Franco-Nevada’s Shariah Exclusion: A Golden Contrarian Play Amid Regulatory Crosswinds

The exclusion of Franco-Nevada (FNV) from the S&P/TSX 60 Shariah Index on May 16, 2025, has sent its stock spiraling, but beneath the noise of index-driven selling lies a compelling opportunity. For investors willing to parse the nuance between transient compliance hurdles and Franco-Nevada’s durable value proposition, this could mark one of the most compelling entry points in years. Let’s dissect why this exclusion isn’t a death knell—and why it might just be the catalyst to own this rarefied gold royalty giant.

Shariah Exclusion Dynamics: Debt, Energy, or Both?

The Shariah Index exclusion criteria, governed by AAOIFI guidelines, prioritize companies avoiding excessive leverage, interest-based financing, and revenue from prohibited sectors like alcohol or gambling. While Franco-Nevada’s core business—royalties on precious metals—aligns with ESG-friendly secular trends (e.g., gold’s role in decarbonization strategies), its exposure to the energy sector (via oil and gas royalties) and financing structure may have triggered the red flag.

The key question: Is this exclusion a structural flaw or a temporary misstep?
- Debt Profile: Franco-Nevada’s debt-to-market cap ratio hovers below 10%, far below the 30% threshold often cited in Shariah-compliant indices.
- Energy Exposure: Roughly 15% of FNV’s revenue comes from oil/gas royalties, a segment that Shariah indices may now view as incompatible with evolving ESG standards.

The Contrarian Case: A Royalty Monopoly in a Gold Super Cycle

Franco-Nevada’s model is a cash-generating machine: it owns royalties on 35% of global gold production and 18% of silver, with minimal upfront capital risk. Unlike miners that face exploration costs and operational volatility, FNV profits from others’ success—collecting a slice of production without bearing the burden of rising mining costs or environmental liabilities.

Consider these secular tailwinds:
1. Gold’s Safe-Haven Surge: Central bank demand for gold hit a record $118 billion in 2024, with China and India accounting for 60% of incremental buying.
2. Silver’s Industrial Renaissance: The EV revolution requires 20x more silver per car than ICE vehicles, and solar panels use 20g of silver each.
3. Undervalued Metrics: At 12x forward EPS and a 2.5% dividend yield, FNV trades at a 30% discount to its 10-year average P/E, despite record margins.

Shariah Compliance Stress Test: Can FNV Adjust?

To regain Shariah inclusion, Franco-Nevada could:
- Divest Energy Royalties: Spin off or reduce oil/gas exposure, focusing purely on precious metals—a move that would likely boost its ESG profile.
- Refinance Debt with Shariah-Compliant Structures: Convert traditional loans to Islamic instruments like sukuk, which align with profit-sharing principles.

The company has already signaled flexibility: in Q1 2025, it sold non-core assets to bolster liquidity and signaled intent to prioritize high-margin gold projects.

Catalysts for Reversal: A Triple-Play Opportunity

1. Re-Inclusion in Indices: If FNV trims its energy exposure, it could regain favor with Shariah indices, triggering passive fund buying.
2. Gold Price Catalysts: A Fed pivot to rate cuts or a geopolitical flare-up (e.g., Middle East tensions) could spike gold to $2,500/oz+, lifting FNV’s revenue.
3. Share Buybacks: With $2 billion in net cash, FNV could repurchase shares aggressively, boosting EPS and dividend yield.

Conclusion: A Buy at These Levels, Despite the Headwinds

Franco-Nevada’s exclusion from the Shariah Index is a tactical stumble, not a terminal injury. The stock’s 20% drop post-announcement reflects a knee-jerk reaction to index outflows—a perfect contrarian moment. With gold poised to thrive in a world of fiscal stimulus and ESG-driven capital allocation, FNV’s royalty model is a leveraged play on one of the most robust commodity cycles in decades.

For investors with a 3–5 year horizon, this is a high-conviction buy at current levels. The re-inclusion of FNV in Shariah indices could be just a strategic pivot away—but even if it isn’t, the company’s gold royalty empire remains a fortress in a volatile world.

Act now before the next leg of the gold rally lifts this undervalued champion.