GOLD STRATEGY Apr 26

 

GOLD STRATEGY APRIL 2026, Gold, FNV and WPM

Summaries are from NotebookLM, sourcing transcripts, company presentations and filings; my commentary is added.

Gold price

The charts below, the top two courtesy of Auscap, show a story of the relative strength of the gold price. In real terms in is almost twice as high as the dramatic 1980 peak. Of course, my framework on gold is that the price is mainly determined by growth in the money supply of the major economic blocs (G3). I use M2, but I could use other definitions. M2 seems a reasonable money supply measure to follow. The theory is that over the long-term gold will follow the aggregate growth in the money supply. The time lags and correlation are not that tight, which is common in the real world. The graph below (from Gemini) shows a correlation of 0.58, which is not bad for real-world correlations, but it does imply that we should expect sustained deviations from the trend, in both time and magnitude. The red dashed line versus the gold price is most relevant as a line of best fit over 20 years. The conclusion is that gold is significantly overvalued on this basis on a long-term view. When the positions were taken in 2022/3, you can clearly see that the gold price was undervalued, which led to the positions being initiated. There is no way of knowing how quickly the two lines will converge. The middle graph shows the extent of previous gold bull markets compared to the current one. This could be relevant or may not, either way, it is most likely that the bull market is probably closer to the end than the beginning. There are many possible other influences over the shorter term, such as central banks building gold supplies, and how India and China react. Predicting these is difficult, but it is a long stretch to assume a new paradigm now exists, IMO. However, given the inherent uncertainties with any commodity forecast, the strategy here is to slowly reduce exposure. My target gold exposure, stocks and bullion, is around 2%, currently, it is 6-7%, so a staged reduction in exposure is anticipated and has already begun. The other question is what exposures to hold in the longer term, FNV, WPM or bullion. I don’t have much interest in holding gold miners due to the operational risk.

Streamers versus royalty

Business Model

• Wheaton Precious Metals (WPM): Operates a 100% streaming revenue model, where it provides upfront capital in exchange for the right to purchase a percentage of production at fixed prices or a percentage of the spot price. While this insulates WPM from operating costs, its stream agreements frequently contain step-downs—meaning the percentage of production Wheaton receives drops significantly (often by 50% or more) after certain delivery thresholds are met, which limits some long-term discovery optionality.
• Franco-Nevada (FNV): Employs a hybrid model but relies heavily on Net Smelter Return (NSR) royalties, which make up roughly 58% of its measured and indicated ounces. Unlike streams, FNV’s royalties generally do not have step-downs or life-of-mine caps, giving FNV "free" leverage to future expansions and exploration successes. Furthermore, FNV is vastly more diversified, boasting nearly 120 producing assets compared to WPM's. FNV has 39% exposure to streaming and 7% other (eg profit share).  

The conclusion of the above is that although both companies participate in the commodity upside and do not expose themselves to operating cost issues, the streaming model is usually inferior and is more appropriate for large producing mining companies, looking to offset capex. Because they are large and operating, the mines have more bargaining power and can extract better terms. The royalty companies are usually smaller and require start-up capital. The royalty business is usually superior in terms, with no step downs, no continuing capital, where streamers pay for production as it is produced, at a percentage of revenues. The downside of royalty is that the time to production is longer and relies on geological expertise to a greater degree, ie identifying the attractive deposits. One of the positives for the royalty business is that the dormant properties can, with the much higher gold price, be fast-forwarded. So, a positive for FNV's large royalty portfolio.  

Commodity Exposure

Commodity Exposure and Capital Allocation. While both companies are heavily leveraged to precious metals, their capital allocation strategies regarding commodity diversification differ significantly:

• Wheaton Precious Metals (WPM): Operates as a pure-play precious metals streamer, with 99% of its portfolio in precious metals (98% of its 2025 production came strictly from gold and silver). WPM explicitly avoids layering oil, gas, or iron ore into its portfolio, differentiating itself from hybrid peers.
• Franco-Nevada (FNV): Aims to be the "go-to gold stock" but deliberately maintains a diversified commodity segment that includes iron ore, oil, natural gas, and natural gas liquids (NGLs). In 2025, precious metals accounted for 85% to 90% of FNV's revenue, while its diversified assets generated the remaining 10% to 15%

If we are looking for the most direct precious metal exposure, WPM is the better play. Having said that, WPM has a large silver exposure with AU/Ag 60/40%. WPM has also made a large silver stream purchase post-balance date, so silver plays a large part. FNV looks more like a longer-term asset accumulation play, with a strong gold focus.

Geographical risk

Geographical Exposure and Risk Mitigation Geographically, both companies derive the vast majority of their revenue from the Americas, but their exposure to top-tier jurisdictions and their approaches to geographical risk differ:

• FNV: Heavily Americas-focused, with 89% of its Q4 2025 revenue derived from the Americas (44% South America, 21% Canada, 15% U.S., and 9% Central America & Mexico). FNV actively targets OECD and Tier-1 jurisdictions, calling it a "happy coincidence" that its recent major deals were located in Canada, the U.S., and Australia. When FNV does allocate capital to riskier geopolitical jurisdictions, it mitigates this risk by requiring a faster payback period on its investment. Despite these efforts, FNV's geographical risk materialised severely when the Panamanian government forced the closure of the Cobre Panama mine, leading to a $1.2 billion impairment and an ongoing $5 billion international arbitration claim.
• WPM: Also relies heavily on massive Latin American assets like Salobo (Brazil), Antamina (Peru), and Peñasquito (Mexico). However, WPM is viewed as having a less attractive jurisdictional profile than its peers, with over 50% of its Net Asset Value (NAV) tied to its top four assets, none of which are in Tier-1 ranked jurisdictions. To mitigate this, WPM focuses heavily on evaluating "community risk" rather than just country risk. For example, WPM views certain African nations as some of the most stable jurisdictions in the world regarding long-term mining security, provided the local community relationships are strong.

The geographical mix favours FNV, but as we saw with Cobre Panama, there is a certain randomness in where problems occur. Therefore, on the surface, FNV looks less risky; it is a matter of degree and can work out in unpredictable ways. FNV has a slight advantage in risk in this metric.

Concentration risk

Franco-Nevada (FNV) and Wheaton Precious Metals (WPM) have vastly different risk profiles when it comes to asset concentration, with FNV being highly diversified and WPM operating a highly concentrated portfolio.

Franco-Nevada (FNV): High Diversification, Low Concentration Risk

• Massive Portfolio Scale: FNV boasts the largest and most diversified portfolio in the royalty and streaming sector, holding over 430 total assets, including 119 that are currently producing.
• Capped Asset Reliance: FNV is highly insulated from single-asset failures because no individual asset contributes more than 13% to 15% of its total revenue. For instance, in 2024, its largest revenue contributor (Candelaria) accounted for just 14.6% of total revenue, and in 2025, its top asset generated 13% of total revenue.
• Operator Diversification: FNV's strategy focuses on securing a massive quantity of royalties, spreading its operational risk across dozens of different mining operators and ensuring that a negative surprise at any single mine does not derail the company's overall performance.

Wheaton Precious Metals (WPM): Low Diversification, High Concentration Risk

• Smaller, Concentrated Portfolio: WPM operates a much tighter portfolio of roughly 42 agreements, with only 23 assets currently in the operating stage.
• Heavy Reliance on Top Assets: WPM is highly vulnerable to issues at its flagship mines. Its top two assets alone (the Salobo mine in Brazil and the Peñasquito mine in Mexico) generate roughly 65% to 67% of the company's operating cash flow. Furthermore, over 50% of WPM's total Net Asset Value (NAV) is tied to its top four assets.
• Massive Operator Concentration: Because WPM relies on a few massive streams, it has extreme exposure to individual mining operators. In 2025, agreements with just one operator—Vale (which runs Salobo, Sudbury, and Voisey’s Bay)—accounted for 49% of WPM's total revenue (up from 46% in 2024) and 52% of its operating cash flows.
• Jurisdictional Concentration: Compounding its asset concentration risk, WPM's portfolio has a less attractive jurisdictional profile than FNV's, as none of its top four NAV contributors are located in Tier-1 ranked mining jurisdictions.

Summary While WPM's concentrated bets on massive, long-life base metal mines provide it with peer-leading production scale, this concentration makes the company much more vulnerable to single-asset operational issues, labour strikes, or localised geopolitical events. Conversely, FNV's model sacrifices some of that concentrated leverage to build a highly diversified, "bulletproof" portfolio that easily absorbs the loss of a major asset—as seen when it recently absorbed the sudden closure of the massive Cobre Panama mine while still delivering record financial results

 

Capital Allocation

There is a certain commonality in the numbers. The NPM are high, which aligns with the business models. The chance of financial stress is fairly remote. The flipside of that is that ROEs are low. Even allowing for usually net cash positions, the businesses garner their returns on either an optionality eventuating over time (e.g., mine expansions) or a commodity price spike. Both companies talk about counter-cyclical investing, and the numbers show some signs that this is indeed the case. Both companies invested more heavily in lower commodity price regimes to the extent that prudence allowed. WPM probably has a slightly more aggressive stance, but it is not significant.

There can be some debate about what to do with the windfall profits from the recent spike in gold and silver prices. WPM's recent deal to buy BHP’s silver stream on Antamina in Peru is interesting. The acquisition post balance date was large, US$4.3B, and will require US$2.4B in debt.  WPM already has a position in this asset, so it knows it well. However, the price is very high and requires either an ongoing high Ag price, significant expansion and/or longer mine life. WPM explained that large streaming assets in silver are rare. Not sure I agree with the asset allocation here. Probably an example of the more aggressive nature of WPM, and that streaming deals are larger and usually from large, powerful miners.

SUMMARY

Both WPM and FNV are well-run companies with tested business models. FNV is more conservative on several measures. FNV appears to be the better fit with my risk tolerance, especially at historically high commodity prices. Bullion is a trickier proposition. In some ways, it acts as a bank, a diversifier, which it has achieved. When is the time to use that windfall? Timing commodity markets is quite difficult. The aim is then to reduce exposure to the sector by firstly selling WPM down and then FNV and bullion in tandem, depending on asset price moves. Ultimately, we should end up with smaller positions in gold represented by FNV and bullion. I do like the “awakening” of FNV's dormant royalty portfolio as a possible bull thesis. There appears to be no hurry to exit, but a staged exit is preferred. In the ST, the market is run by momentum and narrative, which can extend to unreasonable fundamental peaks and troughs. Staggering sales are appropriate in this environment. The other aspect is that almost all my trades are switches, so opportunities in other areas with sound fundamental backing may call on this capital.