Franco-Nevada Corp

NYSE:FNV

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, ladies and gentlemen, and welcome to the Franco-Nevada Corporation Q1 2019 Conference Call. [Operator Instructions] This call is being recorded on Thursday, May 9, 2019.And now I would now like to turn the conference over to Candida Hayden. Please go ahead.

[Candida Hayden, IR Contact]

Thank you, Joanna. Good morning, everyone. Thank you for joining us today to discuss Franco-Nevada's first quarter 2019 results. Accompanying this call is a presentation, which is available on our website at franco-nevada.com where you will also find our full financial results.Sandip Rana, CFO, Franco-Nevada, will be -- will provide a brief review of our results; followed by Paul Brink, President and COO of Franco-Nevada, will provide a closing summary. This will be followed by a Q&A period. Representatives from all our offices including Toronto, Barbados, Denver and Perth and some of our directors are present in our boardroom to answer any questions.Before we begin formal remarks, we would like to remind participants that some of today's commentary may contain forward-looking information, and we refer you to our detailed cautionary note on Slide 2 of this presentation.I will now turn over the call to Sandip Rana, CFO of Franco-Nevada.

[Sandip Rana, Chief Financial Officer]

Thank you, Candida. Good morning, everyone. As you will have seen from the press release issued yesterday, the company delivered another strong quarter of financial results. As you turn to Slide 3, you can see the key financial results for the quarter ended March 31, 2019, compared to prior year. The company achieved a number of financial records, which are all highlighted.This strong financial performance was achieved despite the average price for gold, silver, platinum and the WTI oil price being lower in Q1 2019 versus Q1 2018. Only the palladium average price was higher year over year.With the increase in revenue and due to the lower-cost nature of our business model, EBITDA and net income were also higher in Q1 2019 versus Q1 2018. Adjusted net income for the quarter was $65.2 million or $0.35 per share. These strong financial results continue to showcase the strength of the Franco-Nevada business model, in particular the quality and diversity of the assets. From an operational standpoint, our royalty and stream assets continue to perform well.As you turn to Slide 4, the chart illustrates the gold and gold equivalent ounces for each of the last 5 quarters. The GEOs earned for the quarter were 122,049 compared to 115,671 in Q1 2018. This is a 6% increase. The largest source of the increase is Candelaria. We did expect an improvement in gold and silver deliveries from Candelaria in the second half of 2019 but are pleased with the outperformance in the first quarter. In addition, Hemlo and Subika were also strong performers in the quarter when compared to a year ago. The one negative was Musselwhite where we had to adjust the NPI we had recorded for 2018. We over-accrued the 2018 NPI, and this was reversed in Q1 2019. We are expecting a minimal NPI payment from Musselwhite for 2019.As you can see from the bar chart, PGM GEOs have increased compared to 2018. This is partially due to the impact of higher palladium prices on a conversion to GEOs, but also the company did benefit from higher production at Sudbury as KGHM, the operator, restarted mining the McCreedy deposit in Q4 2018. The PM zone within McCreedy is higher-grade precious metals from which we are benefiting. This will continue into 2020.Turning to Slide 5, we have 2 charts on the page. The first highlights the total revenue earned by the company for the previous 5 quarters. For Q1 2019, the revenue amount of $179.8 million is a record for the company. As mentioned, this is a result of strong performance from our Candelaria, Hemlo and Sudbury assets. The bottom chart highlights energy revenue and the average WTI oil price for the last 5 quarters. Q1 2019 was a stronger quarter for energy compared to a year ago and fourth quarter 2018. However, the revenue associated with realized production increases at our U.S. assets was partially impacted by lower WTI prices.The company did fund $38.2 million during the quarter for the Continental Royalty venture with an additional $13.2 million accrued as an accounts payable on the balance sheet.On Slide 6, we provide a breakdown of our revenue by commodity and geographic location. As shown, 88% of revenue for the quarter was generated by gold and gold equivalent assets with 63% being from gold, 11% silver, 11% PGMs and 3% other. The geographic revenue profile has revenue sourced 82% from the Americas.Slide 7 highlights the diversification of our portfolio. The first chart highlights that only 2 assets contributed more than 10% of our revenue with another being at 7% for the quarter. Those 3 assets, Candelaria, Antapaccay and Antamina, in total generated 35% of our revenue. The company is not economically dependent on any one single asset. Diversification is our strength.The second chart highlights how revenue is distributed from a legal perspective -- legal ownership perspective with no legal entity accounting for greater than 45% of revenue in first quarter 2019.Finally, the last chart highlights our operator diversity. Our largest exposure to revenue being generated by any one operator is 15%, which is Lundin Mining who operates Candelaria. We are fortunate to have royalties and streams on many properties mined by some of the most reputable mining companies in the world.I always like to stress the strength of our business model and the scalability. I think that this cannot be illustrated any more clearly than Slide 8. Here we have highlighted our quarterly revenues and our quarterly general and administrative expenses since our IPO. Since 2008, our revenues have grown from approximately $25 million to almost $180 million this quarter, this while our G&A has remained fairly stable over this time period. General and administrative costs have approximated $5 million to $8 million per quarter for the last 11 years. For Q1 2019, G&A was less than 4% of revenue. Management believes we can continue to add to our portfolio and grow our business without adding significant overhead to the company.Before I turn it over to Paul, I would like to mention that there is no update to the CRA audits currently underway. We continue to provide information and answer questions to CRA.I will now turn it over to Paul.

[Paul Brink, President & COO]

Thank you, Sandip. Our balance sheet is positioned to make substantial investments, and we have current available capital of $1.4 billion. We're seeing good opportunities for both precious metals and energy additions. In both cases, transaction sizes are in the $150 million to $300 million range. On the precious metal side, the predominant theme is asset sales from the majors, and we're active supporting intermediates to acquire some of these assets.Equity capital for the energy sector remains constrained, and there's pent-up demand for the monetization for royalty portfolios. We're seeing a good amount of product and can be discriminating in our bidding. Our innovative partnering structure with Continental has drawn attention in the sector, and there are also prospects for partnering with other operators. We continue to be opportunistic bidding on precious metal on nonprecious mining assets that would also add to the quality of the portfolio.Turning to Slide 10. Our commodity mix objective is to maintain the portfolio with at least 80% gold equivalent production. This quarter, energy made up 12% of our revenue. With the increased contribution of the U.S. energy assets over time and the ramp-up of Cobre Panama, we expect the energy assets to contribute 16% to 17% of revenue by 2023, leaving room for additional energy acquisitions.With that, I'll hand it back to Joanna for Q&A.

[Operator]

[Operator Instructions] And your first question is from Cosmos Chiu from CIBC.

[Cosmos Chiu]

Thanks, David, Paul and Sandip. David, I think you're still there somewhere. Congrats on a very good start to 2019.

[David Harquail, CEO & Director]

Yes, I am, Cosmos.

[Cosmos Chiu]

Oh, yes, David, hey.

[David Harquail, CEO & Director]

I'm not retired yet.

[Cosmos Chiu]

Maybe first off on the Candelaria. Clearly a very good Q1. It was a surprise to me as well in terms of how well it did. I just want to confirm that that's sort of like a sustainable level for the rest of 2019, especially the contribution coming to Franco-Nevada. It sounds like it is higher grade. It sounds like there is stripping, new equipment and billion-dollar investment. But I just want to confirm with you.

[Sandip Rana, Chief Financial Officer]

So Cosmos, Sandip here. Q1 was obviously an outperformer for us. I would not expect Q2 to be to the same level of Q1. So I would expect less ounces being delivered and sold in second quarter. But then again, starting in Q3, we should start to see the benefits of the higher grade and the equipment placement.

[Cosmos Chiu]

Great. And maybe switching gears a little bit here. Cobre Panama clearly is a key driver for Franco-Nevada in 2019. You've given us a range of 20,000 to 40,000 ounces of contribution in 2019. Is that mostly coming in Q3 and Q4? Or is it just Q4? And when I talk about the lower end of that range, 20,000 ounces, and the upper end of that range, 40,000 ounces, what's the difference here? Is it just timing of shipments coming from First Quantum? Or how does it work?

[Sandip Rana, Chief Financial Officer]

So the -- we would expect to start receiving gold and silver being delivered in Q3. Obviously, as they ramp up, we will receive more. So you'll -- we will receive in something in Q3, but then you would see more in Q4. So it will ramp up over time just as the project is ramping up. In terms of the 20,000 to 40,000, it's all based on timing. We get paid when First Quantum gets paid, so it depends upon where they are shipping. So if it's going to take 6 weeks to ship somewhere, we're not going to get paid for a period of time. So it's just a timing difference.

[Cosmos Chiu]

Yes. And then maybe a question on oil and gas, the Continental partnership. In the MD&A, you talk about good success in terms of Continental acquiring additional royalties. Clearly, Franco-Nevada contributed about $50 million in Q1. I think when I look back when you formed the joint venture partnership, the intention has always been for Continental to acquire lands that are getting drilled pretty near term. Is that still the case in terms of what they've acquired? And could we expect some kind of near term upside coming to Franco-Nevada? I guess you realized about $2.8 million in Q1 from the Continental partnership. Can we see near-term upside from that partnership?

[Jason O’Connell, Vice President of Oil & Gas]

It's Jason O'Connell here. We still expect, I guess, the model to hold true. So Continental is still acquiring acreage which is directly in front of their drill bit. It does take time for them to drill those wells, have them come online and then have the royalty payments come through to us. So in terms of the revenue that we expect to see over the course of the year, we would expect to see a slightly higher revenue contribution in Q2 and really more of an increase at the back half of the year as those wells really come online. Those wells are right now predominantly in front of a project area called Project Springboard that Continental is currently focused on. And so as that ramps up towards the end of the year, we'll see more and more revenue coming to Franco-Nevada again probably Q3, Q4.

[Cosmos Chiu]

Great. And then maybe one last question from me if I may. On Nevada, we certainly touched on the potential benefits of the Barrick-Newmont joint venture partnership on Nevada and how that could impact -- potentially have a positive impact on Goldstrike and Gold Quarry and especially the NPI at Goldstrike here. Have you had a chance to maybe potentially quantify what the potential upside may be? And other than the Goldstrike and Gold Quarry, are there any sleepers that could potentially benefit from this joint venture partnership?

[Sandip Rana, Chief Financial Officer]

I think it's too early to tell, Cosmos. There's the possibility to benefit at Goldstrike. And then as you mentioned, Gold Quarry, we don't know what would happen there either. So I think Barrick has to get the joint venture reviewed and figure out what they're going to do, and then as they provide information, we'll assess the impact.

[Operator]

[Operator Instructions] And your next question is from Josh Wolfson from Desjardins.

[Joshua Mark Wolfson, Former Analyst]

Just looking at the PGM division, results there seem very strong. I would have assumed a lot of that was partially contributed by higher palladium prices. I think our expectation was the Stillwater operation would have been lower based on some of the results that the operator put out. Is there any sort of information you can provide as to what drove the higher result there beyond just the palladium price and maybe what the expectations are at Sudbury after some of the mine and operating changes that were announced?

[Sandip Rana, Chief Financial Officer]

Sure. So Josh, with respect to Sudbury, a portion, yes, was the higher palladium price when you do convert to GEOs, but it was truly increased production: platinum, palladium and gold production just because of the McCreedy deposit. And as I said, we will see that continue through the rest of 2019. At Stillwater, it was timing. There were some royalties due from 2018 that got booked in 2019. So you will see a somewhat lower amount likely in Q2 but not significantly.

[Joshua Mark Wolfson, Former Analyst]

Okay. And then one other question for Musselwhite. In terms of the operator who mentioned that there's insurance on the mine that would, I guess, recover some of the loss revenues, would that apply for the NPI as well such that the loss revenues could be made up in future periods? Or is that something at the corporate level for them?

[Sandip Rana, Chief Financial Officer]

No, it does apply. If they receive anything from insurance proceeds and it's recorded as income, it flows through to Franco through our NPI.

[Operator]

Your next question is from Tanya Jakusconek from Scotiabank.

[Tanya M. Jakusconek, Analyst]

Question for Sandip. On your 1-year term loan, can you confirm that you're not able to pay this down until it matures in 12 months' time?

[Sandip Rana, Chief Financial Officer]

We are. There is -- we can repay at any time without penalty.

[Tanya M. Jakusconek, Analyst]

Oh, okay. Okay. Because we just wondered why you would put that in rather than just pay off the loan facility just with cash on hand as it comes due.

[Sandip Rana, Chief Financial Officer]

Two reasons: one, it was better pricing than our existing credit facility; and secondly, by putting the term loan in place, it frees up the $1.1 billion available under the facilities already in place.

[Tanya M. Jakusconek, Analyst]

Okay. Okay. And then maybe one for Paul if I could. Paul, you mentioned some of the size of the transactions that you are seeing in the oil and gas space, which I think you mentioned was in the $150 million to $300 million. How about the opportunities that you're seeing in the nonprecious, so excluding oil and gas spaces, in similar sort of price range?

[Paul Brink, President & COO]

Yes, I'd say they are, Tanya. And I call those midsize-type transactions, but that's the sort of size that we're looking at.

[Operator]

Your next question is from John Tumazos from John Tumazos Very Independent Research.

[John Charles Tumazos, President and Chief Executive Officer]

A smaller company, all these minerals started to do financings on renewable energy such as hydroelectric. Could you see other energy forms besides oil and gas growing into the Franco mix? It interests me because the U.S. electricity market is a lot bigger than the gold market and historically is a little more stable.

[Paul Brink, President & COO]

Hi, John. It's Paul. It was interesting to see that type of transaction, and it's fascinating to see how the royalty model is applied in a lot of different industries, and there are a lot of attractions to the low-risk nature of a royalty. I think for our business, though, we see our core competency being around our technical team and our ability to look at resources in the ground. And what we've really enjoyed is the optionality that you get in investing in a deposit and the potential that that can be 2x, 3x, and in rare cases 100x bigger over the life of a deposit. And so I think our inclination is to stick with resources both on the mining side and on the energy side.

[Operator]

And your next question is from Ralph Profiti from Eight Capital.

[Ralph M. Profiti, Research Analyst]

Specifically with the oil and gas, you talked about the market still continuing to be quite robust, and we've had sort of 2 or 3 quarters since the Continental deal. I'm wondering, are you seeing deal activity pick up, or is it the actual structure of the Continental deal that's actually resonated with potential partners?

[Jason O’Connell, Vice President of Oil & Gas]

Yes, it's Jason here again. The depth of opportunities in the U.S. royalty space is really quite huge right now. That's a consequence of the fact that there is a lot of private money in the space that's looking for a home in longer-term capital, such as [ Norasells ] and other public companies. And so there continues to be a lot of opportunities along that vein. And then in addition to that, I think the Continental transaction that we announced a while back has gotten a lot of traction with other operators. And so there are people that are considering a similar structure where they're trying to take advantage of I guess the arbitrage that exists in the market between what the market price is and the value of these royalties if you know the timing of when they're developed. So really the scope of opportunities is large. We'll continue to pursue both sort of the royalty packages that we've acquired in that structure, and we'll continue to pursue discussions with other operators on how to potentially work together to extract value by buying ahead of the drilling program.

[Ralph M. Profiti, Research Analyst]

Okay. So it sounds like it's both. And you keep this kind of deal structure quite separate from sort of the deal structures in the metal space. Am I to kind of assume that it's be very difficult to transfer this type of deal accretion to Franco into metals deals? And I'm specifically talking Continental versus precious metals deals.

[Paul Brink, President & COO]

I'd say the way to think about it is, with a mining asset, when somebody has made a decision to build a mine or a mine is built, you've got a, on the royalty aspect, you've got 2 benefits. You got the benefit of knowing the timing of your production, plus you got the benefit of a low-risk royalty interest, and that's what's made our business so good. The beauty of the Continental deal is it allows you to get something similar but in the energy space. Because we're able to combine both the knowledge that the operator has on the timing of the drill programs -- that gives us the production certainty -- plus we're applying the low-risk royalty arm above that. So I'd say in doing deals like the Continental deal in the energy space lets us get some of the low-risk profile to what we can get in the mining space.

[Ralph M. Profiti, Research Analyst]

Yes, okay. And maybe if I can just finish off with a higher level question. When you think about competing sources of capital to Franco-Nevada, everything from public debt markets to private equity to sovereign wealth, where do you think you're going to see the most competitive tensions, say, the next 1 to 2 years?

[Paul Brink, President & COO]

And you're thinking of parties that would be bidding against us for access.

[Ralph M. Profiti, Research Analyst]

Correct, yes.

[Paul Brink, President & COO]

Hard to know. It's certainly the trend has been a lot more private capital. Or maybe that's just a dearth of public capital competing. I'd say of all of this, there's so much capital that's come out of the public equity markets, both on the mining side and the energy side, but mostly what we see is a lack of capital competing for these assets. So if that persists for the next number of years, I think that'd be a terrific opportunity.

[Operator]

There are no further questions at this time. You may proceed.

[Candida Hayden, IR Contact]

Thanks, Joanna. We expect to release our second quarter 2019 results after market close on August 7 with a conference call held the following morning. Thank you for your interest in Franco-Nevada. Goodbye.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.