Q1 2021 Franco-Nevada Corp Earnings Call

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Good morning, ladies and gentlemen, and welcome to the Franco Nevada Corporation, Q1, 2020 One 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 for Charlie. Please go ahead.

Thank you Chris good morning, everyone.

Thank you for joining us today to discuss Franco Nevada as first quarter of 2021 results accompanying this call is a 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 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.

And we'll executive team are available to answer any questions.

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 for Franco Nevada.

Thanks, Jason Good morning.

Our diversified portfolio outperformed and the first quarter generating record revenues and near record margins and 85% adjusted EBITDA margin and 52% adjusted net income margin.

Gold equivalent ounces for the quarter were ahead of our expectations strong deliveries from and I.

Ongoing ramp up at Cobre, Panama and leverage to gold prices at Hemlo made for the largest increases over Q1 and 2020.

As we progress through the year, we expect higher contributions from each of Cobre, Panama and candle area due to increased throughput and higher grades respectively.

Energy revenues for the quarter were well ahead of our guided annual run rate and a strong initial contribution for the Haynesville.

High interest wells and the Permian and high energy prices were the drivers.

We're committed to ensuring that Franco Nevada has the gold investment that works for all our stakeholders, including our shareholders, our operating partners and our communities.

Along with our asset Handbook recently published our annual ESG report.

Thanks for the use free report or a sector leading rankings.

Promoting responsible mining through our capital allocation.

Ongoing contribution to communities and our increased commitment to diversity.

And our board and top of the chip.

During the quarter, we added two attractive precious metal assets, a royalty on rocks goldstrike and gold development project and it was.

And the precious metal stream on the continent satellite mine in Peru.

Both assets with excellent upside potential.

We were delighted post quarter and to acquire tranche of Vale iron ore royalty debentures for royalties and the Vale interest along with our Labrador iron ore royalty company investment.

And to our base of low risk long life cash flow.

And further and Haas the diversity of our portfolio.

With the additions for the portfolio remains more than 80% precious metal focused.

A recently published asset Handbook highlights for the year on year growth and 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 a strong growth year for Franco, Nevada, with new acquisitions, and mine expansions and new mines all contributing.

We continue to see numerous exploration successes and the portfolio.

Most recently success at a couple of world satellites to the Rosemont deposit.

Ongoing expansion of scheme as SK Creek deposit.

Extensions of East Goldie at.

Canadian melodic and.

Hi, great step out holes at Woodbridge has spent a lot of this deposit.

This week cut and Lake provided the latest drilling update on that 270000 meter drill program at Detour Lake and <unk>.

<unk> and expansion of the resource at detour should be a catalyst for our stock this year.

Strong gold prices and near record copper prices and boosting the development outlook for our pipeline of gold and copper interest the hardrock Valentine Lake and Stibnite gold projects and.

And they will Paula and tax tack of copper and copper projects amongst others.

Following the <unk> royalty debenture acquisition, we revised our guidance and outlook and now expect 25% growth and revenue over the next five years.

We announced for that year end results and increased quarterly dividend to <unk> 30 per share. This was our 14th successive annual dividend increase the board has now declared for the first of those dividends payable June 'twenty for us.

The 15% increase is larger than typical and reflects the growth and our business due to cobre Panama.

And note on board succession, and renewal at yesterday's annual meeting the honorable David Peterson step down as chair of the compensation and ESG Committee.

And after more than 13 years as a director of Franco Nevada.

The board and I would like to thank David for his outstanding leadership and many years of SaaS.

And we will no doubt message unique abilities for building unity within the board.

In terms of renewal, you'll recall and Maureen Jensen joined the board at this time last year Maureen has a strong governance background, having previously led the Ontario Securities Commission.

To sum up our.

Our portfolio continues to outperform and is built in growth and tremendous long term optionality.

We are and our net cash position of $1 2 billion and available capital and.

And I'll now generating EBITDA at a rate of $1 billion per year.

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 Santa Ana.

Thanks, Paul Good morning, everyone first quarter 2021 continue to build on the positive momentum that Franco Nevada, and a 2020 with our royalty and stream portfolio continues to perform well and ahead of expectations.

Although the gold price and first quarter of 2021 was a little weaker than fourth quarter and Franco Nevada still delivered a very strong financial quarter with record revenue and record adjusted EBIT.

On slide three we have highlighted the gold and gold equivalent ounces sold for the three months ended March 31, 2021 and 2021.

Overall, geos 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 and to Mena was a combination of higher silver deliveries along with higher silver prices during the quarter I'd like to highlight that for and to 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 from and to meet at for fourth quarter 2020.

We anticipate silver per ounce production from and to me not to be at the high end of the two eight to $3 2 million range previously provided for 2021.

At Hemlo, and we continue to benefit from mining on our 50% NPI ground. 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 and the second half of the year.

Cobre, Panama and had a strong first quarter for Franco Nevada with Geos sold of 29622 as the project continues to ramp up that deliveries were in line with the full year of 105 to 125000 Geos sold guidance. We've 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 ALDA.

Although <unk> has decided to continue mining at <unk> west for an additional number of years it will be at a lower production rate, which was reflected in the geos sold and the first quarter of 2021.

As for Guadalupe and the company received and sold fewer geos and the quarter because of lower grades than a year ago.

Slide four highlights our total revenue and adjusted EBITDA for Q1, 2021, and Q1, 2020 as you can see from the bar charts revenue and adjusted EBITDA has increased significantly year over here.

The average gold price for the quarter was $17 94 per ounce compared to 15, and 83 per ounce a year ago, a 13% increase.

And at $308 9 million and revenue in the quarter is a record for the company as is the adjusted EBITDA of $262 7 million as.

As Paul mentioned margin of 85% was achieved.

Gold and silver revenue increased from $189 1 million and the quarter last year to 237 7 million and 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 there.

Company also recorded $7 $2 million and revenue from the and East 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 and adjusted EBITDA was due predominantly to the increase and Geos 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 and Q1 2020. The increase is due to the source and we're mining and energy revenue was derived the company recorded higher depletion from and Mackay and <unk> and Cobra, Panama during the quarter.

Adjusted net income and adjusted net income per share increased significantly and first quarter. Adjusted net income was $160 9 million for <unk> 85 per share increases of 47, 3% and 44, 8% respectively over prior year.

Franco Nevada has always been a royalty company, but its a fault to include streaming as part of the business model.

Slide six breaks down the mix between streams and and royalty revenue for first quarter 2021.

The streams that we've added have been very successful for the company, adding significant top line growth.

The largest component of our revenue generating $176 9 million or 50% of revenue during the quarter.

However, it is royalties, whether mining or energy, which generate higher margin and net cash flow from operations.

As you can see the costs related to royalties are minimal with a combined cost of $3 5 million related to the $132 million and revenue generated by the royalties.

We believe our business model at both stream and royalty assets will allow us to continue to achieve peer leading EBITDA margins.

With respect to margin to <unk>.

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 and 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.

And 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 costs being sold and more royalty ounces recognized as revenue in Q1 2021.

And a rising gold price environment, we expect to benefit fully is the cost per ounce should not increase significantly and as can be seen and first quarter could decrease depending on the mix of royalties versus streams.

And one of the strength of having a diverse portfolio.

The other cash component for the company besides the cost of sales as our corporate administration costs.

Our board and management are very proud of our focus on cost management and 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 as 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 across 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 equivalents.

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> and 11% those are 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 who operates cobre Panama.

As was disclosed on April 16, 2021, the company purchased $57 million Valley royalty debentures subsequent to quarter and for $538 million.

The debentures allows holders to receive a premium payments based on net sales from a number of valleys Brazilian mines.

With this acquisition Franco, Nevada, and expects to recognize 25000 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 and for the year from the previous 555 million to 585000.

The midpoint of this revised guidance range is a 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 and 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 and second quarter.

Thereafter, we will accrue quarterly <unk>.

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 that precious metals revenue could it be below 80% for the quarter, depending upon how our precious metal assets perform.

That does occur we do expect to again be above 80% precious metals revenue and third quarter 2021.

Also on the valet royalty there is a seasonality for production and net sales with production being lower and 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 a combination of cash on hand, and $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 a question. Please press star followed by one on your Touchtone phone you will hear three til and prompt acknowledging your request and your questions will be pulled and the order they are received.

If 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.

Yes. Good morning, Thanks for taking my question.

Just starting with the energy revenues of $45 million and the quarter. I know you mentioned kind of benefited from production and prices could you give us a sense maybe if.

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.

And then I'll call here I appreciate the question.

For Q1, we did have a <unk>.

And then normal revenue number for energy as part of that number came from revenue from prior periods.

And if you adjust for that prior period revenue.

And 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 last year, but we only receive payment for this year.

With the higher prices, we do expect.

And to have better revenue and the prices were a bit above that.

$55 per barrel, <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 that revenue should increase by about 13%.

So again, if prices remain high and we expect revenues will be higher and and there will be a bit of leverage within that revenue number.

And then so that means your debt.

I guess with this production is there anything when I think of the longer term guidance, where this is sort of and.

For 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.

And the benefit of that prior period revenue that I would not expect to continue going forward and in addition to that and and we did have a good quarter production.

Production or volume wise, but.

But we continue to think debt.

And our guidance is still relevant that we provided at the beginning of the year.

And 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 you not to take the revenue from the quarter and and annualize that.

Okay Perfect and then just a final question on Hemlo and I know.

And so is around close to 12000 of Geos in the quarter and there was around the 4000.

Ounce benefit I think you had talked about last quarter I get 20.

To 30000 ounce contribution.

And I know you mentioned that I guess that the the NPI should decrease and the second half, but just given sort of the Q1 results.

And I guess could you can exceed that guidance for at least at the high end of it for the year.

I think it's still too early to net.

<unk> at this stage of that 12000, obviously as you said there is 4000 related to prior period.

And right now I would say, we're probably and kind of pent up and the middle of that range, but because it is and MPI and cost to impact the payment and.

And as expected there should be lower production on the land towards the end of this year or and the second half of this year still comfortable with that range and 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, just looking at the valley transaction and guidance, just so I understand clearly so and the second quarter Youre planning to accrue production that would've started from January is that correct, yes, thats 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 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 and her from from April.

That's a full years production January one to December 31.

Okay understood.

And I understood.

And then.

On the on that sort of <unk>.

Sure. Thank you for that disclosure, we've always had this large short term investment dollar amount that we could never understand what it was.

Looking back at that deal it looks like those shares were acquired.

Just starting to be acquired at least maybe five plus years ago.

We didn't get this at.

At the analyst day, but strategically what's what's Franco thinking about this large share position, obviously for the current share prices a lot higher than where it was required but.

What's the ultimate goal here for the company.

Josh.

We think of the investment really just as a royalty holding.

Labrador Iron ore income fund is run with very little G&A. So it's effectively just a straight pass through of off net interest.

So we're very happy just for the current position we hold.

But the stock is traded very well and.

And.

So not looking to acquire any anymore at these prices as you know for our focus on adding new assets for <unk> is on the precious metal side.

But it is an attractive asset if it was ever trading at a far lower prices.

And we 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 and your next question comes from Cosmo Chu CIBC Cosmo. Please go ahead.

Thanks, Paul and Sandeep.

And team maybe my first question is on Latam Latin America here.

Certainly the COVID-19 situation isn't great and.

Latam and a number of your assets or royalty and streams and Latin America. For example, I think there was a bit of an outbreak debt.

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 or I guess more into Q2, and now and how have you factored that in.

Cosmos.

And you're absolutely right.

Latin America has been heavily impacted by COVID-19.

All of the assets.

And.

The only outbreak we aware office that Anthony net.

And we haven't heard anything yet in terms of that impacting production.

Either through the first quarter this year will through the rest of the year.

So to date as far as where they are able to manage that without impacting production.

Okay for sure.

And maybe now moving from.

And to me now to West Africa.

You made a number of acquisitions.

And the past quarter, one that didn't really get a lot of attention was a guilla, but I think it is actually one that could have.

Good upside potential here.

Although it's fairly small, but I guess my question is in two parts. The first part is.

With our recent combination proposed combination on Fortuna silver and rocks gold, they really talked off and all potential here.

All other pits cooler.

And some of the other ones I just wanted to confirm that.

The royalty is on all of the different all the entire land package.

Hi, Cosmos this year.

Hi, Ed.

Right. It does cover the mining license, which covers all of those targets.

And and prospects.

Great and then.

And are you getting more excited now with the proposed acquisition or merger of Fortuna silver and Rob skull to potentially and now with so guilla being part of a larger company.

And you see more upside potential from here onwards.

We loved the deposit.

It starts and ends in terms of geology for us and.

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.

Company lots of potential and we hope to maintain good contacts in relations and.

And would also be keen to do something bigger there ever needed.

Of course and.

And then on the flip side here now that it is within a bigger company could you Ian and I will confirm with US I believe theres a buy down right.

The at the royalty and how that works and within a larger company and now do you think that by Dow is going to exercise.

More so than previously.

Sure and.

So there's a little bit of background. There was another preexisting royalty that existed on the property prior to our transaction and it had a 100% and buy down.

Our deal.

Would allow the company to buy back half and a predefined price effectively equivalent to the price at which we bought in and.

And that was an arrangement debt.

Worked for both parties, we were able to do due diligence.

And obviously you see some other great things there.

Sunbird and ahead of time.

And which made it a very compelling acquisition for us so it's a bit of.

And 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.

And 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, you're going and then at East Goldie.

And Canadian melodic.

I haven't gone through your entire sort of asset handbook, yet but.

And I'm not sure how much you can comment at this point in time, but.

That new discovery potentially fall within your royalty growth and can you talk about the extent of your royalty on that land.

Land package here in terms of the area.

Thanks Cosmos.

And the royalty claims that we have at Canadian <unk> don't cover the full property position.

Scott I think it's five separate claim blocks that we cover.

It's a bit of a checkerboard.

One other claims Cabos what is our understanding that the center of the East Goldie deposit.

The extensions that they have now made it to the east of that.

Do have another claim block that for.

And to the east and so it's early days, but.

It looks like the part of that extension, maybe on one of our other claims and so we're very excited Nevada.

Great. Thanks, again and those of other questions I have 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. There was a comment made earlier and the call today about.

Sudbury potentially being lower than expected and I know originally when you gave that 2025 guidance Sudbury.

<unk> was it was going to continue out and is that still the case and my second question is can you just remind me when the.

And Ws royalty is it and the 2000 and then does it and the five year guidance to where does the 325000 ounce cash kick in before then thank you.

Hi, Brian for Sandy at Sudbury, Yes, it's going to continue mining and Mccreedy West til.

Till 2026 is the current life of mine plan.

As we highlighted at the end of <unk>.

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 will be about 10 to 12000 geos per year for the next five years.

Great So that hasnt changed at all that Hasnt Jacobs.

And just year over year, it's a lot less and it was lost share, but thats the reason that theyre mining at.

And at a reduced rate with.

With respect to mine waste solutions, we expect the cap to be reached in 2024, so it is not and including 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, our Q2 2020 results after market close on August 10th with the conference call held the following morning. Thank you for your interest and 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.