Innovating Gold Production

Franco-Nevada is the world’s largest gold royalty and streaming company. This means the firm invests in gold and mines, but indirectly, the idea being to provide investors with exposure to gold prices and gold exploration while limiting the risks of investing directly in mining companies. Management summed it up in its most recent annual report this way: “In a world confronted by political volatility and financial market instability, we believe making Franco-Nevada a lower risk gold investment that pays dividends and has leverage to gold is the right strategy.”

The company accomplishes this objective via royalties and streaming. Royalty arrangements invest in a mine in exchange for a percentage of revenue from that site for the life of the mine. Via its streaming deals, Franco-Nevada purchases the right to buy gold assets at reduced prices in the future. This model is designed to reduce investor risk, for example, eliminating unexpected expenses at the mines or protecting from the impact of rising commodity prices.

Growth comes from new investments, and this is where Franco-Nevada’s innovation strategy is apparent. The firm first conceived of its royalty and streaming model in 1985 and has since been refining it. As a result, the model has become an intangible asset. For this Knowledge Leader, we believe the intellectual property and organizational capital embedded in acquiring royalties and streams is rolled up in the firm’s acquisition-related investing cash flow.

Franco-Nevada site map, source: Franco-Nevada website