Good morning, ladies and gentlemen, and welcome to the Franco-Nevada Corp Third Quarter Results 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 immediate assistance, please press star zero for the operator. This call is being recorded on Tuesday, November sixth, 2018. I would now like to turn the conference over to Sandip. Please go ahead.
Thank you, Jessica. Good morning, everyone. Thank you for joining us today to discuss Franco-Nevada's third quarter 2018 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. I am Sandip Rana, Chief Financial Officer of Franco-Nevada. I will provide a brief review of our results, followed by Paul Brink, President and Chief Operating Officer of Franco-Nevada, who will provide a closing summary. This will be followed by a Q&A period. Representatives from our board of directors and management team 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 two of this presentation.
As you turn to slide three, you will see a table summarizing the key financial results for the company. Overall, the company had a solid quarter, with significant increases in gold equivalent ounces and revenue over second quarter 2018, but slightly lower than the same period in 2017. Stronger performance compared to second quarter 2018 occurred despite the gold price averaging $1,213 per ounce in Q3 2018, compared to $1,306 per ounce in Q2 2018. The portfolio of assets performed well, with three assets having strong quarters. Antamina and Guadalupe both delivered more ounces in the quarter compared to prior year, and Fire Creek-Midas had higher GEOs and revenue due to the timing of prepaid ounces being sold. In addition, Candelaria, whose gold and silver deliveries have been lower year to date than 2017, had a better quarter.
It delivered approximately 18,000 GEOs in the third quarter, its highest amount this year. Of course, our oil and gas assets performed very well year-over-year. We are pleased with the performance of our portfolio this quarter. As you turn to slide four, the chart highlights the change in GEOs from Q3 2017 to Q3 2018. GEOs sold decreased from 123,787 to 120,021 this quarter. The largest decrease year-over-year was from silver assets, mainly Candelaria and Antamina. Franco-Nevada has been impacted by lower grade ore being processed at Candelaria, but this is only short term, and we expect production levels to recover in 2019. As mentioned, we did see improvements in September. The PGM assets delivered less GEOs during the quarter compared to Q3 2017, despite higher palladium prices, due to refiner issues with Stillwater. Franco-Nevada only received royalty payments for two months during the quarter.
We will be receiving an extra month of payment in the fourth quarter. On a positive note, the company recognized more GEOs from MPI Gold in the third quarter of 2017. Turning to slide five, we have two charts on the page. The first chart highlights the total GEO sold for the previous five quarters. Although Q3 2018 GEOs is lower than prior year, the amount is the highest achieved thus far in 2018. As mentioned, we had strong quarters from Antamina and Guadalupe. The bottom chart highlights precious metals revenue and the average gold price for the previous five quarters. Quarterly precious metals revenue has fluctuated between $136.3 million in Q2 2018 to $152.3 million in Q3 2017. Slide six also showcases two charts on the page. The top chart highlights total revenue for each of the previous five quarters.
Q3 2018 did see an increase in total revenue over the previous quarter. This increase was a combination of general improvements in mining operations, as well as an increase in oil and gas revenue. The bottom chart highlights the oil and gas revenue and average oil price for the last five quarters. This quarter was a very strong quarter for oil and gas revenues. This was due to stronger oil prices and increased production from our newly added U.S. assets. The company is beginning to realize the embedded growth of these U.S. assets. In addition, we had a very strong quarter from Weyburn, which generated $10.6 million in revenue. On slide seven, we provide a breakdown of our revenue by commodity and geographic location. The chart on the left provides a breakdown of revenues.
82% of revenue for the quarter was generated by precious metals, with 65% being from gold, 12% from silver, and 5% PGMs. The geographic revenue profile has revenue being sourced 83% from the Americas, with Latin America being the largest component. Slide eight highlights the diversification of our portfolio. The first chart shows the adjusted EBITDA contributions from our key assets. Antamina is our largest contributor at 15% of adjusted EBITDA. Our top three assets contribute 34% of adjusted EBITDA. Diversification is our strength. The second chart highlights how adjusted EBITDA is distributed from a legal ownership perspective, with no legal entity accounting for greater than 40% of adjusted EBITDA. On slide nine, we highlight the strong margins the company achieves on a consistent basis. Our all-in sustaining cost per ounce was $308 per ounce for the quarter.
As you can see, the cost per ounce has fluctuated over time, depending upon the source of GEOs earned, that is, whether it's royalty or stream ounces. During the quarter, we realized a GEO margin in excess of $900 per ounce. This is reflected by the strong adjusted EBITDA reported by the company. Franco-Nevada is proud of its business model, and one of our strengths is the scalability of this model. As you can see on slide 10, the company's fixed costs, highlighted in the light blue, has remained fairly constant as we continue to grow this business. Management believes we can continue to add to our portfolio and grow our business without adding significant overhead to the company. Our margin for Q3 2018 was 79%.
Before I turn it over to Paul Brink, President and Chief Operating Officer, I would like to provide an update on the Canada Revenue Agency review that is currently underway for Franco-Nevada. The process is ongoing, whereby Franco-Nevada continues to provide information requested by CRA and is responding to queries from CRA. As previously disclosed, the review relates to fiscal years 2012 through 2015. I will now turn it over to Paul.
Thank you, Sandip. Our precious metal assets performed well this quarter with Atacama and Guadalupe particularly strong. Also, Candelaria's performance improved, and we expect it to be making a full contribution again in 2019. First Quantum remains on schedule for first ore to the mill at Cobre Panama in Q1 2019. They also continue to work with the Panamanian government and others to clarify the legal position of Law 9 following the recent court ruling. Slide 11 has an update on our oil and gas assets. Our U.S. oil and gas assets have been performing ahead of expectations. Drill activity is higher and drilling productivity is better than our acquisition assumptions. Revenues for the quarter for these assets was particularly good, although approximately $4.5 million related either to lease bonuses or to production from prior quarters only received in Q3.
The bonuses relate to leasing out some of our acreage to operators in exchange for a royalty and an upfront payment. A portion of our royalty acreage in the SCOOP/STACK is on ground operated by Newfield, and we believe Encana's $5.5 billion acquisition of Newfield will be very positive for the development of these lands. Encana has substantial financial strength and from its activities in the Montney and Permian, some of the industry's best experience in developing these fracking plays. We previously announced a transaction to acquire royalties in a strategic relationship with Continental Resources. The first tranche of the transaction for $215 million was closed in October. Continental has been able to acquire royalties at a greater rate than we both anticipated, and we have agreed to move forward some of the spending from the future tranches.
We expect to spend an additional $35 million-$55 million on this venture in 2018. We expect revenue from our Canadian oil and gas assets will be negatively impacted in the fourth quarter by the recent widening in Canadian differentials. Overall, following the strong performance of the oil and gas assets year to date, we're increasing our guidance for 2018 from the previous $65 million-$75 million range to $75 million-$85 million. Turning to available capital on slide 12. In funding the first tranche of the Continental transaction, we drew down $200 million from our revolving credit facility, leaving us with $900 million of unused capacity under the facility. Working capital and marketable securities at the end of September were $149.9 million and $161.3 million respectively, providing total available capital of $1.2 billion. Looking forward, we're entering a period of strong revenue and EBITDA growth.
Over the next 2 years, Cobre Panama will be ramping up to full production. In 2019, Candelaria should return to normal operations, and we expect growth from our U.S. oil and gas assets over the next few years. As a result, we're expecting a greater than 30% increase in revenue and EBITDA from the assets already in place. Any revenue from future spending under the Continental partnership would be in addition to these projections. Absent any further acquisitions, Franco-Nevada will start building a substantial cash balance in 2019. Cobre Panama is now fully funded and the remaining commitment with Continental of $250 million over 3 years is only a small portion of the projected operating cash flow projection during that period. That concludes my comments and I'll hand the call back over to the operator for 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 1 on your touch tone phone. You will hear a 3-tone prompt acknowledging your request, and your questions will be polled in the order they are received. Should you wish to decline from the polling process, please press the star followed by the 2. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Cosmos Chiu of CIBC. Please go ahead.
Hi. Thank you, Sandip and Paul. I guess my first question is maybe taking a step back here. To me, it seems like activity in terms of precious metal stream acquisition has slowed down a little bit. I guess first off, is that an accurate statement? Is Franco-Nevada now better positioned to make acquisition now that you fully funded the Cobre Panama stream? Is it really just a function of the market?
Thanks, Cosmos. It's Paul.
Hi, Paul.
Yeah, I think your conclusion there is the right one. We're looking forward to making more acquisitions on the precious metal side, but it is a function of the market. As you're well aware, in this market, there's so little equity capital available that it's making it tough for people to build new mines. We really expect that when the industry gets back to building new gold mines, that there'll be good opportunities to add to that side of our portfolio.
Mm-hmm. Okay. Maybe focusing a bit more on Cobre Panama. Certainly, there's been news coming out of First Quantum on Law 9 and whatnot. It seems like it doesn't really impact the mining concession itself. Paul, from your perspective and based on your understanding and your interpretation, are you at all concerned about what's happening with Law 9?
Whenever there's uncertainty like that, Cosmos, yes, it is concerning. Although the interpretation, I think as you allude there, is it relates more to the law and the form in which the concession was issued. The current interpretation is that it doesn't impact the validity of the concession itself. That does give us some comfort, although we are looking forward to having more clarity on the issue, which hopefully we'll get early next year.
Great. Maybe switching gears a little bit, Sandeep, you had talked about the CRA audit here. Are you watching what's happening at Cameco in terms of that CRA audit, and the tax court conclusions? Is Franco-Nevada's situation comparable to what's happening at Cameco, Wheaton Precious Metals, or any of those other ongoing issues?
Sure. Cosmos, we absolutely do watch what's going on in the tax courts. Obviously, the tax court sided with Cameco, which was a very good positive, I think for all of us. The facts are not necessarily exactly the same, but there is elements in the case that are similar to both what's going on with Wheaton Precious and potentially what could happen with Franco-Nevada. I think it's positive momentum. Obviously, the CRA has filed an appeal, but they are only appealing part of the verdict at the end of the day. They're not appealing the sham conclusion, but they are going after transfer pricing. I think overall it is a positive, but we'll have to see how it all plays out.
Of course. Maybe switching gears again on oil and gas. Paul, as you had mentioned, there's differentials now in terms of Canadian oil and U.S. oil. How is that factored into your investment decision? I guess we've seen it because your last few investments have been in U.S. oil. Is that the trend that we should continue to expect as you make more investments in oil and gas?
Cosmos, on the oil and gas side, as you well know, historically, we've had a good amount of assets in Canada. In recent years we've added some additional assets in Canada, but also in the U.S. We remain interested in both jurisdictions. Obviously, in fact, when we're looking at opportunities, access to markets is one of the things that we always take into account, and often good access to market makes some assets much more attractive.
Mm-hmm. Maybe one last question, if I may. Certainly on Cobre Panama, going through your MD&A, going through your press release, there's a lot of exciting things that are happening in the portfolio. There's Fire Creek, which is now under the hands of Hecla. There's Macassa, they're sinking a new shaft. Blitz, they're building a new mine at Stillwater. Paul, what's getting you the most excited in terms of what's happening? There's certainly a lot happening, what's one or two things that are the most exciting to you when you look at it?
No surprise, Cosmos, the biggest driver for us is going to be Cobre Panama.
As we're well aware for this year, it's been a relatively flat year in terms of revenues for the company. We're very excited as we go into 2019 and 2020 because we'll have Cobre Panama kicking in. We have the oil and gas assets that continue to ramp up over that period, and Candelaria will be back to full strength. We really see ourselves having very strong growth over the next few years.
Great. Thanks, Paul. Thanks, Sandip. That's all I have.
Your next question comes from Greg Barnes of TD. Please go ahead.
Yes, thank you. Given the strong growth in oil and gas revenues this year and I think you've raised guidance twice now, can you give us some sense of where you think oil and gas revenue will be 2019, 2020? I know you don't have guidance out yet.
Hi, Greg, it's Jason O'Connell here. Going into 2019, there's a few factors that are going to drive our oil and gas revenues. We're going to see, or we plan to see some growth from U.S. assets that we've acquired, and especially from Continental, as that transaction starts to add revenue. That's going to be offset a little bit if we continue to see weakness in the Canadian oil price. As you may know, differentials right now are quite wide, assets like Weyburn may suffer a little bit. Net-net, I think you're going to see growth on the U.S. side potentially offset a little bit by weakness on the Canadian side from those Canadian assets. 2019 revenues should be higher than they are for this year. We haven't provided exact guidance, but order of magnitude is probably 10%-20% higher.
Would you see further growth into 2020 as well? I assume you would.
Yeah, we should see continued growth, again, coming from those U.S. assets and as Continental contributes more and more revenue as assets are acquired into our partnership there. There should be continued growth really over the course of the next five years or so. It'll be sort of modest growth each year, and it'll be a bit lumpy. Again, that's dependent though, on oil prices remaining where they are.
Sure
Canadian oil prices staying at a place where Weyburn is profitable and continues to generate strong revenue.
Excellent. Thanks, Jason.
Your next question comes from Fahad Tariq of Credit Suisse. Please go ahead.
Hi. Thanks for taking my question. I apologize if this has already been covered and if I missed it, but can you talk a bit about your appetite for oil and gas acquisitions, further acquisitions, and how committed are you to trying to maintain an 80/20 split between precious metals and oil and gas? Is that something that you're reconsidering now, given the relative strength in oil and gas? Thanks.
Fahad, it's Paul. As you're aware, over the last couple of years, we've seen tremendous opportunities in oil and gas, particularly in U.S. oil and gas. We continue to see good opportunities there, and we'd like to take advantage of them. We are cognizant of maintaining that balance in our portfolio. Over the long term, it is something that we'd plan to stick to. We are always looking to be opportunistic, though, and if good assets come available, to find a way to bring them into the portfolio and then balance the portfolio over time. I think we have discussed before, if oil and gas does become a bigger part of our portfolio, that there are always lots of options for us to balance that, either by adding more precious metals assets over time or by potentially putting those assets into a separate entity.
Thank you.
Your next question comes from Carey MacRury of Canaccord Genuity. Please go ahead.
Hi. Good morning, guys. Just another question on Cobre Panama. I recall in the agreement, First Quantum has a threshold that they have to exceed the run rate of 58 million tons per annum. I believe you pay a discounted price on the gold received prior to that. Just wondering if you could just provide a little more color on what that looks like.
Carey, it's Paul. The way the transaction is set up is that to the extent they don't reach that throughput rate by the start of January next year, that on the initial ounces we receive, we pay a discounted price for those ounces, and the price of each ounce is just discounted by $100 an ounce. We run out the calculation so that in effect, we receive a 5% return on our invested capital until they reach the 58 million ton throughput rate.
Is that 58 million tons, is that over a quarter or over a month sort of time horizon?
I believe it's a 30-day measurement.
Great. Thank you.
Your next question comes from Tanya Jakusconek at Scotiabank. Please go ahead.
Good morning, everybody. I have two questions. I have one for Paul and then one for Sandip. Paul, can I just come back to the oil and gas opportunities that you're seeing because you still do have room to increase your oil and gas exposure. Are you right now seeing more opportunities still in the U.S. versus Canada, even with the differential?
I'm going to hand that question over to Jason, Tanya.
Okay, Jason. Hello.
Hi, Tanya. There are opportunities both in Canada and the U.S. There are some opportunities in Canada to help companies finance expansion or to help with their balance sheet. Really, the majority of the opportunities that we're seeing right now, they do remain in the U.S. It is a very opportunity-rich environment. Again, it's the nature of the land base in the United States that really opens up those opportunities. It's just there's a lot more privately held land royalties that we're able to buy. We're seeing opportunities there really in a range of formats, I guess. There's small asset acquisitions that we could contemplate that would sort of tuck into the larger portfolios that we've already acquired, right through to very large acquisitions that are potentially out there where private equity groups have assembled meaningfully sized portfolios of assets that we could look to acquire.
There are a lot of different sets of opportunities. What we're going to do is just look for ones of high quality in good areas, and just look at if we can get good value for those opportunities or not.
Jason, when you say small and large, the small opportunities that you usually put in with your quarters are in the sort of tens, 20, $30 million ones. What would you consider your large ones? Are we still talking $500 million?
There are opportunities of that size that exist. Whether or not we pursue those opportunities, we don't know at this stage. Certainly, there are portfolios out there that are held, again, by these private equity groups that are in that range, yeah.
Maybe just a better way to ask you is what sort of range are you looking at? Do you see more opportunities in right now?
Really, it's across the board. There are more opportunities than we can look at right now, and they are all sizes, right through from $10 million, $20 million, right through to $500 million plus.
That's helpful. Thank you, Jason. Maybe Paul, just for you, maybe you mentioned that you didn't see any opportunities right now in the precious metal space. Are you looking at the non-precious metal space, excluding oil and gas? Are you seeing any opportunities there?
Yes, on both. We are seeing some opportunities on the precious metal space. I would say they're mid-size transactions rather than any big transactions. There are some decent prospects, though. Yes, we are also looking at mining assets that are non-gold assets. Again, there are some decent size opportunities there. Looking forward into 2019, I think you'll probably see a good mix in terms of gold, non-gold mining, and oil and gas assets that we add to the portfolio.
Okay. Again, Paul, just the sort of size that we're talking in mid-size for the precious metals and the non-precious metals, what sort of sizes are you looking at?
Mid-size would be $100 million, $200 million.
Okay.
I think, for us, a large transaction is $500 million plus.
Okay. That is more in the oil and gas versus the non-precious metals?
Yes.
Yeah. Okay, perfect. Thank you. Sandip, if I could, just coming back to the CRA review, can you just give us an idea of what exactly you're doing, what the CRA is asking from you right now over those years of 2012 to 2015?
Sure. The way the review works is CRA will submit a list of questions on how things work, requesting certain levels of documentation. We are providing that documentation to them. It also includes potentially interviewing staff of our various subsidiaries, so we're going through that process as well. It's an ongoing process. It's an information exchange. They ask questions, we answer, and they've raised no issues at this time, and they just continue to request information, and we comply and provide it.
Okay, they haven't asked anything specific from you. It's just general questions.
Just general questions.
Okay, that's helpful. Thank you very much.
Your next question comes from Josh Wolfson of Desjardins. Please go ahead.
Thanks. Just related to the oil and gas properties that have current production, SCOOP, STACK, and Midland, those assets performed well again this quarter. I recall part of the tailwinds last quarter, I think, was some catch-up payments. Was that the same reason for the outperformance this quarter, or was it more related to current production?
Thanks, Josh. It's Jason. It really was both, again. There were some catch-up payments from prior quarters. We'll likely continue to see that going forward, sort of the nature of how payments are received. We typically get paid for wells that have been drilled and completed and come online six to eight months prior. We'll continue to get those catch-up payments. Also, it's a function of production growth. Again, we expect to see that building into next year and going forward for the next five years or so.
Got it.
I guess the other element that we do get that does contribute to our revenue from time to time are lease bonus payments. We did have upwards of $2 million of lease bonus payments this quarter. We'll continue to get those lease bonus payments, although they are a bit sporadic and they're basically impossible to predict. They'll continue to contribute to revenue going forward as well.
Got it. That's roughly $3 million, I guess, Continental payments revenue this quarter. Is that reasonable to expect going forward, or is it going to grow or change substantially in the short term?
It is going to grow quarter-over-quarter. I think $3 million is a good place to start for the beginning of 2019, but it's going to grow quarter-over-quarter and be likely meaningfully higher than that by the end of the year.
Not a bad start. One other question related to Cobre, and I'm not sure if there's any sort of updated view. In terms of when deliveries are expected to start that accrue to Franco, were you still expecting first half year, or is that potentially maybe mid-year at this point?
I don't have the exact timing on it, Josh. They are speaking end of the first quarter for first ore through to the mill. The question was asked of First Quantum in their call, and they do have quite extensive capacity for storing concentrates at site. They'll obviously build up enough concentrate until they can justify a large shipment before they make the first shipment. Obviously, it's when that shipment gets made that we get our first payment. I expect that that'll be some months after first ore through the mill.
Got it. Now that I think about the, I guess, if you're receiving production based on concentrate sales and, I guess, the kicker on the cost side is related to throughput, is it possible that you'll benefit from that over a shorter period upfront, before the deferral of some of the production, the concentrate buildup. I'm not sure if that's clear.
Yeah. Want to restate that, Josh?
Sorry, it's a bit confusing in my mind. I guess given that the throughput is the factor that determines the lowered costs for Franco, is it possible that you would benefit from that cost reduction over a shorter period, but that there would be a delay if you're talking about the concentrate that would be built up on-site? If not clear, we'd be happy to take that offline.
Yeah. I'm not sure where you're getting there in particular, Josh, but we do expect, once we start receiving those initial deliveries, that we would be paying a discounted amount. As mentioned previously, it's $100 discount from what we would otherwise pay. We keep effectively receiving that discount until we've received a 5% return on our invested capital that's outstanding at the time.
Okay. That sounds good. Those are all my questions. Thank you very much.
Ladies and gentlemen, as a reminder, should you have a question, please press the star followed by the one. There are no further questions at this time. Please proceed.
Thank you, Jessica. We expect to release our year-end 2018 results after market close on March 19th, 2019, with a conference call held the following morning. Thank you for your interest in Franco-Nevada.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.