Q3 2020 Franco-Nevada Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to the Franco Nevada Corporation Q3, Twentytwenty results Conference call.
At this time all lines are in listen only mode.
Following the presentation, we will conduct a question and answer session.
If at any time during this call you require immediate assistance. Please press star zero for the operator.
This call is being recorded on November 2020.
Oh, no I'd like to turn the conference over to Ken data Hayden IR. Please go ahead.
Thank you Veronica.
Good morning, everyone. Thank you for joining us today to discuss Franco Nevada third quarter Twentytwenty result.
Accompanying this call is a presentation, which is available on our website at Franco.
Franco Nevada Dot Com, where you will also find our full financial results.
Sandeep Rana CFO of Franco Nevada will provide a brief overview of our results.
Been great repeat business development, but the business development update and tallgrass, President and CEO of Franco Nevada will comment on our growth outlook.
This will be followed by <unk> period.
Our full executive team is available to answer any questions.
I would like to remind participants that some of today's commentary may contain forward looking information and refer you to our detailed cautionary note on slide two this presentation I will.
I'll now turn over the call just Sandeep Brenda CFO thinking about.
Thanks, Ken.
Good morning, everyone third.
Third quarter 2020 was a return to some form of normalcy for Franco Nevada, as we saw most of our royalty and stream interest resumed normal operations by the end of the quarter.
In the Golden Highway assets, which are still on care and maintenance are expected to remain so for the remainder of the year.
Our partners at a royalty and stream assets have done a great job managing the COVID-19 pandemic.
Matching the necessary safety protocols and procedures, while still delivering excellent operating performance.
With the increase in precious metal prices and returned to normal operations Franco Nevada delivered a very strong financial quarter, achieving a number of financial records.
On slide three we have highlighted the gold and gold equivalent ounces 'cause it three months and nine months ended September Thirtyth 2020 and 2019.
Overall, despite the impact of the pandemic Geo sold were fairly stable for both periods shown with 134800 in 17 in third quarter 2020.
Parents 133219, a year ago.
Gold ounces represent 80.6% of Geo sold for the quarter compared to 76.4% a year ago.
For the quarter, we got strong performance from a number of key assets.
A key contributor contributors recovery, Panama candle area, and a car and Guadalupe.
Cobre, Panama resumed production in early August and reached full production ahead of schedule. The ramp up has gone well and we look forward to the cross Kobe patent I will deliver the comp.
Company in the coming years.
Candle area was a strong contributor resulting in just over 20000 Geos sold compared to 16573, a year ago. It was the largest revenue generator for Franco Nevada during the quarter being 14% of total revenue.
For highlights are total revenue when it adjusted EBITDA for three quarters shown as you can see from the bar charts revenue has increased significantly compared to the comparable quarter shown that.
The 279 $8 million in revenue in third quarter is a record for the company as as the adjusted EBITDA of $235.1 million for the quarter margin of 84% was achieved.
The average gold price for the quarter was 1911 per ounce compared to 14 74 per ounce a year ago at 29, 6% increase.
Increasingly price combined with the increase in gold ounces sold in the quarter resulted in gold revenue increasing from 151.1 million in Q3, 2019 to 206 1 million at 36% increase.
Third quarter also saw rebounded energy revenue as an increase from 14.6 million and Q2 2020 to 22 8 million this quarter as we saw rebound and oil and gas prices.
For the quarter gold was 74% of revenue silver, 9% Pgm's eight other one energy 8%.
As you turn to slide five you will see the key financial results for the company I won't get into the detailed numbers, but the company delivered strong financial results with at achieving records for a number of the key financial metrics during the quarter.
As mentioned the increase in revenue and adjusted EBITDA was predominantly due to the increase in precious metal prices.
Adjusted net income and adjusted net income per share also increased significantly in third quarter.
Adjusted net income of $152 3 million or 80 per share where increases a 50% and 48% respectively over the prior year.
This increase was a combination of the higher revenue, but also to the lower depletion being recorded depletion.
Besides the cost of sales as our corporate administration costs, Our board and management are very proud of our focus on cost management, we'd like to stress the strength of our business model and the scalability.
The chart on slide eight clearly illustrates our focus on being is cost efficient as possible and 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 million two two.
<unk> 280 million this quarter that is more than a tenfold increase this while our G&A has remained fairly stable over this period G&A cost of average $5 million to $8 million per quarter for the last 12 years for.
For Q3, 2020, G&A was less than 2.5% of revenue at $6.3 million.
<unk> management believes we can continue to add to our portfolio and grow our business without adding significant overhead to the company.
Before I turn it over to Ian I wanted to provide an update on the CRA audits with respect to the various audits ongoing both international and domestic there are no material changes the only additional item to note is that the CRA has now added 2016 to the list of years being audited.
And now where paso over to Ian who will provide an update on the recent royalty acquisitions.
Thank you said, it's been good morning, so over the line.
I'm pleased to be able to provide an update on some of our recent royalty purchases. This morning.
Some of the exciting organic growth within the portfolio.
Thank you Ian.
First aerial cover is the upside of the Npi's in our portfolio.
While the steady performance of sauce, and screams as a bread and butter in a bull market are NPI Shine that's did the hemlo NPI this quarter.
There are a number of other N P I as in the portfolio.
[noise] goldstrike, it's the most substantial.
We haven't seen as much as we'd like from Goldstrike NPI. This year with the goldstrike material being fed to the mill at a slow rate.
That does leave more material for the future.
We have 5% MPI on muscle white that hasn't contributed since the fire in early 2019 at the mines now back in operation with a production rate of about 250000 answers a year and we estimate the NPI will stop paying again in late 2021.
Two other npi's may come to life.
We have a 20% NPI on certain claims it macassar and the recent exploration success is expanding the whole body towards those claims.
And a 5% NPI end up indoor or P. G M operations in South Africa May turn profitable if these hi, PGM prices continue.
The next items outgrowth outlook slide 11 shows they expected near term drivers X.
Expansions at Stillwater Tasiast in Macassar.
The construction of Solara, snotty, and Karaka Waco, all expected to complement the growth incorporate Panama over the next five years.
With increased capital available to the sector likelihood of development assets move into production has picked up assets like Valentines Lake.
Rock instead might gold advancing towards construction decisions and currently not included in a five year guidance.
It's exciting to see the level organic growth across the portfolio.
Slide 12 highlights recent portfolio updates I won't cover them all as I'm sure you're falling many of the North American assets like Hardrock Stibnite, an island gold.
Less familiar I think Australia and assets last quarter I mentioned the expansion from open pit to underground Duked in in Australia.
Another interesting, Australia and development is Luna.
Also known as Matilda, where we have a 3.6% MSR.
Luna is currently producing 60000 ounces per annum from oxide all.
But with a total sulfide resource of close to 6 million ounces. They currently constructing a sulfide concentrator that allow production of 100 220000 ounces per annum by late 2021 and have stage two plans to expand production to 250000 ounces per annum.
The pace of drilling in the gold sectors picked up last quarter I highlighted exploration successes, a detour melodic valentine late could handle.
And expect these to contribute to contribute reserve and resource increases at year end.
To reserve and resource updates will receive through the quarter.
The first the candle area Lundeen, an annual midyear update once again increased MNI resources in particular, reflecting success.
Handled area Naughty underground.
The new MNI resource is an 18% year over year increase.
And have now more than doubled the mind life from the 14 year expected life at the time they acquired the mine in 2014.
The second update was from equinox at the Mosquito mine in California, MNI resources increased by 94% and the total mineral inventory at the mine is now greater than 2 million ounces.
As an aside we also received news from Equinox of the first go pool at Castle Mountain Dew.
The portfolios or three meaningful exploration successes this quarter.
Kirkland Lake has been having ongoing success this year expanding the whole body at my cancer.
And a TOBA Copeland antiseptic 254 grams per ton of a 14 and a half meters extending the south main complex further to the south near the contact with the amalgamated break.
We have a variable rate royalty on primary goals in Nevada, Goldmine, South of Turow mine that we estimate will be 6% on the sulfide material.
On the prior reserves, we expected south a tour to contribute for the next four years.
Although they have now discovered material extensions to the El Nino underground.
Will likely extend mine life, when they up date reserves and resources at year end.
Skinner resources continues to evict success at SK Creek with a developing a high grade open pit.
The 2019 P. A indicated production 22618 ounces of gold equivalent.
At an average gold equivalent grade of greater than four grams per ton.
More recently, they're having success at that initially with the Watertown zone and this quarter discovering unusual SK deeps that lives 260 meters below the prime known mineralization.
The drilling success bodes well for a longer term organic growth always the most profitable type of growth.
The final topic to cover his are available capital shown on slide 13 cash balances building rapidly we are working capital of $559 million and know that.
Including are available credit facilities of 1.1 billion, we have a total of $1.8 billion of available capital to deploy on new growth opportunities.
Given where the balance sheet now stands strong cash flow generation and the stock trading below as high as of earlier. This year, we're not currently planning to use our ATM facility.
With that I'll hand, it to the operator and we welcome any questions.
Thank you very much so ladies and gentlemen, we will now begin the question and answer session.
Should you have a question. Please press the star followed by one on your Touchtone phone.
You will hear me three Tara comp acknowledging your request and your questions will be pulled in the order that they're received.
Should you wish to decline from the polling process.
Please press the star followed by cute.
If you're using a speaker phone please lift the handset before pressing any key.
Your first question comes from.
Hi, Terry with Credit Suisse. Please go ahead.
Hi, Good morning, Thanks for taking my question on Slide 10, where you talk about the Freeport royalty portfolio can you talk a little it's quite a bit of the <unk>. The large the land package is quite large can you talk a little bit about how additional discoveries would work in terms of you know Franco's exposure.
Secondly, based on your internal number what would be IRR for this portfolio. Thanks.
Good morning, seeing great here.
So this is a portfolio of 24 royalties.
And the land packages broken out over a number of those a very large chunk. However.
That is covered by the walbridge royalties so.
Fennell on their flagship project, but also also Martin year and northway going on.
So that it comprises a very large component.
And the royalty there is 1% to 2% 1% on panel on believe it's 2% Martin year and 1% on north wait annoying on there's variable rates of royalties across the others that have been acquired.
And so it's specified in each I think will provide more granular disclosure with the asset Handbook.
These are ready.
Relatively early stage royalties and a number of cases to cash flowing or.
Hot Springs, which is a renewable energy royalty and milk <unk>, which is a copper mine in Mexico. So.
The IRR for this is something we probably won't disclose directly because there's a lot of it is really in the option value of these assets and his SaaS based on what we think the geological crossed activity is assessing based on cash flow is.
As a tough thing to do at this stage.
Okay, not a problem and.
And just one other question on the at the money equity program I believe you raise $20 million and a quarter I'm guessing perhaps funded steel uhm can you just walk us through like philosophically why why top that program when there's quite a bit of cash on the balance sheet and that's my last question. Thank.
Sure. So so when we did implement that program in 2019, we did have get on the balance sheet and we completed a deal with a range of resources on the Marcellus.
So at the time the program was implemented too.
Pay off the debt that we had and which was done earlier this year and thereafter.
Thereafter, the objective was to build a cash balance on our balance sheet, which is Paul mentioned as a decent size right now of just under $500 million. So at this stage as as was mentioned we don't intend to use the ATM at this stage.
Thank you.
Thank you very much your next question comes from.
Jackie pray Bellow scheme with a BMO. Please go ahead.
Thank you very much I, just I want to start with just a modeling question. If you can help me out Uhm I guess, specifically with Kobe, Panama, because it's a fairly new mine still be the revenue zeal reported in the corner, where will quite a bit higher than what I was looking for anyways can you give us a bit of a <unk>.
Or some color in terms of like how you expect those deliveries.
Let's see in the fourth quarter to play out do you expect that sister fall back down below the mines production run rate for the for the next quarter. Thanks.
Sure I, so sofa Cobra, Panama It was roughly 16000 geos.
Put for the third quarter Fourthquarter, obviously, it depends on where they are making shipments and timing of payment for Franco, but I would expect to see at least the same level of geos for that we achieved in third quarter.
So so I guess that that would lead me to my next question, which is you mentioned in the M. D. Any of that you expect to be so at the high end of your your previous guidance for the full year Uhm is there a chance or alright, I guess is there a possibility that you could actually exceed that high end up with a guidance by by a meaning.
Full amount, it's it's production that Kobe Panama's is consistent with with what we saw this quarter and and I know assuming that.
Kendall area is back up and running near term, obviously as well.
Yeah that that would be great. If we were able to exceed our guidance. Obviously right now we're looking at the best available information, there's always assets that surprises and a quarter for example, the hemlo NPI.
So again, if the happen low MPI or some of the other assets deliver more than what's expected. There is the possibility that we do exceed our guidance.
That'd be it a good problem to have I guess and and maybe I'll just just one final question Uhm.
Your your revenue from from Golden Precious metals, you disclose is 92%. This this quarter and energy on me, making up a small portion. So I know you get this question every quarter. So I'll I'll take my turn asking it I guess is is that I'm opening up the possibility or or is that making you I think a little bit harder about.
Adding energy royalties to your portfolio in the near term.
The.
More so than what the balance is Jackie we.
We look to see whether the sector is there's a lot of capital of as being pulled out of the sector.
We are seeing some attractive opportunities.
Moderate in size. So we are actively looking but it's really driven by the quality of the assets rather than.
The current commodity mix.
Okay perfect. Thanks, very much pollen intended.
Thank you very much. Your next question comes from the neat thing with <unk> Industrial Alliance. Please go ahead.
Great. Thanks, I guess in terms of the opportunities you're seeing out there on the precious metal side would you see would you say your focus more on the lower priced acquisitions that have a significant future geological potential or are there still these larger opportunities out there being shocked by operators.
No you've been talking about in the previous quarters.
Good morning to see it again I would say both.
There are interesting opportunities to look at on the larger end of the spectrum.
And we continue to evaluate goes but when we see opportunities that are smaller that have the potential to get much bigger, especially in precious metals, we are aggressively pursuing those as well.
Okay, and then just Wanna use a smaller one do you think like some like on some of these newer asset is it easier to acquire a royalty that's already existing on the asset versus creating a new one with some of these junior explorers from from your perspective.
Generally I would say it is easier to buy existing royalties, we'd like to create new royalty.
We find that is really good opportunities there from time to time.
But at the moment, there's probably more.
Teal flow and the existing royalty space, especially around precious metals.
Okay, great. Thank you.
Thank you very much. Your next question comes from customer too, which is C. A D. C. Please go ahead.
Hi, Thanks, Paul 70, Bennion and congrats on the very good Q3 here Uhm, maybe my first question is on the N. P is uhm as you mentioned, a hemlo of the $24 million in revenue $13 million came from a previous quarters could you remind me how these M P I contract.
Work and you know could we expect other sort of catch up in the future quarters or or is is pretty much. It.
Sure So cosmos.
Hey, How're you doing.
Net profit interest so the way. The calculation is you are able to deduct your operating costs as well as capital and whatever profit on this specific specific MPI to 50 per cent.
Sure then Franco does have so there's different elements because the MPI doesn't apply to the whole property.
From our standpoint, it's difficult to get some visibility on what the number is we make our best estimate each quarter. It just so happens with the sharp right in the gold price.
In second quarter, the NPI was much higher than what we had envisioned and it was also a component of the spent on development at the time and.
So could you have catch up payments yet so like for example, we've made an accrual will make an accrual for fourth quarter as well.
It could be that depending upon where commodity prices are we've underestimated we could also possibly overestimate.
It's not an exact science.
But just so happened that the at the NPI for the second quarter was much more significant than what we thought it was going to be enhanced to catch up even in Q3 mhm.
So so this could happen I'd say goldstrike as well you know depending on your career all that you've made a goldstrike there could be one quarter, where you know there could be a catch up.
There could be the thing with goldstrike as they do provide us a fair bit of information Hamel always a little different it just depends on what sort of agreement you do have so.
So the likelihood of a catch up like that it got goldstrike as much last versus versus a hemlo and versus for example, a muscle light.
There, we don't have as much visibility, our our agreement with goldstrike and information sharing it's much better with Derek at Goldstrike.
Uh-huh for sure Uhm, maybe switching gears, a little bit it'll get to see that you've made some acquisitions at a quarter with you know good you know potential here at Wal Birch I don't know walbridge as well. So yeah could you maybe walk me through you know the asset I don't know how 'bout you can tell me about life fell in love.
And you know the timing here why are they saying in terms of potential production and how do the other two kind of fit into the whole scheme of things Martin the and also north way no.
It goes well.
So that one is where they are very much focused on walbridge point you to their recent presentations that got some excellent presentations outlining the project, but maybe I could just quickly highlight there are a few of those there.
Call in the presentation and they're looking at both open pit potential and hydrate underground.
There is already a ramp.
Into the deposits and they have taken the bulk sample. So it's one from a geological perspective, we find very interesting and we see there being very good upside, but it is still early.
So exactly what it's going to shake expiated timeline it but.
But it's an an excellent jurisdiction in terms of building in mind.
And I understand that they've already put in a bunch of the steps in place so they could permitted relatively rapidly.
But the plan right now as for resource I think in the second half next year.
Don't quote me on that that's my recollection.
Okay.
And then the other two Martin Yeah, and North a loyal how do they kind of fit in what are they separate.
They're separate they are geographically distant.
Different royalty rate.
Near the company does seem to be spending some time on murphy or less so on what's called into.
But they both have historical resources and are in a great jurisdiction. So we're always happy to pick up that kind of an asset rationality within the portfolio.
Uh-huh for sure and maybe just one last question here you know I'm just trying to confirm my mathematics here. You know you talk about your guidance 475 to five O five for the year and you know it looks like your training to the top and for sure but of course, there's at the X factor call candle area, but you know Kendall.
Area did about 20000 G O as in Q3, So you know worst case scenario even if.
You know say it doesn't come back or there's minimal contribution in queue for you know based on simple math you could still potentially hit your guidance. So you know Kendall area. Just really you know a factor of Ah you're gonna hit the bottom man or the higher end does that is that a good understanding here.
Yeah, So I guess the way we look at it as if candidly area rug.
<unk> production in the near term.
We think will be at the higher end of the guidance.
And if not more towards the middle.
The other X factor in this is are the Mpi's and if gold price continues to rise.
They could perform better than they have previously and so that that would add additional upside to to our performance and as I said potentially exceed guidance.
Mmm great. Thanks, a lot those all the questions I have thank you for banks crossbows.
Thank you very much. Your next question comes from my <unk> with Bank of America. Please go ahead.
Oh, Oh, thanks, Sir.
Morning, everyone. Just had a question Paul Sunday in on hold on highway Yep.
Let's see what what's the quarterly revenue contribution Franco's forgoing at the moment I know you'll get it eventually reserves on the ground forever.
Oh, I forgot mine and secondly has kirkland like giving it in any indication what why you're what steps would be required to well what else to happen for them.
Mine is three open what what are they.
What must be something thanks.
Mike It's fall.
I don't have an exact number in terms of the revenue there. It is one of us more assets at the small producer.
And.
You know don't don't have much guidance in terms of of the the moving pieces, they're all of the timing on Golden Highway.
The.
Company has reported they are considering their alternatives with the asset uhm.
So whether his call for them ongoing or not I am uncertain.
I'm sure in due course, it will be up an operation uhm, but don't have a lot of guidance on the timeline, what it'll take to get there.
Okay. Thank you.
Thank you very much. Your next question comes from Brian Macarthur with Raymond genes. Please go ahead.
Hi, Good morning, Sorry, My question goes back to what Cosmos with asking on the handle O N. P. I. So just so I understand that the.
13 million is the true up from the period before is that is that is thanks for what you're doing is you're you're accruing and then you actually get the cast payment the door and the 13 million is that that that cast is coming in this quarter when I'm trying to figure out.
Is your a crewing, but when the cast is actually coming in from that's M. P. I, because obviously, there's ongoing spending uhm that affects let the operator decides to do when when they actually pay that out and how you actually.
Get the cash in on all of this.
Hi, Brian Sandeep here Uhm, yes, you're right. So what happens is each quarter, we will accrue what we believe is the MPI amount and then.
Dr Baiter, Barry will make payments to us in the middle of the following quarter. So for example, the accrual that we would have done for third quarter. We will receive in November and in fact, that's all paid in cash and at that time, then we will do a true up and so it just so happened that we made an accrual in second quarter and then we were paid subsequent to the second quarter.
And the amount was significantly higher than what we had a crude again, we've made an accrual for third quarter and there is the possibility that the the accrual could be too high or too low we will find out in the next few weeks when we received a statement and the cash associated with the MPA.
But you're never giving cashback you just no no. We do know it just carry so Florida and for ammo MPI has been with US since 2000, when we've got public. It just so happens that it was in a deficit position and then it was achieved profitability a few years ago.
Right cause you're you're making estimate the capital and all the rest of it which is flexible. So you just the crew and if you get it wrong. It just you get left the next quarter or whatever national cash threw up there no. There are no cash we have to return correct perfect.
Perfect. Thank you very much that's what I thought okay.
Thank you very much ladies and gentlemen at the reminders did you have a question. Please press the star followed by one.
Your next question comes from correct Barnes with T. T Security, Yes. Please go ahead.
Thank you Sandy just sort of way too.
Provide some idea of what the N P. I run rate would be it in 1900 dollar gold price going forward.
Maybe not just the handle but for the group with N. P. I is that you have.
It is something that we will look to do and at.
Potentially as part of our guidance that we issue in the first quarter's with our each year end results something that we could could provide.
Would you do that by ask that'll just as a lump sum number across all of the M. P. I.
Likely a lump sum number.
Okay.
Any quantum around that number would be for Q4.
Q for I'd have to take a look.
But.
Let me, let me take a look I don't want a given number off the top of my head.
Okay fair enough. Thank you.
Mhm.
Ladies and gentlemen, as a reminder, so you have a question. Please press star followed by one.
So can dita Hayden there are no further questions at this time. Please proceed.
Thank you Veronica we expect to release our year end 2020 results aftermarket closed on March 10th with a conference call held the following morning. Thank you for your interest in Franklin, Nevada Goodbye.
Ladies and gentlemen, this concludes to conference call for today, we thank you for participating and ask that you. Please disconnect Caroline Thank you.