Q1 2022 Franco-Nevada Corp Earnings Call

Okay.

Good morning, ladies and gentlemen, and welcome to Franco Nevada Corporation first quarter 2022 results conference call and webcast.

This call is being recorded on May five 2022.

At this time all lines are in a listen only mode.

Following the presentation, we will conduct a question and answer session, where you may ask a question through the phone lines for webcast.

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I'd now like to turn the conference over to your host Bonnie B check Vice President Finance. Please go ahead.

Thank you Michele good morning, everyone. Thank you for joining us today to discuss Franco Nevada's first quarter 2022 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. The presentation is also available to view on the webcast.

Paul Brink, President and CEO of Franco Nevada will provide some introductory remarks, followed by Sandy Brenna, Chief Financial Officer of Franco, Nevada, who will provide a brief review of our results. This will be followed by a Q&A period.

Our full executive team is available to answer any questions participants may submit questions by telephone or via the webcast.

I 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 three of the presentation.

I will now turn the call over to Paul Brink, President and CEO of Franco Nevada.

Thanks, Bobby and good morning.

I am pleased to announce strong Q1 results once again demonstrate the high margin nature of our business.

Quarter benefited from strong precious metal energy and iron ore prices.

The energy contribution was particularly strong.

Is that somewhat by lower precious metal deliveries.

Total geos are on track to meet annual guidance.

We had slightly lower precious metal deliveries to the unexpected from co break Kimball area and celebrate.

The impacts were planned maintenance shipment timing and transport constraints.

None of the issues, so unlikely to impact annual production.

Oil and gas prices have been strong gas prices in particular remains above $7 per mcf almost double the $3 75 per Mcf, we used to compile a guidance.

We're getting accelerated payback from our Marcellus and Haynesville natural gas investments.

During the quarter, we published our fourth annual ESG report.

The highlights for this year was the addition of comprehensive emissions disclosure for our producing mining assets.

We've made further progress on our diversity goals as our team grows.

Our efforts continue to be recognized in last months, we were named to the corporate Knights list of best 50 Canadian corporate citizens.

Business stands out in today's inflationary world, a Renaissance scream interest effectively inflation proof.

G&A is less than 3% of revenue.

And our energy interest actually provide leverage to energy price inflation.

As a result, our revenue growth is translating directly into expanded earnings.

Sure.

We provided guidance at year end and expect good growth through 2026 from mine expansions and new mines.

First quantum is on track to expand cobre, Panama up to 100 million tonne per annum throughput by the end of 2023.

Detour Lake <unk> seen further exploration success and Agnico is now considering an underground mine.

And an even larger throughput expansion.

The Tasiast 20, <unk> expansion is ongoing.

The company's operating around 21000 tons per day.

And melodic the Odyssey project construction is on track and over time more of East Goldie appears to fall on our royalty claims.

Newmont's half of SaaS production is also moving more on to us would be to claims through the next number of years.

The Solaris North <unk> mine built is now 70%, 70% complete.

Guillaume greenstone or under construction.

When the industry has access to capital that typically drives our organic growth.

Asset Handbook launched at our recent Investor day highlighted impressive resource growth in the portfolio.

<unk> royalty ounces were up 15% year on year to $18 6 million ounces.

Our calculation of mine life based on MNI royalty ounces moved from 28 to 32 years.

We had a couple of small additions to the portfolio during the quarter.

Four 6% MSR on the <unk> copper mine in Chile.

And a 2% MSR on claims that cover a portion of the castle Mountain Gold mines, where we have an existing royalty on the broader property.

We have no debt and $1 7 billion in available capital.

We're generating robust cash flow $231 million in the quarter.

Earlier this year, we increased the dividend <unk> 32, a share or roughly $61 million per quarter.

Looking forward our business development team is very active principally looking to finance new gold mines.

With that I'll hand, the call over to Sandy.

Thank you Paul Good morning, everyone as Paul mentioned, the company reported strong financial results for first quarter 2022.

Our royalty and stream portfolio performed well in the quarter highlighted the benefits of our diversified portfolio by both asset and commodity.

Just to remind you of one of the changes with our reporting beginning last quarter, we began including energy revenues and our gold equivalent ounce total. We believe this provides a more comprehensive measure of our business that will be useful to investors to evaluate the full scale of our portfolio.

On slide four we have highlighted the golden gold equivalent ounces.

For the three months ended March 31, 2022 and 2021.

Overall, geos sold increased slightly compared to prior year with Q1, 2022, Geos sold being 178614.

As we had highlighted during our year end financial results call. We were expecting last year was in 2022 from a few specific assets hemlo and to Mena and add to the Cai.

That did occur during the quarter when comparing year over year at.

At Hemlo, Barrick produced less gold ounces from Franco lands, resulting at lower NPI than prior year. Despite a higher gold price costs were relatively the same year over year at answered Mackay. The operator is mining through lower grade zone, and it was impacted by lower recoveries during the quarter, we expect deliveries to resume.

To prior levels for 2023 and beyond.

<unk> 2021 was an exceptional year in terms of production, we expect 2020 to be more of a normalized year similar to previous years with a range of $2 8 million to $3 2 million silver ounces being delivered.

At Cobre, Panama, our largest asset geos were relatively flat year over year with 29495 being sold compared to 29622 a year ago.

First quarter was impacted by some scheduled plant maintenance, which should not be a factor in second quarter.

A couple of strong performers in the quarter were Guadalupe and candle area with both delivering more geos in Q1 2021.

Although candidly Rio Geos were higher year over year, there was some impact from delays in shipments.

For diversified geos or valet royalty resulted in just over 9000 geos for the quarter.

This does include about 2400 geos related to prior year.

As you know each quarter, we make an estimate of what the royalty will be with the actual amount being announced by valley in late March and September of each year.

As a result, you will see adjustments to our accruals twice a year in Q1 and in Q3.

Energy Geos increased by 49% year over year as we benefited from continued higher energy prices.

Slide five highlights our total revenue and adjusted EBITDA amounts for the three months ended March 31, 2022 and 2021.

As you can see from the bar charts revenue and adjusted EBITDA has increased year over year. The company recorded $338 $8 million in revenue in first quarter and $286 6 million and adjusted EBITDA margin of 84, 6% was achieved.

First quarter continued the strong contribution from the energy assets.

Revenue increased from $45 $1 million, a year ago to $75 6 million this quarter.

<unk> oil price averaged $94 29 per barrel during the quarter at 63% increase from prior year natural gas prices also increased significantly with Henry hub, averaging $4 57 in Mcf during the quarter compared to $2 73, a year ago.

As you turn to slide six you'll see the key financial results for the company as mentioned with the increase in Geos sold and commodity prices. The company had strong revenue growth for the quarter.

On the cost side, we did have an increase in cost of sales despite lower stream ounces being delivered and sold cost of sales is dependent on which assets deliver stream ounces as not all fixed payments per screen.

<unk>.

Depletion was higher at $74 6 million versus $71 2 million a year ago due to the increase in Geo sold but also recording depletion related to the salary royalty, which was not present last year.

Finally, with respect to taxes, the effective tax rate for the quarter was 16, 5%, which is higher than the 15%. We have trended to previously this was due to higher income being generated in Canada, and the United States from our energy assets.

Adjusted net income was $177 2 million a 10% increase over 2021, while adjusted net income per share was <unk> 93.

And 11% increase compared to prior year.

Slide seven highlights the continued diversification of the portfolio, which we consider one of the strengths and Differentiators of Franco Nevada.

As shown 71% of our Q1 revenue was generated by precious metals.

The geographic revenue profile has revenue being sourced 90% from the Americas, with Canada, and the U S being 37%.

With respect to asset diversification Cobra, Panama was our largest revenue generator at 17% of total revenue for the quarter, followed by <unk> and <unk> at 8% core.

Cobra, Panama continues to be the only asset greater than 10% of revenue.

The last chart highlights our operator diversity, our largest exposure to revenue generated by any one operator is 17%, which is first quantum who operates cobre Panama.

We're fortunate to have royalties and streams on many properties mined by some of the most reputable mining companies in the world.

Yes.

Slide eight illustrates the strength of our business model to generate margins for first quarter 2022, the cash cost per Geo, which ascent, which is essentially cost of sales divided by gold equivalent ounces sold was $2 $244 per geo.

This compares to 231 per <unk> in the first quarter of 2021.

This amount will fluctuate depending on the mix of royalty versus stream geos, including mining and energy, but as you can see at current average gold prices the company generates significant margins.

In a rising commodity price environment, we expect to benefit fully as to cost per geos sold should not increase significantly.

We consider our cost structure to be essentially fixed.

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

We'd like to stress the strength of our business model and the scalability.

The chart on slide nine clearly illustrates our focus on being as cost efficient as possible in managing this business here.

Here, we have highlighted our quarterly revenues and our quarterly corporate administration and share based compensation expenses since our IPO as you can see revenues have grown significantly over the period shown while corporate costs have remained fairly stable.

For first quarter 2022, corporate admin and share based compensation expense was $9 $9 million or less than 3% of revenue.

We'd like to highlight that share based compensation expense was higher than in previous quarters. As the company is required to mark to market. The deferred share units held by directors with the increase in the Franco Nevada share price during the quarter. There was a corresponding increase in this expense.

Management believes we can continue to add to our portfolio and grow our business without adding significant cash overhead to the company.

Slide 10 summarizes the financial resources available to the company.

Effective March 2000, $22 million to $100 million credit facility held by one of our subsidiaries was not renewed at this time, we have one corporate facility for $1 billion and when including this with our cash and cash equivalents total available capital at March 31, 2022 is $1 7 billion.

And now I will pass it over to Michele and we're happy to take questions.

Yes.

Thank you.

We will now begin our Q&A session.

If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad.

If you would like to withdraw your question. Please press the star followed by the two.

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Please standby for your first question.

Your first question comes from Michael <unk> of H C. Wainwright. Please go ahead.

Hey, guys. Thanks for taking my questions.

Yes.

How are you doing heiko.

Wonderful. Thank you hey, with the higher grades at Kendall area, and the commensurate higher geos that youll receive.

At what point in time will that start to get reflected in your outlook and on that same token.

Are there maybe any assets that really came in differently. This quarter than you expected either strongly to the upside or to the downside. Besides the call. It twentyish assets that you mentioned in your release.

Can you repeat the candle area question.

Yes.

We said it was higher grades at site during the quarter and so you've got more and more Geo has been you really thought you would get in your outlook.

At what point in time do you think we'll see the impact of that in your longer term outlook.

Yes, I think.

Speaking here, what we would point you to is <unk> guidance, which.

Which is really what we based our outlook upon.

As part of their forecasted mining sequence.

Maybe just to add a comment on that.

One of the issues they've been dealing with at Cadillac here, what's the grade reconciliation and.

They have.

Being able to improve on that issue and I think this quarter was a good demonstration of that.

Don't think they've put guidance out there but.

Once they have a better grip on that grade reconciliation in.

Comfortable that they can keep the dilution low I expect that.

The chance that they would increase their there.

Production outlook.

Got it.

Are there sorry.

Sorry go ahead your second part of your question.

Assets that were higher or below our expectation I think most.

Most were in line.

As we highlighted <unk> was lower due to transport issues.

They're still mining and stockpiling ore.

Candidly I did have some delays on shipments.

Otherwise most of those assets were in line with our expectations.

Got it and just following up on that a little bit and just thinking out loud with you or a bit too.

Energy segment, obviously, a phenomenal model.

Surprise and Youre only precious metals royalty company in our coverage universe at least that has this kind of leverage to energy prices and.

And we're I mean, Paul mentioned this earlier and quite the inflationary environment.

I mean, just from what we model out there is not all that many large scale projects coming online in the next few years, but then again interest rates are going up I'm, just trying to get your thoughts on pricing that youre seeing in the market, maybe if you could for both energy and metals.

Obviously, the current environment. There is it's got to be getting tougher, but I think some people to offset this might also be getting a little bit more desperate to make a deal.

Yes.

Yes.

Comment on the outlook and in our most of the way we active right now on the precious metal side.

I think it's a constructive environment to do deals in precious metals.

And that's always the balance sheet.

Would love to do most of your deals when commodity prices are weak.

You get better return on the prices.

A lot of our businesses.

The financing new builds and <unk>.

Need a robust enough gold price environment for people to be building mines.

But we always say a lukewarm environment is a good environment for us.

I'd say that that's the sort of environment, we and certainly for gold equities.

There is some gold equity availability, but.

The ethanol not at Crazy prices, So I would say that the gold price set up we're very bullish on long term gold prices.

Industry is building mines, we do think it's a good time to be financing new gold mine builds.

Yes.

Delighted with the performance on the energy assets.

But prices are high at the moment.

Also because of the balance of our portfolio, we're not looking to add more energy assets at the moment.

So I'd say that's it.

Broad summary of.

What we're thinking.

Got it. Thank you guys so much ill get back in queue.

Your next question comes from Cosmos <unk> of CIBC. Please go ahead.

Hi, Thanks, Paul Sandeep and team maybe.

Maybe my first question is on the Casa Roni royalty.

Not so much on the acquisition itself, but I found it interesting that along with the royalty acquisition you've put in a private placement with <unk> royalty was that more like a finder's fee did they were they the ones who initiated it in terms of the royalty could you maybe talk a bit more about that.

Arrangement.

Sure Cosmos.

Thanks.

No Dave Cole, who runs the amex from way back when we were all working at Newmont and have been intrigued by the business that he has built over time.

Think they stand out amongst a small royalty companies and what.

Many companies are competing to buy assets and what's probably an overheated market.

Their business has got a large component which is around.

The royalty generation.

Where the prospect generating selling on the properties and keeping royalties.

They've built up a very large portfolio of royalties. So we think an attractive business model. So we've had discussions for a long time with Dave in terms of.

Participating in his business.

Where it all came together is yes.

They had acquired a portion of this royalty before which which put them in the driving seat in terms of acquiring.

The second portion and they included us in that transaction and we decided to make the investment at the same time.

Great.

Maybe another question or maybe it's related or maybe its not related I'm sure earlier. This week you saw that sandstorm is.

<unk> acquisition of Nomad.

As you said you know the competitive nature of the industry at least on the smaller as now ultra competitive.

Any comments you want to make on.

M&A and the royalty space and does that need to continue.

Sure.

I would say from our perspective Cosmos, it's always we see good prospects to do private deals.

It really is just around.

What's the best use of your capital what's the best return on capital. We've always found that in doing private deals. We believe we can get a better return on capital.

So that has certainly been a focus.

Do see the rationale obviously for smaller players.

Size does matter more in terms of relevance to investors. So I can see the impetus for smaller players to merge in order to create scale and create liquidity.

Of course, thanks, Paul and maybe switching gears, a little bit I think sandeep, you sort of mentioned that.

But I noticed that for the iron ore revenue $16 8 million in the quarter of which $4 5 million is related to the second half of 2021 as you mentioned it gets chewed up twice a year and make an estimate but I also noticed that.

In Q1 iron ore prices increased quite a bit.

Compared to Q4 last year.

Even compared to when it peaked earlier on last year as well.

That also play into.

You know what the adjustment could be like I guess, what I'm trying to ask is as iron ore prices go up is the adjustment that usually comes through a positive and then.

Of course, when the other way around when iron ore prices come down is the adjustment usually negative.

And in theory, yes.

Part of that is also we don't have complete visibility to the prices that valley is selling the iron ore at because they have entered into certain contracts.

We're just taking sort of the average price for the quarter, making our best estimate and obviously, we also estimate the deductions that get applied against the royalty. So in theory, yes, if youre in a rise in iron ore price environment.

Get the positive adjustment.

But the unknown there is the the.

The realized prices that valley will actually achieve.

Got it thanks, Paul and Sandeep those all the questions I have thanks again.

Your next question comes from Tanya Jocose connect of Scotiabank. Please go ahead.

Hi, good morning, everybody. Thank you so much for taking my questions.

Just maybe starting off with Sandeep, just a couple on the modeling side.

Just wanted to talk to you you asset portfolio performed as expected.

So assets that were different from for US number one handler and number two gold quarry.

Starting with hemlo much stronger than we had expected any change to your guidance. There you had provided guidance for us early <unk>.

<unk> done very well in Q1.

So there is a small component of Q1 revenue for Hamlin, Kenya that that was related to prior year. So as you know we make an estimate on the NPI and then it gets chewed up each quarter based upon the various reports to us. So there was a little bit of carryover going forward.

I would expect it to be less in Q1 after the for each quarter for the rest of the year.

My guess, it's probably going to be.

Half to 60%.

<unk> of what we achieved in Q1 going forward again, it's an unknown.

Costs were in line with prior year, just that the production was less on our royalty ground.

And I'm, making the assumption that that will continue for the remainder of this year.

With respect to gold quarry.

Last year in Q1, we had a true up for the previous year. It was a catch up payment.

And so year over year it looks like there is a large variance for gold quarry.

But the amount that we recorded for Q1 it was our expectation.

Okay are we getting any more some gold quarry than the rest of the year because.

It'll be next next to nothing basically okay, alright, that's helpful and as a portfolio overall now that you have.

Geos.

For the entire portfolio is there any guidance you can give us or whether you're expecting a stronger second half.

Anything that you can help us quarter over quarter improvements.

Can you help us with.

All I can say is that right now we're on track to achieve our guidance for upon the both the precious metal side add total geos.

Okay.

And then maybe just Andy just on the global minimum tax and only ask you all the time, but it is now in the Canadian Federal funding.

122 can you just give us your thoughts about.

What's your take on that.

<unk> implemented a cell Wang any thing you can share that would be helpful.

And yes, it was part of the Canadian.

Federal budget that was released a couple of weeks ago.

It's in consultation now I think they are asking for a consultation until early July July seven anticipate Tate, it's definitely moving forward in terms of process.

<unk>.

Theres lots of articles out there that are saying, it's going to be tougher to implement as well to get everybody on side I think there was an article in the financial post this morning on the global minimum tax.

I'm getting everybody aligned so at this stage, we're under the assumption that it will be implemented but all we can do is follow the process and just see how it all plays out at the end of the day.

And do you think of 2023 is an optimistic timeframe or how do you see that.

With everything that's going on in the World right now I think 2023 is optimistic.

It was early 2023 now that I think they are saying to the end of 2023, if it does happen 2024 or beyond is likely.

Perfect and then my final question just on M&A and I know I asked this all the time.

Youre doing a lot of smaller royalty deals under $15 million and I know that Paul mentioned that you are seeing interest from mine belt. In this inflationary environment are you seeing that maybe these operators with these capital blow ups that are happening that are just pulling back on moving forward on some of these.

Projects are.

Youre doing more royalty deals or is it just that you are now.

We just haven't seen some of these mine, Belgium illustrate just some clarity on what you are seeing that thank you.

Hi, Tanya.

Here at.

In terms of mine mill I would say, yes. There is there continues to be a decent pipeline, especially on the gold side of projects that are moving forward towards development.

A number of them have quite current capital estimates. So we're hopeful that that continues on a small royalty side as we typically say we looked across the spectrum.

We see good royalties, even if they are smaller we like to add those it gives us optionality within the portfolio.

So we'll continue to do that as well.

And just on the mine Bell still in the same range that couple of hundred million dollars that we've talked about over and over again.

I'd say across the spectrum, but on the gold side.

Typical type of size that you might see.

Okay, great. Thank you so much I'll be someone else to ask questions I appreciate the insights.

Okay.

Yes.

Yes.

There are no further questions on the phone lines I will now turn the Q&A session over to <unk>, who will take questions from the webcast.

Thank you Michelle and we have no further questions from day webcast either so this concludes our first quarter 2022 results conference call and webcast.

We expect to release, our Q2 2022 results after market close on August 10, with a conference call held the following morning.

Thank you for your interest in Franco Nevada.

Yes.

Yes.

Ladies and gentlemen, this does conclude your call for this morning, we would like to thank you all for participating and ask you to please disconnect your lines.

Okay.

Yes.

Okay.

Okay.

Got it.

Sure.

Yes.