Good morning, ladies and gentlemen, welcome to the Franco-Nevada Corporation Q1 2019 conference call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require assistance, please press star zero for the operator. This call is being recorded on Thursday, May 9th, 2019. I'll now turn the conference over to Candida Hayden. Please go ahead.
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 of Franco-Nevada, 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, 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, we refer you to our detailed cautionary note on slide two of this presentation. I will now turn over the call to Sandip Rana, 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 strong quarter of financial results. As you turn to slide three, you can see the key financial results for the quarter ended March 31st, 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 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 four, the chart illustrates the gold and gold equivalent ounces for each of the last five 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 overaccrued the 2018 NPI, and this was reversed in Q1 2019. We are expecting a minimal NPI payment for 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 the conversion to GEOs, but also the company did benefit from higher production at Sudbury as KGHM, the operator, restarted mining the McCreedy West deposit in Q4 2018. The PM Zone within McCreedy West is higher grade precious metals from which we are benefiting. This will continue into 2020. Turning to slide five, we have two charts on the page. The first highlights the total revenue earned by the company for the previous five 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 five 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 six, 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 seven highlights the diversification of our portfolio. The first chart highlights that only two assets contributed more than 10% of our revenue, with another being at 7% for the quarter. Those three assets, Candelaria, Antamina, 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% 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 eight. Here we have highlighted our quarterly revenues and our quarterly general 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 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 audit currently underway. We continue to provide information and answer questions to CRA. I will now turn it over to Paul.
Thank you, Sandip. Our balance sheet is positioned to make substantial investments. 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-$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 Resources has drawn attention in the sector. There are also prospects for partnering with other operators. We continue to be opportunistic, bidding on precious metal, on non-precious 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 energy assets to contribute 16%-17% of revenue by 2023, leaving room for additional energy acquisitions. With that, I'll hand it back to Joanna for Q&A.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the one on your touch-tone phone. You will hear a three-tone prompt acknowledging your request. Your first question is from Cosmos Chiu from CIBC. Please go ahead.
Thanks, David, Paul, and Sandip. Paul, David, I think you're still there somewhere. Congrats on a very good start to 2019.
Oh, yeah, David. Hey.
I'm not retired yet.
Maybe first off on 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'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 a billion-dollar investment, but I just want to confirm with you.
Cosmos, Sandip here.
Hi, Sandip.
How are you doing? Q1 was obviously an outperformer for us. I would not expect Q2 to be to the same level of Q1.
I would expect less ounces being delivered and sold in the second quarter. Again, starting in Q3, we should start to see the benefits of the higher grade and the equipment placement.
Great. Maybe switching gears a little bit to 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? 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?
Hey, Cosmos. We would expect to start receiving gold and silver being delivered in Q3.
Obviously, as they ramp up, we will receive more. We will receive something in Q3, but then you would see more in Q4. It'll 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.
It depends upon where they are shipping. If it's going to take six weeks to ship somewhere, we're not going to get paid for a period of time. It's just a timing difference.
Yeah. 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 a 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? 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?
Yeah. Hi, Cosmos. It's Jason O'Connell here.
Hey, Jason.
We still expect, I guess, the model to hold true. 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. 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. 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.
Mm-hmm. Great. Maybe one last question from me, if I may. On Nevada, you certainly touched on the potential benefits of the Barrick-Newmont joint venture partnership on Nevada and how that could 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? Other than Goldstrike and Gold Quarry, are there any sleepers that could potentially benefit from this joint venture partnership?
I think it's too early to tell, Cosmos. There's the possibility to benefit at Goldstrike. Then as you mentioned, Gold Quarry, we don't know what would happen there either. I think, Barrick has to get the joint venture reviewed and figure out what they're going to do. Then as they provide information, we'll assess the impact of that.
Great. That's all the questions I have. Great start.
Thank you, ladies and gentlemen. As a reminder, should you have any questions, please press star followed by one. Your next question is from Josh Wolfson from Desjardins. Please go ahead, Josh.
Thanks. 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 operating changes that were announced?
Sure. Josh, with respect to Sudbury, a portion, yes, was the higher palladium price when you do convert to GEOs. It was truly increased production, platinum, palladium, and gold production, just because of the McCreedy deposit. 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. You will see a somewhat lower amount likely in Q2, but not significantly.
Okay. 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 lost revenues, would that apply for the NPI as well, such that the lost revenues could be made up in future periods, or is that something at the corporate level for them?
No, it does apply. If they receive anything from insurance proceeds and it's recorded as income, it flows through to Franco-Nevada, through our NPI.
Okay, great. Thank you very much.
Thank you. Your next question is from Tanya Jakusconek from Scotiabank. Please go ahead, Tanya.
Yes. Good morning, everyone, and congratulations on a very strong quarter. Question for Sandip. On your one-year term loan, can you confirm that you're not able to pay this down until it matures in 12 months' time?
We are. We can repay at any time without penalty.
Oh, okay. Thank you, 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.
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.
Okay. 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 within the $150 million-$300 million. How about the opportunities that you're seeing in the non-precious, so excluding oil and gas space? Is it in similar sort of price range?
Yes, I'd say they are, Tanya, and I call those mid-size type transactions, but that's the sort of size that we're looking at.
Okay. Thank you so much.
Thank you. Your next question is from John Tumazos from John Tumazos Very Independent Research. Please go ahead.
Thank you very much. A smaller company, Altius 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.
Hey, John, it's Paul. It was interesting to see that type of transaction, it's fascinating to see how the royalty model is applied in a lot of different industries and 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. What we've really enjoyed is the optionality that you get in investing in a deposit and the potential that can be two, three times, and in rare cases, 100 times bigger over the life of a deposit. I think our inclination is to stick with resources, both on the mining side and on the energy side.
Thank you.
Thank you. Are you finished with your question, John?
Yes. I'm not as long-winded as the other guy.
Thank you. Your next question is from Ralph Profiti from Eight Capital. Please go ahead.
Good morning. Thanks for taking my questions. Specifically with the oil and gas, you talked about the market still continuing to be quite robust, and we've had two or three 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?
Yes, 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 ourselves and other public companies. There continues to be a lot of opportunities along that vein. In addition to that, I think the Continental transaction that we announced a while back has gotten a lot of traction with other operators. 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. Really, the scope of opportunities is large.
We'll continue to pursue both sort of the royalty packages that we've acquired and 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.
Okay. It sounds like it's both. You keep this kind of deal structure quite separate from the deal structures in the metal space. Am I to assume that it'd be very difficult to transfer this type of deal accretion to Franco into metals deals? I'm specifically talking Continental versus precious metals deals.
Yeah. 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, on the royalty aspect, you've got two benefits. You've got the benefit of knowing the timing of 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 their drill programs, that gives us the production certainty, plus we're applying the low-risk royalty element of that. I'd say in doing deals like the Continental deal in the energy space, that lets us get a similar low-risk profile to what we can get in the mining space.
Yeah. Okay. Thanks for that, Paul. 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 tension, say, in the next one to two years?
You're thinking of parties that would be bidding against us for assets?
Correct, yeah.
Yeah. Hard to know. Certainly, the trend has been a lot more private capital, or maybe that's just a dearth of public capital competing. I'd say overall, there's so much capital that's come out of the public equity markets, both on the mining side and the energy side, that mostly what we see is a lack of capital competing for these assets. If that persists for the next number of years, I think that'd be a terrific opportunity.
Yeah. Agreed. Okay. Yeah, great. Thanks very much.
Thank you. There are no further questions at this time. You may proceed.
Thanks, Joanna. We expect to release our second quarter 2019 results after market close on August seventh, with a 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. We thank you for participating, and we ask that you please disconnect your lines.