Earnings Call: Q2 2019

Aug 8, 2019

Good morning, ladies and gentlemen, and welcome to the Franco Nevada Corporation Q2 2019 Results Conference Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on Thursday, August 8, 2019. I would now like to turn the conference over to Candida Hayden. Please go ahead. Thank you, Britney. Good morning, everyone. Thank you for joining us today to discuss Franco Nevada's Q2 2019 financial 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. Sandy Brenna, CFO of Franco Nevada, will provide a brief review of our results, followed by Paul Brink, President and COO of Franco Nevada, who will provide the closing summary. This will be followed by a Q and A period. Representatives from our Toronto office are present 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 Sandy Brana, CFO of Franco Nevada. Thank you, Candida. Good morning, everyone. As you will have seen from the press release issued yesterday, the company delivered another quarter of strong financial results. As you turn to Slide 3, you can see the key financial results for the 3 6 months ended June 30, 2019 compared to same periods in 2018. The company had a strong quarter with increases across all financial metrics when comparing the 2 quarters. For the 6 months ended June 30, 2019, the company has achieved a number of financial records compared to the 6 months ended June 30, 2018. These are all highlighted. 2019 is off to a very strong start. With the increase in revenue and due to the lower cost nature of our business model, adjusted EBITDA and adjusted net income were also significantly higher in Q2 2019 versus Q2 2018. Adjusted EBITDA was $137,900,000 or $0.74 per share and adjusted net income for Q2 twenty nineteen was $64,000,000 or $0.34 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 five quarters. The GEOs earned for Q2 2019 were 107,774 compared to 107 133 in Q2 2018. It was a flat quarter year over year. Although geos were stable year over year, the company did have strong performance from its gold NPI such as Hamlo and Goldstrike as well as strong contributions from its PGM assets. However, the strong performance was somewhat negated by lower geo deliveries by Guadalupe, Bald Mountain and Antipakay. Turning to Slide 5, we have two charts on the page. The first highlights the total revenue earned by the company for the previous 5 quarters. For Q2 2019, revenue earned was $170,500,000 This is an increase from Q2 2018 the company benefited from higher mining asset revenue with both PGM and other mining contributing to the increase. In addition, the energy assets had a strong second quarter. The bottom chart highlights the energy revenue and the average WTI oil price for the last 5 quarters. Q2 2019 was a better quarter for Energy compared to both Q2 2018 and Q1 2019. The increase in Energy revenue was a result of strong production performance from our Orion asset and the growth in revenue from the Continental Royalty Acquisition Venture. The company did fund $37,500,000 during the quarter for the Continental Royalty Venture with an additional $10,800,000 accrued in accounts payable on the balance sheet the end of the quarter. With respect to this venture, the acquisition pace has been favorable so far this year. As a result, the company has agreed to increase the capital commitment in 2019 to $120,000,000 up from $100,000,000 previously. On Slide 6, we illustrate the commodity mix of our revenue as well as highlight the jurisdiction in which the revenue is generated. As shown, 84% of revenue for the quarter was generated by gold and gold equivalent assets with 62% being from gold, 10% silver, 9% PGMs and 3% other. The geographic revenue profile has revenue being sourced 80% from the Americas. One of the strengths of our business model is the diversification of our portfolio. Slide 7 aims to highlight this. The first chart illustrates that only 2 assets contributed more than 10% of our revenue individually with another being at 6% for the quarter. Those three assets in total generated 29% of our revenue. The company is not economically dependent on any one single asset. The second chart highlights how revenue is distributed from a legal ownership perspective with no legal entity accounting for greater than 41% of revenue in Q2 2019. The last chart highlights our operator diversity. Our largest exposure to revenue being generated by any one operator is 12%, 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. One area that our board and management is very proud of is our focus on cost management. We like to stress the strength of our 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 $25,000,000 $170,000,000 this quarter. This while our G and A has remained fairly stable over this time period. General and administrative costs have approximated $5,000,000 to 8,000,000 dollars per quarter for the last 11 years. For Q2 2019, G and 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. To add another financing option for the company, Franco Nevada recently announced an at the market equity program. If you turn to Slide 9, I will highlight some of the key elements of this program. It is usually referred to as an ATM program. The program will allow the company to issue from treasury up to $200,000,000 worth of common shares. All sales would be at the discretion of management. There is no requirement that mandates actual sales having to take place under the ATM program. The program provides the company with another tool in managing the balance sheet and the liquidity available to the company. We look at the ATM program, the $1,100,000,000 in credit facilities and the significant cash that the company will continue to generate as sources of capital to help finance future transactions. There are a number of benefits of implementing an ATM program. Some of these include a lower commission structure than traditional methods of raising equity, increased flexibility and timing of sales and the elimination of any discount in the share price when selling shares. The two points to highlight when executing an ATM program are that the ATM program is under similar blackout restrictions as company management. As a result, if Franco Nevada did choose to execute under the ATM, there would be no ATM sales from the 1st day after quarter end until after the company releases its quarterly earnings. And secondly, there are volume limitations of how much can be sold into the market on any given day. The current capital available to the company is highlighted on Slide 10. The company has approximately $1,100,000,000 available when including working capital, marketable securities and undrawn credit facilities. As of today, the company has $385,000,000 in debt outstanding, which is a combination of $225,000,000 drawn on its corporate credit facility and $160,000,000 1 year term loan, which matures in April 2020. Overall, the company is in a very strong financial position. Before I turn it over to Paul, I would like to mention that there is no update to the international CRA audit currently underway. We continue to provide information and answers answer questions from CRA. However, the company did receive a proposal letter for 2 of its Canadian subsidiaries during the quarter. The CRA letter is proposed to reassess 2014 2015 taxation years to increase income by adjusting the timing of the deduction of upfront payments with respect to precious metal streams. The additional federal and provincial taxes would be approximately $1,600,000 This is effectively a timing issue of when taxes are paid. If a reassessment is received, we will file the necessary Sandit. I'll start with our mining assets and in particular Cobre Panama. Our team just returned from their latest visit to site and report that the ramp up is progressing well. The first two trains, each a SAG mill and 2 ball mills, are fully operational. All four in pit crushers are also operational. The first copper concentrates were shipped in June, and along with their 2nd quarter reporting, First Quantum reiterated their 2019 production guidance for Cobre Panama. Payment timing and as a result, timing of our GEO deliveries has been quicker on the initial concentrate sales contracts and what we expect with longer term sales contracts. As a result, we're anticipating the GEOs delivered to Franco Nevada will be towards the upper end of our prior guidance of 20,000 to 40000 GEOs in 2019. On other items, the business development team are actively pursuing new transactions, and we have good prospects for acquiring additional precious metals assets this year. Turning to energy on Slide 12. Franco Nevada has acquired a 1% overriding royalty interest on a portion of Range Resources acreage in the Marsalis Basin for $300,000,000 Our strategy has been to focus on the core of the best oil and gas basins that are proven to attract capital throughout the commodity cycle. The Marsalis is one of the most prolific and active gas and liquids plays in North America. Ranger's acreage has good exposure to the liquids rich portion of the Marsalis giving it a very competitive cost position. The assets have strong current cash flow. Assuming gas prices of $2.40 per Mcf, 2020 revenue is expected to be 25,000,000 dollars Range has a strong track record of growing reserves and production from these assets, and our revenue is expected to grow to approximately $30,000,000 per annum in 5 years. These are long life assets with large undrilled inventory. The Royalty area contains approximately 2,400 undrilled well locations, which at the 2018 rate of 78 new wells per year would provide approximately 30 years of drilling runway. The principal focus is the Marcellus formation, but there's also potential upside in the development of the Utica and Upper Devonian formations. The acquisition adds to our commodity diversification through increased exposure to natural gas and natural gas liquids. The economics of the play are underpinned by liquids, which contribute roughly half of the revenue. Including the new Marcellus assets, our revenue is still projected to exceed 80% from gold equivalent ounces through 2023. GEO growth during the period is largely driven by the ramp up of Cobre Panama. We've provided updated guidance for 2019 on Slide 13. Based on the strong results year to date and an increase in expected deliveries from Cobre Panama, we now expect 2019 GEO deliveries to be at the higher end of our previously announced guidance range of 465000 to 500000 GEOs. The Masolos transaction contributes immediately to cash flow, including this new royalty and anticipating continued strong performance of the energy assets. We now expect to generate $100,000,000 to $115,000,000 in energy revenue this year. This compares to $70,000,000 to $85,000,000 previously. The guidance assumes WTI prices of $55 per barrel and Henry Hub natural gas prices of $2.40 per Mcf for the balance of the year. Higher gold prices could not have come at a better time for Franco Nevada. We have invested through the downturn and are delighted that the run up in gold price is happening in tandem with the ramp up of Cobre. We're looking forward to a strong second half to twenty nineteen and a growing revenue outlook over the next 5 years. That concludes our comments. I'll hand it back to the operator and welcome any questions. Thank Your first question comes from Chris Terry from Scotiabank. Please go ahead. Hi, guys. It's Chris here. I had a couple of questions today. The first one just in terms of the precious potential opportunities. What's your best estimates or what are you seeing in terms of divestments that you expect from the majors? And how do you think that the M and A cycle may play out on that front from how you're viewing it? Thanks. Chris, it's Paul. I expect that the run up in the gold prices here will be a very good thing for those divestments. I think for the seniors looking to monetize some of those assets, they need a stronger environment where the buyers of those assets can access more capital. So I think as we move into September, you'll see the pace of those divestments pick up. Okay. Thanks. Do you think it could be before the end of the year rather than 2020? Yes, I think they're prospects this year. Okay. Okay, thanks. And then on Slide 6, where you've got the revenue mix and energy at 16%. Just thinking about the mix going forward, you obviously had Cobre Panama, which increases the percentage of the precious space. From here though, if you were to do more oil and gas deals and you get closer to that overall level, does that mean you have to do, I guess, precious deals at the same time that you would do oil and gas deals? Or do you think naturally that Cobre Panama will just take up the slack and you can still get you still have room for 1 or 2 more oil and gas deals? Thanks. With the growth in Cobre and also the run up in gold prices, there is a little more room for non gold transactions, although the focus of the company is on precious metal at the moment. And in terms of active deals, I think it's most likely that the next transactions would be precious metal related. Okay. Thanks, Paul. The last one for me. Just on Cobre into 2020 and the timing, should we expect any delays at the start of 2020? Or is it we just take the 1st quantum guidance and run that straight through for what you should expect? I guess, is there any difference in timing versus the production for the Franco share? Thanks. As we've pointed out, there is a difference in timing when they produce concentrate to when we get our deliveries, and it depends on when they get paid for those concentrate sales. Obviously, while they're still ramping up production, we get some of that lag. So I expect a bit of a lag in 2020, but it shouldn't be a substantial item. Okay. That's it for me. Thank you. Your next question comes from Cosmos Chiu from CIBC. Hi. Thanks, Sandip and Paul. Congrats on a very good quarter. Maybe next time for next quarter, I'll just take what I think earnings is going to be, tag on 10% and call out my new estimate. But maybe my first question is on Kuwait Panama. Your 20,000 to 40,000 ounces guidance for 2019, that hasn't changed, but now you're saying that you're going to be trending closer to 40,000 ounces up at the top. Is that once again just due to timing? And then on that, say it's going to be 40,000 ounces, how much higher is Q4 going to be compared to Q3? So Cosmos, yes. It really just is timing. We the part of it that we didn't know was what the timing of those payments would be. We had factored in roughly 2 months, which I think is a good estimate for over the longer term what that timing will be with longer term sales contracts. For the initial contracts, it's been just less than a month. And so that's what's made up the difference. But I think the obviously, Q4 is going to be greater than Q3 as we ramp up. I don't have the particular numbers on the 2 quarters. Okay. Maybe sticking with the guidance here. On the energy guidance, you've increased it in part due to the recent acquisition. But I also see that the assumption right now is $55 per barrel WTI. We're not there right now. It's had some decrease in the past few days. Could you give us some sensitivities in terms of like $1 per barrel change? What does that mean to your potential revenue? Cosmos, it's Jason O'Connell here. Hi, Jason. In terms of sensitivity, the biggest area of sensitivity is in regard to the Weyburn NRI, which is about, let's call it, 20% of our overall revenue. Last time we ran the sensitivities, I believe it was a 10% change in the price of WTI resulted in about 100 and sorry, 1.1 percent sorry, 10% change in WTI is sort of a 12% change in revenue. Okay. And maybe sticking with energy here and the recent lower oil price, do you see that as an opportunity to acquire more energy assets? Or is the volatility right now a bit too much? And you would rather wait for that to die down a little bit? No, Cosmos, I think the volatility is less important on the energy side. I think there's lots of opportunity for us regardless of where the oil and gas prices are. There are a number of assets as we've discussed before that are available to us in the U. S. In particular. I don't think the commodity price is really what's driving the availability of those assets right now. I think the issue for us is more strategically, where does our energy ratio sit relative to precious metals. As Paul mentioned, I think the focus for the company right now is really more on the precious metal side than the energy side. So while there are plenty of opportunities, I think, to focus on, we really are focused right now on the precious metal side of the business. And then on the partnership with Continental here, it sounds like there's a favorable pace in terms of acquisitions and you've increased the commitment from $100,000,000 to $120,000,000 Sandeep, can you remind us in terms of how much more needs to be spent to get to that $120,000,000 in 2019? And then how much is committed, I guess, dollars 100,000,000 in 2020 and then how much in 2021? I can't off the top of my head, Cosmos, I can't remember how much is left of this year. We did fund $37,500,000 in the second quarter. It would be $100,000,000 again in 20 20 and approximately $40,000,000 in 2021. I got it. Okay. I can back that out. Great. And then in terms of the quarter here, I guess we've seen we saw some pretty good results coming out of Goldstrike, some pretty good results coming out of MWS quarter over quarter. Could you maybe comment on those 2? And more specifically on Goldstrike, is that sustainable? Sure. So first with MWS, it's all about timing of when we get deliveries. But on an annual basis, they typically do about 25,000 GEOs in terms of deliveries to Franco. With respect to Goldstrike, part of the amount was some adjustments to the NPI calculation as we reviewed it and we found some errors that needed to be corrected. So that was part of the increase related to gold strike. So it's not sustainable going forward. Although we do expect a better NPI just based upon where the gold price is today. Great. Thank you. That's all I have. Your next question comes from Greg Barnes from TD Securities. Please go ahead. I think this is a question for Jason. As Cosmos pointed out, you have accelerated the payments on Continental. Is there a scope to extend that agreement or add to it and put more money into it? Yes. Thanks, Greg. There isn't a specific plan to extend that agreement. It would be up to the 2 parties to jointly agree to do so. I think realistically what will happen is we'll evaluate once our full commitment is achieved. We'll look at what the opportunities look like and how the assets are performing and decide at that point whether both parties have an appetite to extend the agreement further. But given the pace of drilling you're seeing so far, clearly there are opportunities beyond this. Certainly, on the acquisition side, there have been. We are somewhat limited in terms of how much acreage Continental can actually buy on the ground that is in front of their drill schedule. So as they progress drilling up their acreage position, it should become more and more difficult to acquire royalties. And so again, we'll just have to evaluate once we get through in the next couple of years how much of that royalty inventory is left to be acquired and what the prices look like at the time. And lastly, how are the assets performing relative to our expectations. So I think we'll evaluate all those criteria once we get through the initial commitment period and then like to make a decision alongside Continental at that point. Okay, that's great. Thank you. Your next question comes from Carey MacRury from Canaccord Genuity. Please go ahead. Hi, good morning guys. Just a question on the Goldstrike NPI. I think you mentioned in your press release that could potentially improve just given the synergies around the Newmont Barrick JV. I'm just wondering with all the potential changes in order flows, do you have a sense on how that's going to work on Goldstrike and how that will be tracked going forward? Hi, Terry. Sandeep here. No visibility right now. I think they're working it out themselves, obviously. And we will get information as it becomes available, but we have no visibility right now. And then we do do annual site visits and audits. So I would say within the next 6 months, we should get some sort of visibility of what the impact will be. And your NPI at the end of the day is based on the ore coming out of Goldstrike, not the facility itself? It's based on the so there's obviously the NSR, which is a royalty based upon the various claim blocks within Goldstrike of which we get various royalty rates. And then you have the NPI where they get to deduct capital. So what will happen is if they're allocating ore from other properties besides Gold Strike and getting processed at Gold shift it. Okay, great. Thank you. The next question comes from the line of Robert can shift here. Okay, great. Thank you. Your next question comes from Brian MacArthur from Main Plains. Please go ahead. Hi, good morning. My question is also in oil and gas. So first half you did very well. You'd sort of made about close to $50,000,000 at give or take $55 oil, which is what you're forecasting. But in the back half, you should be similar, I would think. Then on top of that, you'd get some from the new Marcellus plus you've got a ramp of more money at Continental. And then I think you get the $9,000,000 catch up for the transaction. So if you put that all together, I'm surprised guidance is a little higher. Is there something else that's happening in the ramp up of the Marcellus deal? So you sort of indicate $25,000,000 next year. So if I just have that, that's $12,000,000 plus my $9,000,000 catch up is $21,000,000 right there. Is there something else going on somewhere else I'm missing? Not entirely, Brian. I think the big drivers for the difference there are Weyburn and generally Weyburn fluctuates quite a bit depending on the level of capital that's coming into the operation. Oftentimes their capital allocation schedule is a bit back end loaded in terms of back end of the year. And so you may see the Weyburn contribution come down a little bit. The biggest difference, I think, is just in the way we look at most of the U. S. Assets that we have that are outside of range and outside of Continental. In terms of forecasting revenue there, it's very, very challenging to accurately budget for those assets. We just don't know when that acreage will be drilled and what the royalty rate on individual wells will be. And so our approach to budgeting there is arguably a little bit conservative in that we sort of assume our production will remain relatively flat or decline a little bit from natural well decline. So broadly speaking, you're right. If everything were to stay the same, you would be adding those elements on top. But I think the other elements you need to think about are just, again the capital at Weyburn oftentimes is back end loaded towards the end of the year. And we have been a little bit conservative on the U. S. Assets just because of that lack of visibility. Great. Thanks very much. I guess one other element, Brian, just as I'm thinking about it, there was also a bit of a catch up payment early in 2019 from revenue that we under accrued for 2018. In other words, it was revenue in 2018 that was 2019. So that's another element just impacts that math. Great. Thanks very much. That's very helpful. There are no further questions at this time. Please proceed. Thank you, Britney. We expect to release our Q3 2019 results after market close on November 11, with the conference call held the following morning. Thank you for your interest in Franco Nevada. Goodbye. Ladies and gentlemen, this concludes your conference call for today. 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