We're very happy to host Eaun Gray, the Senior Vice President of Business Development for the new Royalty Finder for Franco-Nevada. The company earned $0.95 in the March quarter. So they have almost $3 million a day to reinvest, including depreciation and depletion. I'm sure Eaun's gonna apologize for all the money they make at $110 oil and $6-$8 natural gas. You should have a better sequential earnings report than the average royalty company, with gold and silver trailing a little bit. Please tell us all the good news, Eaun.
Thank you, John, and good afternoon to everybody. John, really appreciate you including us again in this conference. It's always a pleasure to do this with you. I'd like to start off by first just highlighting our cautionary statement, which I've opened on slide two. This is available on our website, and it also points you to our annual risk disclosures as I will be making some forward-looking statements in this presentation. You know, Franco-Nevada, as you allude to, John, has got a very robust business model. Overall, you know, we have one of the most diversified portfolios within the royalties and streaming space. We've got a strong track record of execution, and additionally, you know, we've got a number of growth prospects within the portfolio that bode well for the future.
You know, I think while a lot of other royalty companies can say that they have some of these things, you know, there is quite a bit of differentiation here, especially in just how large and diversified our portfolio is. This has really borne fruit over time. You can see, you know, our performance has really led a number of key indices. We're quite proud of that, and we've got some very supportive shareholders as well. You know, we think of ourselves as capital allocators within the mining space, and we invest across the cycle, when times are good and also when times are bad. Sometimes when capital is scarce, it's the best time to make investments.
When the equity markets are difficult, we look to support companies that we partner with through that period. You know, we do have very strong cash flow from our existing assets, so at this stage in our growth cycle, we don't really need to be tapping the equity market to fund our growth to a large extent. It's built in with our cash flows, and we're also quite proud of our dividend increases over time. We think the portfolio also has great organic potential within it, providing optionality on a lot of properties that we find quite exciting. You know, in my team within business development, you know, we're tasked with growing the business. You know, we like to do this in a number of ways.
Depending on where we are in the cycle, it does differ. Right now , we are seeing the equity market for gold stocks being particularly tough. In that type of market, you know, we can provide capital to help projects move forward. We like to call that kind of the emerging market or emerging project basket. You've seen probably in the past the financing we did with SolGold to support the development of Cascabel and the exploration pre-feasibility study there. Marathon Gold with Valentine Lake. Skeena Resources quite recently. One that we continue to be quite proud of is the investment to acquire the claims from Cliffs in the Ring of Fire.
You would have seen that, Wyloo just picked up Noront there, with our loan that was provided at the time, now repaid and the royalty now on the balance sheet with that capital recouped. But we also like to provide project financing. You know, secularly, that's been a tough space for banks, so Cobre Panama, our largest asset by margin, that was a project financing to help get that built, through, you know, what were at times quite difficult conditions in the copper market. Candelaria with Lundin and acquisition financing. Of course, during the dislocation of the credit market, we did deals with Glencore and with Teck as well. A pretty rounded overall business model and ways to grow. Asset selection is key here.
You know, trying to get it right as much as possible to get the exploration optionality. We've had some great wins within the portfolio over time, which I'll touch on a little bit later. Now, the portfolio is quite diversified globally. You will note that there are some areas where we don't have assets. In this environment, quite lucky in that regard, I think, to be out of some of the riskier jurisdictions, focused more in the Americas. Really quite diversified even within this area. Four cornerstone assets really led by Cobre Panama, but Candelaria, Antamina, and Antofagasta are leading copper mines globally in what we think is a good environment for copper going forward. Performance continues to be quite strong, which I mentioned.
I won't spend much time on that, but I will again highlight the diversity of the portfolio. In terms of revenue, if you look at operators, individual assets, geography, and also individual commodities, as John alluded to earlier, diversification is our strength. Now, track record has also been very important. You know, we have managed to keep our G&A down. Our business model is not one where we have a lot of cost of goods sold that are exposed to, you know, for an inflationary environment. In fact, we're quite lean in that regard, very robust margins, and we stand to benefit disproportionately, I believe in an inflationary environment relative to operators. I think it's quite a good case for Franco-Nevada at the moment.
Just moving through these slides, one worth highlighting, I think it's slide 21 within our investor deck, shows performance in different market environments. And again, you know, my view in this environment where you're seeing a lot of inflation and operators really take that on the chin, you know, a large extent, and the royalty model does benefit overall, and provides a very interesting investment opportunity, should there be a sustained period of inflation for operators. Now, in terms of growth, you know, we do have some very interesting kind of built-in growth. And the most material really is Cobre Panama. Cobre Panama, large copper mine in Panama, operated by First Quantum Minerals. We're across the whole property, including with Korean partners.
It is ramping up or intended to ramp up to 100 million tons per annum of throughput. Over the next few years, we get a bit of a tailwind from that. That is quite beneficial from a high-quality asset. We've provided a bit of detail within the investor deck and, you know, lots of information there and also on First Quantum's website, if anyone is interested in looking at it in more detail. But also more broadly, the portfolio has a number of other growth options within it that we see being quite beneficial going forward. Some of the lesser-known ones, I think worth highlighting here is Salares Norte with Gold Fields' very advanced gold development project in Chile.
Will be a large producer when it comes online. High-grade open pit, primarily oxides. Very interesting. Séguéla, in Côte d'Ivoire, that is now owned by Fortuna. We did the deal there with Roxgold. That project is also well advanced in terms of development. It should be coming on in the near term here. Valentine Lake also one that we've seen great progress on the permitting. Hopefully, we'll continue to see progress on that front. They have been leading with the drill bit there at their Berry deposit , where they've added a lot of interesting intersections and are planning to put out an updated resource report in the near term. Certainly, encourage investors to keep an eye out for some of those.
You know, as I alluded to with the torque within the portfolio, Detour Lake, this is a royalty that David Harquail, our Chairman, bought years ago for a relatively modest sum. But that asset continues to grow, and we look forward to seeing what Agnico puts out with their update, which I think is expected imminently.
It's notable that half of these projects in this slide are in Canada or the US. Only one of the expansions, Cassius, and one of the new mines in Ivory Coast are countries that couldn't vote to condemn the Ukraine war. I view those 52 countries as pariahs of sorts.
Right. Yeah.
None of the times are pretty good batting average, or 7 out of 8.
Yeah. What we say is, you know, we try to keep majority of our investments in pretty straightforward mining jurisdictions. You know, there always is noise around taxes and things of that ilk. We will make investments in other jurisdictions where we see good potential going forward and, you know, moderate risk. You know, producing asset news, I think I alluded to a lot of that already. You know, there are a number of projects, Castle Mountain being one that might not get as much attention from our investors, but we did just add another royalty on Castle Mountain. It's quite an attractive royalty. Hopefully with the phase two expansion permitting advancing that, it'll be an even bigger contributor going forward.
Every one of these operators in that slide are very fine companies.
Yeah. We do value our relationships with our operators. It is quite important. We try to work with the best team. Team is always important when making investment decisions. You know, within the portfolio, John, you and I touched on this a little bit earlier, but there are a number of interesting opportunities where things really do stand the chance of being quite meaningful contributors going forward. You know, with Cascabel, for instance, in Ecuador, Copper World in Arizona, you know, Fénelon, Martinière, Inca de Oro, Valentine Lake, Eskay Creek. It's quite a deep portfolio, which is what I would highlight for investors there. Quite keen to watch these projects develop.
As gold prices were quite strong over the last couple of years, these projects have received a lot of attention and investment. It should be a fruitful future for them. Finally, this is a slide I mentioned last year. I'd really just point to the bottom right-hand corner. There are a number of things here that are further out in the future. You know, Taca Taca, First Quantum in Argentina, very attractive copper project. Casa Grande I mentioned, NuevaUnión, Crawford Nickel in Ontario, Ring of Fire. There's a lot of potential there in the long term, which excites us. Overall, you know, we are in a good position to grow the business. As you mentioned, we are generating significant cash flow, and we actively look to deploy that.
I do think it's a good environment for Franco-Nevada, both in terms of organic growth but also future acquisitive growth. We've got a good balance sheet. Markets are, you know, both the bond market and the equity market, more challenging than they've been for some time. As a provider of capital, that does stand to benefit us going forward. John, with that, I'd be happy to answer any questions that you've got.
Oh, I got lots. We earned $0.95 in the March quarter. With oil and gas rising more than gold and silver have fallen, is it safe to expect at least $1 in the June quarter?
I'm not gonna speculate on that at this stage, John. I think I'd probably get myself in trouble doing that. It is very nice to see energy prices where they are for our portfolio. You know, as opposed to, I think most where you know people are quite concerned about the inflationary impacts of energy, we actually stand to benefit. Our last two investments in natural gas in Haynesville and Marcellus, you know, they are very well positioned in this environment and should be good performers going forward, given where prices are.
Wheaton Precious Metals and Sandstorm have been getting a lot more deals done in the last year. Are any of those assets that were big enough to move the needle for Franco-Nevada? Any of those deals you wish you had done?
I won't comment on individual deals that others have done. What I would say, though, is that in the current environment, where I think capital is more scarce, there are some excellent opportunities still. We're keen to add assets in this environment. Also quite interesting, as you noted, gold has been more of a laggard than other commodities. I think that's quite positive. You know, relative to investing in other metals or commodities at this stage, I think it is a good time to continue to invest in gold as we see inflation and the potential for the gold price then to reflect that inflationary environment going forward.
The royalty and streaming companies are better than the mines in an inflationary period because you're not exposed to operating and capital costs. Franco's model is just like your slides show, good in every phase of the cycle.
I believe that is correct, yes. Particularly,
Wheaton or Royal Gold, et cetera. The structures are great.
Right. Yeah. Again, one of the differentiators that is quite observable is for us, you know, we have a number of development assets already within the portfolio, and a lot of these came into the portfolio at a very low cost base. You think of Detour, for instance. It's that's fantastic for our shareholders when that type of thing happens, and when, you know, assets continue to move into stronger and stronger hands and get more and more attention. There are a number of circumstances, like Detour, that will continue to benefit our shareholders in this environment.
Let's try to understand better the distant assets that might come into production. What is your stake in First Quantum's Taca Taca?
We have a royalty on Taca Taca. It's a royalty we've had for quite some time. It's a straightforward NSR royalty. You know, it's detailed in our asset handbook, so I would encourage people to have a look there as it provides more fulsome information than what I have here. That asset is one that First Quantum has continued to advance. You know, it's public in terms of permitting, continuing to focus on that asset. It's located in Salta, Argentina, which is quite a welcoming jurisdiction for mining within Argentina. Good potential for that one going forward.
I think there hasn't really been a detailed timeline provided for that at this stage by First Quantum, but with copper prices being strong and First Quantum de-leveraging rapidly, given the ramp up of Cobre Panama, it's a logical next step in terms of development for a team with excellence to build.
Let's try to work out the numbers. If First Quantum Minerals made a quarter million tons of copper or 550 million pounds, that would be $2.2 billion of gross revenue. If you had 1% of that, it would be $22 million. Am I doing the math right?
I'm just double-checking the exact royalty percentage that we've got there for you, John. I think you're right. There are taxes associated with that, so you can't ignore that, and you've got to pay the transportation because it is a net smelter return royalty.
Just as an example, Our shares outstanding, how much is the royalty?
It's 1.08%.
$22 million is a good starting point. Before taxes and expenses, it would be $0.11-$0.12 incrementally. It's not quite 3% growth. In terms of Cascabel, what is the stake?
Cascabel is one that actually bears probably a bit more explanation. The royalty we have on Cascabel is 1% NSR on its face. But it has a number of bells and whistles associated with it. There are minimum payments of $10 million a year that start, subject to certain conditions, I believe in 2028. Additionally, there's a gross-up on the royalty. If certain copper equivalent is not produced, royalty gets adjusted upwards in its percentage. And that is quite beneficial. I think we've referenced that off of 80% of what was in the PEA at the time we did the deal. At a minimum, it's 1%. It could be significantly more, kind of as that make-whole type of provision comes in. Also, we have-
Do you expect Cascabel to be an underground block cave , such as the earlier technical studies?
Yeah. They have now released their PFS. I think that is, you know, a pretty robust document in terms of how it scopes out production. It remains a block cave, just a smaller block cave. They're also using a shaft to get access to it quicker. I think that is a very prudent way to develop that.
Do you think it'll be 200,000 tons of copper or 300,000 tons of copper?
I'm not gonna speculate. I'd encourage.
These block caves are tough to execute.
They are. That's why, you know, we included so many of these deal protections. We do see it as, you know, despite the fact that it's likely the majority of the economics come from a block cave, there is open pit potential, which they've flagged. They've had drilling success, one of the neighboring deposits also covered by the royalty, Tandayama-America . They're looking to identify some open pit potential to supplement the underground block cave, which can take longer to propagate. Again, I think it's prudent the way that the current team is advancing that. It's got strong shareholders with BHP and Newcrest. You know, good experience developing large projects and Newcrest in particular with block caves. We're quite hopeful that will be a significant contributor over time.
What is the stake in Courageous Lake of Seabridge?
Courageous Lake is a straight NSR. I don't remember exactly what the percentage is. It might be one or two. It's a significant gold asset, northern Canada. Again, one of these that, should it come to the fore, would be a meaningful contributor to us.
We just had the call with them, and they said that they might phase it down from a 400 to a 200,000-ounce start-up to reduce initial capital. They haven't updated that feasibility study for a decade. They're just about to update the KSM. That they've got these things like Snowstorm and Three Aces and Iskut River and Courageous Lake that they could sell for large amounts of money. T hey're a $1 billion cap, and they don't seem to get credit for anything. It's like the more they do, the more they get discounted. They might do something to advance that.
Yeah. Courageous Lake is 1.02% NSR.
In terms of the Stibnite project, what would that stake be?
I believe that Stibnite is roughly 2%. Again, a significant potential contributor going forward. Permitting, of course, is the primary laggard in terms of timeline. Fantastic deposit, you know, good grades in the United States, so no surprise that permitting is a challenge. But it's one that we added piece, what? Maybe about 10 years ago now.
Their argument is that they're gonna clean up the mess.
Absolutely.
A little bit like the argument for KSM of Seabridge Gold. That the property bleeds sulfides and makes acid water run off. If they mine it, they'll clean it up.
I think there's an excellent case for that. You know, the historical mine was there from decades ago. I've seen it in the past, you know, think of Pueblo Viejo, for instance, where a modern mining operation really can stand to improve the environment. It is always tough to convince people. There's a lot of sensitivity towards new mining development. That one, I think is a great case to be permitted.
What is their scale? About 200,000 ounces?
I believe it's a little above that, and the royalty is 1.7%.
These are all nice little projects. The trouble with earning $2 million a day is that the growth comes in 2%-3% increments. We just have to suffer through that.
Yeah. You know, what we're hopeful is that going forward, we do start to see some pretty meaningful projects advance as capital markets do loosen up. Those larger copper projects, especially held by intermediates are fantastic opportunities, especially as you know, the banks have been moving away from that type of market. You know, they need a lot of capital to build that type of project. Going forward, hopefully we can add some you know, former Panama type assets, but it's just not on the immediate horizon. We have to keep an eye out and position ourselves when bigger assets do come available.
Once again, questions are welcome through the question box. We have some. Is the approximate annual 18% return measured per share or on the company as a whole?
Where is the 18% coming from?
That was your rate of return since the IPO in 2007.
Yeah. I believe that.
In terms of IR, yeah.
I believe that's on the IPO price, but I can confirm that.
How much is the current Holt-Holloway royalty?
That is a more complicated royalty. You know, it's not currently paying. The mine is shut down. With Agnico and new ownership there, we you know hope that it will be brought into kind of an integrated plan, and we can see a future where it starts to pay. It certainly is more of a patchwork and complicated situation.
Is the old rate 8%?
It's on a sliding scale. You know, I think it could get potentially even a little bit higher.
You know, sometimes you can't apologize for having cut a good deal to begin with.
Well, I can't take any credit for that. Yeah, hopefully we see that mine return to production soon.
What is the sensitivity of earnings to the prices of commodities? Gold, silver, PGMs, oil, gas?
You know, we've looked at this, and of course, you know, the assumptions are important and they change over time. It has been relatively linear, which you would expect. There are always deviations in mine plans quarter to quarter that you know, we're not necessarily aware of. I think on the oil side, there might be a little bit of torque, especially from the operating interests we have, but overall, it's fairly linear.
If gold goes up 10%, 75% or 80% of your earnings goes up 10%?
Approximately.
Tell us about the NuevaUnión royalty.
Sure. Our royalty is on Relincho, which is the lower piece of the complex, as opposed to Cerro Moro, which is-
It's copper moly rather than copper gold.
That is correct. Yeah. That came, I believe, in the same acquisition that we got Taca Taca.
Is it a 1% NSR, 2%?
It's in that ballpark. I think it's 1%, but I refer you to the asset-
It's unclear whether the optimization plan would start at the bottom of the hill at Relincho or the top of the hill at Cerro Moro for the copper gold.
That's right. You know, it's something that we'll have to see going forward. My understanding is there are some higher grades lower down at the Relincho as well. You know, we're not privy to the current mine plan.
I think they're still studying it.
Permitting still has a ways to go.
Your company was sort of countercyclical and bought into the oil and gas assets when the Haynesville Shale was particularly in disfavor around the time BHP was divesting and after Freeport-McMoRan had divested. Now things are good. What are the pros and cons of taking a profit when the assets doubled or tripled in value?
You know, it's not something I would say we spend a lot of time thinking about, monetizing individual assets within our portfolio. You know, I think as that case illustrates well, the optionality is something that's not necessarily the most tangible at all times. While, yes, prices are high now, there's probably also a good backdrop to continue to harvest significant cash flow, going forward. It's certainly not something that we're flippant about. You know, we will look at it. We're not in any major hurry to, you know, look at monetizing assets. Over time, we've been much more an aggregator of assets. It doesn't take a lot
You've been like a Warren Buffett buy and hold in Berkshire Hathaway. You buy good pieces and keep them.
Yeah. You know what? I think we would have probably eroded shareholder value over time if we tried to take that approach in terms of buying and flipping.
When was the last time Franco-Nevada sold a producing royalty or a stream? Ever?
I don't think we have. You know, I don't have perfect history on the company, so don't quote me on it, but certainly there's not been any terminal sales while I've been with Franco now for seven years.
In terms of transactions, is your biggest priority low cost, size, and long life with exploration potential optionality?
You just painted a perfect picture, I think there, John. You know, that's the ideal. You know, can you sometimes get a good deal on other assets? Yeah. I think, you know, where we can, and there's good tenure, we would look to do that. We wanna offer duration to investors, and I think it's hard to get in other places like you can with the royalty model. You know, the ability to profit through multiple cycles with long-life assets, generally those should be lower cost to survive the cycles. You know, focusing on the geology and saying, you know, we think this is something that over time will continue to bear fruit.
A lot of times, what you see is, you know, you drill out just to a certain level and then you know, it's not economic to continue to drill out past 10, 15, 20 years. You know, good chance that things will be found with time, and we expose our shareholders to that work when we can.
Are there any pretty girls you wished you had kissed that you didn't kiss in terms of the deals that have gone by over the years?
You know, we certainly have seen good assets trade. It's not always on the terms that we'd like. You know, I think I'd be remiss to say that there weren't some that, you know, got away. You know, I think we've had very good luck overall adding assets that have really provided great exposure for shareholders.
Has Franco-Nevada bought ever a royalty company that was publicly traded with producing properties?
We did buy Gold Wheaton, a number of years back.
Today, not Wheaton Precious Metals, not so much Royal Gold, but the smaller royalty companies have not been treated well in the stock market. Your company has held its value. Given the difficulty in getting deals done, I guess that's an opportunity, but few of them have cornerstone assets like your top four mines.
Yeah. Everybody always.
It might be the biggest cornerstone asset that's in a smaller publicly traded royalty company.
Right. Yeah, I think what I would say is, you know, we still see good opportunity to buy assets directly, as opposed to buying a whole company. You know, it is complicated. You would wanna see there being good value there. Often, you know, people will seek a premium, which, you know, for a royalty company, I think is passively managed.
Well, Wilmar just sold at almost no premium. I guess they were afraid that one of their founding shareholders wanted to sell and was gonna knock the stock down. It's good to be diversified and large like Franco-Nevada and not have any of those headaches.
Yeah. It's certainly not the top priority for us at the moment in terms of acquisitive growth of that nature on market. We do evaluate it. You know, we would be remiss not to. Bankers are always coming in, you know, pitching ideas, but we're quite cautious in that regard.
In order to have a 10% increase in earnings or about $0.40 a share, you need to have over $100 million annual revenue. Your company doesn't explicitly have a minimum size criteria, it's more of a quality criteria. The growth increments that we're using as examples are more like 2%-3% growth from a particular mine coming on. There's nothing wrong with that. It's a reflection of your success and the fact that the company's big and you're making $2 million a day. If an investor were building a 20-year dividend discount model, do you think that 5% is a secular growth rate of your volume aside from the price benefit? Do you think that's a reasonable target for 10 or 20 years?
A 5% CAGR in revenue?
5% CAGR in volume without adjusting for price.
Without adjusting for price. You know, it's certainly something we're shooting for. You know, as time goes on, could that get harder? Yes. At the moment, you know, we do see good opportunities. I wouldn't wanna, you know, pencil myself in for, you know, a particular growth rate. You know, that's something, you know, in the single digit growth rate percentages that I think we've probably exceeded that historically. We do see good opportunities at the moment.
In terms of markets and given your size as you're cash flowing almost $1 billion a year now, should someone interpret that the silver market or the PGM markets are too small, and you need a bigger market like gold or the base metals byproducts or oil and gas because you're just so big and you need a bigger pond to play in?
You know, I think there's still good opportunity in silver. We'd love to continue to add precious metals assets, both gold and silver, to the portfolio. That's really, to be honest, within the business development team, our focus right now is precious metals. PGMs, you know, a little bit more cautious about. We've seen the volatility in palladium. You know, we just wanna make sure if we did something there that it would be, you know, beneficial over time. That we're, you know, using realistic prices over the longer term. We have great PGM exposure now. It's been a fantastic contributor. I think Stillwater's certainly been within the top ten for us in terms of revenue for a little while now.
Shareholders have benefited significantly from that. I wouldn't wanna say we wouldn't do more, but I think we'd just be quite careful about how we might do that.
Once again, questions from the webcast are welcome. In terms of building up cash, we almost accumulated $200 million in the March quarter. Is there a threshold where there's such a thing as too much cash? If you got to $2 billion in cash, would you pay a special dividend?
We've been progressive with our dividends over time. We always wanna make sure that, you know, we're in a good position to pay them long term and grow them. We are cautious about how we increase dividends. You know, personally, as the business development person, I see good opportunity to grow and deploy a lot of that cash flow over the medium term here. I don't think we're gonna be in that kind of position where we're seriously considering that because I'm hopeful that we'll be able to deploy into new investments.
Has the company ever bought back common shares in down markets?
No. That is
That would be unnecessary because the junior golds hurt much worse than Franco, and that's when you have your best opportunities.
That's probably fair. It's not something. You know, we do like paying the dividend and progressively increasing it. Share buybacks don't get a lot of attention.
In terms of your revenues by mineral or the share, what's interesting, I've calculated like four years running history. The number one and two are obviously gold and silver, but the number three bounces around where PGMs have been as high as 9%, and oil has been as high as 10.4%, and hydrocarbons have been as high as 15%. It's not really clear what's number three. Is that fair?
Over time, that's been the case. You know, I would say that doesn't probably fully reflect the investment that was done into the energy space, which was significant. Of all the other commodities we've invested in, you know, energy is clearly next to precious metals, number two. You know, I think in this environment, you probably see that demonstrated more clearly than in the past.
In the last four years, gold and silver averaged 76.5%. If we threw in PGMs, it would be 84% or 85% precious metals. Do you think that's a reasonable prologue to the future, or do you think iron ore and energy are gonna take a few points more?
Yeah, I won't speculate on these percentages there, but maybe I can comment more on the trends. You know, first off, I would say the focus for new business development right now is precious metals. We have good cash flow, and we are very much focused on deploying back into precious metals, and as almost a rebalancing of the cash flows that we're earning right now. We will look at other commodities, you know, if there's something that's very attractive, evaluate it, but that's a clear focus for us. You know, we've provided details on the energy business. We've seen a pretty significant move there in the spot markets over the last six months. I would expect that will be reflected in our revenues while that is sustained, which I think there's good likelihood for that going forward.
Paul, I've done my best to try to draw you out a little bit. I know that you have attorneys and constraints. Any last questions from the webcast? Paul's been a trooper. He's been down with COVID, but he didn't postpone the meeting, and we appreciate that. Wish you all the good health, and I know you need 30 hours a day to look at all the precious metals deals.
Well, thank you, John. I appreciate you hosting us, and I look forward to doing this again sometime.
Super. Thank you very much.
Bye-bye.
Bye-bye.