Q3 2019 Earnings Call
Good morning, ladies and gentlemen, and welcome to Franco Nevada Corporation, Q3, 29, <unk> results conference call. At this time all lines are not listen only mode. Following the presentation. We will conduct a question and answer session. The anytime during this call you've acquired needed assistance. Please press star Israel 40, operator, but at this conference is being we.
Quoted on Tuesday November 12, 2019, and I would like to turn the conference over to Mr. David Harquail. Please go ahead Sir.
Yeah. Thank you silly.
Good morning, everyone welcome to Franco, Nevada third quarter financial results call.
Accompanying this call is the presentation, which is available on our website at Franco Nevada Dot com.
You'll also find a person or web site, the full financial disclosure supporting our materials supporting our disclosure.
Before we begin formal remarks, we would like to remind participants at some of today's commentary may contain forward looking information. They refer you to our detailed cautionary note on slide two of this presentation.
This is David Harquail and I am the current C O Franco Nevada and important number.
Slide number three is an outline of the current directors and executive management, a Franco Nevada.
Almost all the faces you see our here today and will be available for questions.
We have highlighted on the slide steps that are being taken to renew both our board an executive team.
Jennifer Maki Anneli, if you have joined the Franco Nevada Board and just the last six months.
Also in September we announced their intention that effective may six oh at our annual meeting in 2020.
I will transition to a non executive role.
General and paired with the sawn wood transition to chair Emeritus.
On the same day, our intention is for Paul brink to become our new President and Chief Executive Officer, and if so approved by the shareholders joined the board.
[noise] all these changes have been part of a long term well communicated process that has had the unanimous support of our board executives and major shareholders.
We believe the transition will be seamless while at the same time preserving the DNA and discipline and what makes Franco Nevada successful.
I will now calling Sandeep Rana our CFO to provide a few a brief review of our results. He will then be followed by Paul Brink currently our president and Chief operating officer to provide some corporate updates. We will then be happy to take any of your question.
Sandeep the floor is yours. Thank you David Good morning, everyone. As you will have seen from the press release issued yesterday. The company delivered another quarter of strong financial results. In fact third quarter was a quarter of milestones for the company.
We received the first delivery of gold and silver ounces from Kobe, Panama and third quarter. This is a precious metal stream that was originally entered into in August 2012.
That's been a long time coming but it was worth the wait first quantum minerals has built a world class operation and we look forward to receiving a gold and silver ounces from the mine for years to come to.
The second milestone for the company was financial Q3, 2019 is the first quarter. The company has exceeded $200 million in revenue in fact revenue for the quarter was 235.7 million, 38% increase over Q3, 2018, and Q2 2019 as you turn to slide for.
Or you will see the key financial results for the three months ended September Thirtyth 2019 June Thirtyth 2019, and September Thirtyth 28, the company had a strong quarter with increases across all financial metrics when comparing to the period mentioned a number of new financial records have been achieved for the quarter.
These are all highlighted.
With the increase in revenue and due to the lower cost nature of our business model adjusted EBITDA and adjusted net income. We're also significantly higher in Q3 2019 versus prior period shown on the slide.
Adjusted EBITDA was 192.9 million or a dollar three per share and adjusted net income for Q3, 2019 was 101 point sixmillion or 54 cents per share.
Strong financial results continue to showcase the strength of the Franco Nevada business model increases in commodity prices flow directly to EBITDA and earnings for our company.
From an operational standpoint, our royalty and stream assets assets continue to perform well.
As you turn to slide five the chart illustrates the Golden gold equivalent ounces sold for each for the last five quarters. The Geos earned for Q3 2019 were 133219, a record for the company compared to approximately 120000 in Q3 2018, the increasing geos.
Hold was due to the first deliveries of gold and silver.
From Cobre Panama.
Company sold approximately 21500 geos from this asset during the quarter.
In addition, the company had strong performance from its hemlo and <unk> with its leverage the gold price. So beacon times. He has to where we are benefiting from recently completed expansions and Bruce Jack where the royalty began being paid in December of last year.
The company did have lower deliveries and sales from and to pick high and and to meet our but that was as expected.
Also I would like to highlight that the company did receive significant contributions from its PGM assets. During the quarter. This was a combination of higher palladium prices and an increase in production at the Stillwater and Sudbury mines.
Turning to slide six we have two charts on the page. The first highlights the total revenue earned by the company for the previous five quarters.
For third quarter revenue earned as mentioned it was 235.7 million.
At 38% increase the company benefited from a combination of higher mining asset revenue with all commodities <unk> contributing to the increase and the energy assets, having a strong third quarter.
Bottom chart highlights the energy revenue and the average W. T <unk> oil price for the last five quarters.
Third quarter was a stronger quarter for energy compared to prior year as we recorded the first revenues associated with the recent Marcellus royalty acquisition and we continue to have strong production performance from our Ryan asset.
With respect to the Marcellus royalty the quarter did reflect revenues from the effective date of the transaction March Onest 2019, as a result, an additional 9 million in revenue was recorded in the third quarter.
The company did find 28.7 million, but its continental royalty venture with an additional 1.8 million accrued and accounts payable on the balance sheet at the end of the quarter.
On slide seven we illustrate the commodity mix of our revenue as well as highlight the jurisdiction in which the revenue was generated as shown 84% of revenue for the quarter was generated by gold and gold equivalent assets with 64% being from gold, 10% silver, 70% Pgms and 3% other did you.
Geographic revenue profile as revenue being sourced 85% from the Americas with Latin America accounting for 48%.
One of the strain some of the business model is the diversification of our portfolio slide eight aims to highlight this the first chart illustrates that only three assets contributed more than 10% of our revenue and third quarter. Those three assets calibrate, Panama candle area and to Buckeye in total generated 37% of our right.
Revenue.
The second chart highlights how revenue is distributed from a legal ownership perspective that company has offices located in Canada, United States, Australia, and Barbados and hold many assets in each of these entities.
The third chart highlights our operator, operator diversity our largest exposure.
<unk> revenue being generated by anyone operator is 14%, which is first quantum who operates Kobe, Panama, we're fortunate to have royalties and streams on many properties mined by some of the most reputable mining companies in the world.
One of the key elements of our business model is the generation of high margins as you can see on slide nine that company achieved a margin of 81.8% and third quarter. The increase in commodity prices resulted in a significant increase in revenue during the quarter and on the cost side. We did have an increase in stream and other costs, which was three.
38.7 million compared to 33 point Fourmillion and Q3 2018, the increases our results of the increase in stream Geos that company sold particularly related to Cobre, Panama. The company consistently achieved strong margins, regardless of what commodity cycle. We are in.
One area that our board and management is very proud off is our focus on cost management, we'd like to stress the strength of our business model and the scalability I think this cannot be more illustrated clearly that slide number 10 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 million to 235 million this quarter that it's almost a tenfold increase this while our DNA has remained fairly stable over this time period.
General and administrative costs have approximated five to 8 million per quarter for the last 12 years.
Third quarter 2019, Gionee was less than 3% of our revenue.
Management believes we can continue to add to our portfolio and grow our business without adding significant overhead to the company.
To add another financing option for the company Franco Nevada implemented an aftermarket equity program also known as an ATM in July if you turn to slide 11, I will highlight some of the key elements of this program. The program will allow the company to issue from Treasury up to $200 million worth of common shares.
All sales would be at the discretion of management. There is no requirement that mandates actual sales having to take place under the ATM program.
The program provides the company with another tool and managing its balance sheet and the liquidity available to the company. We look at the ATM program. The 1.1 billion in credit facilities and the significant cash that the company will continue to generate as sources of capital to help finance future transaction.
The company did use the ATM program during the quarter selling 884000 shares for gross proceeds of 84.3 million.
Before I turn it over to Paul I would like to mentioned that there is no material update to the seery audit currently underway. We continue to provide information to answer questions from CRH.
The company did receive the previously highlighted reassessment for its Canadian subsidiary subsidiaries.
Assessing the 2014 and 2015 taxation years to increase income by adjusting the timing of deductions for upfront payments.
This is approximately 1.6 million reassessment.
And with that I will now turn it over to Paul.
Yes, and it.
The ramp up at Kobe, Panama continues to go well first quantum declared commercial production on September 1st a month ahead of schedule.
The three mill trains made up of seven mill, So now operational.
And 72 million tons per annum throughput as expected by year end.
Throughputs expected to increase to 85 million tons per annum with the addition of the eighth Goldman.
First quantum is confirmed that 29 team guidance for Cobra of 140270 5000 tons per annum of copper production.
As we indicated on our last call, we expect Geos delivered to Franco to be at the high end of on guidance for co right.
That is close to 40000 Geos in 2019.
Q3 was the first quarter that we received deliveries from Colgate.
Total GE has delivered were 22942 ounces and the Geo sold was slightly less at 21526 ounces.
We did benefit from fast payment terms on the initial short time concentrate sales contracts during the quarter.
That's the contracts move to longer term the timing of deliveries will be a bit slower.
So conservative estimate for Q4 deliveries.
Turning to slide 13.
In July we invested 300 million to acquire a 1% overriding royalty from range resources covering their operated position in the core of the must solace play in Pennsylvania.
The effective date of the transaction was March 1st.
During the seven month period from the effective date until the end of Q3, we recorded 13.1 million in revenue.
Average of approximately 1.9 million.
We continue to expect the royalty to generate approximately 25 million then 2020, assuming a two dollar 50 per mcf price for natural gas.
The ongoing revenue growth rate will depend on range as capital plans over the next few years.
Turning to guidance on slide 14.
We expect that our mining geos will be at the higher end of our guidance range for the year, we've narrowed the guidance closer to the top end of the range on it now is 490 500000 geos.
Our energy guidance was increased in Q2. Following the addition of the Marseilles royalty and the performance of existing portfolio, we're maintaining it at that level, which is 100 million to 115 million.
As always we're positioned to make substantial investments.
And currently have available capital shown on slide 15 of 1.4 billion.
Our working capital and market marketable securities together total 359 million.
And we had 245 million drawn on our debt facilities at September Thirtyth.
Subsequently, we've repaid an additional 65 million, leaving 180 million in debt outstanding as of today.
We're seeing good acquisition opportunities that present, where most active on the mining side.
In precious metals, there's potential for both smaller transactions, that's less than 100 million.
Midsize transactions greater than 500 million and we're also seeing some larger transactions upwards of about involves.
We continue to be opportunistic and other commodities and believe we have room for incremental non precious transactions.
With that I'll hand, it back to the operator welcome any questions.
Thank you, Sir ladies and gentlemen, if you do have a question. Please press star followed by one on your Touchtone phone you will hear Athree, Tom prompt acknowledging you request not that questions will be taken any overseas.
You should wish to withdraw your request simply press star followed by too and we do ask that if you're using a speakerphone. Please lift the handset before passing any keys.
And your first question will be from Cosmos Chiu, let's see Ibcs. Please go ahead.
Great Thanks, David Paul and Sandeep.
Congratulations on a very strong Q3, and congratulations David I'm Paul.
Maybe my first questions on Kobe, Panama here.
Paul as you mentioned your it seems like it did look deliveries are moving into more long term contracts in Q4 could you maybe walk us through how that changes in terms of the deliveries to Franco Nevada I'm. Just wondering you know when does Franco Nevada get paid on these contracts is when the weather concentrate guys shipped out.
Or is that when a smelter.
That's the concentrate or is it one.
First quantum actually gets paid and again, how does does switching over to long term contracts.
Impact that.
The it's just a small timing impact overall cosmos.
The in terms of how we get paid when the concentrate ships. The we get the bulk of our payment as a provisional payment and then at a later date you. Once they are once the concentrate is actually being processed you've got a final settlement that as an adjustment, but economically it's really that provisional payment, which is the major driver.
For the initial contracts that we entered into we will and getting those payments and anything you know 20 to 30 days after the concentrate chip.
More typical longer term contracts into that'll move out to maybe 30 to 40 days on average.
So just as you transition you it's it's a.
A couple of weeks to amongst difference in terms of the timing.
So it's really graduate student how Q4.
Yes, as you transition to those other contracts.
Exactly.
And then I don't know if this is related to Kobe, Panama as well, but sandeep.
Realize our I noticed that youre taxes as a percentage earnings in Q3 is slightly lower than than previous quarters.
I know somewhat remember that I believe the Kobe, Panama stream is a bit more tax efficient again, you know is the lower percentage and taxes, a result of to Kobe, Panama deliveries in Q3 and at what should we expect in terms of a tax rate on a go forward basis.
Yeah, Hi, Kosmos, yes, you are side.
Hey, I cobre, Panama isn't at and tax efficient structure.
It is add just due to the number of stream ounces, we did receive and sell in Q3. It did impact the tax rate. So it is slightly lower going forward I think at reasonable estimate is between 15 and 16% as the as the long term tax rate for the company <unk>, Great and then maybe switching gears a little bit here at Marcel.
Yes.
You know certainly there was a catch up payment and in Q3, given it started in March or it got a rolled back or started so the contract.
I was retroactive since March I, just want to make sure I think you highlighted the 15.9% your revenue in Q3 coming from energy I just want to make sure that you know I guess, what I'm trying to get to is it that number seems a bit inflated I guess that includes your your payment youre onetime payment for Marcellus to confirmed.
Number one number two well be a more normalized number if I was to take out.
That Marcellus contribution and if it goes also talk about that 20% target you still trying to get or not trying to get to about a 20% cap and if that's still the case.
Hi, Cosmos Sandip here you are right in that percentage for energy. It is that 9 million catch up payment for the stub period is included.
If you were too.
Pull that out I am going forward, obviously, it'll depend upon how the other commodities do and gold and silver and the stream ounces from those assets, but I think around 14%, 13% to 14% I think as a reasonable number for energy.
Okay, and Kosmos in terms of the outlook the.
Recall, the we think of that 80, 20 us as a rough guide to.
The the 20% being the maximum of fantasy on on goal that we had won over the longer term.
And looking at any deals where its asset quality that is number one for us.
So as we look at them where obviously.
That's what drives any individual deal.
Right now were most active as I mentioned on the precious metal side.
And so that's the most likely area in terms of incremental additions <unk> for sure.
And then a again on energy as well I noticed that your contribution to continental $19.6 million in Q3 slightly lower than what you did in Q2 is that just a function of you know you had contributed a lot and the first half and so now just.
Rounding it out in the second half and then I know from that perspective, I believe there's still some contributions nita and your 2020 like how should we look at it is it going to be more front end loaded once again or is it going to be.
Based on activity, you know acquisition activity on continental or is it more kinda like evenly spread out in the quarters in 2020.
Hi, guys. This is Jason O'connell, Hi, Jason Justin.
And thinking about how those contributions are made they have been fairly regular.
In terms of monthly payments historically.
We're seeing a bit of a slow up towards the end of the year here.
Okay and of how continental ultimately is able to buy acreage on the ground.
And so we expect that number probably be a little bit lower towards the end of the year as continental has.
I guess approaches that are $120 million cap for the year.
Going forward in 2020, we still have in place a contribution limit of $100 million. So we expect them to be pretty close to that.
That amount it could be more or less again, depending on just pace there acquisitions throughout the year.
And then following that Theres theres about 50 million or so remaining how they would come in in 2021.
Before the end of our comments.
Okay, and then maybe one last question if I may well congrats on getting very good scores on U.S.G.
But my question is you know as a royalty streaming company here.
Yes, GE score would be impart dependent on you know the actions are reactions of some of your partners to producers the operators. How do you how do you manage that risk and how do you make sure that you know you can maintain that good standing at a high standing.
The U.S.G. surveys.
Kosmos is David here.
As you know the.
We're very active on the World Gold Council right now and I'm quite proud that.
As an industry now we've had 26 gold companies now agreed to a common set of standards on MSG and these are now going to be in the next two years were all up all the companies are being to implement eisen audit process in terms of a third party verification never fulfilling the functions on MSG.
So I've I've talked to my colleagues in the oil and gas industry and they are quite jealous of what we're doing right now and audit straight.
In terms of what we can do we don't control the operations, that's absolutely clear, but we can absolutely control, how we allocate capital so weve institutionalized and our due diligence.
Process, where we do look at all community issues, we look at tailings risk we look at.
Environmental risk as everyone of our assets, it's something that integral now in business development and its integral in terms of the board review of these assets as well as we all on our more significant assets. We visit a number of them actually several times a year, we try to touch or at least our major assets at least once.
The year I sort of Marmara second Terrorizes every second year will review as part of those visit any SG issues that we're concerned with and is something that we will bring up other companies. If there's an issue or we'll look at trying to isolate that risk from our company and sell those assets, we have not yet gotten to a certain circumstance, where we needed to selling.
Asset I think we're lucky that most of our operators are either members of the World Gold Council or the IC ATM they're following.
Very high standards and Theyre, they're working hard to improve those so.
We did have a slide on the on number 16. So I'm happy you brought up the question. We're we're very proud that at least we've been able to be proactive on this business and I think we've now got the rating agencies.
Recognizing what we're doing and so.
We just found out a few weeks ago that we're now ranked number one by sustained analytics out of 104 precious metals company, so as something I'm going to tout as long as we're number one and a MSC I.
Has now I appreciated the form of business that we're doing and we're now rank double a. I understand that Theres no. Other company in the mining business has ranked higher than that so were.
Ranked at that level for 2019, so I'm very pleased to be where we are and will continue to be proactive and try to stay ahead of the curve.
Great. Thanks, again, David Paul Sandeep, and Jason does all the questions I have thank you.
Thank you next question will be from carry at Macquarie at Canaccord Genuity. Please go ahead.
Hi, Good morning question for Paul You mentioned some of the business development opportunities I'm. Just wondering if you can give a little bit more color or those.
On producing assets development assets, maybe M&A related.
[noise] carrying we're seeing opportunities across the board.
So some of the themes that we spoken off before asset sales coming out of some of the major companies.
We're seeing some project builds in the precious metal space and also seeing some byproduct opportunities. So.
It really is across the spectrum of the type of opportunities that we typically see.
And in terms of developed development assets do you think the markets there for equity and debt or you know how do you think about that in terms of obviously a stream can be difficult to to fund the project 100% basis.
As we're all aware, there's not a lot of equity available. There is some that and there are stream. So I think there a few assets that are able to move ahead in this market, obviously with good assets with good sponsors.
Okay, great, Thanks, and congrats on great quarter.
Thank you.
Next question will be from Mike Malone.
Bank of America. Please go ahead.
Oh, Hi, David Paul Sandeep, just how to cluster on hemlo.
You may have seen barrick's presentation was a five year guidance from a week ago, where I had a great slide on exploration hemlo, showing a 500 meters of down plunge extended the season I'm just wondering how that impacts your NPL in the future.
Hi, Mike Sandeep here, yes, so back those results are on our property and we're very excited.
Obviously, it because it's an anti there'll be development cost associated with it. So it's it is hard to.
No exactly what the impact will be but hemlo as you can see from this quarter the leverage to the gold price is quite significant so we're actually quite encouraged with what Pamela will provide to us going forward.
As a where theyre working as on all on Franco anti ground.
Yeah, David here, it's yes, if you look at the down plunge is going to the northwest that's on what was called the Interlake claims and that's on the ground. There is some work that Barrick has done on whats called the Golden Scepter further to the west, but the majority of what they focus and highlighted.
That was on a Franco Nevada's interlake claims.
Okay, well thank you.
Thank you.
Ladies and gentlemen, as a reminder, if you do have any questions. Please press star followed by one on you touched on.
Your next question will be from Tanya.
Caustic at Scotiabank. Please go ahead.
Great Hi, good morning, everybody and congrats on a great quarter.
Question for Sandy first just coming back to calibrate Panama Sandeep can you talk a little bit about the the fact that you know we didn't reach the 58 million tons per annum until after John first to 19, and just getting the hundred dollar discount on your goal deliver.
Prices.
Was that the case that you saw in Q3.
Yes, so because they didnt reach the 58 million.
Yes, we do get the $100 reduction per ounce.
Gold gold ounce going forward.
Well the return is a achieved by Frank for the 5%.
And so that will go on for probably three to four years.
Okay three to four years from now and it is showing up in your cost.
Yes, correct.
Okay. That's helpful. Thank you very much and what is the remaining balance.
No.
I'd have to get back to you on that one.
Okay. That's off the top of my head, it's approximately $40 million.
Okay. That's helpful. Thank you so much for that and then maybe for Paul just coming back on your M&A opportunities that you see out there you mentioned the greater than a billion I mean that comes from my last conference call I think.
We see more smaller type opportunities them, you know sort of under 500 million or thereabouts. So.
You know clearly we've had to change and landscape are those opportunities over a billion dollars have those project build or buy product opportunities.
So those would be byproduct opportunities 10 in and I guess, the shift as being with the weakness.
With base metal prices and with strong precious metal prices, where it works.
Back to a stage, where you've got a good arbitrage on byproduct ones. Yeah, Yeah, I just wanted to see whether well see byproduct. So our that project bells. Okay said 510 byproduct well, it's good to see I mean, not on the base metal side, that's good to see the opportunities are there.
Thank you.
Thank you.
Once again, ladies and gentlemen, if you do have any questions. Please press star followed by one on the Touchtone phone.
And at this time Mr. arc, well, we'd I have no further questions I would like to turn the call back to you.
Yes, Thank you Sylvie.
Hi, Thank you for participating on the call we expect to release our year end 2019 results after market closed in March the knife.
And we'll have a conference call similar to this one the following morning.
Again, thank you for your interest in Franco, Nevada, and we'll talk then.
Thank you, Sir ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we do assets you. Please disconnect your lines enjoy the rest of your day.