Good morning, ladies and gentlemen, and welcome to the Franco-Nevada Corporation second quarter results conference call. At this time, note that all lines are in a listen-only mode. Following the presentations, 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. Note that this call is being recorded on Thursday, August 9th, 2018. At this time, I would like to turn the call over to Ms. Candida Hayden. Please go ahead.
Thank you, Sylvie. Good morning, everyone. Thank you for joining us today to discuss Franco-Nevada's second quarter 2018 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 Jason O'Connell, VP Oil & Gas, who will provide a summary of our recently announced Continental transaction. This will be followed by a Q&A period. Representatives from our Toronto office are present to answer any questions. Before we begin formal remarks, we would like to remind participants that some of today's commentary may contain forward-looking information, and we refer you to our detailed cautionary note on slide two of this presentation. I will now turn the call over to Sandip Rana, CFO of Franco-Nevada.
Thank you, Candida. Good morning, everyone. As Candida mentioned, I will provide a brief summary of the financial results for the company for the three months ended June 30th, 2018. On slide three, we have a table summarizing the key results for the company. You will see that gold equivalent ounces sold is lower than 2017, and revenue earned is marginally lower than comparable periods for 2017. Although the mining asset portfolio did perform well, second quarter 2018 continued to be impacted by lower gold and silver grades and recoveries at Candelaria. We did expect a reduction stream geos to be delivered by Candelaria in 2018 compared to prior year as the operator processed lower grade stockpile ore. However, the grades have been lower than expected. This is only short-term, as we expect production levels to recover in 2019.
Overall, the Candelaria stream has been a great acquisition for the company, with gold ounces to be delivered to Franco-Nevada over the life of the mine 60% higher now than at the time of acquisition, and silver ounces to be higher by 47%. Despite the lower geos and revenue, the company did record higher adjusted EBITDA and adjusted net income financial results for 2018. This was due to the mix of royalty versus stream ounces earned during the quarter, resulting in lower cost of sales and depletion versus prior year. As you turn to slide four, the chart highlights the change in geos from Q2 2017 to Q2 2018. The number of gold equivalent ounces from gold assets excluding NPI did decrease year-over-year. As mentioned, this is primarily due to Candelaria.
We do expect deliveries from Candelaria in the second half of 2018 to be similar to the first six months. For the change in silver geos, Antamina delivered less silver ounces in a quarter versus prior year, resulting in approximately 4,000 less geos in 2018. Turning to slide five, we have two charts on the page. The first highlights the precious metals revenue earned by the company for the previous five quarters, along with the average gold price over that timeframe. As you can see, the precious metals revenue amount was lower in second quarter versus the other quarters presented. The gold price averaged $1,306 per ounce in Q2 2018, compared to $1,329 in Q1 2018. This lower average price, along with the lower gold equivalent ounces, resulted in the decrease in precious metals revenue.
The bottom chart highlights the oil and gas revenue and the average oil price for the last five quarters. Q2 2018 was a very strong quarter for oil and gas. 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. On slide six, we provide a breakdown of our revenue by commodity and geographic location. The chart on the left provides a breakdown of revenues. 84% of revenue for the quarter was generated by precious metals, with 67% being from gold, 11% silver, and 6% PGMs. The geographic revenue profile has revenue being sourced 81% from the Americas, with Latin America being the largest component. Slide seven highlights the diversification of our portfolio. The first chart shows the adjusted EBITDA contributions from our key assets.
Antofagasta was our largest contributor at 14% of adjusted EBITDA. The top three assets contributed 32% of adjusted EBITDA. The company is not economically dependent on any one single asset. 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 eight, we highlight the strong margins the company achieves on a consistent basis. Our all-in sustaining cost per ounce was $322 per ounce for the quarter. As you can see, the cost per ounce has fluctuated over time. Again, this will fluctuate depending upon the source of geos earned. During the quarter, we realized a geo margin in excess of $980 per adjusted EBITDA the company achieved during the quarter. 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 nine, the company's fixed costs, highlighted in 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 Q2 2018 was 78.3%. Before I turn it over to Jason O'Connell, Vice President, Oil and Gas, who will walk us through the Continental transaction, I would like to provide an update on the CRA review that is currently underway for Franco-Nevada. We continue to share information and respond to queries from CRA. As previously disclosed, no issues have been identified at this point in time. The only meaningful change is that the scope has been expanded to include 2015. Previously, the review was for the years 2012, 2013, and 2014. I will now turn it over to Jason.
Good morning, everyone. This is Jason. I'll talk to you about our latest transaction and our updated guidance for oil and gas. On slide 10, you will have seen our press release on Monday announcing a new transaction to form a strategic relationship with Continental Resources to acquire oil and gas mineral rights in the SCOOP and STACK plays of Oklahoma. Mineral rights provide an ownership interest in land that is then leased out to operators in exchange for a royalty. This relationship represents a new opportunity for acquiring royalties by teaming with an operator who will manage an acquisition vehicle to acquire mineral rights ahead of their drilling programs.
While typical mineral rights acquisitions are carried out with little or no knowledge with respect to the timing of when acreage will be developed, this approach directs acquisitions toward acreage that will be drilled in the near term, and thereby maximizes value by pulling forward production volumes. On slide 11, we'd like to emphasize that this strategy is truly a win-win situation for both the operator and the royalty buyer. From Franco-Nevada's perspective, we get the benefit of an acquisition vehicle which provides the ability to acquire assets at the grassroots level or directly from individual owners. This is a segment of the market previously inaccessible to Franco-Nevada due to a lack of staff or resources to carry out these smaller-scale acquisitions. More importantly, Franco-Nevada benefits from the operator's drill plans, along with their knowledge of local land title and geology.
The operator is able to direct acquisitions to areas it will develop in the near term and to focus on areas with superior geology and well performance. Lastly, the operator will also manage the acquisition vehicle, which means there's little administrative cost or management time required of Franco-Nevada. From the operator's perspective, Franco-Nevada will carry a portion of the operator's acquisition costs in exchange for having them manage the acquisition vehicle. This allows the operator to effectively increase the economic interest in their land position at attractive values. For both parties, this structure results in a significant uplift in value. On slide 12, our strategic partner for this transaction is Continental Resources, with whom it has been a pleasure working together to create a unique and innovative model for acquiring mineral rights.
Continental is a best-in-class operator with assets in the Bakken play of North Dakota and the SCOOP and STACK plays in Oklahoma. They recently celebrated 50 years of history and are led by industry veteran Harold Hamm. The company has built a superior land position covering more than 1.1 million net reservoir acres across some of the most prolific parts of the SCOOP and STACK, and it is the leading operator in the area with 16 rigs currently drilling and recently announced plans to grow to 18 rigs by the end of the year. The acquisition vehicle will target royalty purchases under the most active portions of Continental's operated lands. These acquisitions will complement Franco-Nevada's existing royalty position in the SCOOP and STACK, which is shown on the map on the right side of the slide. These are two of the most economic and attractive plays in North America.
Continental plans to spend $2.7 billion this year to grow their production volumes. The company has targeted a 20% compounded annual growth rate quarterly to 2020, and a good portion of that growth will come from royalty lands. Slide 13 provides a summary of the investment. Upon closing, Franco-Nevada will make an upfront payment of $220 million for the purchase of mineral rights, which Continental has already assembled and which will be held in the acquisition vehicle. Additionally, Franco-Nevada has committed to jointly fund that vehicle for future acquisitions. The vehicle will be funded 80% by Franco-Nevada and 20% by Continental. Franco-Nevada’s share of funding for that vehicle will be up to $100 million per year over a three-year period. The funding is subject to Continental achieving certain development thresholds related to drilling on royalty lands. Revenue distributions from the vehicle are variable and are governed by royalty volume targets.
Franco-Nevada is entitled to a minimum of 50% of revenue distributions and up to 75% of revenue, depending on volumes Continental achieves relative to predetermined volume targets. Continental is entitled to a minimum of 25% of revenue and up to 50% of revenue, depending on the volumes they achieve relative to those targets. The structure creates strong alignment between the operator and the royalty holder in that it provides incentive for Continental to maximize production while providing downside protection to Franco-Nevada and supporting our returns in the event of volume shortfalls. Acquisitions will be focused on Continental’s operated acreage position in the core parts of the SCOOP and the STACK. As mentioned in its quarterly release yesterday, Continental announced accelerated development of its acreage with the addition of new drill rigs. This augmented activity will improve the value of our royalties. Slide 14 provides some guidance for the investment.
With respect to the $220 million that will be funded at closing, we do not expect a material revenue contribution this year. Revenues are expected to begin in earnest and begin ramping up in 2019 and continue to increase over the course of the next 10-plus years. During that period, revenues net to Franco-Nevada are expected to reach a level of $30 million-$35 million per year at current commodity prices, and are expected to generate after-tax returns of greater than 10% under either spot or strip pricing scenarios. We were fortunate to begin negotiating deal terms at the end of last year and are therefore able to capture the benefits of an upward move in the oil price. These are long life assets with perpetual ownership rights and cash flows, which are expected to build and stabilize over a period of more than 30 years.
Following that will be a long period of slowly declining revenue as well as drawdown. While the guidance provided pertains to the upfront $220 million investment, future investments into the acquisition vehicle are expected to generate similar economics on a staggered basis. The above referenced economics are based on only two to three hydrocarbon horizons. However, upside potential exists in the form of multiple other undeveloped hydrocarbon-bearing zones, which may become a target in the future. Additionally, those economics reflect current expectations of recovery factors. However, those recovery rates have the potential to increase over time from improvements in extraction technologies. Lastly, there is also an opportunity to expand upon the commitment with Continental should the parties desire to do so in the future. Turning to Slide 15. Over the past two years, Franco-Nevada has invested approximately $344 million into U.S. oil and gas assets.
The investments have been focused towards the core areas of the SCOOP, STACK, Midland, and Permian Basins. We have purposely targeted areas with the most favorable economics for operators, this is evidenced by the chart on the slide ranking counties in the U.S. by rig count. As you can see, royalty acreage related to our royalties covers the most active counties in the U.S., which is a good proxy for the underlying economics, as operators tend to focus their capital in areas of highest returns. The transaction with Continental will increase our exposure to U.S. oil and gas, bringing the total spending to approximately $564 million on closing, with commitments to add another $300 million over the course of the next three years, for a total of up to $864 million.
On slide 16, over the past two years, Franco-Nevada has taken advantage of a very favorable acquisition environment for U.S. oil and gas assets. Since Franco-Nevada began acquiring these assets, oil prices have increased, rig activity continues to outperform our initial expectations, well productivity in the basins continues to improve, and we will benefit from a reduction in U.S. corporate tax rates brought into effect under the current administration. As was highlighted by Sandip in the financial discussion, the U.S. oil and gas assets are already beginning to generate meaningful revenue contribution for the company. We are expecting these revenues to grow significantly over the coming years as operators transition from drilling in order to hold their acreage toward full-scale developments of their lands. Slide 17 provides an update of the company's oil and gas revenue guidance from that which was provided in the March 2018 financial disclosure.
With increased oil prices and strong performance from several assets, we are increasing our 2018 guidance from the prior range of $50 million-$60 million to a range of $65 million-$75 million under a $65 per barrel WTI price assumption. Additionally, with the increased prices and new contributions from the Continental acquisition vehicle, we are increasing the five-year guidance from the prior range of $80 million-$90 million to a range of $120 million-$140 million, again, under a $65 per barrel WTI price assumption. This includes only the Continental assets acquired with the upfront investment of $220 million, and our $300 million in expected further investments with Continental are not included. Recent acquisitions in the U.S., along with the Continental transaction, will result in a significant increase in oil and gas revenue over the course of the next five years.
With that, I'll turn it back to Sandip.
Thanks, Jason. Slide 18 provides a summary of our updated full year guidance for 2018. As Jason mentioned, based on higher oil prices and production, we have increased our oil and gas guidance. With respect to mining asset guidance, based upon performance for the first six months of 2018 and expectations for the remainder of the year, the company is revising the GEOs guidance to $440,000-$470,000 from the previously guided $460,000-$490,000. Slide 19 summarizes the financial resources available to the company when including our marketable securities and credit facilities and after accounting for the Continental initial funding of $220 million, we currently have $1.2 billion of capital still available to complete transactions. During the quarter, we funded $89.2 million towards our Cobre Panama stream commitment
At the end of Q2 2018, we had funded $886 million of our $1 billion commitment. With respect to how the company plans to fund the $220 million for the Continental transaction, we will be using cash on hand, plus drawing down on our credit facility. As you are aware, one of our key business objectives is to generate at least 80% of our revenue from precious metals. Slide 20 highlights how that goal has been achieved over the last decade, and how Franco-Nevada has actively managed it. At our IPO, we were slightly above 50% precious metals revenue. We made a conscious decision at the time to only enter into precious metal transactions until we reached at least 80% precious metals revenue.
Even with our recent move into U.S. oil and gas royalties, we are still above the 80% precious metals threshold, with the addition of Cobre Panama, with deliveries beginning in 2019, we expect to remain above 80%. This, of course, does not take into consideration any future precious metal transactions we may complete. Now I'll pass it back to Sylvie. Management is available to take any questions.
Thank you, sir. Ladies and gentlemen, if you do have a question at this time, please press star followed by one on your touch-tone phone. Note that questions will be taken in the order received. If you should wish to withdraw your request, please press star followed by two. We ask that if you're using a speakerphone to please lift the handset before pressing any keys. Your first question will be from Chris Terry at Scotiabank. Please go ahead.
Hi, guys. It's Chris here. I just wondered on slide 20 where you've talked about that 80% and the mix of the different assets going forward. Can you comment just a little bit about the second half of this year and maybe into 2019, how you're seeing potential deal flows in the more traditional precious space? Just a little on the oil and gas space. How has the environment changed with the oil price going up? Do you see potential for other deals outside of the one that you've just done?
Chris, it's Paul Brink here. First of all, on the overall outlook, the environment is good. We're seeing a good amount of transaction activity. I'd say there are two broad buckets that falls into. The first is on the mining side. More of that, as you'd expect at the moment, is non-gold, but mining related assets. I'd say with the downturn in the gold price, what we've been waiting for in the gold sector is for the industry to get back to building a good amount of assets, been hoping that would happen in the nearer term. I think with the downturn in the gold price, we've got to push that expectation back a bit. As I say, there are some good opportunities that we're looking at that are on the mining side, but non-gold.
The other side that continues to be active is on the oil and gas side. To your question, when we value most of these assets, we're typically using a strip price deck, and that oil price deck still goes down to the low mid sort of $50 per barrel. We still see good value in acquiring oil assets in this environment, we expect that we'll continue in that direction as well.
Okay. Thanks, Paul.
Thank you. Next question will be from Josh Wolfson at Desjardins. Please go ahead.
Thank you. A couple of oil and gas questions. I guess first in terms of your investment outlook, you mentioned $864 million spent thus far on the U.S. properties. I guess there was also some money spent at Orion, for the thermal project there, which takes you up to the mid nines. I recall at one point there was discussion about the total targeted $1 billion in oil and gas. Does this investment with Continental sort of max you out in terms of your energy exposure, or would you still continue to look in the space, in the interim or longer term?
Josh, it's David Harquail here. Right now if we do nothing, we're on track to get close to that 80% limit, as we've shown on our slide number 20. We fully expect in the next four years, we're going to be seeing additional gold assets or precious metals assets added to the portfolio. The way we look at it is we still have some room to add further. We just are always measuring against our confidence of what we'll be able to add on the precious metal side. We feel we still have some room to add on the oil and gas side, but it is going to be measured against the opportunities that we have on the precious metal side.
I understand.
Josh, it's Jason here. Just to clarify, you mentioned the $864 million that we'd spent to date. Just want to keep in mind that $300 million of that will be spent over the course of the next three years. That's not all spent to date, that's future spending as well.
Got it. Okay. Thank you. Then maybe for some more details on the oil and gas side. In terms of the 2022 guidance, does that assume that the additional $300 contingent payments are made and that would include the revenues from that future-dated investment?
No. The $120-$140 assumes only the upfront payment of $220 million. We provided guidance based on basically what we know will be spent. The other $300 million we expect to spend, but we haven't deployed it yet, there's no revenue in that guidance attributable to the additional $300 million. That would be in addition to the range that was provided.
Okay. It's fair to say as you sort of commit additional funding, your forecast for the revenue side will grow reasonably considerably?
That's right.
Okay. Maybe in terms of some of the specifics on the SCOOP/STACK play, and I guess what the outlook is. In terms of your forecast for gas versus oil content, what sort of split should we be assuming?
It'll be variable, it will change over time. In the first year or so, the split would be quite gassy. They'll be up to probably roughly half gas. Continental, in their quarterly call yesterday, indicated they're transitioning to a more oil-rich production profile. They'll be targeting areas of higher oil content. We expect over the course of the next couple of years, that ratio will change from, call it half gas, half oil, to probably 70% or 80% oil.
Okay. I'm not sure how to ask this, I guess looking at slide 16 with the rig count, at least for the SCOOP/STACK, which may be representative on the new properties. The rig count there is, I guess, a little bit over 100 now. When you look at sort of steady state numbers for the play, what sort of number of pay status rigs are you assuming, and what would be the equivalent production volume for that?
When we value these opportunities, we don't anticipate an increase in rig count. What we do is we take the current rig levels and create our valuations from there. We don't have a particular outlook for the overall basin. Obviously, it's going to depend on commodity prices. The higher the price, likely the more rigs that'll be active. In terms of this particular situation, Continental has announced as of yesterday that they are adding new rigs in the SCOOP/STACK. They're going from 16 to 18 rigs by the end of the year. When we began evaluating the opportunity, Continental was at 16 rigs, so that'll be a benefit to us over how we value the acquisition. We expect that the rigs that they employ in the basin will be directly probably correlated with the price of oil.
Jason, I'll add to that, it's David here. If I remember our first STACK deal when we went in two years ago, it was about 70 rigs that we were assuming in our projections, and we're now north of 100 rigs. I think we've been very conservative in the assumptions on the rigs.
Okay. Those are all my questions. Thank you very much.
Thank you. Next question will be from Cosmos Chiu at CIBC. Please go ahead.
Hi, thanks Sandip, Jason, Paul, and David. Maybe a few questions from me here. Maybe looking at the oil and gas strategic partnership first. Jason, these mineral rights that entity is going to be purchasing, acquiring, Can you remind us, is it more or less like an NSR?
Yeah, sure, Cosmos. Basically, the way it works is, in the U.S., mineral rights or land title is privately held by individuals. That presents an opportunity for Franco-Nevada to acquire the underlying mineral title or mineral rights. Those mineral rights are then leased out to operators in exchange for a royalty. That's how the royalties are created.
The royalties themselves, you can think of them as an NSR. Basically, they are a gross royalty on production revenue, less some small cost for transportation and processing.
Okay. Then, I guess what's happening here is that Continental's going to be driving some of the valuation and some of the opportunities, looking at some of the opportunities that you can acquire using this entity, looking at some of the mineral rights that are maybe currently in production and some that are part of future production. Is that how I should look?
Yeah. The premise here is that, as a typical mineral buyer, you don't have any information on timing of development. What Continental brings to the table here is the visibility into when acreage will be developed or drilled, and that brings forward revenue. What they'll be buying is, they'll be buying acreage that is specifically located under their drilling program.
What that does is it creates a very large sort of arbitrage between the typical market and our acquisition vehicle. The typical royalty buyer in the market is essentially blind when they acquire royalties. They'll have to assume a conservative set of assumptions around timing. They'll have to say, for example, acreage may be developed in five years or 10 years or 20 years. They really don't know, and it has to be conservative, and that's what sets the price.
Yep.
The advantage to us in this scenario is that we can pay that market price for benefit of knowing that our royalties will be developed in the next one, two, or three years. That's what creates a value arbitrage that we're taking advantage of. Yes, Continental, as the acquirer here, will be focused on acquiring acreage generally underneath undeveloped lands, but undeveloped lands that will be drilled within the next one to three years.
Mm-hmm. Okay. Maybe, switching gears a little bit on the accounting side for this new vehicle here. How is that going to work? It's a separate vehicle, but at the same time, I would imagine what's being generated as revenue, which is going to roll up into Franco-Nevada's financial statements. Is that how it's going to work?
Yes. Cosmos, Sandip here.
Hi, Sandip.
It's a separate legal entity. As Jason mentioned, we have the possibility to earn 50% of the revenue, up to 75%-
depending on volume metrics, if they're met or not. Based on that, we will pick up, if it's 50%, we'll pick up 50% of revenue, 50% of any costs that are in that company, which will be minimal.
Basically, it's just the largest component will be revenue.
I guess the other part is, Jason O'Connell, as you mentioned, within the next 10 years, you're expecting revenue of about $30 million-$35 million coming from this new vehicle here. I guess, looking at the rig count, everything else, how should we look at it? Is it like a straight line sort of going to $30 million-$35 million in 10 years? Or is it more exponential? Is it more like a parabola going up? Or how should we look at it?
The expectation, Cosmos Chiu, is that it's not a completely straight line. It'll be more pushed forward than that. In the next two or three years, you should see a significant bump up from basically zero revenue in 2018 to a higher level in the next three years. It's a slower ramp from there up to $30 million-$35 million 10 years out. It's more heavily weighted towards the first three or four years.
Maybe one last question on this oil and gas here. In terms of Stack and Scoop play, previously there have been some comparisons between Stack and Scoop and potentially the Permian Basin. Jason O'Connell, would you make that comparison?
Yeah. We view the Stack and Scoop and the Permian basically as the two premier basins or broader basins in North America. The reason is the economics in both those plays are extremely attractive for the operators, and that is where they will focus their capital. Breakeven costs for both basins are very attractive. They are sub $30 in the core parts of the play. They have many similarities. The difference between the two, Cosmos, is really one of scale. The Permian is significantly larger in terms of overall area than the Scoop, Stack.
The other difference, which has been highlighted lately, is infrastructure. The Permian has been, if you follow the oil and gas world, has been experiencing some challenges with respect to egress capacity. Some of the operators in that area have been experiencing wider differentials on their sales. The Scoop, Stack does not have that issue yet, particularly with Continental. They have got ample capacity on both the oil and the gas side. That play is located very proximal to Cushing, Oklahoma, which is where the WTI reference price is established. From an economics perspective, they are both very high-quality basins. The Scoop, Stack is smaller scale and has, right now, the benefit of better infrastructure.
Yeah. Sorry, maybe one last question from me here. In terms of this new vehicle, how is it being structured? Is it offshore, or is it going to be based in the U.S. and paying full taxes? Could you maybe touch on that a little bit?
Yeah. It will be held within a subsidiary in the U.S. It will be paying full U.S. taxes. We do have the benefit, obviously, as I mentioned, of more favorable tax rates under the current administration.
It's a U.S. subsidiary that will hold our interest in that company.
Great. That's all I have. Thank you.
Thanks, Cosmos.
Thank you.
Thank you.
Next question will be from Greg Barnes at TD Securities. Please go ahead.
Yes, thank you. Sandip, how are you thinking about the balance sheet as it evolves over the next year or so? You're obviously going to go into the credit line, and I know Franco doesn't like to carry debt. What's your thinking along those lines?
Greg, the plan, as I've mentioned, to fund this Continental transaction, we'll use cash on hand and draw into the facility. Our expectation is that we will have funded Cobre Panama by the end of this year. Next year, we won't have that capital outlay, and we'll be generating significant cash flow based upon the growth of Cobre coming in store next year, as well as the continued growth of the U.S. oil and gas assets. Our cash generation's going to be quite significant, which will easily pay off the credit facility as it is drawn down. At this time, if your question is whether we're going to raise equity, we have no intention of raising equity at this time.
Jason, you've got a three-year plan, I guess, with Continental, the $300 million going forward. What's the intention beyond that? I know it's success-based, clearly this isn't just a three-year investment and then it stops.
Yeah. Thanks, Greg. It is a three-year investment right now. After three years, there is no expectation that we would invest more. It's really more of an option for the parties. If the venture is successful, if the gold-to-oil ratio of the broader company is in line and there's opportunity to invest more in oil and gas, then we take that opportunity and have a discussion with Continental about investing more dollars into the vehicle. As it's structured right now, it's strictly $300 million over the course of the next three years, then there are no further obligations beyond that. It really is an opportunity, if we so choose to seize it. Right now, 300 is the maximum commitment.
Greg, it's David Harquail here. I'll just add, it's steps in a relationship. I think this is a unique process here, we'll see how it works. I can tell you we've been to the Continental offices a number of times now. Harold Hamm has personally been up to our offices as well. I think there's been a very good rapport between our companies because we both have a very long-term perspective in this business, we think this is something we can build over a long period of time. I'd say so far it's a very positive relationship, the real test is time, we'll see how this goes.
Thank you.
Thank you. Next question will be from Steven Butler at GMP Securities. Please go ahead.
Guys, we'll just beat this one to a pulp here on the stock again. On 2022 revenues, Jason, in your $120 million-$140 million guidance range for revenues, what is the approximate contribution from the $220 million deal with Continental in that revenue for 2022?
It's slightly less than the $30 million-$35 million that we indicated on the prior slide.
Okay.
As mentioned, the revenue will ramp up from basically zero this year to that $30 million level within 10 years or so.
Right.
As I explained to Cosmos, that's a bit front-end loaded, within five years, in 2022, we'll expect a little bit less than the $30 million, but certainly more than half of that amount.
Sure. Okay.
We get somewhere between those two numbers.
Okay. Then 2019, is it a humble start, or is it still a decent number in 2019 next year, as your expectations are right now?
We haven't given the guidance for 2019 because it's based on Continental achieving their volume target.
Right.
We don't know whether they'll achieve that number or not at this stage. I guess it depends on your definition of humble. Certainly, it'll be a fraction of that $30 million level.
Okay. Sounds good. I guess actually looking sequentially, guys, Q1 to Q2, Midland and Delaware were probably the best contributors to the sequential improvement in oil and gas revenues. Any comments there? I guess I just look at the rig count, and I guess we can just maybe sort of do the math, but it looks like things are going quite well in Midland and Delaware as well.
Steve, Sandip here. Yes. The U.S. assets have been large contributors, especially over last year. The first half of the year did include some catch-up payments from 2017.
Okay.
Approximately $2 million-$3 million. If you were to simply just double up the first six months of the year, that's not going to work for the second half of the year.
Okay. Thanks, guys.
Thank you. Next question will be from Tanya Jakusconek at Scotiabank. Please go ahead.
Great. Good morning, everybody. I'll leave the oil and gas and move on to just two other questions that I have. Just on the M&A side, I think you mentioned that you're looking at some mining non-precious. Dave or Paul, would that be base metals like copper, zinc, other non-precious metals?
Tanya, it's Paul. Yes. As you know, in our business, really what we're trying to do is invest in good resources that we think have got good economics to give us a payback on our investment, plus greater upside. We're open in terms of commodities. Obviously, precious metals are the best for us, but, if they're base metal deposits bulks, that fit that description, we're also open to those, and we're seeing some good opportunities on that side.
Okay. That's perfect. Thank you there. Then maybe Sandip, just for you, on the CRA, We appreciate that another year now has been included under the review. I know you had previously given guidance that if it was a transfer pricing issue, and we don't know if that's what they're interested in, that the impact to you would mainly be on Palmarejo, and I think the number had been about $25 million for 2012 to 2014. If we included 2015 in that number, what would the theoretical back taxes be on Palmarejo? I think that would be the only one paid, right?
Yeah. As you know, the way the streams work, you recover your deposits before you pay tax.
Yeah.
Yes, it was Guadalupe-Palmarejo-
is one asset, Mine Waste Solutions was the other one.
Okay.
To the end of 2015, they're still the two, so the number really doesn't change much.
Okay. About the $25 million?
Yeah.
Okay.
Still around that.
Okay, perfect. Thank you.
Thank you. Next question will be from Carey MacRury at Canaccord Genuity. Please go ahead.
Hi, good morning. Maybe another question on oil and gas for you, Jason. You talk about the $30 million-$35 million in 5 to 10 years. From what you can see today, is that where you see it peaking at, or is there opportunity to go above that on the original $220?
There is some opportunity to go beyond that. It all depends on the level of drilling activity that goes on with Continental. Our expectation is that as they continue to develop the land, there is opportunity for the revenue to continue on beyond that point. 10 years out is not the absolute peak in revenue, but it is close. You probably have another few years, three to five years of growth beyond that before it really starts to flatten out. There is some capacity beyond that, probably another five years or so.
I guess secondly, once you hit that level, how many years do you think you can sustain it? You talk about 30-year plus assets here.
Maybe here's our expectation based on today's reality on the ground. I guess it all depends on the inventory that Continental has, how many locations they have to drill wells, and the recovery from those wells. As technology improves and recovery rates improve, we expect that in reality, it'll probably be longer than that. There are a number of horizons, as I mentioned, that we're not including in our valuations, that if they get developed in the future, would significantly add to that timeframe. The 30 years that we're talking about includes the formations that are currently being developed and currently targeted by Continental. If they target future formations, that timeframe can get extended quite significantly.
Carey, this is David Harquail here. Just our experience with Weyburn, a big unitized field in Western Canada, and it's been producing for 40 years. We think it has a life for another 40 years over time. The big advantages with these oil fields in these large areas is that you look at them from the traditional recovery horizons. As Jason says, we're only looking at up to only three horizons. There's more horizons beyond that. You go into enhanced recovery, and what we experienced at Weyburn is you had the vertical drilling, you had horizontal drilling, you had water flood, you had CO2 injection. No one is yet talking about enhanced oil recovery yet on these fracking operations.
Once we look at other horizons, I think there's going to be a phase in the future where people will be looking at things such as CO2 injection in these wells. Because we're only looking at in the teens, in terms of % recoveries on our existing economics. I'm totally convinced once you have all that infrastructure in place, they'll be doing enhanced oil recoveries. I think the 30 years represents what we know right now with the technologies that are being applied. I'm convinced this is going to be something my great-great-grandchildren will still be collecting dividends on. I think that's what's very exciting about this.
Is there an underlying reserve associated with the land position, or how does that work?
There is an underlying reserve, although it's Continental's proprietary information, it's not something that we can share right now. The reserve, again, that we based our economics on goes out a long way in time, and we expect as technology improves and as these future zones are brought into plan, that that reserve will increase substantially.
Then maybe one last question. Just, you've been focused on the U.S. oil and gas opportunity. How would you characterize the differences between what you're seeing in the U.S. versus what you'd see in Western Canada?
There's a significant difference between the two countries, and the difference comes down primarily to how land is held. In Canada, the majority of the mineral rights are held by the Crown. We can't buy that really from the government. There were, at one time, private mineral rights, privately held mineral rights. Those have mostly been bought up by PrairieSky or Heritage Royalty, which is owned by Teachers' Pension Plan. There's very little private mineral rights that can be acquired right now, and there's not a lot of activity in that space. In the U.S., as I mentioned, that the majority of mineral rights are held by individuals. There's a huge segment of the industry, I guess, that is focused on buying and trading these mineral rights.
There are many private equity-backed groups that'll go around and aggregate those interests, create portfolios, and look to grow them and trade them. It's a very different magnitude, I guess, between the two countries in terms of the size of the opportunity. There are some opportunities in Canada that we continue to look at. Most of those opportunities exist directly with an operator. So rather than buying mineral rights from individuals, we would look to create manufactured royalties as a form of financing for operators, and we continue to look at those from time to time. It just depends on the rates of return on a relative basis. Right now, we're seeing better rates of return in the U.S. for those types of opportunities than we're seeing in Canada.
Okay, great. Thank you.
Thank you. Next question will be from Brian MacArthur at Raymond James. Please go ahead.
Hi. Good morning. Two questions, and they have to do with the revenue distribution sharing. In the initial 220, you make this statement that it's 50% Franco-Nevada, then there's a 25% variable. In your base assumption of $30 million-$35 million, is it 50%, so that if you do extra volume drilling there and when you do better than expected, you're going to get a double kick, i.e., more rigs and wells, plus you're getting a disproportionate amount to the upside? Is that how the volumetric function works?
Not exactly, Brian. The way that distribution works is that anywhere, really, between, for us, the 50% and the 75%, we're essentially receiving the same revenue because we get a larger share of the volumes if the production is lower, and we get a smaller share of the volumes if the production is higher. Really anywhere between those two levels, we're essentially achieving the same amount of revenue, and that's by design. I guess what we were trying to achieve with this structure is that we are protected when or if Continental was to fall short of their targets. That revenue that we're showing you on the slide is sort of a protected revenue, whether Continental is achieving their full 50% or whether they're achieving only a 25% revenue distribution.
I got it. It's kind of a downside option as opposed to an upside option, if I want to look at it that way, protection. Is that fair?
That's right. Anywhere between those two percentages, we're protected, and it's protected on the downside. We will share in the upside with Continental should they achieve beyond the volume targets, which means if they are achieving 50% of revenue, that's a good thing for us. The higher the proportion of distributions they receive, really the better it is for us if they can get over their targets.
going-
The simple way is just to think of it as a 50-50 split in our projections, and then we have downside protection. We'll take more if Continental doesn't achieve the numbers. I think what is an expression of Continental's confidence is they can at least achieve projections that we're using on our 50-50 estimates. I expect they'll perform better, but if they perform better, we're just getting 50%.
Great. That's very helpful. That's very clear. Just the second part of it then on the $300 that gives in going forward, it says you can fund up to 80-20, but then is that coming out at the same way, 50, 25? Or is there a different function there going forward? Because you're putting in proportionally more money.
Yeah, it's the same structure. For that remaining $300 million, we continue to fund 80% of it, and the distribution structure continues to be, we receive 50% to 75%.
Great. Thanks very much.
Thank you. Ladies and gentlemen, as a reminder, if you do have any questions, please press star followed by one. Your next question will be from Kip Keen at S&P. Please go ahead.
Yeah. Hi, guys. Thanks for taking my question. Were there any labor negotiations in Latin America that you have your eyes on? I don't recall. In Antamina, did they make an agreement yet? I gather it was up in the third quarter, I'm not sure.
Kip, I haven't seen anything on any labor unrest at any of the operations that we've been involved in.
Are there any contracts up for negotiation sort of in the near term, next quarter or two?
I don't have it offhand, so yeah.
Kip, David here. We look at labor as sort of standard for the business. Because we're so diversified, we're not sweating any individual operation and labor interruptions. The only one we've been watching closely is Cobre Panama because they've been working with their various unions there. That seems to have been all resolved in the last few months, and things are proceeding smoothly. On the other operations, because we're buying for 20, 30 years on investing these things, we fully expect there'll be interruptions from time to time. Nothing too long. We expect that to be resolved.
Okay, thanks.
Thank you. At this time, we have no other questions registered.
Thank you, Sylvie. We expect to release our third quarter 2018 results after market close on November 5th, with a conference call held the following morning. Thank you for your interest in Franco-Nevada. Goodbye.
Thank you, Ms. Hayden. Ladies and gentlemen, this does conclude your conference call for today. Once again, thank you for attending, and at this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.