Q2 2022 Franco-Nevada Corp Earnings Call
Good morning, ladies and gentlemen, and welcome to the Franco-Nevada Corporation's second quarter 2022 results conference call and webcast.
This call is being recorded on August 11, 2022. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a Q&A session where you may ask a question through the phone line or webcast. If you are joining by webcast, you may submit a written question for the Q&A session at any time during this call by typing your question in the Q&A section of the webcast platform.
If you require immediate assistance during this call, please press star 0 at any time for the operator.
I would now like to turn the conference over to your host, Bonavie Tech.
Vice President, Finance. Please go ahead.
Thank you, Christina. Good morning, everyone. Thank you for joining us today to discuss Franco-Nevada's second quarter 2022 results.
Accompanying this call is a presentation which is available on our website at franco-nevada.com where you will also find our full financial results. The presentation is also available to view on the webcast.
During our call this morning, Paul Brink, President and CEO of Franco-Nevada, will provide introductory remarks, followed by Sandy Brana, Chief Financial Officer, who will provide a brief review of our results, and Ian Gray, Senior Vice President, Business Development, who will provide an overview of our SACAS Invenial transaction.
This will be followed by a Q&A period.
Our full executive team is available to answer any questions. Our participants may submit questions via telephone or via the webcast.
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 notes on slide 3 of this presentation.
I will now turn the call over to Paul Brink, President and CEO of Franco-Nevada. Thank you, Bonavie, and good morning.
We are proud to report our best quarterly and half year results on record. Each of revenues adjusted to EBITDA and adjusted net income were records for the quarter.
The low-risk nature of our business is most pronounced in today's inflationary environment.
Our top-line precious metals stream and royalty interests help generate our highest-ever margins since adding streaming to our business over 85% for adjusted EBITDA and 55% for adjusted net income.
High energy prices in this environment are a positive for us and drove an increase in our diversified TOs.
Partly offset by marginally lower precious metal TO salt.
At half year our total geo-solve is slightly ahead of the midpoint of our guidance range and we're maintaining our previously issued guidance.
In July , we were delighted to announce a financing package for the Tocco Tazinho property in Brazil with G-Mining Ventures for $353 million.
The financing package included a 250 million gold stream, 75 million term loan, and a 27.5 million equity financing.
The project is construction ready with first gold deliveries expected in late 2024 and is fully financed. The team behind G-Mining Ventures is well known in the industry for its record of building mines on time and on budget.
including Merion for Newmont Mining and Frutte del Norte for Lundin Gold.
We expect Tokita Zinyu will be the first of many mine builds for the company and have entered into a long term partnership for future financings and acquisitions.
We've been in close dialogue with Lundin Mining on the sinkhole that has developed close to the Alcaparosa portion of the candle area operations.
Fortunately, all staff and community are safe and the appearance of the sinkhole didn't result in any injuries. Lundin and Tsunajiraman have experts evaluating the event and hope to have an initial understanding of the causes in the coming weeks.
Notable in terms of organic growth news in the quarter was Detour Lake. Ignaco Eagle announced a 10-year mine life extension to 2052.
and that they're looking to expand throughput to 32 million tons per year, as well as potentially develop an underground mine that could increase production to a million ounces or more per year. The detour expansion, along with expansions at Stillwater and Tazius, and of course, Cobra Panama, form the core of our near-term organic growth.
We'll also have contributions from three new mines in the next couple of years, and the construction of Solaris Norte, Greenstone and Seguela are all proceeding on track.
We expect the development of Valentine Lake, Stibnite Gold, and Escape Creek to follow.
With respect to ESG, during the quarter, Franco-Nevada was named to the Corporate Knights 2022 list of the best 50 corporate citizens in Canada.
Also, as part of the Toca de Zinho transaction, we committed a million dollars of environmental and community support programs over four years.
We also continue to expand our community engagement and contributions with existing partners.
In summary, Frank and Vada continues to deliver with record financial performance, built-in growth and long-term optionality. We're cash flow positive with no debt of $1.9 billion in available capital and are generating operating cash flow at a rate of $1 billion per year.
We're focused on growing the company by adding more precious metal assets and are seeing a good pipeline of opportunities.
With that, I will hand it over to Sandy. Thank you Paul. Good morning everyone. As Paul mentioned, the company reported record financial results for second quarter. The quarter once again highlighted the benefits of our diversified portfolio by both asset and commodity.
On slide four, we've highlighted the gold and gold equivalent ounces sold for the three and six months ended June 30th, 2022 and 2021.
Overall, GOs sold were relatively flat when compared to prior year with Q2 2022 GO sold being $191,052 compared to $192,379 last year. You may recall that in Q2 2021 we did record two quarters of GOs and revenue related to the value royalty we had just acquired. This would have equated to an additional $7,600 GOs and $13.8 million of revenue recorded in Q2 2021.
Overall, most assets performed as expected during the quarter with less GOs delivered by anta, antipakai, Guadalupe and Stillwater.
As we have highlighted previously, 2022 is a lower production year for Antipakai, as the operator is mining through a lower grade zone. We expect deliveries to resume to prior year levels for 2023.
For Antimina, we expect 2020 to be a more normalized year, similar to previous years, with a range of 2.8 million to 3.2 million silver ounces being delivered, which is what is transpiring.
Unfortunately, the Stillwater mine was impacted by a significant flood event in June , which resulted in the suspension of operations at the mine.
This suspension will have a slight negative impact on our GOs and revenue from Stillwater for third quarter.
One of the surprises in the quarter was the Hemlow MPI, which was ahead of our expectations, coming in at 10.5 million Canadian.
This was a result of an increase in mining on Franco-Nevada royalty lands and an improvement in operating costs. As we've mentioned previously, it is difficult to predict what the MPI payments will be on a quarterly basis.
For the diversified geos, our valet royalty resulted in 5,407 geos, 10.1 million in revenue for the quarter. This was lower than previous quarters due to lower production at the mines, as well as a lower iron ore price.
Each quarter we make an estimate of what the royalty will be with the actual amount being announced by valet in late March and September each year. As a result, you will see adjustments to our accruals in Q3.
For our energy assets, GOs doubled year over year as we benefited from continued higher energy prices.
Slide 5 highlights our total revenue and adjusted EBITDA amounts for the 3 and 6 months ended June 30, 2022 and 2021.
As you can see from the bar charts revenue and adjusted EBITDA have increased year over year for both periods. The company recorded three hundred and fifty two point three million in revenue in second quarter and three hundred and one point two million in adjusted EBITDA which are both records. A margin of eighty five point five percent was achieved.
Second quarter continued the strong contribution from the energy assets as revenue increased from $47.3 million a year ago to $91.5 million this quarter.
The WTI price averaged $108 per barrel during the quarter, a 63% increase from prior year. Natural gas prices also increased significantly with Henry Hub averaging $7.49 in MCF during the quarter compared to less than $3 in MCF a year ago.
Oil prices have pulled back recently to approximately $90 a barrel, but are still significantly ahead of last year.
As you turn to slide six, you'll see the key financial results for the company. Some key financial metrics, revenue, adjusted EBITDA and adjusted net income are records for the company for both the three and six months ended June 30, 2022.
On the cost side, we did record a lower cost of sales amount in Q2 2022 as lower stream ounces were delivered and sold.
Cost of sales is dependent on which assets deliver stream ounces as not all fixed payments per stream ounce are equal.
Depletion was also lower at 69.6 million versus 77.2 million a year ago. Depletion is calculated on actual mining geosold as well as barrels of oil equivalent received from the energy business. With lower mining geosold in the quarter and relatively flat energy production, this resulted in less depletion being recorded.
With respect to taxes, the effective tax rate for the quarter was 15.7%, which is slightly higher than the rate we have trended to previously. This was due to the higher income generated in Canada and the United States from our energy assets.
Adjusted EBITDA was $301.2 million for the quarter, while adjusted net income was $195.8 million, a 7% increase over 2021. Adjusted net income per share was $1.02 per share, a 6% increase compared to prior year.
Slide 7 highlights the continued diversification of the portfolio which we consider one of the strengths and differentiators of Franco-Nevada. As shown, approximately 70% of our Q2 2022 revenue was generated by Precious Metals.
The geographic revenue profile has revenue being sourced 91% from the Americas, with Canada and the US being 42%.
With respect to asset diversification, Colbury Panama was our largest revenue generator at 18% of total revenue for the quarter followed by Candelaria.
Colbreak Panama continues to be the only asset greater than 10% of revenue.
And the last chart highlights our operator diversity. Our largest exposure to revenue being generated by any one operator is again 18%, which is First Quantum who operates Colbreak Panama.
Slide eight illustrates the strength of our business model to generate high margins.
For second quarter 2022, the cash cost per geo, which is essentially cost of sales divided by gold equivalent ounces sold, is $238 per geo.
This compares to 246 per geo in second quarter 2021.
The 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 the cost per geo 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 is our corporate administration cost.
We 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 we've highlighted our quarterly revenues and our quarterly corporate admin and share-based compensation expenses since our IPO. As you can see revenues have grown significantly over the period while corporate costs have remained fairly stable. For Q2 2022 corporate administration including share-based compensation expense was 5.8 million or less than 2% of revenue.
Share-based compensation expense can fluctuate quarter to quarter as the company is required to market the deferred share units held by directors.
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 our guidance for 2022. We've updated our pricing assumptions for all commodities for the remainder of 2022 as highlighted on the slide. Our guidance ranges have not changed. We are guiding to 680,000 to 740,000 total geos sold for 2022, of which precious metal geos are estimated to be 510,000 to 550,000.
I will now turn it over to Ian Gray, our Senior Vice President, Business Development, to review our recent transaction with G-Mining Ventures.
Thank you, Sandeep.
In July , we were very pleased to complete the Tokotunzinio project financing.
We're delighted to be partnering with G-Mining Ventures, a team that has successfully and quite frankly provided one of the best track records delivering similar projects in South America.
The project is conventional from a technical standpoint, has good grades, and is located in Parab, Brazil, a season mining jurisdiction.
We believe that there's great upside potential in the broader land package as well.
We have also worked an agreement into the deal such that the G-Mining team will provide us opportunities through a right on future transactions.
We've included key project parameters on this slide and highlight the very recent feasibility study.
Franco-Nevada's participation is primarily through a $250 million dollar Gold Stream.
But we'll also be providing a $75 million term loan and subscribe for $27.5 million in equity along slide with La Mancha and El Dorado.
This financing covers the full expected cost to build the mine plus a buffer.
Finally, as part of this financing, we will be contributing to GMAN's efforts to support communities and the environment with a commitment for up to 1 million over 4 years.
On slide 13, we highlight our available capital of $1.9 billion.
Equity valuations of mine developers are particularly depressed at the moment in this high inflation environment. We believe we can put capital to work.
with good developers on good projects.
With that, I'll hand the call back to Bonnevy.
Thank you for your presenters. Operator, you may now begin the Q&A session.
Thank you.
During this Q&A session, if you would like to ask a question, simply press star then the number 1 on your telephone keypad.
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We'll take our first question from Adam Josephson with KeyBank.
Thanks. Good morning, everyone.
Quick question about still water. Can you be more specific about the impact you're expecting in the third quarter?
Sure, hi Adam. I guess they had the flood in late June and it's very unfortunate but I don't think there were any injuries or deaths or anything of that nature. They are trying to restart it. I don't know if they have restarted it or are close to but the impact on our GOs would be approximately, if they do start in Q3, approximately 2,000 GOs.
Okay, so not a really complex question. The term's out.
Yeah, yeah, no, thank you for that, Cindy. In terms of your updated
I just wanted to drill down, no pun intended, on oil and Nat Gas for that matter. Obviously, prices have fallen from the recent peaks because of Chinese lockdowns, other demand destruction, combined with expectations of further demand erosion as the...
economy deteriorates, perhaps this is best for Ian. Based on your conversations with your partners and.
the production plans that you've seen.
I know you raised your WTI for your assumptions by five bucks a barrel, but can you just talk qualitatively about what you're seeing in terms of energy markets and more specifically energy prices and how resilient you expect oil and gas prices to be based on those production plans? Climate Change Good morning!
Yeah, it's Jason here. Thanks for the question. I think for oil, we've seen a steep run-up in oil prices over a number of months here. Part of that is attributable likely to the Ukrainian conflict, but even before that there was a run-up in prices, really that was, you know, I think attributable to an underlying supply deficit.
Some of that premium has come out, as you point out, over the last month or so here, as COVID concerns continue in China and the overall sort of negative impact to the economy become apparent. Going forward, we still think that prices will remain strong for a while here.
The impact that we've seen on operators is drilling rates and activity rates, particularly in our US operations, have been strong. It rebounded quite significantly from the lows that we saw in 2020.
We're still below peak activity levels that we would have seen back in.
sort of late 2019 before the oil price crash.
So I'd say, you know, looking at it holistically, we're probably 70-75% of those.
peak activity levels and we'll keep an eye on where those activity levels go. Operators are still disciplined in how they're deploying capital and so I don't expect it to be a strong ramp up here but I would say it will continue to be robust.
I appreciate that. Do you expect to get back to 100% in the foreseeable future, or do you think that perhaps is a stretch based on any number of constraints that continue to exist?
Yeah, you know, I think it will depend on where commodity prices ultimately go and how long they stay elevated. You know, I think if you see very strong commodity prices, activity levels inevitably will creep up towards those highs, but if commodity prices are, you know, in the, you know, below kind of $90 a barrel range, I don't think you'll see, you know, activity rates come back to where they were at their peak levels which would imply, you know, significant growth in overall production volumes in the U.S.
gold market up cycles and how that's affecting your willingness to transact.
I thought it may be a comment. Our industry has become more competitive. No doubt about it.
real question is, how do you progress the business in that sort of environment? And best I'll turn it to Ian Gray. Maybe Ian, if you can comment on how we're thinking about playing in this environment. Thank you, Paul. Okay.
In this environment, as I mentioned a moment ago, we do see some stress in the capital markets for miners and that drives opportunity. We think that we can partner effectively as we did with GMEN with groups that have good projects and good teams and that need our financing. So that's going to be a key area of focus for us going forward.
That really does drive kind of more medium-sized deals, but we think it's a good place to focus the majority of our efforts.
I appreciate it. And Ian, is the stress based almost entirely on the inflation that these companies are dealing with or is it because the capital markets also closed to some of these guys? To what exactly would you attribute that stress and consequently, how long do you think it's likely to last?
I would say the capital markets are certainly a contributor to that and you know markets are fickle so they can change but at the moment equity markets remain pretty tough for medium to you know smaller developers and that's an opportunity and I think the same with high yield. High yield is also a fairly challenging market for a lot of mining companies to access at the moment so that also drives opportunity.
Thank you.
So to our next question from Heiko Ile with...
H.C. Wainwright.
Hey there, thank you guys, Hello Poland team, thanks so much for taking my questions.
Congratulations on the geomining deal as well for the project, obviously. It's nice to see somewhat larger scale transactions happening again given that we're still in a climate where folks tend to be quite a bit scared.
Obviously with the Tocco Tizinio it was only partially for the stream. Nine figures of money were spent on a term loan and the equity private placement. You still have a large amount of dry powder at your disposal but can you maybe provide a bit of color on what you're seeing in the market with the sellers of streams? Obviously again you went to the term loan and a private placement as opposed to a stream for at least part of the money with the big thing being the stream but nonetheless. Alright.
And building on all that, maybe tell us a bit about what you're seeing, other ways that you think deals might get done in the future, if not outright streaming.
Thank you for the question. You are right, we did provide a term loan component and a participation alongside La Mancha and El Dorado in the equity race. It was important I think in the current capital environment to provide a fulsome solution. We were happy to participate in doing that. The lion's share of our financing still was Goldstream. But going forward we were so consistent that we found the opportunity, especially as the states rained about Travis's
You could see this type of financing as a model for others. That's entirely possible should the capital markets remain challenging where you bring a few groups together to complete the picture.
And then the other end of the spectrum, geopolitical risk factors have become quite a bit more important in 2022 than they've been in many years. We just had another Minister of Mining and Energy in South America who joined the fray literally today, who's openly against mining. You got 49% of your revenue tied to Mexico, Central and South America. Can you just provide a touch of color on which parts of the world you're watching the most intently and more dicey than they are?
as much color as you're willing to provide in this setting.
Sure, no doubt about it. There's been a shift to the left, particularly in South America. May well have happened in any case, but certainly spurred on by COVID.
So we do keep an eye on that.
As we think about portfolio, one of our greatest strengths is diversification.
In mining you do need to take some risk. The way we think about it is we want to be a low risk way for investors to participate. We know that most of our capital needs to be in good jurisdictions. We can have some of it exposed to areas that have more risk.
So, we know we need to continue to participate in some of these countries. It's just a question of what's the dollar exposure that you have to each of them and is that a reasonable amount in the context of our portfolio? Obviously, what's happening in the region means you're a bit more circumspect about it.
But also what we've seen over time and quite honestly that the same applies to Canada and the US and elsewhere, the pendulum swings.
You know from from her.
from one set of political leaders to the next. We're very long-term investors.
So we're happy to hold the interest. We don't spend much time thinking about divesting the interest, you know, more so, as I mentioned, than we just.
holding amount that is palatable in the context of our portfolio and happy to ride out the bumps along the way.
And obviously you have enough diversification where not one asset will really break you. Thank you guys so much for your questions. I appreciate it and stay well.
Thank you.
We'll take our next question from Lawson Winder with Bank of America.
Hey, good morning guys. Thanks for the update today. I wanted to, well first of all about the pipeline. When you say a strong pipeline of precious metal opportunities, are these base metal mines with precious metal by-products or primary precious metal mines?
Thank you for the question.
I would say we are seeing a bit more of a focus at the moment on primary precious metals opportunities. Not to say that the other opportunities don't exist, but I would say they are probably more focused on the primary product.
Okay, got it. Thanks. And then I really liked your slide where you showed your risk diversification by operator and it got me thinking, how does Franco assess operator concentration risk?
So for example, what would be maximum thresholds? For example, if one of your top five existing streams were to offer the opportunity to materially increase that exposure via other assets in their portfolio. I mean, would that be an easy yes? Or would there be some concerns?
It's something we obviously think about. I wish I could say that there was a single answer or a single number. It obviously depends on the context. It depends on the quality of the assets. It depends on the jurisdictions where they are. It depends on how good that operator is.
So, no bright lines, obviously something that we pay attention to. Also when operators are building assets, so much more important because your performance of the asset is sort of dependent on that.
capability of bringing it on in time.
So we do focus on operators. We've been very fortunate. I gotta say, a theme that's played out for Franco over time is, over time, good assets move into even stronger hands.
on operators, we've been very fortunate. I gotta say a theme that's played out for Franco over time is over time good assets move into even stronger hands.
So part of that also plays in our thinking as we think about investing in assets.
That's an interesting comment. You just made that last one. So if I'm interpreting that correctly, you're basically saying you like the idea of getting streams on assets that could be possible takeout candidates or acquisition candidates?
You know, more so just that as we all know, you look at any asset in the industry, any company, there's a great amount of turnover. The geology doesn't change, the country doesn't change. Over time the operators can change and we feel if you get the assets right, if you invest in good assets.
the chances are they migrate into even stronger hands over time.
Got it, well said. And then following up on an earlier question regarding South America, it's actually thinking about, you know, one particular country you do not have a lot of exposure to in South America is Argentina. I think that's actually served Franco quite well given the challenges that countries had and is currently facing. What would be Franco's appetite to add material Argentine exposure at this point?
We're open to adding exposure to Argentina.
We're evaluating it, no surprise to anyone in the call, the geology is fantastic. And so I think that things are moving in the right direction in the country at the moment.
So we keep monitoring it. If the opportunity came up we would spend a lot of time on it, that's for sure.
Thanks very much for your responses today. All the best guys, have a great day.
Thanks, boss.
And we'll take our next question from Tanya Jokoskinek with Scotiabank.
Good morning everyone. Thank you so much for taking my questions. Two really. I have one to do with just the guidance looking forward. Maybe Sandy, can you help me a little bit on.
Trying to forecast this Hemlo or you know we had been given guidance that I think was like 60% of the revenue is supposed to come out in like Q1 and now we've had a stronger Q2 so what are we looking for Hemlo for the next two quarters?
Are we seeing any...
So, you know, I hear you, Tanya. It was a surprise to us as well. Obviously, it's a lot harder to predict because of the cost structure. It's an MPI. You know, my estimate in my forecasting for HEMLA for the next two quarters is to, you know, to see what the
be approximately five to six million Canadian a quarter. And that's based upon my understanding of what the production level should be and an estimate on cost. So that's what I'm forecasting. Whether that comes to fruition or not, time will tell, but that's the only guidance I can give you. Okay, thank you. That's appreciated. And just looking out for Q3 and Q4, is it safe to assume we've got obviously the 2,000 ounce dip at Stillwater Hamlet.
sort of normalizing, is it safe to assume as we look at Q3 and Q4 that...
most companies have this that Q4 should have a better performance on a geo basis than Q3.
Historically Q4 has been a strong quarter for us. For Q3 the one part that we're not aware of yet is the valet debenture payment that will get announced on September 30th. So obviously we've made accruals for our royalty there, but if the dividend that valet is paying comes in higher, we would make that adjustment in Q3. So all things being equal, yes Q4 will likely be a little stronger than Q3, but Q3 does...
300 range or is your medium size 500? What is your medium size?
Hi Tanya, it's Ian. I think you've got it. That's a fair characterization of what we think of as medium.
That one.
Yeah.
And Ian, when you are looking at these deals which appear to be mostly on gold companies that are developing assets, should I be thinking, again your focus is on precious metals, should I be thinking that the new formula for deals going forward right now is you're going to have a stream plus an equity component plus a debt component, so three components.
for an overall transaction. I mean, beginning of the year, you know, I started seeing just the stream and equity, and now we're streaming equity and debt. Is that sort of how I should be thinking of transactions going forward?
So Tania, Paul, the way we're thinking about it and the way we think about our business is, I mean, our audience dreams are terrific instrument and we want to do as much of it as we can because we love the optionality that you get in it. But the other element of our business that you need to make yourself successful and I think we're good at is picking the right assets. It's about the ability to do due diligence and take a view which are the better assets that you think can do better over time.
and be flexible about how you provide the financing.
And as you think about, you know, this, you know, I've been surprised that, you know, I've seen such big royalty transactions occurring in the last little while. I'm just kind of keen to understand your view of are you seeing other royalty portfolios that are out there of material size that, you know, we're not aware of? Or maybe royalty portfolios are smaller and are you looking at any of those? Hi Tanya, it's Dean again.
entities like that that exist and they trade from time to time.
Okay.
That's helpful. Thank you very much. I'll let someone else ask questions.
Thanks, Tanya.
We'll take our next question from John Tumazos with John Tumazos variant dependent research.
Thank you.
Thank you for taking my question.
In terms of the...
Brazilian transaction you just did the production is two years out
It's a new operator, but they're veterans of many many campaigns
Clearly, the junior companies, the emerging companies, the new companies have the least depth of management, often not in this case.
But there are the companies that have the hardest time raising money.
Could you give us a little more explanation?
as you might consider
the financing of a new mind by a new company.
how many years out you'll go.
how many executives they need to have that built how many mines before.
You know, the emerging companies can't afford the full suite of management like First Quantum or Newman or Barrick.
Their budgets are tight.
Sorting out the depth of management is a challenge.
Johnny, you know, you...
put your finger on a key issue. The industry often suffers from a shortage of experienced folks and we see that particularly when it comes to building projects. So something that we spend a lot of time on.
is looking at the ability of folks to execute, particularly on a build.
Again, I won't say we put it down to an exact amount of people that they have, but we do pay attention to do they have good execution plans, do we believe that they can execute on those plans. We're fortunate again in our portfolio, we've got good growth over the number of years, so we're not hung up on trying to add immediate growth. So in terms of the timing of when those fields come in, we can be flexible. As with many pilot products, as they seem to cool down, we have higher load1966, whereas
More so when we're looking at the projects at the stage of development. You know in our business.
One of our goals rules is, you know, on your downside case you put your money in, on your downside case you want to make sure that you get your money back. That's the worst case outcome and expose yourself to the upside. You know, what does that mean in terms of projects and stage of developments? It means we've got enough, it's got to be at a stage of development where we've got enough confidence, it becomes a mine and enough confidence that there are the economics and the amount of water in the downside case to make sure we get our money back.
and expose the self-stop site. So those are sort of the brackets around, when we're looking at meaningful capital, what we can and can't do.
If we were to contrast Franco, Nevada
say the Osisko gold royalties or Sandstorm, those companies have invested a bigger slug of their capital in earlier stage companies. You obviously have a much fuller valuation.
So maybe maybe staying with the majors is really good
for the valuation of your sock.
Yeah, you know, rather than thinking of that way, I...
You know, what we always hold ourselves out to. I think a good part of the premium that the company trades at is, well, two parts. You know, one is the built-in optionality and a lot of that comes from the depth of the royalty portfolio that we have. I think the other part of it is track record. It's, you know, regardless of what you do, I think if you can demonstrate to shareholders that you can make good decisions and ultimately get them good returns on your capital, that feeds into your premium.
So in my mind, I think those are the two things that are important in the company to sustain that valuation.
Do you think you'll be investing in more projects that are two years or three years from production?
because that's partly the point where the companies need to write the checks and it's harder for them to raise money in the tough markets before production.
I think there's a good likelihood of it now and for all the reasons that you say. It's just it's where the market is though those seem to be the people that need the capital the most. So I'm hopeful that we can put more money to work in that area.
I think there's a good likelihood of it now and for all the reasons that you say. It's just it's where the market is, though those seem to be the people that need the capital the most. So I'm hopeful that we can put more money to work in that area. Thank you. Certainly.
We'll take our next question from Adam Josephson with KeyBank.
Thanks for taking my follow-up. I appreciate it. Ian, you mentioned in response to a previous question that more of the strengths and royalties that you're looking at.
Thanks for taking my follow-up. I appreciate it. Ian, you mentioned in response to a previous question that more of the streams and royalties that you're looking at are on precious metals mines.
rather than on base metals mines. Can you just go into more detail about why you think that's the case?
Sure.
I would say first off it's probably somewhat symptomatic of the capital markets and then also I think on the precious side you do have a larger number of projects generally kind of the size that we've spoken about. Also you know base metals prices up until quite recently have been quite elevated so I think that has left a number of balance sheets quite strong.
And so with that in mind, just the latter point.
particularly, would you expect that to change in the foreseeable future? I mean, as the global economy weakens, obviously, base metals prices have come down quite considerably in many cases. How long a lag would you expect there to be? If that were to continue to be the case, at what point might you expect the pendulum to shift?
back toward base metals mines.
Certainly, this is a cyclical industry and the pendulum could swing fairly quickly and we've seen that in the past. At the moment it hasn't to a major degree but certainly could move relatively quickly.
I appreciate that. Thanks Ian.
It appears there are no further questions on the phone line. I will now turn the Q&A session over to Bonavitek who will take questions from the webcast. Thank you, Christina. We do have one question from Diego Tramitera of Noster Capital Management. Is your long-term target still to generate less than 20% of revenue from energy assets?
Our overall target is to be the go-to gold stock, which means we got to keep the proportion of gold and precious metals in the portfolio high. Our overall strategy is unchanged. We do...
The core thing behind that is markets are cyclical. Opportunities come at different times and when good assets come available we want to be able to do them. So we're trying to steer away from putting a particular number out there so that we have as much flexibility as possible so that when good assets come available, precious or diversified, that we can take them on board but manage the portfolio so that the...
The vast amount of it is gold and precious metal over time to make sure that the stock performs as a gold stock. Where are we right now in the market? We've been so fortunate. Energy prices are doing particularly well. It means they're a larger portion of revenues. We look at that as exactly the reason that you do it. If you want to capture the run in prices when you have it in different commodities, it tends to be a self-fixing problem.
Right now, I think gold prices are particularly weak, gold equity markets are weak. It means a good place to add assets is in the gold sector. I think we have good opportunities and most likely the next deals that we'll do will be in precious metals and will build up that side of business.
Thank you, Paul, and thank you, Diego, for your question. There are no further questions from the webcast. This concludes our second quarter 2022 results conference call and webcast.
We expect to release our third quarter 2022 results before market open on November 7th with a conference call also held that morning.
Thank you for your interest in Franco-Onubato.