Earnings Call: Q1 2021

May 6, 2021

Good morning, ladies and gentlemen, and welcome to the Franco Nevada Corporation Q1 2021 Results Conference Call. At this time, all lines are in listen only mode. Following the presentation, we will conduct a question and answer session. This call is being recorded on May 6, 2021. I would now like to turn the conference over to your host, Jason Picciotti. Please go ahead. Thank you, Chris. Good morning, everyone. Thank you for joining us today to discuss Franco Nevada's Q1 of 2021 results. Accompanying this call is a presentation, which is available on our website at franconevada.com, where you will also find our full financial results. Paul Brink, President and CEO of Franco Nevada, will provide some introductory remarks followed by Sandeep Brana, CFO of Franco Nevada, We will provide a brief review of our results. This will be followed by a Q and A period. Our full executive team are available to answer any questions. We would like to remind participants that some of today's commentary may contain forward looking information, and we refer you to our detailed cautionary note on Slide 2 of this presentation. I will now turn the call over to Paul Brink, President and CEO of Franco Nevada. Thanks, Jason. Good morning. Our diversified portfolio outperformed in the Q1, generating record revenues and near record margins, an 85% adjusted EBITDA margin and 52% adjusted net income margin. Gold equivalent ounces for the quarter were ahead of our expectations. Strong deliveries from Andamena, Ongoing ramp up at Cobre Panama and leverage to gold prices at Hamlo made for the largest increases over Q1 2020. As we progress through the year, we expect high contributions from each of Cobre Panama and Candelaria due to increased throughput and higher grades, respectively. Energy revenues for the quarter were well ahead of our guided annual run rate, a strong initial contribution from Haynesville, some high interest wells in the Permian and higher energy prices were the drivers. We're committed to ensuring that Frank and Vada is the gold investment that works for all our stakeholders, including our shareholders, our operating partners and our communities. Along with our asset handbook, we recently published our annual ESG report. Highlights of the ESRI report are our sector leading rankings, promoting responsible mining through our capital allocation, Ongoing contribution to communities and our increased commitment to diversity in our board and top leadership. During the quarter, we added 2 attractive precious metal assets, a royalty on Roxgold Seguela gold development project in Cote d'Ivoire And a precious metal stream on the Condesavela copper mine in Peru, both assets with excellent upside potential. We're delighted post quarter end to acquire a tranche of Vale Iron Ore Royalty Debentures. The royalty the Vale interest Along with our Labrador Iron Ore Royalty Company Investment, add to our base of low risk long life cash flows and further enhance the diversity of our portfolio. With the additions, the portfolio remains more than 8% precious metal focused. Our recently published asset handbook highlights the year on year growth in our reserves and long reserve lives. Yes, and all assets will further extend both measures. Turning now to our outlook. 2021 is expected to be a strong growth year for Franco Nevada with new acquisitions, mine expansions and new mines all contributing. We continue to see numerous exploration successes in the portfolio. Most recently, success at Copper World Satellites to the Rosemont deposit, Ongoing expansion of Skeena's SK Creek deposit, expansions of East Goldie at Canadian Malartic and high grade step up holes at Walbridge's Spenalontis deposit. This week, Coton Lake provided the latest drilling update On the 270,000 meter drill program at Detour Lake, the likely expansion of the resource at Detour should be a catalyst for our stock this year. Strong gold prices and near record copper prices are boosting the development outlook for our pipeline of gold and copper interests. The Hard Rock, Ballantyne Lake and Stibnite Gold Projects and the Alpala and Tancataca copper projects amongst others. Following the Farley Royalty Debenture acquisition, we revised our guidance and outlook and now expect 25% growth in revenue over the next 5 years. We announced with our year end results an increased quarterly dividend to $0.30 a share. This was our 14th successive annual dividend increase. The Board has now declared the first of those dividends payable June 24. The 15% increase is larger than typical and reflects the growth in our business due to Cobre Panama. A note on Board succession and renewal. At yesterday's Annual Meeting, the Honorable David Peterson stepped down as Chair of the Compensation and ESG Committee And after more than 13 years as the Director of Franco Nevada. The Board and I would like to thank David for his outstanding leadership and many years of service. We will no doubt miss his unique abilities for building unity within the Board. In terms of renewal, you'll recall that Maureen Jensen joined the Board at this time last year. Maureen has a strong governance background, having previously led the Ontario Securities Commission. To sum up, our portfolio continues to outperform. It has built in growth and tremendous long term optionality. We're in a net cash position of $1,200,000,000 in available capital and are now generating EBITDA at a rate of $1,000,000,000 per year. We're focused on precious metal acquisitions and see good prospects for adding to the portfolio. I'll now hand it over to our CFO, Sander Brenner. Thanks, Paul. Good morning, everyone. Q1 2021 continued to build on the positive momentum that Franco Nevada ended 2020 with. Our royalty and stream portfolio continues to perform well and ahead of expectations. Although the gold price in Q1 2021 was a little weaker than Q4. Franco Nevada still delivered a very strong financial quarter with record revenue and record adjusted EBITDA. On Slide 3, we have highlighted the gold and gold equivalent ounces sold for the 3 months ended March 31, 2021, 2020. Overall, GEO sold increased over 10% compared to prior year, with Q1 2021 GEO sold We had a number of strong contributors during the quarter: Antamina, Hamlo, Cobre Panama The strong performance for Antamina was a combination of higher silver deliveries along with higher silver prices during the quarter. I'd like to highlight that for Antamina, Franco Nevada is delivered silver ounces based on a 1 quarter lag for production. For example, the silver ounces we received in Q1 2021 were related to production from Antamina for Q4 2020. We anticipate silver ounce production from Antamina to be at the high end of the $2,800,000 to $3,200,000 range previously provided for 2021. At Hemlo, we continue to benefit from mining on our 50% NPI ground. The company recorded 11,675 GEOs sold for the quarter, of which just over 4,400 GEOs related to prior periods. We do expect mining on NPI ground to decrease in the second half of the year. Cobre Panama A strong first quarter for Franco Nevada with GEO sold of 29,622 as the project continues to ramp up. The deliveries were in line with the full year 105,000 to 125,000 GEO sold guidance we have previously provided. Finally, we were delivered our 1st gold and silver ounces for the recent Condestable stream transaction. Just over 3,000 Geos sold were recorded as revenue for the quarter. Two assets which did deliver less geos in the quarter versus prior year were Sudbury and Guadalupe. Although KGHM has decided to continue mining at Macready West for an additional number of years, it will be at a lower production rate, which was reflected in the GEO sold in the Q1 of 2021. As for Guadalupe, the company received and sold fewer GEOs in the quarter because of lower grades than a year ago. Slide 4 highlights our total revenue and adjusted EBITDA for Q1 2021 and Q1 2020. As you can see from the bar charts, revenue and adjusted EBITDA has increased significantly year over year. The average gold price for the quarter was $17.94 per ounce compared to $15.83 per ounce a year ago, a 13% increase. The $308,900,000 in revenue in the quarter is a record for the company as is the adjusted EBITDA of $262,700,000 As Paul mentioned, margin of 85% was achieved. Gold and silver revenue increased From $189,100,000 in the quarter last year to $237,700,000 in Q1 2021, a 26% increase. 1st quarter also saw strong contribution from the energy assets as revenue increased from $26,500,000 a year ago to $45,100,000 this quarter. The increase was due to a rebound in oil and gas prices as well as an increase in production. The company also recorded $7,200,000 in revenue from the recently announced Haynesville Natural Gas transaction. As you turn to Slide 5, you will see the key financial results for the company. As mentioned, the increase in revenue and adjusted EBITDA This is due predominantly to the increase in GEO sold and an increase in commodity prices, both precious metals and energy. On the cost side, cost of sales was lower at $40,600,000 versus $43,600,000 a year ago. The decrease was due to less ounces delivered and sold from Sudbury and Guadalupe. We pay a higher cost per ounce for these two streams. Depreciation was higher at $71,200,000 for the quarter compared to $64,400,000 in Q1 2020. The increase is due to the source of where mining and energy revenue is derived. The company recorded higher depletion from Antifakay, Condostable and Cobre Panama during the quarter. Adjusted net income and adjusted net income per share increased significantly in 1st quarter. Adjusted net income was $160,900,000 or $0.85 per share, increases of 47.3% and 44.8 percent respectively over prior year. Franco Nevada has always been a royalty company, but has evolved to include streaming as part of the business model. Slide 6 breaks down the mix between streams and royalty revenue for Q1 2021. The streams that we've added have been very successful for the company adding significant top line growth. They have become the largest component of our generating $176,900,000 or 50 percent of revenue during the quarter. However, it is royalties whether mining or energy, which generate higher margin and thus cash flow from operations. As you can see, the costs related to royalties are minimal with a combined cost of $3,500,000 related to the $132,000,000 in revenue generated by the royalties. We believe our business model of both stream and royalty assets will allow us to continue to achieve Peer leading EBITDA margins. With respect to margin, the slide on the chart on Slide 7 illustrates how the margin for the Our mining cost structure, which we reflect in our cash cost per ounce, This includes our cost of sales, less cost associated with the Energy business, which are minimal. Cash cost per ounce usually ranges between 2.50 $300 per GEO sold. The average gold price increased approximately 13% year over year, but the cash cost per ounce actually decreased 18%. This decrease was a result of GEOs with lower fixed costs being sold and more royalty ounces recognized as revenue in Q1 2021. In a rising gold price environment, we expect to benefit fully as the cost per ounce should not increase significantly and as can be seen in the Q1 could decrease depending on the mix of royalties versus streams, one of the strengths of having a diverse portfolio. The other cash component for the company besides the cost of sales is our corporate administration costs. Our Board and management are very proud of our focus on cost management. We like to stress the strength of our business model and the scalability. The chart on Slide 8 clearly illustrates our focus on being as cost efficient as possible in managing this business. Here we have highlighted our quarterly revenues and our quarterly general and administrative expenses since our IPO. Since 2008, our revenues have grown from approximately $25,000,000 to $310,000,000 this quarter. That is more than a 12 fold increase. This while our G and A has remained fairly stable over this time period. Q1 2021 corporate administration was $6,200,000 or 2% of revenue. Management believes we can continue to add to our portfolio and grow our business without adding significant overhead to the company. Slide 9 highlights The diversification of the portfolio, which we consider one of the strengths and differentiators of Franco Nevada. As shown, 85% of our q121revenuewasgeneratedbygoldengoldequivalents. The geographic revenue profile has revenue being sourced 90% from the Americas with South America being the largest at 29%. With respect to asset diversification, Cobre Panama was our largest revenue generator at 17% of total revenue for the quarter followed by Anupakay at 11%. Those are the only two assets That generated more than 10% of our revenue. The last chart highlights our operator diversity. Our largest exposure to revenue being generated by any one operator is 17%, which is First Quantum, who operates Cobre Panama. As was disclosed on April 16, 2021, The company purchased 57,000,000 Vale royalty debentures subsequent to quarter end for $538,000,000 The debentures allow holders to receive a premium payment based on net sales from a number of Vale's Brazilian mines. With this acquisition, Franco Nevada expects to recognize 25,000 to 35,000 GEOs sold for full year 2021. With the additional GEOs to be received in 2021, we have increased our guidance to 580,000 to 615,000 for the year from the previous 555,000 to 585,000. The midpoint of this revised guidance range is a 15% increase over 2020 actuals. Our energy revenue guidance remains the same as disclosed at year end of $115,000,000 to $135,000,000 For the Vale royalty revenue, the Q2 ending June 30, 2021, we will be accruing revenue for the royalties For the period January 1 to June 30. So essentially, we will be accruing 6 months' worth of revenue in second quarter. Thereafter, we will approve quarterly. The actual cash payment will not be received until the end of September and then every 6 months thereafter. With the recognition of 6 months of revenue in Q2, there is the possibility that precious metals revenue Again, be above 80% precious metals revenue in Q3 of 2021. Also on the Vale royalty, There is a seasonality for production and thus sales, with production being lower in the first half of the year versus the second half. The split is typically 40five-fifty 5. As of today, as seen on Slide 11, With respect to available capital on hand, the company has liquidity of $1,200,000,000 We did fund the Vale Royalty acquisition $538,000,000 with a combination of cash on hand and $150,000,000 draw on our credit facility, but we continue to be in a net cash position. I will now turn it back to Chris. We are happy to take questions. Thank you. Ladies and gentlemen, we will now begin the question and answer session. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Tyler Langton, JPMorgan. Tyler, please go ahead. Yes, good morning. Thanks for taking my question. Just starting with the energy revenues of the $45,000,000 in the quarter, I know you Kind of benefited from production and prices. Could you give us, I guess, a sense maybe if current prices hold where they are? Just kind of what Sort of the revenues could look like this year, just given the obviously you're kind of well on track to hit the guidance? Yes. Hi, Tyler. It's Jason O'Connell here. I appreciate the question. For Q1, we did have a higher than normal revenue number for energy. Part of that number came from revenue from prior periods. If you adjust for that prior period revenue, The number for the quarter would have been closer to about $40,000,000 or so. So we had about $5,000,000 coming from Really, it was wells that were producing last year, but we only received payment this year. With the higher prices, we do expect To have better revenue, the prices were a bit above the $55 per barrel WTI and $2.50 per Mcf Prices that we used in our guidance, we benefited from that. If prices stay elevated for the rest of the year, I would expect that we would come in a bit higher than Our guidance that we provided, during our Analyst Day, we provided a bit of information around the sensitivity to commodity prices. So there is a bit of leverage Associated with our energy portfolio, if prices on average are 10% higher Then the guidance that we gave, the revenue should increase by about 13%. So again, if prices remain higher, we expect Referenues will be higher and there will be a bit of leverage within that revenue number. And then should that I guess with this production, is there anything when I think of the longer term guidance where this is sort of a more temporary benefit for this year? Or is it should we not expect that? I would say within the when you look at the quarter, again, there is the benefit of that prior period revenue that I would not expect to continue going forward. In addition to that, we did have a good quarter production or volume wise, But we continue to think that our guidance is still relevant that we provided at the beginning of the year. So some of those assets that had a good quarter The wells on some of those assets will continue to decline throughout the year. So I would just caution you not to take The revenue from the quarter and annualize that. Okay, perfect. And then just a final question on Hemlo. I know This is around close to 12,000 of GEOs in the quarter and there was around a 4,000 ounce benefit. I think you talked about last quarter like a 20,000 A 30,000 ounce contribution makes and I know you mentioned that, I guess, The NPI should decrease in the second half, but just given sort of the Q1 results, I guess, could you exceed that guidance or at least hit the high end of it for the year? I think it's still too early to narrow it at this stage. Of that 12,000, obviously, as you said, there's 4,000 related to Prior period, right now, I would say we're probably going to end up in the middle of that range, but because it is an MPI and cost do impact The payment, and as expected, there should be lower production on the lands towards the end of this year or in the second half of this year. Still comfortable with that range. Not in a position to narrow it at this stage. Great. Thanks so much. Your next question comes from Josh Wolfson, RBC Capital Markets. Josh, please go ahead. Thanks. Just looking at the Vale transaction and guidance, just so I understand clearly. So in the second quarter, You're planning to accrue production that would have started from January. Is that correct? Yes, that's correct. Because we didn't own them until April 16, 2021, but we're entitled to payments for production from January 1. So for June quarter end, we will be accruing 6 months' worth of production Sure, sales. Okay. And then the guidance for the I forget what the exact number was, 25,000 to 35,000 ounces. Did that assume production from Jan or from April? That's a full year's production, January 1 to December 31. Okay. Understood. And then on the sort of Lyft shares, thank you for that We've always had this large short term investment dollar amount that we could never understand what it was, which Looking back at that deal, it looks like those shares were acquired just started to be acquired at least maybe 5 plus years ago. We didn't get this at the Analyst Day, but strategically, what's Franco thinking about this large share position? Obviously, the current share price is a lot higher than where it was acquired, but what's the ultimate sort of goal here for the company? Josh, we think of the investment really just as a royalty holding. Labrador Foreign income fund is run with very little G and A, so it's effectively just a straight pass through of that interest. So we're very happy just for the current position we hold, but stock has traded very well. And So not looking to acquire any more of these prices as you know for our focus on adding new assets really is on the precious metal side. But it is an attractive asset. If it was ever trading at a far lower prices, we would consider adding more. Okay, great. Those are all my questions. Thank you. Thank you. Your next question comes from Cosmos Chiu, CIBC. Cosmos, please go ahead. Thanks, Paul and Sandeep and team. Maybe my first question is on Latin America here. Certainly, the COVID-nineteen situation isn't great in the LatAm and a number of your assets Royalty and streams are in Latin America. For example, I think there was a bit of an outbreak at And Tamina, could you maybe comment on your understanding of the situation right now? And has it impacted You in any way so far in Q1 or I guess we're into Q2 now. And how have you factored that in? Cosmos, you're absolutely right. Latin America has been heavily impacted by COVID. All the assets, the only outbreak we're aware of is at Antamina, but we haven't heard anything yet in terms of that impacting production either through the Q1 this year or through the rest of the year. So to date, as far as we're aware, they're able to manage that without impacting production. Okay. For sure. Maybe now moving from Antamina to West Africa here. You made a number of acquisitions in the past quarter. One that didn't really get a lot of attention was Seguela. But I think it's actually one that could have good upside potential here, although it's fairly small. But I guess my question is in 2 parts. The first part is, with a recent combination or proposed combination of Fortuna Silver And Roxgold, they've really talked up potential here of some of the pits, Kula, Aisin and some of the other ones, I just want to confirm that, the royalty is on all the different or the entire land package. Hi, Cosmos, it's Ian. Hi, Ian. You're right. It does cover the mining license, which covers all of those Targets and prospects. Great. And then, Ian, are you getting more excited now with The proposed acquisition or merger of Fortuna Silver and Roxgold potentially now with So, Guayla being part of a larger company, do you see more upside potential from here onwards? We love the deposit. It starts and ends in terms of geology for us. And the technical team really liked it. And so we were very happy to partner with the team at Rock School there. And we're also very happy to see Fortuna now come into the picture, Bigger company, lots of potential, and we hope to maintain good contact and relations and Would also be keen to do something bigger there if ever needed. Of course. And then on the flip side here, now that it is within a bigger company, Could you, Ian, confirm with us, I believe there's a buy down right at the royalty. How that works? Within a larger company now, do you think that buy down is going to get exercised more so than previously? Sure. And so a little bit of background. There was another pre existing royalty that existed on the property prior to our transaction It had a 100% buy down. Our deal would allow the company to buy back half At a predefined price effectively equivalent to the price at which we bought in. And that was an arrangement that Worked for both parties. We were able to do due diligence. And obviously, you see some of the great things there, like Sunbird ahead of time, which made it a very compelling acquisition for us. So it's a bit of back and forth in terms of negotiation, but We cut it at 50% and it's very possible they'll do that, but we're still happy with the royalty and being part of the project. Of course. Maybe one last question here and coming back to Canada here. As you mentioned, Paul, in your opening remarks, There has been a new discovery made by Agnico Yigal and Yamana at East Goldie at Canadian Malartic. I haven't gone through your entire sort of asset handbook yet, but I'm not sure how much you can comment at this point in time. But would that new discovery potentially fall within your royalty grounds? And can you talk about the extent of your royalty on that land package here in terms of the area? Thanks, Cosmos. The royalty claims that we have at Canadian Malartic don't cover the full property position. Scott, I think it's 5 separate claim blocks that we cover. It's a bit of a checkerboard. One of the claims covers what is our understanding that the center of the East Goldie deposit. The extensions that they have now made are to the east of that. We do have another claim block that falls to the east. And so it's early days, but it looks like that part of that extension may On one of our other claims and so we're very excited about it. Great. Thanks again. Those are all the questions I have. Thanks again, Paul. Thank you. Your next question comes from Brian MacArthur, Raymond James. Brian, please go ahead. Hi, good morning. I just have two questions, both related To the 5 year guidance, there was a comment made earlier in the call today about Sudbury potentially being lower than I know originally when you gave that 2025 guidance, Sudbury, the assumption was it was going to continue out then. Is that still the case? And my second question is, can you just remind me when the MWS royalty, is it in the 2,000 and Is it in the 5 year guidance too or does the 325,000 ounce cat kick in before then? Thank you. Hi, Brian. Sandy here. Sudbury, yes, it's going to continue mining on Macreedy West till 2026 is the current life of mine plan. As we highlighted at the end of as part of our year end, it will be at half the rate it was for 2020. And so if you look Q1, it's on pace for that profile. So it's within our expectations for 2021. So it will be about 10000 to 12000 GEOs per year for the next 5 years. Great. So that hasn't changed at all. That hasn't changed at all. It hasn't changed. Just year over year, it's a lot less than it was last year, but that's the reason because they're mining at a reduced rate. With respect to Mine Waste Solutions, we expect the cap to be reached in 2024. So it is not included in our 2025 year outlook. Thank you very much. Thank you. There are no further questions at this time. Please proceed. Thank you, Chris. We expect to release our Q2, 2021 results after market close on August 10th with the conference call held the following morning. Thank you for your interest in Franco Nevada. Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.