evin McElligott joined Franco-Nevada Corporation (TSX:FNV, NYSE:FNV) in 1996. He has been Managing Director – Australia since 2008, and is responsible for business development and portfolio administration in Australia. He is based in Perth, Western Australia. Mr. McElligott holds a Bachelor of Commerce degree from the University of Saskatchewan and is a Chartered Professional Accountant. Franco-Nevada Corporation is the leading gold-focused royalty and streaming company with the largest and most diversified portfolio of cash-flow producing assets. Its business model provides investors with gold price and exploration optionality while limiting exposure to many of the risks of operating companies.
Kevin, thank you for your time. How has the last year been for the gold streaming and royalties business?
With the rapid growth of our precious metals streaming and royalty revenues in recent years, the precious metal component of our revenue mix passed 90%. So, in the past year or two we have looked at opportunities in a wide range of commodities. The result is that our larger deals last year were oil and gas. So while things aren’t booming in the gold side, we are still seeing plenty of activity and opportunity.
Tell us about some of the new royalties and streams that Franco-Nevada has acquired recently. What was the rationale for their acquisitions?
The big new assets are oil and gas royalties in the United States. While we have always had an oil and gas royalty portfolio, this is the first time we have invested outside Canada. The rationale is that we are buying quality assets at the bottom of the cycle. The great thing about buying into high quality assets is that the operators involved are still profitable and investing and growing even in a down market.
Given the amount of macro-economic uncertainty around potentially peaking stock markets and the US-China trade war, how has gold fared?
My experience is that the gold price seems to perform well at both ends of the spectrum, but struggles to get momentum in mixed/mediocre markets. When financial markets are in turmoil, gold benefits from the flight to safety. Then things are booming with synchronized growth, gold performs as demand for luxuries grows. If gold is flat, then that reflects mixed economic news. We see that now. Economic indicators like GDP growth, inflation, and unemployment look healthy in most major economies. The counter to this is political uncertainty, with Brexit and the trade war rhetoric from the US.
When considering the performance of the gold price, how important is it to look to beyond the USD? For example, how has gold performed in currencies such as AUD, RMB and GBP
My focus is Australia, and this is as good as it gets. Record gold prices above $A1,800 per ounce. Surprising we haven’t seen more of a gold investment boom locally. Just goes to show that local resource market sentiment is really driven by discoveries.
What are your thoughts on the recent merger between Randgold and Barrick?
I am a skeptic of big mergers, and the forecast synergies and cost savings to support them. These are both large organizations. It creates a lot of turmoil within each company as everyone finds their place in the new structure over the following months, and integrates the management systems and procedures. This is time-consuming activity at all levels of the organization. That said, I hope this deal works out well for everyone involved – management, investors and employees.
Are we going to see further rounds of M&As as producers add to their resource play?
Well we already have, with the proposed merger of Newmont and Goldcorp. Now it’s hard to see another big deal out there. Most likely some smaller deals, as the new merged entities rationalize their portfolios and divest some non-core assets.
In a typical setting, weaker equity markets mean more opportunities for alternative forms of financing. Is the current downturn creating opportunities for streaming companies?
Yes and no. Streaming is typically just one piece of the puzzle for project finance. You also need the debt and equity investors to show up. For a few years after the GFC, the debt providers seemed to disappear completely. So, if the markets get too weak, then nothing happens.
Do you have any views on the potential for royalties and streams to be securitized to release capital back into the sector?
That’s really not our business model. We want to profit from the underlying performance of the assets themselves. Not looking for gains in buying and selling assets, or collecting fees for managing assets owned by others. Hard to imagine a scenario where we would benefit by carving out some of the portfolio into a passive royalty trust. The way we get more capital into the sector is by performing well and attracting new investment.
How has Franco-Nevada’s business interests progressed in the oil and gas sector?
We have completed several sizable oil and gas deals in the past 18 months. And I don’t think we are done. The sector is huge and the opportunities are plentiful. The real limit for us is a self-imposed limit on the nonprecious component within our total asset portfolio.
Last year, we asked about Franco-Nevada getting into battery materials, how does that stand now?
A year ago it would have been hard for us to invest. Asset values were very optimistic and prices had run up quickly. Once prices have increased 100% or more, can you really hope for another 100%? Now that some of the heat has come out of the underlying commodity prices and the asset values, we can see which companies have some staying power, and which projects are likely to move forward. And the investment valuations look more reasonable. Much more likely to see us do a deal in the current environment.