Franco-Nevada Corp

NYSE:FNV

Earnings Call Transcript 2022-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the Franco-Nevada Corporation's Third Quarter 2022 Results Conference Call and Webcast. At this time, the call is being recorded November 7, 2022. [Operator Instructions] I would now like to turn the conference over to your host, Bonavie Tek, Vice President, Finance. Please go ahead.

[Bonavie Tek, executive]

Thank you, Michelle. Good morning, everyone. Thank you for joining us today to discuss Franco-Nevada's third quarter 2022 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. The presentation is also available to view on the webcast. During our call this morning, Paul Brink, President and CEO of Franco-Nevada, will provide introductory remarks; Sandip Rana, Chief Financial Officer, will provide a brief review of our results; and Eaun Gray, Senior Vice President, Business Development, will provide an overview of our recent Magino transaction. This will be followed by a Q&A period. Our full executive team is available to answer any questions. Participants may submit questions by telephone or via the webcast. 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 3 of this presentation. I will now turn the call over to Paul Brink, President and CEO of Franco-Nevada.

[Paul Brink, executive]

Thanks, Bonavie, and good morning. I'd like to start by announcing that Jacques Perron will be joining our Board of Directors. We pride ourselves on the technical capabilities of our Board, and Jacques will certainly add in that area amongst others. Jacques' had a very successful career in the industry, has led a number of companies, and I'm sure as well known to most of you. We got to know Jacques through his running companies, where we have royalty interest, in particular, while he is CEO of Pretium offering Brucejack and as the CEO of St Andrew Goldfields running Holt and Holloway. Jacques, welcome to the Board of Franco-Nevada. Turning to our Q3 results, we saw good underlying production from our diversified portfolio of assets in the quarter. While precious metal prices declined, the impact on our revenue in the quarter was partially offset by higher energy prices. Our Q3 GEOs are lower than Q2 -- than Q2 with 2 main items. While Cobre Panama had record production for the quarter, the strong performance isn't fully reflected in our Q3 GEO sales due to the timing of shipments. We also had a lot of contribution from our Vale iron ore royalty. Despite these items, Franco-Nevada has earned record GEOs, revenue, adjusted net income and adjusted EBITDA for the 3 quarters through September. We're on track to meet our 2022 guidance. We expect to be at the higher end of our overall GEO guidance range and at the lower end of our precious metal range. The weaker gold price environment has led to an increase in demand for royalty and stream financing and in our business development activity. We're pleased to have acquired a royalty on Argonaut's Magino project in Ontario currently advancing through construction. The projects had its issues with cost overruns made only tougher in this inflationary environment, although, we believe Argonaut now has a good line of sight on completing construction as planned. The asset has great upside. The current mine plan is a small portion of the total resource, and we believe far more oil will be recovered over the life of the mine. Last quarter, we announced the financing package we had provided to G Mining for the construction of the Tocantinzinho project in Brazil. Since then, the Company has received its license extensions and has commenced construction. Magino and Tocantinzinho add to a growing list of mine builds in our portfolio, most advanced are Salares Norte and Seguela, which are scheduled to start production next year along with Magino. We expect to see the first gold ounces from Greenstone, Mara Rosa and Tocantinzinho in 2024 and Valentine Lake is scheduled to start in 2025. Our other growth driver is mine expansions. The Cobre Panama expansion is on track to reach 100 million tonne per annum of throughput by late 2023. First Quantum commented this quarter that the mill has performed at the 95 million tonne per annum rate and expect by year-end, it will operate sustainably at the 90 million tonne per annum rate. At Detour Lake, Agnico have discussed their plans to produce greater than 1 million ounces per year. The expansion work was ongoing through the quarter, and they hope to meet the near-term throughput target of 28 million tonne per annum ahead of schedule. On the other hand, Stillwater have reduced their growth plans to 700,000 PGM ounces by 2027, down from 850,000 PGM ounces previously expected. The other mine expansions at Tasiast, Macassa, Odyssey and Island Gold are all progressing well. We continue to advance our ESG effort on a number of fronts. During the quarter, we have awarded 4 scholarships to diverse mining students at McGill, UofT and Queens. We committed 225,000 of funding for community programs, as part of the Magino transaction. The number of programs we're funding are also currently being implemented, including community water infrastructure at Antapaccay, an education initiative in partnership with Antamina and community waste management at Cascabel. In summary, we're blessed with a business model that's high margin, largely immune to cost inflation and exposes our shareholders to tremendous long-term optionality. With the prospect of global recession, it's a great comfort to have no debt, $2 billion in available capital and to be generating operating cash flow at a rate that's close to $1 billion per year. You'll recall that last year, the Board moved the annual dividend review earlier in the year, and we expect the same timing in 2023, with the dividend declaration in January for the first quarter dividend that's paid in March. With that, I'll hand the call over to Sandip.

[Sandip Rana, executive]

Thank you, Paul. Good morning, everyone. As Paul mentioned, the Company saw strong underlying production from our diverse portfolio of assets during the quarter. The majority of the mining assets performed in line with expectations. Revenue and earnings were impacted by weaker precious metal commodity prices and timing of deliveries for certain assets. The one area of the business that continued to deliver strong financial results was the Energy division. On Slide 4, we've highlighted the gold and gold equivalent ounces sold for the 3 and 9 months ended September 30th, 2022 and 2021. Overall, GEOs sold were relatively flat when compared to prior year, with third quarter GEOs sold being [ 176,408 compared to 177,578 ] in third quarter 2021. Of this precious metal GEOs were [ 120,542 down 7,150 ] GEOs from prior year. The largest contributors to the lower precious metal GEOs were Stillwater, Antamina and Cobre Panama. The lower contribution of GEOs from Stillwater was the result of the mine production being temporarily suspended, as a result of flooding in the area in late June. The mine resumed operations in late July. Also, the amount of GEOs sold from Stillwater was lower due to the impact of lower platinum and palladium prices on the conversion to GEOs. For Antamina, we expected 2022 to be a more normalized year with silver ounce deliveries to be in the range of 2.8 million ounces to 3.2 million ounces. This is what is transpiring for the first 9 months of the year. However, we've recorded less GEO sold than expected, as the gold to silver ratio has weakened this year, resulting in less GEO sold on conversion of silver ounces. At Cobre Panama, First Quantum achieved production during third quarter. However, due to timing of shipments, gold and silver deliveries and ounces sold were lower than expected for Franco-Nevada during the quarter. We expect higher deliveries from Cobre Panama in fourth quarter. Offsetting the lower GEOs sold from the assets mentioned, we had strong third quarter performance from Candelaria and Tasiast compared to prior year. For diversified GEOs, our Vale Royalty resulted in just over 3,600 GEOs for the quarter. This was lower than prior year due to lower production and lower iron ore prices. Also this quarter, the true-up recorded related to the period January 1st to June 30th, 2022, resulted in a revenue reversal of approximately [ $1.6 million ]. As you know, each quarter, we make an estimate of what the royalty will be with the actual amount being announced by Vale in late March and September each year. As a result, you will see these types of adjustments to our accruals twice a year, Q1 and Q3. Energy GEOs increased by 54% year-over-year, as we benefited from continued higher energy prices. Slide 5 highlights our total revenue and adjusted EBITDA amounts for the 3 and 9 months ended September 30th, 2022 and 2021. As you can see from the bar charts, revenue, adjusted EBITDA have decreased year-over-year for the 3 months. The Company recorded $304.2 million in revenue in third quarter and $256.7 million in adjusted EBITDA, a margin of 84.4% was achieved. Partially offsetting the lower contribution from precious metals in the quarter was a continued strong contribution from the energy asset, as revenue increased from $55.1 million a year ago to $83.8 million this quarter. The West Texas intermediate oil price averaged just over $91 per barrel during the quarter, a 30% increase from prior year. Natural gas prices were also higher with Henry Hub averaging $7.91 per Mcf during the quarter compared to $4.32 per Mcf a year ago. For the 9 months year-to-date, both revenue and adjusted EBITDA are higher than prior year, new records for the Company. As you turn to Slide 6, you'll see the key financial results for the Company. Although, GEOs were relatively flat, revenue, as mentioned, declined because of lower commodity prices. On the cost side, our cost of sales was flat, which is consistent with the flat year-over-year GEO sold. Cost of sales is dependent on which assets deliver stream ounces, as not all fixed payments per stream ounce are equal, as well, the cash cost per GEO, which was $238 this quarter, will fluctuate depending on the mix of royalty versus stream GEOs, including mining and energy. But at current average gold prices, the Company continues to generate significant margins. Depletion decreased to $68.5 million versus $73 million a year ago. Depletion is based on actual mining GEO sold and barrels of oil equivalent received on the energy side of the business, as we received less GEO from Antamina, Vale and Cobre Panama. This impacted depletion, as those assets are higher per ounce depletion assets. With respect to taxes, the effective tax rate for the quarter was 16.2%, which is higher than the 15% we have trended to previously. This was due to higher income being generated in Canada and the United States from our energy assets. Adjusted net income was $159.7 million or $0.83 per share for the quarter. Slide 7 highlights the continued diversification of the portfolio, which we consider one of the strengths and differentiators of Franco-Nevada has shown just over 70% of our Q3, 2022 revenue was generated by precious metals. The geographic revenue profile has revenue being sourced 90% from the Americas, with Canada and the U.S. being 42%. With respect to asset diversification, Cobre Panama was our largest revenue generator at 15% of total revenue for the quarter, followed by Candelaria and Antapaccay. Cobre Panama continues to be the only asset greater than 10% of revenue. And the last chart highlights our operator diversity, our largest exposure to revenue being generated by any one operator is 15%, which is First Quantum, who operates Cobre Panama. The other cost component for the Company beside the cost of sales is our corporate administration costs. The chart on Slide 8 highlights our quarterly revenues and our quarterly corporate admin and share-based compensation expense since our IPO. As you can see, revenues have grown significantly over the period shown, while corporate costs have remained fairly stable. For Q3, 2022, corporate admin, including share-based comp, was $5.1 million or less than 2% of revenue. Management believes we can continue to add to the portfolio and grow our business without adding significant cash overhead to the Company. On Slide 9, we reiterate our guidance for the year based upon updated commodity prices, as highlighted on the slide and our expectations of production from our royalty and stream interest for fourth quarter, we're forecasting that we'll be at the high end of the total GEO sold guidance of [ 680,000 to 740,000 ]. Also, we expect to have a higher contribution of GEO sold from our diversified assets than our original plan. I will now turn it over to Eaun, who will speak to our recent Magino transaction.

[Eaun Gray, executive]

Thank you, Sandip. In October, we were very pleased to complete the Magino royalty and equity finance. We're delighted to work with the Argonaut team and its bank syndicate to provide a financing solution for the project, which is expected to go into production next year. The project design is conventional from a technical standpoint and is located in excellent mining jurisdiction, Ontario. We believe that there is good potential in the broader land package over time in this exciting district next to Island Gold, where we also have a royalty. We've included key project parameters on this slide and highlight the recent quarterly update, where Argonaut noted, the Magino project is now 70% complete. Moving to the next slide, Slide 11, we highlight our available capital of $2 billion. Equity valuations of mine developers remain particularly depressed in this high inflation environment, and we believe we can put capital to work partnering with some of the best development projects and help them to differentiate themselves. With that, I'll hand it back to the operator for any questions. Thank you.

[Operator]

[Operator Instructions] The first question on the phone line is from -- comes from [ Heiko Ihle ] of H.C. Wainwright.

[Heiko Ihle, analyst]

It's Heiko, not Hector. And just [ wanted to ] extend my congratulations to Jacques. I had the pleasure of working with him when he was with Pretium and it was a pleasure. So congratulations to all of you. I hear more and more about -- I hear more and more about 4 sellers in the market. I mean that's just one example, and I understand this is not a perfect comp, $50 million deal happened today, where the seller specifically stated that the deal removed financing overhang. Obviously, this is sort of a special situation thing, but can you provide some insight on what you're seeing with pricing of distressed sales in the market? And also the sizing and the development stage that these potential streams might be in. I mean, you've hinted at some of this in your release when you go -- weaker gold price environment has led to an increase in demand for royalty and stream financing. But maybe if you could just provide some more data points, if you could?

[Eaun Gray, executive]

Sure. Heiko, it's Eaun speaking here, and thank you for the question. It's an excellent observation. I think what we see at the moment is a number of companies specifically in the precious metals space, where there is an acute need for capital, I think our transaction that we announced with Argonaut and Magino is a good case in point or the type of financings that we're looking at, at the moment. And we see good potential within the precious metal space to continue to do more of these kind of medium-sized transactions. So hopefully, going forward, there will be more like that. The size, the guidance, I think, is more towards the intermediate overall size.

[Heiko Ihle, analyst]

And pricing wise?

[Eaun Gray, executive]

Pricing, I think the market remains relatively competitive, but where we try to differentiate ourselves is to work with partners that value what we do and the solution that we provide. And we try to be nimble in that respect and provide value to our counterparties. And hopefully, as a result, also offer our shareholders attractive returns on the deals that we do.

[Heiko Ihle, analyst]

Fair enough. This was a wonderful lead into my follow-up question. And with the caveat that I've never really had it pointed out to me quite like this on a call or rather in the earnings release, with all the push towards ESG, and I mean you're actually breaking down and quantifying some of your longer-term ESG goals in this release today, are you actively avoiding investments with operators that you believe do not fulfill your longer-term ESG requirements. I guess what I'm asking is, in addition to having their social license to operate, which I assume is always a prerequisite, would you actively not invest into something because of board composition or other ESG [ and airports ] failures?

[Paul Brink, executive]

Heiko, it's Paul. Yes, ESG is very important, and that the way we think of ourselves is we are allocating capital on behalf of our shareholders. We want to make sure that we do, and we want to make sure that they're comfortable that when we're allocating capital, it is into good projects. So a lot of our due diligence is focused on environmental and community impacts. And absolutely, there are projects that we look at, where there's either an existing environmental condition, maybe something in their planning that we're not comfortable with, perhaps it's a community relationship. There are deals that we've turned down for all those reasons in the past to make sure that we are supporting good projects.

[Operator]

The next question comes from John Tumazos of John Tumazos Very Independent Research.

[John Tumazos, analyst]

Is it fair to say that your investment criteria automatically get a little more rigorous with lower metals prices because you use the spot gold price rather than an estimated future gold price in making investments, [ and ] you seek the bottom [ quartile ] of the cost curve. And in addition, in the current period of rapidly rising interest rates, [ where we're ] at 4% and getting higher, would you reach your hurdle rate of return to reflect current market conditions?

[Paul Brink, executive]

John, Paul again. The -- I'd say the best way to characterize it is we want to be a consistent source of capital throughout the cycle, and we try to be as consistent through the cycle in terms of what that cost of capital is. What tends to happen is when things get overheated in the sector, nobody hits our term sheets because they can get cheaper capital, particularly from the equity markets. When the markets are weak, when the costs are -- when other cost of capital become higher, that's when we see that people tend to hit our term sheets. So it's less, so that we try and change the way we price deals. It's just that we're trying to be consistent through the cycle.

[John Tumazos, analyst]

So you're using the same numbers today, as you would have used on March 1st when gold was in [ 2000 ]?

[Paul Brink, executive]

No. We -- when we present -- when we look at things, we always have a view as to what our current prices; we also have a view, as to what our long-term prices. We try and look at every deal through those 2 lenses. The art of it is picking a point somewhere in between the 2. But we're trying to make sure that the deal makes sense to us, both on current and on long-term prices.

[John Tumazos, analyst]

You worry that it's too hard -- do deals and do large deals because of the capital and competition in the sector? Or is it better to just sit on the sidelines and let other people pay too much?

[Paul Brink, executive]

There is more competition in the sector, no doubt about it. The -- but our view is, this is a very capital-intensive sector. It's a very volatile sector. And that if you're patient, the good assets will come available, and there will be good opportunities to grow our Company.

[Operator]

[Operator Instructions] Next question comes from Tanya Jakusconek of Scotiabank.

[Tanya Jakusconek, analyst]

I think that's me. Just wanted to circle back to Eaun, so I understand correctly. So Eaun, are we -- when you said you're seeing deals more back in sort of the midrange for pricing, is that, that $100 million to $300 million range that we talked about in Q2?

[Eaun Gray, executive]

Tanya, yes, I think that's a reasonably fair way to characterize it. I wouldn't put hard bounds on that. There's potential both bigger and smaller, as we negotiate and look at transactions. But that is generally, where we're seeing the majority of the opportunities at the moment, and it is pretty active.

[Tanya Jakusconek, analyst]

And the ones under $100 million [ or ] more of these royalty sort of deals that you're seeing, and so the streams would be greater than $100 million. Would that be fair or...

[Eaun Gray, executive]

Not necessarily. I think we see both types of opportunities, bigger royalties, as well are -- are also out there. The royalties like Magino in Ontario, 2% NSR. It's pretty much bread-and-butter type of business. We like to do those even if they are a little bit under $100 million, as you point out.

[Tanya Jakusconek, analyst]

And so as you mentioned, in the precious metal space is your focus and just project financing continues to be the main opportunities?

[Eaun Gray, executive]

Yes. I think project financing, that's a fair assumption that, that is the majority of the opportunities, but we see others as well, and there are also kind of byproduct base metals deals out there that we look at.

[Tanya Jakusconek, analyst]

So those are back on the radar again?

[Eaun Gray, executive]

I don't know if they ever went off. But yes, there are some of those out there.

[Tanya Jakusconek, analyst]

If I could ask a bit of guidance from Sandip for just looking out for the remainder of the year. I appreciate you telling us some insights on Cobre Panama, so expecting a stronger Q4. Hemlo looked like it came in at per guidance, and I think it was at CAD 5 million to CAD 6 million per quarter or thereabout, and I think you had mentioned [Technical Difficulty] distributed Q3, Q4. Just wondered about Vale because we were quite off on that, that contribution. Any guidance for Q4 on that one. I know we don't have the accrual happening, but anything you can give there, would be appreciative or any other assets for stronger Q4 performance.

[Sandip Rana, executive]

Sure. So Tanya, I guess, Hemlo, I would expect similar to Q3 in the fourth quarter. And then specifically on Vale, obviously, only iron ore prices have come down. So I would expect something similar to third quarter, obviously backing out the revenue reversal of $1.6 million, that was part of the number.

[Tanya Jakusconek, analyst]

Any other assets in Q4 that you think you should flag for us?

[Paul Brink, executive]

No. As I said, I think underlying production at most assets was good in the quarter. It was just timing of deliveries in Cobre Panama specifically. So I think it's business as usual. I think most assets will come in similar.

[Operator]

Thank you. There are no further questions on the phone line. I will now turn the Q&A session over to Bonavie Tek, who will take questions from the webcast.

[Bonavie Tek, executive]

Thank you, Michelle. We have 2 questions from Bernie Picchi of Palisade Capital. The first one is, can you quantify the [ miss ] that occurred because of shipment delays at Cobre Panama? And will that miss be picked up in Q4?

[Paul Brink, executive]

Sure. So the delivery that was delayed into Q4 for Cobre was about 7,000 GEOs to 8,000 GEOs, that so we have received that and that will be sold off in this quarter. Obviously, you can't predict on timing of shipments. So there's nothing to say that there's a delivery that could have potentially be received at the end of December doesn't get pushed into January, but that is the quantum of the shipping delay for Q3.

[Bonavie Tek, executive]

And the second question from Bernie is, it would appear that acquisitions of non-precious metals are not front and center at this time. Any comments?

[Paul Brink, executive]

We continue to look outside the precious metals space as well. I think what we would note, however, is there's a preponderance of deals to do in the precious metal space. And in the current pricing environment, that's where we're focusing a great deal of our attention.

[Bonavie Tek, executive]

And our last question is from [ Vincent Lentini of Lentini Capital. ] Does Franco-Nevada hold any physical gold on its balance sheet?

[Sandip Rana, executive]

We do. So we have 3 royalties that pay us in coins, Tasiast, Detour and Kirkland Lake. It's roughly 6,000 ounces per quarter, and we do hold that on the balance sheet, and we sell that on a regular basis.

[Bonavie Tek, executive]

And that was the last question. There are no further questions from the webcast. So this concludes our third quarter 2022 results conference call and webcast. We expect to release our year-end 2022 results after market close on March 15th, with the conference call held the following morning. Thank you for your interest in Franco-Nevada.

[Operator]

Ladies and gentlemen, this does conclude our conference call for today. We thank you for your participation and ask that you please disconnect your lines.