The Top Stock to Own in 2012 - Franco Nevada

The most common question on investors mind of recent has probably been, "what stock do I want to own in 2012?" or "what is the top stock pick for 2012?" Every answer you get is different - some may like large cap equities, some may like the small-caps, while some may like an entire sector, such as the financials. Since I believe that gold will outperform most other investments in 2012 due to a number of reasons, my top stock pick for 2012 is a gold stock.

"Gold does not pay dividends."

This statement is very common from people who are against investing in physical gold and silver or in commodities in general. What they often fail to recognize, however, is that many gold stocks out there pay dividends! Not only that, they are increasing their dividends as their cash flows improve, margins increase, etc. This has happened as the price of gold had risen from $1200 to $1900 (and back down to $1600 recently).

The one knack against gold mining stocks is that they are risky because they face a number of potential problems, including high operating costs, political risks (nationalization of a mine), etc.

These are legitimate concerns that can be minimized in many ways. If you want exposure to gold but less risk, I strongly recommend Franco-Nevada (FNV), a gold-royalty streamer which "provides yield and exploration upside with less risk than an operating company." 


The Beauty of the Franco-Nevada Business Model

Like another favorite pick, Sandstorm Gold, Franco Nevada is much less risky than a miner because they are essentially a LENDER to the miners. They give mining companies money for getting the mines ready, then receive a percentage of the production for the life of the mine. It's another financing option for mining companies, besides going to the market and offering shares, which dilutes shareholders.

They complete MANY deals to lower their risk - if one mine goes bad, it does not affect them much. They have 41 assets currently producing, and 23 that are at an advanced stage, and 149 at the exploration stage.

They have a secured and diversified portfolio of assets (mainly gold but also other commodities) in safe political regions (US, Canada, Mexico0, and are protected from high inflationary costs because of their fixed price model!

I like Franco in particular because they pay a MONTHLY dividend. The current yield is 1.2 percent and that is expected to increase in 2012 by a significant amount.

Asset Breakdown by Country - 27 percent in the US, 25 percent in America, 25 percent Mexico, 17 percent South Africa, etc. All considered mining-friendly countries for the most part.

Revenue is expected to come in around $400 million for FY 2011. The company has about $750 million cash on hand to complete more deals (they have the option to buy a deal at $350 mill. with Taseko Mines (TGB), pending the mine being approved).

Earning per share in the 3Q were .35 cents, on revenue of $111 million and net income of $44 million. For FY 2012 I am expecting EPS anywhere from  1.60 - 2.40 with revenue anywhere from $420-550 million.The stock trades around $38 a share as of writing.

The company has 138.4 million shares outstanding with a market cap of $5.8 billion.They are listed on the NYSE with the symbol FNV.

Franco-Nevada 5 Year ChartCredit:

With my forecasted gold price at $2,100 - $2,500 for 2012, Franco Nevada could be trading in the $60-$70 range in 2012. With current gold prices at $1600, I believe they are still worth more than the current $38 price, and value the shares at over$50. In my opinion, Franco is much more undervalued then their major competitor, Royal Gold, and they have a lot more room to grow and do more deals in the near future.

With the debt crisis, this actually creates a more favorable environment for FNV for completing more deals, as companies may have some trouble finding financing for their projects.

Full Disclosure: I am long FNV. Please do you own due diligence when investing.

What is your top stock to own in 2012?