Stocks vs Bonds: A Look at Franco-Nevada, RE Royalties and Brookfield Renewable Partners

Franco-Nevada: Stability in Uncertain Times

Low risk, plenty of opportunities! That is probably an apt description of the business model of major royalty firms in the mining sector. After all, in the current environment, costs are rising for many producers. However, royalty grantors, which provided capital in the past, are generally unaffected. That is because they secured a share of gold production based on revenue rather than profit.

Franco-Nevada pioneered this business model in 1983. With a current market capitalization of approximately CAD 46 billion, it ranks among the three largest royalty companies in the mining industry. The half-year results demonstrate just how successful this model is. The company increased its revenue to USD 1.23 billion—a rise of 66.9%. To achieve this, the company sold about 265,000 GEOs, or so-called gold-equivalent ounces. Earnings per share rose disproportionately by 81.4% to USD 4.26. Incidentally, it achieved these figures with just 44 full-time employees. This demonstrates how efficiently the royalty model can be operated over many years.

With no debt and USD 900 million in cash reserves, Franco-Nevada can continue to operate from a position of strength even in this market environment. The company focuses on gold royalties; overall, it holds interests in more than 400 assets worldwide, half of which are in precious metals. An additional 35 are in the energy sector. In this respect, Franco-Nevada is primarily a gold story.

Franco-Nevada's stock has recently pulled back by about 15% from its August high. Long-term investors may view this pullback as a buying opportunity. However, the gold price will also need to cooperate.

RE Royalties: The Dividend Yield Is Rising, But…

RE Royalties shareholders likely got a scare at the end of September. In one fell swoop, the small-cap stock lost about a fifth of its market value, but it later recovered and recouped some of those losses. There is plenty of room for speculation about the reasons. For instance, an investor might have liquidated a large position. Or perhaps someone wanted to reduce their overall exposure to small-cap stocks in this market environment, thereby triggering the share price decline. In general, however, RE Royalties' business model appears to be working. In January, the Canadian company paid an annual dividend of CAD 0.04 per share, which, at the current price level, corresponds to a hefty yield of 11.8%.

RE Royalties has applied the principle of royalties from the oil and mining sectors to the field of renewable energy. The company invests heavily in solar and wind farms, battery storage, and hydropower. To date, it has financed more than 130 individual projects. In return, the company receives royalties—that is, a share of the future revenue from each individual project. And these revenues can flow for years and decades.

However, management is not satisfied with the stock's performance. These insiders hold about a quarter of the shares. That is why experts from PricewaterhouseCoopers were brought in to review the strategy. RE Royalties has stated so far that all possible options, such as strategic partnerships, co-investments, or optimizing the capital structure, are on the table. Even the sale of the entire company is not ruled out.

For investors, there are essentially two options. Either you collect the high dividend, or you bet on a sale—and thus on a takeover of the company. However, it must also be clear that RE Royalties, with a market capitalization of just CAD 15 million, is a true micro-cap and therefore not suitable for every investment portfolio.

Brookfield Renewable Partners

Brookfield Renewable Partners' stock has also taken a significant hit recently. This can be easily explained by the market environment, as the company is likely the world's largest provider of renewable energy. Its portfolio now includes hydroelectric power plants, wind farms, solar power plants, and large-scale battery storage facilities spanning multiple continents. However, this highly capital-intensive business does have its drawbacks in the current market environment. Many renewable energy infrastructure projects are financed with debt. When the Federal Reserve raises interest rates, refinancing costs for companies like Brookfield Renewable Partners increase accordingly. This, in turn, reduces project returns.

On top of that, Brookfield, a dividend-paying stock, faces real competition for investors from US Treasury bonds. These offer around 5%, just like the company's dividend. However, high-credit-quality Treasury bonds are considered less risky than corporate bonds in the market. Last but not least, inflation is currently taking a toll on Brookfield as well, driving up the costs of materials and plant construction. The highly dynamic tariff environment adds to the headwinds.

From a financial standpoint, however, everything has been going smoothly for the Canadian company so far. Funds from Operations (FFO) rose by 13% to USD 421 million in the second quarter. Demand remains strong. The boom in AI data centres is driving long-term contracts and fairly secure cash flows. Bold investors can therefore view the stock's correction as a welcome opportunity to pick up a few shares. One thing is clear, however: if we remain in a cycle of interest rate hikes for an extended period, the stock price could fall even further.

Interest rates affect not only the markets but also Brookfield Renewable Partners' refinancing costs. However, bold investors are now taking a closer look. RE Royalties offers a dividend yield of more than 11%, but the strategy review is currently causing uncertainty. Despite the correction in the gold price, Franco-Nevada, as a gold royalty company, remains a strong and, above all, highly profitable cash cow.