Goldman Downgrades Franco Nevada To Sell

The business model of Franco Nevada Corp (NYSE: FNV) appears “set to underperform,” Goldman Sachs’ Andrew Quail said. The analyst downgraded the rating for the company from Neutral to Sell, while reducing the price target from $48.40 to $51. The new price target reflects 24 percent downside.

Business Model Likely To Underperform

When gold prices are higher, the operators offer better leverage to the underlying commodity than the royalty streamers, analyst Andrew Quail mentioned. Among the royalty streamers, Franco Nevada’s shares are trading at a 70 percent premium, which appears excessive.

Moreover, there are risks to the construction timetable of Cobre Panama, the company’s largest growth project. Quail commented, “We see better opportunities in our other royalty streamers,”

The EPS estimates for 2016, 2017 and 2018 have been raised from $0.35 to $0.66, from $0.20 to $0.79 and from $0.28 to $0.76, respectively, to reflect higher gold prices.

Negative Catalysts

Uncertainty related to Cobre Panama – The company has committed another $660mn, while there has been a 17 percent correction in copper prices since July 2015, which puts the project’s timetable at risk.

Overvalued – “FNV is currently trading at a 65% premium on a 12-month forward EV/EBITDA multiple vs. its 8-year average. On a relative basis, FNV is also trading at an all-time high premium vs. its peers,” the analyst wrote.