Q4 2019 Earnings Call
Good morning, ladies and gentlemen, and welcome to the Franco Nevada Corporation 2019 results Conference call.
I'd note that all lines and they listen only mode, but following their presentations, we will conduct a question and answer session and if at any time. During this call you require me did the system. Please press star girlfriend, operator, no color is being recorded on Tuesday March 10th 2020, and I would like to during the conference over to Candide.
Please go ahead.
Thank you. So these are good morning, everyone. Thank you for joining us today [laughter] to discuss Franco Nevada, 2019 result in company outlet.
Accompanying this call is a presentation, which is available on our website Franco Nevada Dot com, where he will also find their full financial myself.
Then deeper I know our CFO will provide a brief review of our 2019 grizzled followed by Paul brings our president and COO discussing the company outlets.
This will be followed by Q in a period.
Our entire matched me Seamus person 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 Chew up this presentation I will now turn over the call to Sandip Rana CFO Frank.
Thank you Ken good morning, everyone.
As you will see from the press release issued yesterday the company reported its strongest financial results. However for the corporate and full year as we look back at 2019, the key milestone achieved in the or what's the delivery of the first gold and silver ounces free Colibri Panama.
1.356 billion investments made by the company. This world class assets will generate significant cash flow for years to comp.
The startup Kobe, Panama, coupled with strong performance from our other assets and higher commodity prices resulted in record financial results.
As you turn to slide five you can see how the company performed against the guidance levels that were issued for 2019.
The initial guidance provided by the company was 465000 to 500000 Geos.
In Q3, 2019 could we guided to the higher end of that range as the portfolio was performing better than planned.
The Geo sold for 2019 were 500 in 16438, which easily exceeding the high end up the guidance range with respect to our energy assets. The company had guided to revenue of 70 to 85 million for the year using a 55 dollar W. T <unk> oil price based on higher production out or assets and the addition of them.
Marcellus I sat in the third quarter the company raised our energy revenue guidance during the year.
Revenue for the energy assets for 2019 was 116 million, which also exceeded the top end of our range.
Turning to slide six and looking at the gold equivalent ounces sold for the last five quarters as well as the previous five years you can see that it has it has been a significant increase for both time frames.
The 153000 Geos sold in quarter 2019, compared to 105000 Geos sold in Q4 2018 was the most ever for the company.
It's strong fourth quarter, a closed out the year with 516438 Geo sold for 2019 also record. This was a 15% increase over full year 2018.
Over the five year period Geo sold have increased from approximately 350000 in 2015 to an excess of 510000 Geos in 2019, an increase over 40%.
Slide seven illustrates the movement NGL sold year over year, and how the increase in gold equivalent ounces materialized.
As you can see from the chart the largest increasing geo. So it's been gold assets of which cobre Panama is the largest component as mentioned first deliveries in sales reported in July 2019.
Yes that deliver geos in excess of our expectations for the year.
Had guided to approximately 40000 geos sold for 2019 with actual being in excess of 43000.
Our strong contributors in the quarter end year, but can deliver yes, Guadalupe and sofica.
Our net profit interest in hemlo had a strong quarter end year generating 18.2 million in revenue.
Net profit interest royalties provide more leverage to rising commodity prices and I was evident in 2019.
The company benefited from higher platinum and palladium prices during the year, but also higher production at Stillwater and separate.
The one category category, which was lower was the amount of silver ounces sold friend to me [laughter], which came in below 2018 levels, but this was anticipated based upon the mine plan in place.
2019 saw another volatile year for commodity prices. However, the second half of the year with stronger for precious metals as prices increased significantly. This can be seen on slide eight this positive momentum has continued into 2020.
Energy prices were not as fortunate as both the W. CCI, all price and gas prices were lower quarter over quarter and year over year energy prices have continued the volatility into 2020.
Slide nine highlights our gold and gold equivalent revenue for the last five years, along with the average gold price over the same period.
The company's cold and gold equivalent revenue has increased in 2018, sorry, 2019 from 2018 [noise].
When combining the higher Geo sold in 2019 with the higher average press precious metals prices. The Golden Gold equivalent revenue was 720 million compared to 567 million a year ago at 28% increase.
As you turn to slide 10, you will see the key financial results for the company I won't get into the detailed numbers, but I would like to highlight a few points. There were many records financial records for the company for the quarter and year.
With the increase in commodity prices and Geo sold the company had strong revenue growth for the quarter end the year and with the margin generation offer business model. There was a significant increase in adjusted EBITDA and adjusted net income.
On slide 11, we illustrate the commodity mix of our revenue as well as highlight the jurisdiction in which the revenue was generated as shown 86% of our full year revenue was generated by Golden gold equivalent in 2019 with gold being 65% silver, 10% Pgms, 9% and other mining 2%.
The geographic revenue profile has revenue being sourced 84% from the Americas, but Latin America being the largest.
Okay.
One of the strength of our business model is the diversification of our portfolio.
The first chart on slide 12 highlights that only two assets and elyria enhance buckeye contributed more than 10% of our revenue individually for 2019.
Our top three assets in total generated 32% of our revenue.
Illustration of our diversification.
The check second chart highlights how revenue was distributed from a legal ownership perspective with no legal entity accounting for greater than 50% of revenue.
The last chart is operator diversity, our largest exposure to revenue being generated by anyone operator is 12%, which is lending mining who operates pantelleria and glencore cooperates enter Buckeye, we're fortunate to have royalties and streams on many properties mined by some of the most reputable mining companies in the world.
Slide 13 illustrates the strength of our business model to generate high margins.
For 2019, the cash cost per Geo, which is basically cost of sales less depletion and oil and gas cost divided by gold equivalent ounces sold its $266 per geo.
This compares to 239 for Geo in 2018.
This amount will fluctuate each quarter, depending on the mix of royalty versus stream ounces.
As you can see at current average gold prices the company generates significant merges with.
With our business model, the company's season immediate financial benefit to rising commodity prices.
One area that our board and management is very proud of is our focus on cost management. We like this stress the strength of our business model and the scalability I think I think this cannot be more illustrate it any more scale even slight chance.
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 250 million this quarter that as a tenfold increase this while our DNA has remained fairly stable over this time period.
Hey costs or average five to 8 million per quarter for the last 12 years.
For fourth quarter, 2019, Gionee was less than 5% of 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, implementing an aftermarket equity program also known as an ATM in July.
Slide 11 highlights some of the key elements of this program.
The program provides the company with another tool and managing the balance sheet and the liquidity available to the company.
We look at the ATM program, the 1.1 billion in credit facilities and the significance is significant cash that the company will continue to generate as sources of capital to help finance future transactions for 2019. The company sold 1.43 million shares for total gross proceeds of $138.4 million.
The company has a number number of Canada revenue agency audits underway each is at a different stage in the audit process on slide 16, we've attempted to summarize these audits and current financial impact.
The three audits highlighted are the Canadian domestic tax matters, which has potential tax pale payable at 1.1 million for 2014 in 2015, the Mexican in Barbados audits have potential tax payable at 24 million.
Above amounts do not include potential interest and penalties, which could approximate $20 million for the about periods.
Frank going about it does not believe that the reassessments are supported by Canadian tax law and intense defend its tax filing positions.
Slide 17 summarizes the financial resources available to the company and fourth quarter 2019, the company repaid $160 million of debt, leaving a balance of 80 million at the end of year. Subsequently this amount has been repaid and the company has no debt free.
The company continues to have its 1.1 billion credit facilities available I will continue to generate significant cash going forward overall the company has approximately 1.4 billion available capital.
With that I will turn it over to Paul.
Thank you Sandy.
The record 2019 results another step forward and the growth that Franco Nevada.
I'll start by reviewing the growth since our IPO, which is shown on slide 19.
[noise] across on the slide illustrate a few items. The first is consistent growth in ounces delivered with the fivefold growth in geos over the period [noise].
Second as a topline business revenue converting to EBITDA at a consistent margin of approximately 80%.
The third is the scalability of the business despite our growth in assets, we've been able to keep DNA loans.
[noise] a dividend track record as shown on slide 20 aboard as proud of increased the dividend each year through the last 12 years. Their objective is that the dividend is progressing sustainable.
Dividends paid to date have exceeded 1.2 billion, we consider that unimportant threshold.
It's the same amount that was raised from shareholders to take the company public and out 2007 IPO [noise].
[noise], turning now to the outlook for the company and starting on Slide 21 was cobre Panama.
Okay, we'll be the largest drive about growth in 2020 semi and started production early last year credit has to be given to first quantum for their achievement building and commissioning the mine.
As part of my guidance and produce more than 147000 tons of copper and 29 feet.
Well, 2021st quantum expects Kobe to produce between 285000 310000 tons of copper as it continues to ramp up.
[laughter] Franco Nevada sold 43554, Geos from the mine in 29 team and in 2020 expect sales to be between 90000 10000 Geos.
Expected ramp for the production profile through 2024 is shown in the shop.
The growth of Cobra supported by growth across our broadly diversified portfolio main contributors as shown on slide 22.
Kinross is expanding task this which is expected to double the processing rate to 24000, Tom today I may 2023.
So by new Stillwater is progressing the Blitz project with the objective to increase PJM production, it's still water from the past 500 550000 ounces.
To about 850000 ounces per annum.
[noise] additional contributions in 2020 will be from.
In your underground the south Arturo, which sort of production in the back off 29 team.
The first phase production from cost cost them out later this year.
Resumption of operations at Musselwhite, following the fire and nearly 29 team [noise].
First full year production from Victoria's equal mine.
There are number of development projects that we expect to contribute post 2022.
I mentioned them, all but some of the highlights our.
Core recently received premise to develop Kirk Waco, and additional deposit on the at <unk> property.
So feels was successful in the last week's raising equity to put this allowed us North Bay project in Chile into production.
And we're hopeful that Centera primary goal reach a production decision later this year at hardrock in Ontario.
[noise] with gold above 1600 announce more capital available to the sector. It's a good environment for organic growth of the assets. We already own. This is the best type of growth.
[noise] the capital crime energy assets as shown on slide 23.
Energy revenues expected to range between 80, and 95 million in 2020.
Price assumptions for the year of $45 per barrel Davidi tea.
At $2 Henry hub gas prices.
The recent downdraft in oil prices, we view substantially lower prices the most achieved 2090.
[noise] will receive a full year revenue from my solace in 2020 and expect contributions from additional royalties under our joint venture with Continental.
We have a remaining commitment on from 44 million to the joint venture.
Well price downturn as an attractive office units opportunity to apply for the royalties in the joint venture [noise].
[noise], the headwinds and 2020, a low expected commodity prices and reduced rig activity year on year on U.S. lap the wafer in and arrivals are expected to be lower due to higher capital spend this year.
Note that we don't include any slowness in the guidance based on assisted make incremental contributions in prior years.
A five year guidance for energy revenues.
A range between 115 and 135 million.
This assumes that remaining committed capital to the royalty acquisition venture with Continental is funded.
While we believe this good potential for oil and gas prices to rebound.
Guidance price assumptions for 2024 same slows used for 2020 that is $45 somebody T I had $2 hammering out.
Oh.
Our corporate guidance as shown on slide 20.
Slide 24, and 2020, we expect Geos.
So in the range of 550 to 580000.
As to 516000 Geos in 29 team.
The main assumptions on Cobre, Panama continues to ramp up according to close Quantums guidance.
Three of the core assets cat litter handsets Kinect three in our artful output.
The contribution from Sabodala in 2020, well below them as a transition at the end of 2019 from fixed ounces.
Okay.
And finally as mentioned before Stillwater, Amlan Salvatierra should make higher contribution [noise].
[noise] a five year guidance is shown on slide 25.
She is expected to be in the range of 582 610000 ounces.
Jim So they will be fully ramped 100 million ton proud about 2023.
Guidance uses the same commodity price assumptions this uh huh.
[noise], we've been fortunate that the gold price run up at the same time that the ramp up of Cobre, Panama is driving meaningful growth scenarios.
With growth in place strong potential for organic growth across our portfolio, we don't need to stretch for gross oil prices.
That said our business development team is active there's good potential for transactions. This year, both in the precious metals and in other commodities, both that could move the needle Franco.
[noise] I'll finish with an advertisement as most of you if somebody asked the detailed outlook for each of our assets is given an annual last December [noise].
We expect the 2020 Handbook today available at the end of March at the same time will publish our second annually as she reports with details of I guess, she approach and activities [noise].
Please call our email us if you'd like to receive a hard copy of either document or you'll be able to excess access symbol on our website [noise].
[noise] that concludes my comments I'll hand, the call backs, the operator to take any questions.
Thank you, Sir ladies and gentlemen, if you do have a question. Please press star followed by one are you touched on <unk> you will hear a three tone prompt acknowledging you request note that questions will be taken any order received and she's you decide to withdraw your question simply press star followed by too and we do asset if using a speakerphone. Please.
Lift the handset before passing any keys. Please go ahead and press Star one now if you have any questions.
And your first question will be from Josh Wolfson.
RBC. Please go ahead.
Thank you good morning, I understand it's it's a very complicated energy environment.
No. We're trying to assess spoke the impact of oil prices as well as sort of operator changes a response to that and it gets two questions. Along those lines first is does the current guidance reflect some of the changes that you wouldn't expect or the we've already seen overnight with operators, suggesting to lower price environment.
And then second is there any way that.
You can provide some guidance as to how we should look at sensitivity to Franco's revenues outlook into two changes from the oil price.
Including both that that pricing impact as well as the production impact.
[noise] Hi, Josh it's a it's Jason O'connell I think on your first question. We have tried to incorporate some of the activity impact that you referenced into our guidance for 2020.
It's difficult to do that as there isn't a lot of transparency from the operators as to what they're going to do with their plans going forward.
But we have tried to bake in some of that reduction in activity so that should be reflected in our guidance.
Just overall you mentioned insensitivity sensitivity is a bit of a complicated issue for our 2020 guidance you would've seen that.
Prices were reduced about 20%.
From the levels that they were last year with our revenue for 2020 coming down about 25%.
And that's despite a incremental revenue from Marcellus and some additional acquisitions into the continental royalty vehicle [noise].
The reason for that is that there's quite a bit of leverage within the portfolio.
And so with the drop in commodity price comes to leverage reduction in revenue.
And not only is their leverage but that leverage is really more pronounced stuff lower commodity prices.
So for example, if theres a 10% decline in the commodity price starting from a $50 barrel level or the impact to revenue is about 13%. So weve discussed that number with you before [noise].
But if there's a 10% declined in the commodity price starting from a much lower price for example.
$30 per barrel the impact to revenue is more like 20% so becomes more like two to one.
There's a number of reasons and drivers I guess for that leverage across the portfolio and make sort of differ so in Canada, you have leverage in the form of a margin squeeze that happens for example that the enterprise Weyburn.
Where you have breakeven cost on that asset that are sort of 30 or $35. As you approach that that price revenues become almost de minimis.
For Orion and also in Canada, you have that margin squeeze because it is a heavy oil assets.
The dip a differential to Wi Fi that doesn't necessarily flow dwt I price.
So it's almost like a fixed cost in that asset [noise].
The the U.S. leverage is much different as you mentioned in your question.
Leveraged in the U.S. is more associated with activity levels.
As.
It comes down operators producer capital spending they reduced their drilling activity.
And that will translate into volumes.
And we saw that happening even in the course 2019 as equity markets were difficult for operators.
Their levels of activity reduced and thats likely to be exacerbated obviously.
In the current price environment.
So it is a bit challenging to model or our assets, particularly in the U.S. as I mentioned, we don't have look through into operator plans are what they plan to do as commodity prices come down.
We've tried to factor that into your 2020 budget as best we can so hopefully that's helpful too.
And I guess I'd just point out lastly, obviously the leverage works both ways. So.
There is a return to more normal commodity prices.
We would hope that revenues would increase.
[noise], Okay, and when we looked at the 2024 guidance for oil and gas a if we assume that long term energy price at $45. A barrel is that the steady state production and revenue number we should expect to see longer term or is there still a ramp up.
And in volumes that we should expect the she added beyond 2024.
It will depend on on pricing, so if you're staying in the current commodity environment.
We expect that would be reasonably steady a go forward number if commodity prices improve what can happen is there will be more activity, obviously I'm on our lands, particularly in the U.S. and that will create a build and volumes going forward. So you'll see more growth, but at current prices in the sort of a $45 range we.
Don't expect too much growth beyond 2024.
Timeframe, there should be some additional incremental growth from continental so.
That will continue to build a beyond the 2024 timeframe.
But mostly other assets will remain fairly fairly flat.
Okay, sorry to clarify that outlook is based on 45 dollar or based on the current sort of spot prices.
That's based on $45.
Okay, and then lastly in terms of the investment outlook in a in the energy sector.
I think earlier on the color as mentioned added there are attractive investment opportunities today.
Is that we're more the focus is for the company and has you know they return criteria changed in light of some of the change that you've seen a I fully understand it's obviously very drastic shipped in the markets or maybe difficult to to answer that.
[noise], Josh this fall and they are the.
Terms of.
Acquisition targets as always the straight down the fairway is precious metals.
For all other commodities energy and also the metals were always opportunistic.
Start off looking for good properties and then the second question on US. We ask is where are we in the cycle like to feel like we.
And the lower part of the cycle so.
Open two acquisitions in all of those areas.
Great. That's all my questions. Thank you very much.
Thank you, ladies and gentlemen, as a reminder, should you have a question. Please press star followed by one on your Touchtone phone.
Your next question will be from Tanya Jakusconek at Scotiabank. Please go ahead.
Hi, good morning, everyone. Thanks for taking my call.
Yes, I wanted to follow back on the oil and gas. They just wanted to ask about.
Okay.
You know what this sector weakness how are you going to approach yeah partner in Tampa, and if any do that strap that funding at that Capex program.
Right.
Your capital allocation to other opportunities and that's something you would be looking to do.
[noise], a tiny I'm not not expecting that that's anything that would need to do one of the key things with all of I interest is we do have very strong tenure.
For all investments precious and oil and gas, we know that their cyclical markets. So.
One of things, we look at into <unk>, we look at going into all of these deals is that regardless of the assignment.
We will be able to retain those assets and yes, there will be operated through the cycles. So it's not something that we're thinking too much about smoking.
Okay, and then maybe I know it and again it is probably something that that from time to answer but in terms of the apartments indemnity to reinvest on your royalty lands and Mena line I know, Jason mentioned electric Bill activity going forward, but can you give us a sense of how you.
Factored that into your forecast.
Yes tenure, it's not an exact science, but what we do when we when we create our forecast for 2020 as we look at the level of activity that we've had on our lands for the last few years, we take that history into account and look at it in conjunction with commodity prices and there is a bit relationship between.
Commodity prices are and where drilling levels are.
And so we've tried to extrapolate that as best we can at lower prices to factored into the guidance.
Again, though there is sort of a more pronounced effect as prices declined further fillers become less profitable in the U.S. as you approach to levels, where we are today and so that that pullback in rig activity could become at least in the short term.
More acute.
So we've done our best fit to bake it in there, but it isn't that it's not an exact science.
I appreciate that would you be able to share with us at least some sort of a magnitude and what you may stand at about half of that you will act like just so that we understand what's in your guidance.
Yeah, no it's not half so we'd expect.
It's more complicated than just the drilling activity and the reason for that is also timing and so what what happens with our energy royalties is that well get drilled in any given month and then there's a lag between when that drilling happens when the well is actually completed and tied into infrastructure and then when we get.
Paid on it so there are actually wells in 2020 that were drilled back in 2019 that we'll get the benefit of and so we've tried to carry forward those wells and also look at the level of activity on the lands that we're likely to see in the current environment.
Operators are.
Right now trimming their guidance and their capital budgets. If you look across the space. So it's a bit difficult to figure out exactly where.
[noise], where they'll shakeout and in our forecast we're assuming that.
Theres, a rig count that's probably about 20% less than where it was last year, but that's sort of a rough rough number.
Okay and that 20% is sort of carried forward into 2024.
Yes that carries forward, yeah long term, okay, and maybe if I could tell Paul on Jesse oil and gas.
Strategy I think you mentioned that you're open Kim you know precious metals are there and oil and gas I think you know I'm you know given the decline in the oil price that the and then cycle, where they're at that would make sense for you is it are you looking at all so.
Although commodities you mentioned other is that.
Perhaps from the oil and gas.
Yeah, and looking at the pipeline activity at the moment. It's the first thing is it is quite active the team is busy that number of transactions.
The I'd say the majority of it is on the precious metal side.
The but we all look entrance actions that are also on the energy side and then also some non precious metals there are in terms of transactions both.
Deal sizes across the board some large around some smaller.
But there are some transactions in there that could certainly moves the needle.
Okay.
And if I could just lastly on on the guidance on the precious metal side, and it's coming to add to pick high end and you know the high grade deposit I'm not even then I try and pronounce at that time I'll call, let Carl would you be able to give us any color in terms of when glencore like begin construction that does.
Deposit and sort of what you have for put into your forecast.
For the production profile in 2024.
In terms of exact timing, we don't know tiny of a where they put their environmental permits or they are still working on community support us a need to get that enhance before they make a construction decision.
In terms of what we've included Tanya we.
I have that in our forecast starting in 2024, and it's approximately I just under 20000, geos as well, if we budgeted and that guidance.
Okay. That's helpful. Thank you very much.
Thank you next question will be from John Tumazos, John to muscles Bear Independent research. Please go ahead.
Thank you for taking my question.
My question is do you believe you have a.
Proprietary or size advantage in the very large transactions or will you put a disproportionate amount of money this year.
End of the energy sector.
Hundred 36 million of equity sales last year crew, we gave you extra fire power at a time when triple flag or Ontario teachers are like case.
Or other new entrants.
Trying to nibble into your market share.
John It's Paul.
We.
The space has become more competitive, particularly at the bottom end and so probably the best way to put it is.
When we're competing in larger deals, we expect to be competing against a traditional competitors as well.
Whereas what we have seen its a lot of new entrance, if the small and so so.
Actually found that the the most competitive deals end up being the smallest deals.
But the good news for us, it's the deals that radio meaningful to us and meaningful.
In growing the company I think its usual competition than we've seen over the last 12 years.
In terms of energy again the.
The rather than sending out a particular objective driven by commodities. It always starts with assets, where we're looking for those good quality assets that have got good economics, where we know we can get a payback.
I think were exposing ourselves to good upside.
Looking to be opportunistic outside of precious metals for down for commodities that are in a downturn.
So those those are the general criteria, but you know which deals actually clear in any year, just depend on which fast that those categories.
Thank you.
Did you have any further questions Sir.
Thank you.
Thank you.
Reminder, and once again, ladies and gentlemen, if we had a question. Please press star followed by one on your Touchtone phone. If you are not hearing that three Tom prom. After person Nicky. Please press star zero for operators assistance and your next call comes Oh, Sorry next question will be from Brian Macarthur Raymond James.
Hi, Good morning, I'm, just a question on your Geo guidance for 2024.
50, MW ASCAP come in that year do you have a full years it kind of half a year and then gone in 2025 in your guidance Hi, Brian Sandeep here for 2024, it's approximately 75% of.
What we've been receiving so it does side reached a cap or.
Later on in the year, and then going forward 2025 onward, we have nothing coming from Mws.
Great. Thank you I was just following up and tiniest question to trying to fix the gap in there [noise].
<unk>.
Any further questions Mr. Mcarthur.
Thank you.
Thank you.
And at this time, we have no other questions registered please proceed.
Thanks, So maybe we expect to release, our first quarter 2020 results after market close on May six the conference call. How the following morning. Thank you for your interest in Franco Nevada.
Thank you ladies and gentlemen, this does conclude your conference call for today once again, thank for attending and at this time, we do assets you. Please disconnect your lines.
[music].