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 not like to turn the conference over to Candido 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 Hi, it's been about a dot com, where you will also find our full financial results.

Sandip Rana CFO of Franco Nevada will provide a brief overview of our results.

And great repeat business development, but it was just about <unk> update and tallgrass President and CEO of Franco Nevada will comment on our growth outlook.

This will be followed by a <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 you refer you to our detailed cautionary note on slide two this presentation I will now turn over the call just Sandeep Rana CFO of Franco Nevada.

Thanks, Ken.

Good morning, everyone.

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 other than 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 our royalty and stream assets have done a great job.

During the cold with 19 pandemic.

Lamenting the necessary safety protocols and procedures, while still delivering excellent operating performance.

With the increase in precious metal prices, and then 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 for the three months and nine months ended September Thirtyth 2020, and 2019 over.

Overall, despite the impact of the pandemic Geo sold were fairly stable.

Carried show with 134800 in 17 in third quarter 2020, compared to 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 for key contributor <unk> contributors recovery, Panama candle area and the 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 crawled Cobre, Panama will deliver for the 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 I 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 it increased 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 it 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.

Just the 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.

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 eight 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 million to 280 million. This quarter that is more than a tenfold increase this while our DNA has remained fairly stable over this period.

Cost of average five to 8 million per quarter for the last 12 years.

For Q3, 2020, GA GA was less than 2.5% of revenue at $6.3 million.

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 CRB 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 CR rate has now added 2016 to the list of years being audited.

And now I will pass it over to Ian who will provide an update on the recent royalty acquisitions.

Thank you Sarah and good morning to those on the line.

I'm pleased to be able to provide an update on some of our recent royalty purchases for it.

First off we're very happy to add a 2% NSR on the REO Baker claims at Dolores store today.

This doubles the area that we cover on the project and extends the royalty along strike.

We acquired this royalty for up to $5 million upfront and up to $8 million in contingent payments.

We see good upside of this project and it's really one of the few high quality gold projects currently under construction.

Moving to the next slide we're also pleased to announce the acquisition of a portfolio of 24 royalties from Freeport Mcmoran for $30.6 million.

This portfolio provides good gold exposure, including royalty on Walbridge as flagship event along project in Quebec.

We also acquired a cash flow and royalty on the Neal Hot Springs, geothermal operation in Oregon, and a royalty on Penn Yos has no PS mine in Mexico.

The portfolio altogether covers over 60000, Hectors largely in North America, providing good broad based geological opportunity in regions that we like.

Now moving on terms of pipeline for new deals we see the pipeline is quite healthy at the moment.

There's also quite diverse both in terms of deal size and commodity.

We're seeing a tendency however towards or be slightly more precious metal byproduct do deals in the pipeline but.

But we see very good opportunity and other commodities as well.

Over the next several months.

With that I'll hand, it over to Paul to discuss some of the exciting organic growth within the portfolio.

Thank you Kevin.

First area cover is the upside of the Npis in our portfolio.

While the steady performance of our NSR on streams is our bread and butter and a bull market our npis shine as did the hemlo Npis this quarter.

There are a number of other npis in the portfolio.

Goldstrike is the most substantial.

We haven't seen as much as we'd like from Goldstrike Npis. 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% MPCI on musselwhite that hasn't contributed simplify in early 2019, the mines now back in operation for the production rate of about 250000 ounces a year now.

We estimate the MPCI will start paying again in late 2021.

Two other Npis may come to life, we have a 20% npis on certain claims at Mccann assets and the recent exploration success is expanding the ore body towards those claims.

And our five cent MPCI and the Pandora PJM operations in South Africa May turn profitable if these high PGM prices continue.

The next items our growth outlook slide 11 shows the expected near term drivers.

Expansions at Stillwater to address and Mcafee.

The construction of Solaredge, snorting and clerical Waco oil expected to come from it the growth from co break Panama over the next five years.

With increased capital available to the sector the likelihood of development assets move into production has picked up assets like Valentine Lake.

Rock and stuff, Mike gold are advancing towards construction decisions and currently not included in our five year guidance.

It's exciting to see the level organic growth across the portfolio slide.

Slide 12 highlights recent portfolio updates I won't cover them all as I'm sure you're following many of the North American assets like hard rock strip night, an island gold.

Less familiar with the Australian assets last quarter I mentioned, the expansion from open pit to underground at Duke and in Australia.

Another interesting Australian development is we'll Luna.

Also known as Matilda, where we have a 3.6% NSR.

Well then as currently producing 60000 ounces per annum from oxide will.

But with a total sulfide resource of close to 6 million ounces that currently constructing and saw five concentrated 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 sector has picked up last quarter I highlighted exploration successes, a detour Malartic Valentine Lake at Hemlo.

And expect these to contribute to to contribute to our reserve and resource increases at year end.

To reserve and resource updates were received through the quarter.

As the first a candle area lundeen in annual midyear update once again increased M&A resources in particular, reflecting success candle area Nortech underground.

The new M&A resource is an 18% year over year increase lundeen have now more than doubled the mine life from the 14 year expected life at the time they acquired the mine in 2014.

The second update was from equinox at the Mesquite mine in California, M&A 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 economics of the first goal pool at Costco Mountain Dew.

The portfolio.

Earlier, solarthreed meaningful exploration successes this quarter.

Oakland Lake has been having ongoing success this year expanding the ore body at HMA cancer.

And Tova Cup and the intercept of 254 grams per tonne over 14 and half meat is extending the south mine complex further to the south near the contact with the amalgamated break.

We have a variable rate royalty on primary goals and Nevada Gold mine South Arturo mine that we estimate will be 6% on the sulphide material.

On the prior reserves, we expect itself a tour to contribute for the next four years although.

Although they have now discovered material extensions to the El Nino underground that will likely extend mine life when they up date reserves and resources at year end.

Skeena resources continues to have its success at SK Creek, where they developing a high grade open pit.

That 2019, P.A. indicated production to 2.6 million ounces of gold equivalent and.

At an average gold equivalent grade of greater than four grams per tonne.

More recently that having success a debt initially with the Watertown zone and this quarter discovering a new zone SK deeps that lies 260 meters below the prior known mineralization.

The drilling success bodes well for our longer term organic growth or is the most profitable type of growth.

The final topic to cover is our available capital as shown on slide 13, our cash balance is building rapidly we have working capital of $559 million and no debt.

Including our available credit facilities of 1.1 billion, we have a total of $1.8 billion of available capital to deploy and new growth opportunities.

Given where the balance sheet now stands strong cash flow generation and the stock trading below its highs earlier. This year. We are 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.

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Your first question comes from the.

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 quite a bit of land.

Land the large land package is quite large can you talk a little bit about how additional discoveries would work in terms of.

Franco's exposure and secondly, based on your internal numbers, what would the IR for this.

Oil thanks.

Good morning, Zee and great here so.

So this is a portfolio 24 royalties.

And the land packages broken out over a number of those very large chunk. However.

Is covered by the walbridge royalties so fast.

Panel on their flagship project, but also also Martin here and at North way going on.

So that that comprises a very large component.

And the royalty there is 1% to 2%, 1% on Fenelon believe it's 2% margin year and 1% on north wave going on there is variable rates of royalties across the others that have been acquired.

And so its specified in each I think we'll provide more granular disclosure with the asset Handbook.

These are rare.

Relatively early stage royalties and a number of cases to cash flowing our am.

Hot Springs, which is a renewable energy royalty and Milpitas, which is a copper mine in Mexico. So.

The IR for this is something we probably wont disclose directly because a lot of it is really in the auction value of these assets and as a SaaS based on what we think the geological Prospectivity is assessing it based on cash flow is.

As a tough thing to do at this stage.

Okay, not a problem.

And just one other question on the at the money equity program I believe you raised $20 million in the quarter I'm guessing perhaps to fund. This deal 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. Thanks.

So so when we did implement that that program in 2019, we did have debt on the balance sheet and we completed a deal with that range resources on the Marcellus.

So at the time the program was implemented to.

Pay off the debt that we had and which was done earlier this year.

Thereafter to the objective was to build a cash balance on our balance sheet, which is as Paul mentioned is a decent size right now.

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.

Scheme with BMO. Please go ahead.

Thanks, very much I just wanted to.

Start with just a modeling question. If you can help me out I.

I guess, specifically with cobre, Panama, because it's a fairly new mines still.

The.

Revenues reported in the quarter were quite a bit higher than what I was looking for anyway can.

Can you give us a bit of a sense 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 to sort of pull back down below the line production run rate for the for the next quarter. Thanks.

Sure I, so so for Cobre, Panama It was roughly 16000 geos.

For the third quarter fourth quarter, 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.

Gross for that we've achieved in third quarter.

So I.

I guess that would lead me to my next question, which is you mentioned in the Mdna that you expect to be at the high end your previous guidance for the full year of is there.

Chance or.

I guess is there possibility that that you could actually exceed the high end of the guidance by by a meaningful amount if it's.

Production recovery plan was consistent with with what we saw this quarter and I know assuming that.

Ken Delirious back up and running near term, obviously as well.

Yes, no that that would be great. If we were able to exceed our guidance on obviously, we're right now we're looking at the best available information, there's always assets that surprised us in a quarter for example, the hemlo npis.

So again, if the hemlo npis or some of the other assets deliver more than what's expected. There is the possibility that we do exceed our guidance.

That would be a good problem to have I guess.

And maybe I'll just ask one final question.

Your your revenue from from gold and precious metals, you disclose is 92%. This this quarter and energy only 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 that open.

Opening up the possibility or is that making I think a little bit harder about adding energy royalties to your portfolio in the near term.

The.

More so than than what the balance is Jackie we.

We'll have to see whether the sector is.

Theres a lot of capital that's been 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 Paul and Sandeep.

Thank you very much. Your next question comes from the neat thing with interest Industrial Alliance. Please go ahead.

Great. Thanks.

I guess in terms of the opportunities you're seeing out there on the precious metals side would you see would you say that your focus more on the lower priced acquisitions that have a significant future.

As you go potential or are there still these larger opportunities out there being shopped by operators that you've been talking about in the previous quarters.

Thanks.

Good morning, and see it again.

I'd say both.

There are interesting opportunities to look at on the larger end of the spectrum.

And we continue to evaluate those but when we see opportunities that are smaller but have the potential to get much bigger, especially in precious metals, we are aggressive in pursuing those as well.

Okay, and then just on the smaller ones do you think like some light on some of these newer assets.

Easier to acquire a royalty.

Already existing on the asset versus creating a new one with that 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 there is really good opportunities there from time to time.

But at the moment Theres probably more deal.

Deal flow in the existing royalty space, especially around precious metals.

Okay, great. Thank you.

Thank you very much. Your next question comes from Cosmos Chiu with CNBC. Please go ahead.

Hi, Thanks, Paul Sandy Bunyan and congrats on a very good Q3 here maybe.

Maybe my first question is on the Npis.

As you mentioned I have low of $24 million of revenue $13 million came from.

Previous quarters.

Could you remind me how these npis contracts work and you know we expect other sort of catch up in future quarters or is this pretty much it.

Sure. So cosmos, I, obviously, and hey, how you doing and net profit interest. So the way the calculation as you are able to deduct your operating costs as well as capital and whatever profit on this specific or specific anti to 50%.

Sheridan Franco does have so there's different elements because the MPCI doesn't apply to the whole property.

From our standpoint, it's difficult to get visibility on what the number is we make our best estimate each quarter. It just so happens with the sharp rise in the gold price.

In second quarter, DNP I was much higher than what we had envisioned and it was also a component of the spend on development at the time and.

So could you have you know catch up payments yet. So for example, we've made an accrual will make an accrual for fourth quarter as well and it could be that depending upon where commodity prices are we've underestimated. We can also possibly overestimate, it's not an exact science.

But just so happened that the npis for the second quarter was much more significant than what we thought it was going to be enhanced the catch up in Q3.

And so this could happen I'd say goldstrike as well depending on your accrual that you've made a gold strike there could be one quarter, where you know there could be a catch up.

There could be the thing with goldstrike is they do provide us a fair bit of information Hamel at least a little differently. It just depends on what sort of agreement you do half and so the likelihood of a catch up like that at goldstrike is as much last versus versus a hemlo and versus first for example at musselwhite.

They are we don't have as much visibility our agreement with goldstrike and information sharing is much better with Barrick gold strike <unk>.

<unk> for sure maybe.

Maybe switching gears a little bit.

Good to see that you've made some acquisitions on a quarter.

Good.

Potential here at Walbridge, I don't know walbridge as well so you and could you maybe walk me through the asset I don't know how much you can tell me about lifestyle alone.

And it all.

The timing here what are they saying in terms of potential production and how do the other two kind of fit into the whole scheme of things Martin Nia and also northway noise.

Hi, guys were seeing how are you.

So that one is where they are very much focused at walbridge I'd point you to their recent presentations they've got some excellent presentations outlining the project.

But maybe I could just quickly highlight there are few zones there as we called out in the presentation and they're looking at FFO open pit potential and high grade underground there.

There is already a ramp.

Into the deposit and they have taken a bulk sample. So its 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 out to be in the timeline is tough, but it's an excellent jurisdiction.

Terms of building a mine and I understand that they've already put a bunch of the steps in places like a per minute relatively rapidly.

But the plan right now is 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 the and North Bay in oil, how do they kind of fit in well they separate.

They are separate they're geographically distant as different royalty rate add more near.

The company does seem to be spending some time on one year less so on let's call it into.

But they both have historical resources and the Arctic rate jurisdictions are always happy to pick up that kind of an asset for optionality within the portfolio.

For sure.

Maybe just one last question here Im just trying to confirm my mathematics here.

Talk about your guidance 475 to five or five for the year and you know it looks like you're trending to the top end for sure but.

But of course, there is that ex factory call candle area, but you know candle area did about 20000 Geos in Q3, so worst case scenario even if.

Ill say it doesn't come back or are there was minimal contribution in Q4 based on the simple math you could still potentially hit your guidance. So.

So you know kinda, Larry just really you know a factor or are you going to hit the bottom end or the higher end does that is that a good understanding here.

Yes, so I guess the way we look at it is if it candidly area and resumed production in the near term and we think we'll be at the higher end of the guidance and if not more towards the middle office.

I'll ask the other X factor in this is are the Npis 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.

Great. Thanks, a lot those all the questions I have thank you. Thanks Ross.

Thank you very much. Your next question comes from Mike Chinn loan with Bank of America. Please go ahead.

Oh, thanks, so much.

Hi, Good morning, everyone just had a question on Sunday.

Hold on highway.

Hey, what's the what's the quarterly revenue contribution of Franco's foregoing at the moment I know you've got it eventually reserves on the ground forever I look.

If I got mine and secondly has percolate given you an indication what why you're what steps would be required to Ah well what has to happen for them.

The lines to reopen what are they.

Well I say something thanks.

[noise], Mike its Paul the I don't have an exact number in terms of the revenue there. It is one of our smaller assets its a small producer.

And.

You know don't don't have much guidance in terms of the moving pieces, there or the timing on Golden Highway.

The.

The company has reported they are considering their alternatives with the asset.

So whether his call for them ongoing or not.

I'm uncertain.

I'm I'm sure in due course, it will be up in operation, but don't have lot of guidance on the timeline or what it will take to get there.

Okay. Thank you.

Thank you very much. Your next question comes from Brian Macarthur with Raymond James. Please go ahead.

Hi, Good morning, Sorry, My question goes back to what Kosmos was asking on the hemlo Npis. So just so I understand that the split.

10 million is the true up from the period before it is that is that essentially what you're doing is you're you're accruing and then you actually get the cash payment in the door and the $13 million.

Got back cash is coming in this quarter, what I'm trying to figure out.

Is your accruing, but when the cash is actually coming in from the us MPCI because obviously, there's ongoing spending.

It affects let the operator decides do when when they actually pay that out and how you actually.

Get the cash in on all this.

Sure Hi, Brian Sandeep here, yes, you're right. So what happens is each quarter, we will accrue what we believe is the npis amount and then.

The operator, Barry will make payments to us in the middle of the following quarter. So for example, the accrual that we would've done for third quarter, we will receive in November and attack dissipating cash and at that time that 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 second quarter.

And the amount was significantly higher than what we had accrued again, we've made an accrual for third quarter and there is the possibility that the Dick the accrual could be too high or too low we will find out in the next few weeks when we received the statement and the cash associated with the Npis.

But you're never giving cash back aegis no no. We do know it just carry so Florida and her hamelin pie has been with US since 2000, when we went public it just so happens that it was in a deficit position and then it was achieved profitability a few years ago.

Right, because you're you're making estimates that capital and all the rest, but which is flexible suite as the crew and if you get it wrong. It's just we get less the next quarter or whatever that's no cash true up there is no. There is 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, that's a reminder, should you have a question. Please press the star followed by one.

Your next question comes from Greg Barnes with TD Securities. Please go ahead.

Thank you Sandy pissing away too.

Provide some idea of what the anti run rate would be at a 1900 dollar gold price going forward.

Maybe not just standalone, but for the group of Npis that you have.

Hi, It is something that we will look to do and that you know potentially as part of our guidance that we issued in the first quarter as well.

Year end results.

Something that we could could provide.

Would you do that by asset will just as a lump sum number across all of the Npis.

And likely a lump sum number okay.

Okay.

Any quantum around that number would be for Q4.

Q4, I'd have to take a look.

Right.

Yeah, Let me, let me take a look I don't want to give a number off the top of my head.

Fair enough. Thank you.

Ladies and gentlemen, as a reminder, she has a question. Please press star followed by one.

Second data Hayden there are no further questions at this time. Please proceed.

Thank you for running that we expect to release our year end Twentytwenty result, after market close on March 10th with a conference call held the following morning. Thank you for your interest in Franco Nevada tobacco.

Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect. Your line. Thank you.