Q1 2021 Franco-Nevada Corp Earnings Call
Alright.
[music].
Good morning, ladies and gentlemen, and welcome to the Franco Nevada Corp, Q1, 2021 results conference call. At this time all lines are in listen only mode. Following the presentation. We will conduct a question and answer session. If at any time. During this call you require immediate assistance. Please press star zero for the operator.
This call is being recorded on May six 2021 I would now like to turn the conference over to your host Jason <unk>. Please go ahead.
Thank you Chris good morning, everyone.
Thank you for joining us today to discuss Franco Nevada's first quarter of 2021 results. The accompanying this call is the presentation, which is available on our website at Franco Nevada Dot Com, where you will also find our full financial results.
Paul Brink, President and CEO of Franco, Nevada, who will provide some introductory remarks, followed by Sandy Brenna CFO of Franco Nevada, who will provide a brief review of our results. This will be followed by Q&A period.
Our full executive team are available to answer any questions. We.
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 two of this presentation.
I will now turn the call over to Paul Brink, President and CEO of Franco Nevada.
Thanks, Jason Good morning.
Our diversified portfolio outperformed in the first quarter generating record revenues and near record margins and 85% adjusted EBITDA margin of 52% adjusted net income margin.
Gold equivalent ounces for the quarter were ahead of our expectations strong deliveries from and Amina ongoing ramp up of Cobre, Panama and leverage to gold prices at hemlo made for the largest increases over Q1 2020.
As we progress through the year, we expect higher contributions from each of Cobre, Panama on candle area due to increased throughput and higher grades respectively.
Yeah.
Energy revenues for the quarter were well ahead of our guided annual run rate of strong initial contribution from Haynesville.
Some high interest wells in the Permian and high energy prices were the drivers.
We're committed to ensuring the Franco Nevada is the goal of investments it works for all of that stakeholders, including our shareholders, our operating partners and our communities.
Along with our asset Handbook recently published our annual ESG report.
Highlights of the ESG report our sector leading rankings.
Promoting responsible mining through our capital allocation ongoing contribution to communities and our increased commitment to diversity and our board on top of the chip.
Okay.
During the quarter, we added two attractive precious metal assets, a royalty on rocks gold <unk> Gold development project in Cote d'ivoire, and the precious metal stream on the continent Stoplight Cup of mine in Peru.
Both assets with axiom of upside potential.
We were delighted the post quarter end to acquire tranche of of Vale iron ore royalty debentures. The royalty the Vale interest along with our Labrador iron ore royalty company investment.
Add to our base of low risk long life cash flow.
Further enhance the diversity of our portfolio.
With the additions of the portfolio remains more than 80% precious metal focused.
A recently published asset Handbook highlights of the year on year of growth in our reserves and long life and long reserve lives.
The iron ore assets will further extend both measures.
Turning now to our outlook two.
2021 is expected to be of strong growth year for Franco, Nevada, with new acquisitions mine expansions of new mines all contributing.
We continue to see numerous exploration successes in the portfolio.
Most recently success of <unk>.
For the world satellites to the Rosemont deposit.
Ongoing expansion of skiing as SK Creek deposit.
Extensions of East Goldie.
The Canadian melodic.
In high grade step out holes at Woodbridge has spent a lot of this deposit.
This week cut on Lake provided the latest drilling update on that 270000 meter drill program at Detour Lake.
The expansion of the resource of the detour should be of catalysts for our stock this year.
Strong gold prices of near record copper prices of boosting the development outlook for our pipeline of gold and copper interests, the hardrock Valentine Lake and Stibnite gold projects.
On the El Pilar on tax tack of copper copper projects amongst others.
Following the filing of royalty debenture acquisition, we revised our guidance and outlook and now expect 25% growth in revenue over the next five years.
We announced with our year end results in increased quarterly dividend to <unk> 30 per share. This was our 14th success of annual dividend increase the board has now declared the first of those dividends payable June 24.
The 15% increase is larger than typical and reflects the growth on our business due to cobre Panama.
Of note on board succession, and renewal at yesterday's annual meeting of the honorable David Peterson step down as chair of the compensation on ESG Committee.
And after more than 13 years as the director of Franco Nevada.
The board and I would like to thank David for his outstanding leadership and many years of service.
We will no doubt message unique abilities for building unity within the board.
In terms of renewal, you'll recall that Warren Jensen joined the board at this time last year.
Maureen is the strong governance background, having previously led the interior of Securities Commission.
To sum up of our portfolio continues to outperform it is built in growth from tremendous long term optionality.
We're in the net cash position of $1 2 billion in available capital and are now generating EBITDA at a rate of a $1 billion per unit.
We're focused on precious metal acquisitions, and see good prospects for adding to the portfolio.
I'll now hand, it over to our CFO incentive right now.
Thanks, Paul Good morning, everyone first quarter 2021 continue to build on the positive momentum that Franco Nevada ended 2020 later.
Our royalty and stream portfolio continues to perform well and ahead of expectations.
Although the gold price in first quarter of 2021 was a little weaker than the fourth quarter Franco Nevada is still delivered a very strong financial quarter with record revenue and record adjusted EBITDA.
On slide three we've highlighted the Golden gold equivalent ounces sold for the three months ended March 31, 2021 and 2021.
Overall Geo sold increased over 10% compared to prior year with Q1, 2021, Geos sold being 149575, we.
We had a number of strong contributors during the quarter and to Mena Hemlo, Cobre, Panama and Congress tablet.
The strong performance for <unk> was the combination of higher silver deliveries along with higher silver prices during the quarter I'd like to highlight that for anthem Mena Franco Nevada is delivered silver ounces based on a one quarter lag for production for example, the silver ounces. We received in Q1 2021 were related to.
Production for <unk> for fourth quarter of 2020, we.
We anticipate silver ounce production from <unk> to be at the high end of the two eight to $3 2 million range previously provided for 2021.
At Hemlo, we continued to benefit from mining on our 50% NPI ground the.
The company recorded 11675, Geos sold for the quarter of which just over 4400 geos related to prior periods. We do expect mining on NPI ground to decrease in the second half of the year.
Cobre, Panama had a strong first quarter for Franco Nevada, with Geo sold of $29 622, as the project continues to ramp up the deliveries were in line with the full year of 105 to 125000 Geos sold guidance.
We have previously provided.
Finally, we delivered our first gold and silver ounces for the recent <unk> stream transaction just over 3000 Geos sold were recorded as revenue for the quarter.
Two assets, which did deliver last geos in the quarter versus prior year were separate and Guadalupe.
Although <unk> has decided to continue mining at Mccreedy left for an additional number of years it will be at a lower production rate, which was reflected in the geos sold in the first quarter of 2021.
As for the Guadalupe the company received and sold fewer geos in the quarter because of lower grades than a year ago.
Slide four highlights of our total revenue and adjusted EBITDA for Q1 2021 in Q1 2020.
As you can see from the bar charts revenue on adjusted EBITDA has increased significantly year over here the.
The average gold price for the quarter was $17 94 per ounce compared to $50 83 per ounce of year ago at 13% increase.
The $308 $9 million in revenue in the quarter is a record for the company as is the adjusted EBITDA of $262 7 million.
As Paul mentioned margin of 85% was achieved.
The gold and silver revenue increased from $189 1 million in the quarter last year to $237 7 million in Q1 2021 at 26% increase.
First quarter also saw a strong contribution from the energy assets as revenue increased from $26 5 million a year ago to $45 $1 million. This quarter. The increase was due to a rebound in oil and gas prices as well as an increase in production. The company also reported seven $2 million on revenue from the unit.
The recently announced Haynesville natural gas transaction.
As you turn to slide five you will see the key financial results for the company.
As mentioned the increase in revenue on adjusted EBITDA. The due predominantly to the increase in Geo sold and an increase in commodity prices, both precious metals and energy.
On the cost side cost of sales was lower at $40 6 million versus $43 6 million a year ago. The decrease was due to less ounces delivered and sold from Sudbury and Guadalupe we pay a higher cost per ounce for these two streams.
Depreciation was higher at $71 2 million for the quarter compared to $64 4 million in Q1 2020. The increase is due to the source of our mining and energy revenue was derived the company recorded higher depletion from and to the Chi on desktop and Cobra, Panama during the quarter.
Adjusted net income and adjusted net income per share increased significantly in first quarter. Adjusted net income was $160 9 million from <unk> 85 per share increases of 47, 3% and 44, 8% respectively over prior year.
Franco Nevada has always been a royalty company, but it has evolved to include streaming as part of the business model.
<unk> six breakdown the mix between streams and royalty revenue for first quarter 2021 the.
The streams that we've added have been very successful for the company, adding significant top line growth de.
We have become the largest component of our revenue generating $176 9 million or 50% of revenue during the quarter.
However, it is royalties of weather mining of energy, which generate higher margin and net cash flow from operations.
As you can see the cost related to royalties of our minimal with a combined cost of $3 5 million related to the $132 million in revenue generated by the royalties we.
We believe our business model of both stream and royalty assets will allow us to continue to achieve peer leading EBITDA margins.
With respect to margin the slide on the chart on slide seven illustrates how the margin for the company increases as the gold price increases.
Our mining cost structure, which we reflect in our cash cost per ounce includes our cash is includes our cost of sales.
<unk> cost associated with the energy business, which are minimal.
Cash cost per ounce, usually ranges between 250 to $300 per Geo sold.
The average gold price increased approximately 13% year over year, but the cash cost per ounce actually decreased 18%. This decrease was a result of geos with lower fixed cost being sold and more royalty ounces recognized as revenue in Q1 2021.
In a rising gold price environment, we expect to benefit fully is the cost per ounce should not increase significantly and as can be seen in the first quarter could decrease depending on the mix of royalties versus streams.
One of the strength of having a diverse portfolio.
The other cash component of it for the company besides of the cost of sales as our corporate administration cost.
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.
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 of our revenues have grown from approximately $25 million.
To $310 million this quarter that is more than a 12 fold increase.
This while our G&A has remained fairly stable over this time period Q1, 2021, corporate administration was $6 2 million for 2% of revenue.
Management believes we can continue to add to our portfolio and grow our business without adding significant overhead to the company.
Slide nine highlights the diversification of the portfolio, which we consider one of the strengths and Differentiators of Franco Nevada.
As shown 85% of our Q1 2021 revenue was generated by gold and gold equivalent.
The geographic revenue profile has revenue being sourced 90% from the Americas with South America being the largest at 29%.
With respect to asset diversification Cobra, Panama was our largest revenue generator at 17% of total revenue for the quarter, followed by <unk> at 11% those of the only two assets that generated more than 10% of our revenue.
The last chart highlights our operator diversity, our largest exposure to revenue being generated by any one operator is 17%, which is first quantum two operates cobre Panama.
Okay.
As was disclosed on April 16, 2021, the company purchased $57 million Valley of royalty debentures subsequent to quarter end for $538 million.
The debentures allows holders to receive of premium payment based on net sales from a number of highlights Brazilian mines.
With this acquisition the Franco Nevada expects to recognize 25 to 35000 Geos sold for full year 2021.
With the additional geos to be received in 2021, we have increased our guidance to 580 to 615000 for the year from the previous $555 to 585000.
The midpoint of this revised guidance range of 15% increase over 2020 actuals.
Energy revenue guidance remains the same as disclosed at year end of $115 million to $135 million.
For the valley of royalty revenue the second quarter ending June 32021, we will be accruing revenue for the royalties for the period January one to June 30th So essentially we will be occurring six months worth of revenue in second quarter.
Thereafter, we will approved quarterly the.
The actual cash payment will not be received until the end of September and then every six months thereafter.
With the recognition of six months of revenue in Q2, there is the possibility of that precious metals revenue could be below 80% for the quarter, depending upon how our of precious metal assets perform if the.
That does occur we do expect to again be above 80% precious metals revenue in third quarter 2021.
Also on the valet royalty there is of seasonality for production and net sales with production of being lower in the first half of the year versus the second half. The split is typically 45 55.
As of today as seen on slide 11 with respect to available capital on hand, the company has liquidity of $1 2 billion.
We did fund the valley royalty acquisition of 538 million with the combination of cash on hand and of $150 million draw on our credit facility, but we continue to be in a net cash position.
I will now turn it back to Chris we were happy to take questions.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have the question. Please press star followed by one on your Touchtone phone you will hear three telecom technology on your request on your questions will be pulled in the order of their received.
You are using a speaker phone please lift the handset before pressing any keys.
Your first question comes from Tyler Langton Jpmorgan Tyler. Please go ahead.
Yeah. Good morning, Thanks for taking my question.
Just starting with the energy revenues of the at the $45 million in the quarter. I know you mentioned kind of benefited from production and prices could you give us I guess of sense maybe.
The current prices hold where they are just kind of what your sort of the revenues could look like this year, just given the obviously you're kind of well on track to hit the guidance.
Yes, Hi, Tyler, it's Jason O'connell here I appreciate the question.
For Q1, we did have a higher than the normal revenue number for energy part of that number came from revenue from prior periods.
If you adjust for the prior period revenue.
On the number for the quarter would've been closer to about $40 million or so.
So we had about $5 million coming from really was wells that were producing lost share, but we only receive payment for this year.
With the higher prices, we do expect.
To have better revenue and the prices were a bit above.
The $55 per barrel of <unk> and $2 50 per Mcf.
Prices that we used in our guidance. So we benefited from that if prices stay elevated for the rest of the year I would expect that we would come in a bit higher than our guidance that we provided.
During our analyst day, we provided a bit of information around the sensitivity to commodity prices. So there is a bit of leverage associated with our energy portfolio.
If prices on average are 10% higher than.
And then the guidance that we gave the revenue should increase by about 13%.
So again if prices remain higher we expect revenues will be higher and there will be a bit of leverage within that revenue number.
And then you mentioned that.
I guess with this production is there anything when I think of the longer term guidance, where this is sort of the.
The more temporary benefit.
For this year or is it should we not expect that.
I would say within the when you look at the quarter again there is.
The benefit of that prior period revenue that I would like.
To continue going forward. In addition to that we did have a good quarter.
Production of our volume wise.
But we continue to think that.
In our guidance is still relevant that we provided at the beginning of the year. So some of those assets that had a good quarter.
The wells on some of those assets will continue to decline throughout the year.
So I would just caution not to take the the revenue from the quarter on an annualize that.
Okay Perfect and then just the final question on Hemlo I know.
This is around close to 12000 of Geos in the quarter and there was around the 4000.
Ounce benefit I think you talked about last quarter of 'twenty.
30000 ounce contribution.
And I know you mentioned the I guess the the.
On the NPI should decrease in the second half, but just given sort of the Q1 results.
I guess could you can exceed that guidance or at least at the high end of it for the year.
I think it's still too early to.
Narrow ahead of first stage of that 12000, obviously as you said there is 4000 related to prior period.
Right now I would say, we're probably in kind of end up in the middle of that range, but because it is an NPI and cost to impact the payment.
And as expected there should be lower production on the land towards the end of this year or in the second half of this year still comfortable with that range of that not in a position to narrow it at this stage.
Great. Thanks, so much.
Your next question comes from Josh Wolfson RBC capital markets. Josh. Please go ahead.
Thanks, Jim.
Looking at the Valley transaction in guidance, just so I understand clearly so for in the second quarter Youre planning to accrue production that would have started from January is that correct. Yes, that's correct because we didn't own them until April 16th 2021.
But we're entitled to payments for production from January 1st So for June quarter, and we will be accruing six months worth of production of our sales.
Okay, and then the guidance for the I forget what the exact number was 25% to 35000 ounces.
Did that assume production from Jan or from from April.
That's a full year's production January one to December 31.
Okay.
Understood.
And then.
On the on the sort of lift shares. Thank you for that disclosure. We've always had this large short term investment dollar amount that we could never understand what it was which looking back at that deal. It looks like those shares were acquired.
Just starting to Macquarie on at least maybe five plus years ago.
We didn't get this to the.
At the analyst day, but strategically what's what's franco's thinking about this large share position, obviously for the current share prices a lot higher than where it was required but.
Whats the ultimate sort of goal here for the company.
Josh we think of the investment really just as the royalty holding.
Leverage all of Iron ore income fund is run with very little G&A. So it's effectively just the straight pass through of of that interest.
So we're very happy just for the current position we hold.
The stock is traded very well.
Sure.
So not looking to acquire any any more of these prices as you know for our.
Our focus on adding new assets for years on the precious metal side.
But it is attractive assets if it was of a trading at a far lower prices.
Would consider adding more.
Okay, Great. Those are all my questions. Thank you.
Thank you, ladies and gentlemen, as a reminder, should you have a question. Please press star one on your Touchtone phone. Your next question comes from Cosmo Chu CIBC Cosmo. Please go ahead.
Thanks, Paul and Sandeep.
And the team maybe my first question is on Latam Latin America here.
Certainly the COVID-19 situation isn't great.
Latam and a number of your assets or royalty on screens in Latin America. For example, I think there was a bit of an outbreak.
And to Mena.
Could you maybe comment on your understanding of the situation right now and has it impacted you in any way so far in Q1 of I guess well into Q2 now.
And how have you factored that in.
Cause whilst the.
You're absolutely right.
Latin America has been heavily impacted by COVID-19.
All of the assets.
The only outbreak we are aware of this that Anthony net but we haven't heard anything yet in terms of the impacting production.
Either through the first quarter this year will through the rest of the year.
So to date as far as the work there.
Able to manage that without impacting production.
Okay for sure.
Maybe now moving from.
The Mena to West Africa.
You made a number of acquisitions.
In the past quarter, one that didn't really get a lot of attention was the guilla, but I think it is actually one that could have good upside potential here.
Hello.
Fairly small, but I guess you had all of my question is in two parts. The first part is.
With the recent combination with proposed combination on Fortuna silver and rock gold.
They really talked of potential here of some.
The other pits cooler.
And some of the other ones I just wanted to confirm that.
The royalty is on all of the different all of the entire land package.
Hi, Cosmos the CN.
Hi.
Right. It does cover the the mining license, which covers all of those targets.
And prospects.
Great and then.
Ian are you getting more excited now with the proposed acquisition or merger of Fortuna silver.
<unk> called the potentially now with the Guilla being part of a larger company.
You see more upside potential from here onwards.
We loved the deposit.
Starts and ends in terms of geology for us and the technical team really liked it and so we're very happy to partner with the team at Rock School, there and we're also very happy to see for tuna now come into the picture.
The company lots of potential and we hope to maintain good contacts in relations and would also be keen to do something bigger there ever needed.
Of course.
And then on the flip side here now that it is within the bigger company could you Ian it will.
The confirm with US I believe theres of buy down right.
At the at the loyalty how that works on.
Within the larger company now do you think the by Dow is going to exercise.
More so than previously.
Sure.
So there's a little bit of background. There was another of preexisting royalty that existed on the property prior to our transaction and it had a 100% of buy down.
Our deal.
Would allow the company to buy back half out of predefined price effectively equivalent to the price at which we bought in.
And that was an arrangement that.
Worked for both parties, we were able to do due diligence.
And obviously you see some of the great things there.
Sunbird ahead of time.
The which made it a very compelling acquisition for us so it's a bit of.
On your back and forth in terms of negotiation, but.
We got it at 50% and it's very possible they'll do that but we're still happy with the royalty and being part of the project.
Of course.
Maybe one last question here and coming back to Canada here.
As you mentioned Paul in your opening remarks, there's been a new discovery made by Agnico and Yamana at the East Goldie.
The Canadian Mill Arctic.
I haven't gone through your entire sort of the asset handbook, yet but.
I'm not sure of how much you can comment at this point in time, but.
The new discovery potentially fall within your royalty growth and can you talk about the extent of your royalty on that land.
The land package share in terms of the area.
Thanks Cosmos.
The royalty claims that we have at Canadian <unk> don't cover the full property position.
I think it's five separate claim blocks that we cover.
It's a bit of a checkerboard.
One of the claims Cabos what is our understanding of the center of the East Goldie deposit.
On the expansions that they have now made it to the east of that.
We do have another claim block.
<unk> for the east.
So it's early days, but.
It looks like the part of that extension, maybe on one of our other claims and so we were excited about it.
Okay, great. Thanks again for the other questions I have thanks.
Thanks again Paul.
Thank you. Your next question comes from Brian Macarthur Raymond James Brian. Please go ahead.
Hi, Good morning, I, just have two questions both related to the five year guidance through the comment made earlier in the call today about.
Sudbury potentially being lower than expected and I know originally when you gave that 2025 guidance Sudbury the assumption of what it was going to continue out then is that still the case and my second question is can you just remind me when the.
<unk> royalty is it in the 2000 and they did it in the five year guidance to where does the 325000 ounce of cap kick in before then thank you.
Hi, Brian for the Sandy pure at Sudbury, Yes, it's going to continue mining on Mccready West til.
Till 2026 is the current life of mine plan.
As we highlighted at the end of <unk> as part of our year and it'll be at half the rate it was for 2020.
And so if you look at Q1, it's on pace for that that profile. So it's within our expectations for 2021, so it'll be about 10 to 12000 geos per year for the next five years.
Great. So that hasnt changed at all of that had any day.
Hey, just year over year, it's a lot of less than it was lost share, but thats the reason because of their mining it.
On a reduced rate with.
With respect to mine waste solutions, we expect the cap to be reached in 2024. So it is not included in our 2025 five year outlook.
Thank you very much.
Thank you there are no further questions at this time. Please proceed.
Thank you, Chris we expect to release of our Q2 2021 results after market close on August 10th with the conference call held the following morning. Thank you for your interest in Franco Nevada.
Thank you ladies and gentlemen. This concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.