Good morning, ladies and gentlemen, welcome to the Franco-Nevada Corporation Q4 2018 earnings announcement. 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 immediate assistance, please press star zero for the operator. This call is being recorded on Wednesday, March 20th, 2019. Now, let's 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 2018 results and company outlook. Today's presentation will be a little longer than our typical conference call, as we are providing an update on many aspects of the Franco-Nevada portfolio. 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, our CFO, will provide a brief review of our 2018 results, followed by Paul Brink, our President and COO, who will provide a business development update, followed by Jason O'Connell, our VP Energy, providing the energy guidance, David Harquail, our CEO, discussing the company's outlook. This will be followed by a Q&A period. Our entire management team is 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. 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 we look back at 2018, there are two main items which impacted the financial results of the company for the year. The first being Candelaria, with the processing of lower grade ore from stockpiles resulted in lower precious metal deliveries to the company, which impacted the amount of gold equivalent ounces sold. The second being the strong performance of our energy assets due to higher oil prices and increased production from our royalties. As you turn to slide five, you can see how the company performed against the guidance levels that were issued for 2018. The initial guidance provided by the company was 460,000-490,000 GEOs. We had guided to lower deliveries and sales from Candelaria for the year due to the pit slide that occurred in late 2017.
With the processing of stockpile ore, we were expecting a reduction in gold and silver ounce deliveries in 2018. As the year proceeded, we realized that the deliveries would be lower than initial estimates, we revised our GEO guidance to 440,000 to 470,000. The GEOs earned for 2018 were 447,902, which is within the revised guidance range. The processing of lower grade stockpile at Candelaria is only a timing issue. We look forward to increased deliveries in 2019. The asset has been a great addition to our streams as the gold reserves have increased 100% since the asset was acquired in 2014. With respect to our energy assets, the company had guided revenue of $50 million to $60 million for the year using a $55 per barrel oil price.
Based on higher production at our assets, higher WTI prices, the company raised energy guidance twice during the year, with Q3 2018 revised guidance being $75 million to $85 million. Revenue for our energy assets for 2018 is $86.1 million, which exceeds the top end of our guidance range. Overall, 2018 was a good year, we look forward to a stronger 2019. Turning to slide six and looking back at the Gold Equivalent Ounces received for each of the last six years, you can see that it has been a significant increase from 2013. We've increased from approximately 250,000 GEOs in 2013 to almost 450,000 GEOs in 2018, an increase in excess of 80% over this period. Slide seven illustrates the movement in GEOs from 2017 to 2018 and how the reduction in Gold Equivalent Ounces materialized.
As you can see from the chart, the largest decrease in GEOs is from gold assets, of which Candelaria is the largest component. As mentioned, Franco-Nevada received less gold ounces due to stockpile ore being processed. Our gold stream on Guadalupe also delivered lower gold ounces in Q4 2018 and full year 2018 due to less mining occurring on Franco-Nevada's stream lands. This was expected in the year and will continue into 2019. Our silver assets delivered lower ounces with Antamina coming in below 2017 levels, this was anticipated based upon the mine plan we had received in late 2017. On a positive note, the company did have strong performance from our gold NPI assets, Hemlo and Gold Strike in particular. 2018 saw another volatile year for commodity prices. As you can see on slide eight, there was a mild recovery for certain prices.
The gold price average was slightly lower quarter-over-quarter and relatively flat year-over-year. The biggest gainer for the quarter, the fourth quarter 2018, was the palladium average price, while both palladium and the WTI oil price were the largest positive movers year-over-year. Slide nine highlights our gold and Gold Equivalent revenue for the last eight years, along with the average gold price over the same period. The company's gold and Gold Equivalent revenue has decreased in 2018 compared to 2017. When combining the lower GEOs earned in the year with the lower average commodity prices, the gold and Gold Equivalent revenue was $567 million compared to $628 million in 2017. Energy revenue had a significant increase year-over-year, increasing from $47 million in 2017 to $86.1 million in 2018.
As you turn to slide 10, you will see the key financial results for the company. I won't get into the detailed numbers, but I would like to highlight a few points. For fourth quarter, the company earned a net loss of $31.3 million. This is due to an impairment being recorded on our Sudbury Streams, Levack, Morrison, and Podolsky in particular. The amount of the impairment was $75.4 million for these two assets and $76 million in total impairments. KGHM, the operator, announced in early 2019 that it would be placing the Morrison Mine on care and maintenance effective March 31st, 2019. Franco-Nevada reviewed the carrying value of the Morrison and Podolsky mines and determined an impairment was justified. Although KGHM has decided to place Morrison on care and maintenance, it has restarted the McCreedy Mine.
We expect McCreedy to replace the gold equivalent ounces Morrison would have delivered in 2019. Also, please note that as part of the McCreedy restart, Franco-Nevada has agreed to adjust the fixed cost per ounce to $800 per GEO, effective immediately. This new ongoing cost will be in place until December 31st, 2021. For the full year, although the number of GEOs earned in 2018 was lower than 2017 and mining revenues were lower, with the mix of royalty versus stream ounces and the increase in energy revenue, adjusted EBITDA was higher year-over-year, $519.6 million compared to $516.1 million in 2017. As well, adjusted net income was also higher year-over-year. On slide 11, we provide a breakdown of our revenue by commodity and geographic location.
You can see that 87% of our full-year revenue was generated by gold and gold equivalents in 2018, with gold being 67%, silver 12%, PGM 6%, and other mining 2%. The geographic revenue profile has revenue being sourced 81% from the Americas, with Latin America being the largest component. Slide 12 highlights the diversification of our asset portfolio. The first chart highlights that only one asset contributed more than 10% of our adjusted EBITDA for 2018. Our top three assets in total generated 32% of our adjusted EBITDA, a clear illustration of our diversification. The second chart highlights how adjusted EBITDA is distributed from a legal ownership perspective, with no legal entity accounting for greater than 40% of our adjusted EBITDA. Slide 13 illustrates the strength of our business model to generate high margins.
For 2018, the cash cost per GEO, which is cost of sales less depletion and oil and gas costs divided by gold equivalent ounces, is $239 per GEO. This compares to $265 per GEO in 2017. This amount will fluctuate each quarter depending on the mix of royalty versus stream ounces. As you can see, at current average gold prices, the company generates significant margins. Slide 14 summarizes the financial resources available to the company. In fourth quarter 2018, the company drew on our credit facilities for $210 million to partially fund the Continental Resources transaction. That drawn amount is still outstanding. The company has $890 million available on the facilities to use for future transactions. When working capital and investments are included, the company currently has $1.2 billion of available capital.
Before I turn it over to Paul, I would quickly provide an update on the CRA audit underway. As you know, the company has been reassessed with respect to its income earned in Mexico for 2013. The amount of this reassessment is approximately $14 million. Management does not agree with this reassessment. The company has paid taxes at 30% in Mexico and thus will be filing a notice of objection against this reassessment. In addition, if required, we may seek relief under the Canada-Mexico Tax Treaty, which calls for companies not to be double taxed. Please note that the company has not been reassessed for any additional years for our Mexican income. With respect to our other jurisdictions where the company carries on business, CRA still continues to carry on its audits. No formal issues have been raised. Now I will turn it over to Paul Brink.
Thank you, Sandip, and good morning, everyone. Over the last three years, we've been investing in growth at Franco-Nevada. We've contributed our $1.36 billion portion alongside First Quantum and KORES of the more than $6 billion construction of Cobre Panama. In February, the project reached an exciting milestone with first ore processed through the mills. Page 16 has a photo of the opening ceremony attended by President Varela. The required pre-strip is now completed. The tailings management facility earthworks are 87% complete. The second power unit is in full commissioning and was synchronized to the grid in January. Process plant commissioning and testing are ongoing. First Quantum recently provided guidance for the year and ramp up through 2022. Shown on the chart on slide 18 is a bar chart of the expected production of copper and concentrate.
You'll recall that the amount of gold and silver attributable to Franco-Nevada is indexed off the copper and concentrate. In 2019, that amounts to just less than 60,000 ounces of gold equivalent, assumed using the midpoint of the expected copper production. Deliveries to Franco-Nevada are due when the operator receives payment for concentrate sales, as a result, our deliveries will lag a couple of months the production of concentrate due to inventory build, the timing of shipments, and the timing of payments for those shipments. We've included in our guidance for 2029 an estimated 20,000-40,000 ounces from Cobre. In the following years, deliveries to Franco-Nevada should more closely approximate the production. Turning to slide 19. We've recently added a couple of royalties to our portfolio. The first is a 2% NSR on Gold Fields' feasibility stage Salares Norte project.
Salares Norte is a high-grade open pit gold and silver deposit in northern Chile. The royalty was purchased from a third party for a total of $32 million and has an existing buyback right where Gold Fields can buy back 1% of the royalty for $6 million. The feasibility study indicates an 11.5 year mine life, producing 450,000 ounces of gold equivalent per year for the first seven years. Gold Fields is targeting construction starting in late 2020. Grades are very attractive at this deposit for an open pit at 5.1 grams per tonne of gold and 57.9 grams per tonne of silver. The strip ratio is 13.9:1. The resulting project margins and returns are very strong. We believe there's great potential for additional epithermal systems under cover on the land package.
Many of you would have seen Marathon Gold's announcement in February of our acquisition of a 2% NSR on their Valentine Lake deposit for CAD 18 million. Marathon can buy back a 0.5% for $7 million U.S. Valentine Lake is an open pit gold project in central Newfoundland. M&I mineral resources total 2.7 million ounces of 1.9 gram per tonne of gold, and inferred mineral resources are 1.5 million ounces of gold at a similar grade. Marathon will use the proceeds of the royalty financing to complete a pre-feasibility study that's targeted for the end of 2019. The property covers 240 square kilometers and has excellent upside potential, both to expand the existing deposits and along strike. The company has yet to explore some areas of the strike extent because of lack of access. Turning to our more immediate growth drivers shown on slide 21.
We've invested over $2 billion growing the business in the last 3 years, principally on Cobre and also adding to our energy assets. These are our 2 biggest growth drivers over the next 5 years. Candelaria will also return to milling ore and making a full contribution in the second half of 2019. We're also expecting good organic growth from the broader portfolio, both from expansions at existing mines and from new mines. Over the next 3 years, we'll get the benefit of expansions at Tasiast, Subika, and Stillwater. We'll also be receiving royalties from a number of new mines, Yamana's Cerro Moro, Pretium's Brucejack, and Victoria's Eagle Mine. Endeavour announced yesterday, 4 months ahead of schedule, first gold pour from the Ity CIL project . There are a good list of developments we believe are highly likely to proceed in the next few years.
Rosemont is at the top of the list, having just received its final permits. Other operations where we're expecting near-term developments include the Kurikandja deposit at Glencore's Antapaccay operation, Premier and Centerra's Hardrock project, and the next phase of Premier and Barrick's South Arturo mine. The oil and gas assets we've been acquiring in the U.S. will be strong growth drivers. Many of the properties underlying our royalties in the Permian and the SCOOP/STACK will move to full field development over the next 5 years. In addition, a large portion of the royalties we have acquired in our joint venture with Continental are included in Continental's drill plan over the next 2 years, providing good visibility and growth in the shorter term. Our business has experienced different waves of growth over the last decade, as shown on slide 22.
Recently, we've taken the opportunity to add to the energy side of our business. This was initially through buying royalty packages, although we have now created a new way to grow in this area with an innovative structure to partner with operators to buy royalties. We're also seeing good opportunities to add both precious metal assets and other mining assets to the portfolio. 2019 should be an active year, both for Eaun Gray, who's running the mining side of our business development, and for Jason O'Connell, who's running the energy side. That completes my comments, and I'll hand over to Jason, who'll give an update on the energy portfolio. Jason?
Thanks, Paul. I'll start off on slide 24 by providing a quick overview of our energy assets and how they've been performing. Our legacy Canadian assets continue to perform very well. These are generally long life, low decline assets which have provided consistent production for many years. Weyburn represents a significant portion of our Canadian asset revenue. Through contributions from our net revenue interests, working interests, and royalties, the asset comprises about 75% of Canadian revenue. Because a portion of our Weyburn revenue is derived from a net profit interest and revenues are recorded net of cost, there is increased revenue volatility from changes in capital spending and commodity price. Toward the end of 2018, revenues were impacted by increased capital for new wells and from a widening price differential in Western Canada.
These factors are expected to normalize in 2019 as the oil market regains balance and capital at the operation is reduced. In the U.S., our assets had a strong year as operators continued development of our land base. This trend is expected to continue as those operators evolve to pad drilling and a more efficient approach to manufacturing development. As an example, Encana is now a significant operator of our STACK acreage following their recent acquisition of Newfield Exploration. Encana plans to adopt their CUBE pad drilling technology in the play, which should more rapidly develop our lands.
The U.S. assets also benefited from lease bonuses this year, which are derived from leasing out our lands and our acreage to operators in exchange for a one-time upfront payment in addition to the ongoing royalty. Our newest contributor to the energy portfolio is the Continental Royalty Acquisition Venture, which closed in the fourth quarter of 2018. While the venture is still in its early days, we are very encouraged by Continental's success at acquiring new acreage. Due to a favorable rate of acquisition in 2018, approximately $43 million in incremental capital was moved forward from future years, bringing our total investment at year-end to $261.8 million. Franco's remaining commitments total about $258 million, and that'll be spent over the course of the next three years.
Importantly, the venture has been able to acquire acreage such that we've been establishing a significant royalty concentration underneath Continental's drilling schedule, and in particular, under the company's Project SpringBoard. Schematic of Project SpringBoard is shown on the right-hand side of the slide and provides a good example of the pad drilling efficiencies that are evolving in U.S. shale. SpringBoard is a massive multi-year project covering 73 sq mi, where the reservoirs are being developed in rows to maximize efficiencies through the orderly sequencing of drilling and completion activities. Continental has currently allocated 12 rigs to the area, which are targeting three distinct reservoirs at depth within a concentrated land position. This development is expected to effectively triple Continental's production in the project area by the third quarter of this year.
That volume growth will translate into increased royalty revenues for Franco-Nevada, where we will benefit from a full year of contributions in 2019. Slide 25 provides detail on our updated energy revenue guidance. The chart on the right shows revenue from the energy portfolio going back to 2014. Revenues have nearly tripled from a low of $28 million in 2015 to $86.1 million in 2018 as a result of both improved commodity prices and the addition of assets over the course of the last three years. For 2019, we are expecting revenues of between $70 million-$85 million. Positive factors driving the change from 2018 actual revenues to the 2019 guidance include a small increase in Canadian production volumes owing to our Orion asset, which continues to ramp up capacity.
An increase in our U.S. royalty volumes from the continued development of our acreage in the Permian and SCOOP/STACK, and the addition of a full year of revenue from our assets acquired to date by the Continental Royalty Acquisition Venture. Those positive factors are offset by an approximate 15% drop in commodity prices from the 2018 average realized price down to $55 per barrel WTI, which was used in our 2019 guidance. In addition, there is an absence of budgeted lease bonuses in our 2019 guidance. While there is bonus revenue that may occur, it's highly unpredictable and therefore not included in our guidance. Lastly, we recorded some revenue in 2018 that was attributable to prior periods, and that was not included in our 2019 guidance. Our five-year outlook for energy includes significant growth in revenues from $140 million-$160 million, assuming a $55 per barrel WTI price.
The increase in revenues is driven primarily by continued growth from our U.S. shale assets, as well as a significant increase in revenue owing to the Continental Royalty Acquisition Venture. Note that the revenue outlook assumes the full deployment of our capital commitments to the venture over the course of the next three years. With that, I'll turn it over to David.
Thank you, Jason. Good morning on this first day of spring. I'm going to build on what Sandip, Paul, and Jason have presented and provide you with the overall outlook for Franco-Nevada. Slide 27. This is a snapshot of Franco-Nevada's performance over the past 11 years. Sandip has walked you through the one-off factors for the dip in GEOs and revenues in 2018. I'll be showing you that beyond 2018, we're expecting a return to our longer-term secular growth trend for at least the next five years. More importantly, adjusted EBITDA, adjusted net income remain close to record levels. That is the lifeblood of our company. I'm also very proud of the team here and how efficiently this portfolio is being managed. G&A was even lower last year and is less than 20 basis points versus the value of the assets that we manage.
We are more than twice as efficient as the GLD gold ETF. I feel that our absolute G&A spending of less than $25 million compared to our peers is even more impressive when you consider that we are in both the mining and energy businesses, which require separate teams. What I'm most proud of is our dividend track record, shown on slide 28. Some companies highlight their yields. I like to point out how much we are paying in absolute dividends. We paid close to $180 million last year and have now paid out over $1 billion since our IPO. I'm highly confident that we'll be able to announce our 12th consecutive increase to our dividend at our upcoming AGM in May. Our Canadian IPO investors are now receiving an 8% yield on their cost base. On slide 29 is our 2019 guidance.
I won't belabor the GEO and energy detail which you've already received. However, I need to bring to your attention the depletion numbers highlighted in yellow. We are not perfect. These numbers are better estimates for your projections versus what we issued yesterday. On slide 30, it presents our five-year outlook to 2023. Again, the backing for all this is in our disclosure. Slide 31 gives you a better perspective of both our GEO and energy growth. We expect our EBITDA to grow by over 35% in the five-year period to 2023, even if we don't buy another thing. I expect we'll do much better. Note that we do not convert our energy revenues into GEOs. If we did, then our outlook for 2023 would be over 700,000 gold equivalent ounces. That gives some perspective of what energy is contributing to our overall business.
On slide 32 is an update on our royalty ounces. Many of you will recall, we used to call these royalty equivalent units. While a lot of analysts like to focus on how many ounces are produced in any quarter or year, I like to look at how many ounces are yet to come, net of any costs such as stream payments. Essentially, we measure royalty ounces as effectively our future cost-free ounces. Multiplied by a gold price assumption, it gives an idea of our undiscounted future cash flow. We don't need to worry about overheads or cash taxes, as these are more than covered by our energy business. What I find very encouraging is that our overall inventory of royalty ounces continues to grow, both in absolute terms and on a per share basis. What is happening is that our operators continue to add more ounces to our properties.
Assets such as Candelaria and Guadalupe now have more than twice the contained precious metals than when we bought our interests. This tells me that the long-term value story for Franco-Nevada is getting even stronger, regardless of what was produced in a particular period. Slide number 33 is my final one. It highlights the availability on our website, as of just a few hours ago, of our 2019 Asset Handbook that gives you the supporting data for our royalty ounce calculations. We put a lot of work into this. It was posted just now, so it's the freshest snapshot of our company. We've also posted, for the first time, a separate ESG report, as we know that's important to our shareholders. I encourage you to take advantage of this disclosure. We have our entire executive team available today.
I would like now to turn it over to the operator. We're happy to take your questions.
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 questions are polled in the order received. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question is from Chris Terry from Deutsche Bank. Please go ahead, Chris.
Hi, David, Paul, and Sandip. Thanks for taking my questions. I have two this morning. The first one relates to 2019 guidance, 465,000-500,000 GEOs for the year. I just wondered if you could talk a little bit to the quarterly progression and the 20,000-40,000 ounces expected from Cobre Panama, when we should expect the first ounces to come through. Is that second half, or is there something in the second quarter there? My second question is just around the opportunities you've mentioned for 2019, particularly on the mining side. Just interested whether those relate to greenfield projects, brownfield, whether it's the consolidation that we've seen within the gold space recently or divestments, et cetera. If you could just talk to that in a little bit more detail. Thank you.
Sure.
Chris, it's Jason. I'll take the first question. I'll go to Paul for answering the second one. With respect to the guidance for 2019, you'll see more ounces come in for the second half of the year. Obviously Candelaria, as we've mentioned, is going to resume normal operations in the second half of this year. You'll see an uptick there. Obviously Cobre Panama, as Paul mentioned, we're not completely sure on timing, but there's potential to receive some gold and silver ounces towards the end of second quarter. From there, it should ramp up towards the end of the year. If you wanted to know quarter by quarter, the weighting is more towards the second half of the year than the first.
Chris, on the outlook in terms of business development, seeing a good pipeline and a good range of opportunities in the pipeline. Some of that on the gold side is principal gold streams and gold assets. Some of that is looking at byproduct streams, or gold streams on byproduct assets, and also a combination of greenfields and also some brownfields opportunities. Also seeing some opportunities that are mining opportunities but non-gold opportunities. Should be an active year.
Okay. Thanks, Paul. Is there any clues on the type of jurisdictions you're looking at there? Thanks.
Nothing different from the usual spread in the portfolio. We like to try and keep most of our money invested in good mining countries.
Thanks, guys.
Thank you. Your next question comes from Greg Barnes from TD Securities. Greg, please go ahead.
Thank you. Jason, can you give us some idea of what the lease bonus payments were in 2018?
Yeah. In 2018, they were a little bit over $3 million. As I mentioned in my comments, lease bonus revenue may occur again in 2019, but it is something that is unpredictable as to when different operators will look to lease out our land. It's not something that we're comfortable putting in our guidance.
Okay. Secondly, on slide 24, that schematic you provided on the
it's called. Anyway, the increase in production that Continental's expecting, how is that going to impact you in terms of revenue?
That should significantly increase our revenue over the course of the year. It's not a one-to-one relationship. We have royalties that cover Continental's, really their entire operator position, and the schematic that you've seen and the production rates that are mentioned on the slide are just one small part of their overall production base. In general, what you should expect from our Continental assets over the course of the year is continued growth, and that Project Springboard is an area where we have been really concentrating our acquisitions, so it's going to be a big part of that growth driver.
Is there a way for you to provide us a breakdown of the oil and gas revenue by Canada versus U.S. versus, SCOOP/STACK versus the other regions that you're doing it? Some kind of way we can track how this revenue's growing from these various regions or changing from these various regions?
We do in our asset handbook, break it out into different areas, so you'll be able to see Canadian revenue there broken out into Weyburn and the rest of Canada. You'll also be able to see our U.S. revenue broken out into Oklahoma, which is our traditional SCOOP/STACK assets, Texas, which is our Permian assets, and then the Continental Royalty Acquisition Venture. If you look into the asset handbook, you'll be able to see how those revenues are evolving over time.
Okay. Well, we'll do that when we have a chance. Thanks.
Your next question comes from Josh Wolfson from Desjardins. Please go ahead, Josh.
Thank you. Thanks for providing slide 18. It helps us, I guess, model out the gold production for Franco. With regards to the Cobre Panama, I guess, difference between production and deliveries to FNV, what would that factor be after 2019?
Josh, I expect it'll be less. You've obviously got a carryover year on year. As the production rate of the asset is ramping up, you're still going to have a little bit of a lag. I'd expect a bit of a lag in 2020, but obviously much less than we've got in 2019.
Okay. Just, I guess, with regards to potential investments that are being evaluated, a number of other royalty companies or other competitors have sort of attempted to become one-stop shops and even some public entities are relaxing constraints, it seems, lending and participating in equity. I guess, what's Franco's view in terms of looking at other sort of financing options when consummating transactions to stay competitive in the market?
It is a big issue in the market. Not a surprise to anybody that the constraint on mines getting financed in this market really is the lack of equity capital. There are a number of mines sitting on the sidelines because people can't raise the full financing package. Our approach to that has to try to be to partner with other providers so that we can provide as seamless a package as possible to an operator. Our model has always been, we're a passive investor in these properties. We don't want to be all of the capital that's provided. I think we'll stop short of doing anything that's like a one-stop shop.
Okay, it sounds like Franco would be somewhat I guess in the past, it has invested in equity, it would somewhat relax constraints to provide other forms of financing.
Yeah, in looking at ideas, often the conversation we have with people is, in doing a transaction, the bulk of what we need to receive in the transaction is a royalty or a stream. Where we can help with other pieces of the capital structure, for some of the juniors, we've offered up to say we could provide a bit of equity as a lead order in an equity financing if that's what they want to do alongside a royalty deal. We want to be creative in helping them to raise the full amount of capital without exposing ourselves too much to the other elements of the capital structure.
Great. Those are all my questions. Thank you.
Thank you. Your next question is from Carey MacRury from Canaccord. Please go ahead, Carey.
Hi, good morning. Another question for Jason on the oil and gas side. The 5-year guidance is to get to $140 million-$160 million in oil and gas revenue. Just wondering, given decline rates, how sustainable is that number? Is there an attributable reserve number that we can compare their production rates against in terms of thinking about the ultimate reserve life of these assets?
Thanks, Carey. The reserve life on most of these assets is quite long, and the sustainability of that 5-year number should be on the order of probably a couple of decades. It's comprised of our Canadian assets, where again, Weyburn is the biggest contributor there. Weyburn is a fairly long life asset. It's got another at least decade in front of it at current production rates, and thereafter will slowly decline. That'll be offset by our Orion asset, which will continue to grow and be a steady contributor for many decades. In the U.S., what we expect to see there, and what you'll see in the 5-year guidance, is a ramp-up of production over a 5-year time period. That will hopefully continue to ramp up as those fields are continually developed. Those should again, be producing for many years to come.
There's a huge amount of drillable inventory in the assets that we've acquired.
As those assets are drilled out, they will continue to produce revenue for 10, 20, 30 years. We don't have a formal reserve to give you, but those five-year outlook numbers are very sustainable over a long period of time.
Just on the reserve, is that something that you have internally, or how do you get comfort on valuing these assets over the long run?
Yeah. When we value the assets, we do have internal reserves that we run on the assets. We have separate reserve initiatives that we do for our Canadian assets from time to time. On our U.S. assets, we have technical input into how those reserves are calculated. We used to publish reserves for our Canadian assets when they were more material to the company, but we stopped doing that a couple of years ago, just because the various energy assets individually were no longer material to the overall company.
Maybe one question on taxes. In light of the Wheaton settlement and the CRA auditing your financials or taxes, has there been any discussion with the CRA post the Wheaton settlement?
No, all we've received, as mentioned, is the reassessment on the Mexican income, which they are saying should be taxed in Canada, and we're dealing with that through filing a notice of objection. With respect to the other jurisdictions, the audits are ongoing and nothing has been raised at this time.
I assume there's nothing to infer that the settlement or the outcome would be any different than what Wheaton would have. I wouldn't think.
Well, I think it's a precedent that's been set, but first, we have to get reassessed by CRA, and that hasn't happened.
Okay. Thank you.
Thank you. Your next question is from Alex Hunchak from CIBC. Alex, please go ahead.
Hi, guys. Thanks for taking the question. I just looking for some clarity on the 2023 guidance. To reach that growth, are you guys looking at all of your development projects on slide 21 contributing to sales growth? Or can you give us any more color on which of those assets, like Rosemont or West Detour, are actually part of that sales growth?
The majority of those assets are, for example, Salares Norte, Rosemont, Valentine Lake. Assets that where the operator, the developer, has public disclosure that the mines will be operating or built by that jurisdiction, sorry, by that timeline, have been included in our guidance.
Okay. Maybe just one more. We expect 2019 is going to be a busy year with the divestments from the senior producers. Do you guys have any handle on a timeline for when some of those assets might come up for sale and when you guys might be involved in any of those transactions?
It's an area that a lot of people are looking at. We have, too. I'm sure we'll be involved in some of that. I don't expect that those producers would sell everything all at the same time. I fully expect that they will start with some of the assets and then slowly work through their portfolios. I think it's going to play out over a number of years.
Okay. No problem. Okay, thank you very much.
Thank you. Your next question is from Fahad Tariq from Credit Suisse. Please go ahead.
Hi. Good morning. Thanks for taking my question. Just to follow up on the 2023 outlook, that guidance includes First Quantum getting throughput of 85 million tons per annum. In previous presentations, you had talked about potentially reaching 100 million tons per annum throughput. At that rate, can you give some color as to what the expected GEOs could be, how the guidance would change?
Yeah, we have previously, obviously, we're going with where the asset has been disclosed at this time by First Quantum. If you increased it up to 100 million tons per day, I guess increase by 25%. I think you would see 140,000 plus GEOs per year.
Okay, great. Just as a follow-up, on slide 29, the updated depletion estimate, any color on that? Was that just an error, or is there something related to maybe the Cobre Panama ramp-up?
No, it was an error on our part in the press release yesterday. We're just rectifying that this morning.
Thank you.
Your next question comes from Mike Jalonen from Bank of America. Mike, please go ahead.
Just a question for Paul. Paul, with Valentine Lake, basically, you got an NSR for financing the pre-feasibility study. Says to me they don't have much money, the operator. I guess this kind of follows on Josh's question, more specifically on this project. Would Franco look at a stream of this project to help them out? Because if they're doing a royalty for their pre-fees, what's next for the feasibility study? You know what I mean? They just need to keep raising money. Just wondering what Franco's view here is.
The overall view is we really like the asset, Mike, in terms of projects in North America that are open pit-able, that have got grades that are this high, it really does stand out. The first thing I'd say in terms of in this market where equity is so constrained, I think this is a good way to help developers to move to the feasibility stage. The second, when it comes to the point of potentially putting the mine in production, if we can be helpful to the company and provide more of the capital, to move that forward, we'd love to do something like that.
Okay. Well, thank you for that. Maybe just a quick question for Sandip, just on how he feels about the balance sheet now. I've been covering Franco, I think, since '88, 1988, for those out there. Thanks to David getting me on it. I can't remember, David, the balance sheet being net debt, I guess, if I don't exclude the investments. Just wondering what the view is there.
Mike, your memory's too short. If you remember back in 2015, we had a little over $500 million in debt. That's why when we were doing the Antapaccay deal, we did our first use of proceeds issue to be able to bring that on, because we couldn't tolerate going to $1 billion worth of debt. We have used it. We consider the debt facility like our credit card. We don't want to have it out there for too long, when there's good assets out there, we've got the ability to buy them.
Oh. Thanks for correcting my memory.
Thank you. Your next question is from Brian MacArthur from Raymond James. Brian, please go ahead.
Hi, good morning. Philosophically following a little bit onto the last question, I've seen in Salares Norte as well, which I think it was in place, some of these new deals, you have an NSR, then there's buybacks going forward. I realize you inherit it sometimes. Is that something structurally going forward we're going to see of because people, you put an NSR on and you obviously don't want to get it back, some people may want the option to buy it back. Is that something you're willing to do going forward?
I don't know that it's a structural change. Brian, you're right, the Salares Norte royalty was just an existing royalty. That's the nature of the terms. Also in the current market, there's such a shortage of capital. People are looking for meaningful capital, we're trying to be creative in finding ways where we can do that. Also, on a royalty, we've always got to be cognizant that you don't want to put too big a burden on the property over the long term.
Right.
More so the takeaway would be, we and other players in the industry are just trying to be creative to find ways to provide capital in the industry when there really is a shortage of capital.
I guess the second thing on that, when you actually use shares, is there anything magical about why that was done as opposed to just cash? The way that one, what's quite interesting deal. You put out 32, I assume they'll do the 1% buyback. You get that back, you issue some shares, it's all covered. Is that just the way it had to be done to get done, or is there anything magical about that?
Nothing magical there. It's just the individual who was selling the royalty was interested in taking Franco stock.
Perfect. Just as another thing, there was a comment made earlier on the Sudbury assets that were going to 800, and then that was till 2021 or something. Does it go back to the old rate of 400 past then, or what actually happens?
Yeah. Post 2021, if there's mining occurring on the Sudbury assets, McCreedy in particular, it returns to, I think it's around $420 something right now per GEO.
Great. Thank you very much.
Thank you. Your next question is from Tanya Jakusconek from Scotiabank. Please go ahead.
Great. Good morning, everybody. Thank you for taking my questions. Maybe the first one, just on the 2023 guidance. Thank you very much for clarifying some of the additional assets that were put into the 2023 guidance. Maybe just three, just to confirm. Gold Strike, are we seeing something flattish from Gold Strike from now till 2023? Obviously, with the joint venture, that may change, but is that what you have in your guidance at this point?
I'd have to go back and check in detail, Tanya, but I believe it's pretty flat going forward.
Okay. Then Gold Quarry, we're finished with the minimum at that point. Do we still continue with Gold Quarry into 2023?
Yes. The minimum at 11,250 ounces does reduce to approximately 3,000 ounces going forward. In that year, that's what it would be.
Okay. The Sudbury complex, does that continue in 2023, because we don't have it continuing beyond that.
Correct. As we've stated, Morrison is being placed on care and maintenance at the end of March of this year, and McCreedy will be mined into 2020.
Okay.
At which time there's nothing foreseeable after that.
Okay, perfect. Okay, that helps us out. Great. Thank you on that. Maybe just for Paul, just coming back to the M&A side. You mentioned that you're seeing activity on the gold side and also on the non-gold side and oil and gas. I know I ask you this every quarter, but what sort of size deals are we seeing on the gold side, the non-gold, and the oil and gas?
On the gold side, I'd say, continue to see mid-size deals. For the mining that's non-gold, there's some mid-size potential for some larger deals there. On the oil and gas, we're seeing a lot of activity and so can be really selective. Those could be anything from $100 million up to far larger deals.
Okay. When you define mid-size deals, what is mid-size for you, Paul?
$200 million, $300 million is mid-size.
Fair to say then $200 million-$300 million on the gold and the non-gold side, and then the oil and gas, $100 million-$500 million?
Those are the sort of things that are in the pipeline.
Great. Thank you very much.
Thank you. Your next question is from Steven Butler from GMP Securities. Please go ahead, Steven.
Well, guys, thanks very much, operator. Antapaccay, Guadalupe, and Antamina, guys, you talked about those assets in your guidance. I just wanted to be clear, are all those three assets going to show declines in GEOs in 2019 versus 2018? Is that what you expect, Sandip?
Yes. Not material, but yes, there's declines.
Okay, slight declines.
Yes.
Antamina, you talked about it being below the midpoint of long-term range. I'm wondering if that's just, again, sounds like that's a mine plan thing. Because I was just looking to clarify, because you talked about Candelaria coming back to better order in the second half of 2019, offset by lower deliveries at Antapaccay. I wonder if that was also a second half thing. Antapaccay, you're saying overall slight decline 2019 versus 2018 on those three assets.
Correct.
Oh, okay. Thanks. That's it, guys. Thanks.
Thank you, ladies and gentlemen. As a reminder, should you have any further questions, please press star followed by one. We have no further questions at this time. You may proceed.
Thank you, Joanna. We expect to release our first quarter 2019 results after market close on May 8th, 2019, 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 ask that you please disconnect your lines.