opportunity cost of holding non-interest-bearing gold decreases compared to cash and bonds. Additionally, a decline in U.S. real interest rates may weaken the U.S. dollar, making gold, which is globally priced in dollars, more attractive.
Owning gold directly provides a “store of value” but offers limited returns rather than generate substantial gains like equities. However, other than its appeal in its ability to preserve value, many investors view it as a hedge against economic troubles rather than a high-return investment. So an investor otherwise seeking gold as a soaring investment would be disappointed in the longer term as it doesn’t appreciate by much as gold has risen less than 300% in a century with annualized real returns of 1.34%, adjusted for inflation. Therefore investors looking for a more aggressive approach, aim for gold mining stocks that provide leverage to the gold price that yields returns surpassing those of the underlying commodity.
Despite this leverage, the underlying stock valuations will consider future cash flows and market volatility of the gold as well as the consensus price estimates by market participants. Nonetheless, gold miner stocks should be more volatile than gold itself, offering greater returns if the investor’s thesis on rising gold prices is correct.
Regardless of gold prices rising over the last 15 years, gold mining ETFs and major miners (Agnico, Newmont, Barrick) have underperformed compared to physical gold. Although some companies covered in this article have succeeded, the gold mining sector requires careful scrutiny beyond just reserves and production. Like any other investment that is carefully analyzed mining companies need to be analysed based on management, capital allocation, and geopolitical risk. It is also because of these factors that gold mining companies are unable to reach their potential as viable investments.
Methodology
To curate our list of 10 Best Gold Mining Companies to Invest in, we gathered a list of all companies using the holdings of gold miners ETFs. We then further narrowed down on the basis of their upside potential. With this let’s now jump to our list of the 10 Best Gold Mining Companies to Invest in.
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An aerial view of a large gold mine showing the extensive activity of natural resource extraction.
Franco-Nevada Corp (NYSE:FNV)
Current Price: $125.71
Upside Potential: 11%
Franco-Nevada Corp (NYSE:FNV), a Canadian gold mining company, recently gained attention due to its strong Q1 performance. The company reported an adjusted EPS of $0.76, exceeding estimates by $0.05, although its revenue decreased by 7.1% year-over-year to $256.8 million, surpassing expectations by $7.77 million. Analysts consider Franco-Nevada less volatile compared to traditional gold miners due to its royalty and streaming model, which involves providing upfront capital to miners in exchange for discounted returns and lower-cost gold production rights. The company is also expanding its portfolio, holding over 400 assets. In 2023, Franco-Nevada acquired new royalty interests in Canada, Chile, Australia, and the US. For 2024, it anticipates producing 540,000 gold equivalent ounces, reflecting a 10% organic growth. The average analyst price target for Franco-Nevada is $143, indicating a potential upside of 15% from its current price.
White Falcon Capital Management stated the following regarding Franco-Nevada Corporation (NYSE:FNV) in its first quarter 2024 investor letter:
“Due to the rally in gold, the weight of precious metal royalty companies is on the higher side of our typical 10-15% allocation to them. We recently wrote an article for the Globe & Mail on Franco-Nevada Corporation (NYSE:FNV), a portfolio company, that can be accessed on our blog. We believe that royalties are a better way to express an opinion on gold as they pay a dividend and have optionality on both the price of gold as well as additional discoveries by operating companies. With debt and deficits increasing by the minute and the central bank’s inability to control inflation, we believe that it is prudent to have an ‘outside the system’ asset in the portfolio that can protect our purchasing power over time.”
Overall FNV ranks 10th on our list of the best gold mining stocks to buy. You can visit 10 Best Gold Mining Companies to Invest in to see the other gold mining stocks that are on hedge funds’ radar. While we acknowledge the potential of FNV as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than FNV but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.