Q3 2022 Franco-Nevada Corp Earnings Call
To provide an overview of our recent mizuno transaction. 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.
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 three of this presentation I will now turn the call over to Paul Brink, President and CEO of Franco Nevada.
Thanks, Bob and good morning.
I'd like to start by announcing that <unk> will be joining our board of directors.
We pride ourselves on the technical capabilities of our board and Jacques will certainly add in that area amongst others.
<unk> had a very successful career in the industry.
A number of companies and I am sure is well known to most of you.
We got to know Jacques through Who's running companies, where we have royalty interests in particular, while the CEO of premium offering Bruce Jack and as the CEO of <unk> and Andrew Goldfields.
Following sharp welcome to the board of Franco Nevada.
Turning to our Q3 results.
We saw good underlying production from our diversified portfolio of assets in the quarter.
While precious metal prices decline the impact on our revenue in the quarter was partially offset by higher energy prices.
Our Q3 Geos are lower than Q2 than Q2 with two main items.
While Cobra, Panama had record production for the quarter, a strong performance isn't fully reflected in our Q3 Geo sales due to the timing of shipments.
We also had a lower contribution from our Vale iron ore royalty.
Despite these items Franco Nevada has earned record Geos revenue adjusted net income and adjusted EBITDA for the three quarters through September .
We're on track to meet our 2022 guidance, we expect to be at the higher end of our overall Geo guidance range and at the lower end of our precious metal range.
The weaker gold price environment has led to an increase in demand for royalty and stream financing and in our business development activity.
Pleased to have acquired a royalty on <unk> project in Ontario currently advancing through construction.
The projects have to tissues with cost overruns made only tougher in this inflationary environment. Although we believe are going to now have a good line of sight on completing construction as planned.
Yes.
The asset has great upside the current mine plan is a small portion of the total resource and we believe pharma will be recovered over the life of the mine.
Last quarter, we announced the financing package will provide the <unk> mining for the construction of the token does in your project in Brazil.
Since then the company has received its license extensions and has commenced construction.
The genome token to us and you add to a growing list of mine builds in our portfolio.
Advanced ASO large naughty and segue Ella.
Which are scheduled to start production next year, along with Medina with.
We expect to see the first gold ounces from greenstone, Myra Rossa and took into <unk> in 2024.
And Valentine Lake is scheduled to start in 2025.
Our other growth drivers mine expansions.
Cobre, Panama expansion is on track to reach 100 million tonne per annum throughput by late 2023.
First quantum commented this quarter. The mill has performed at the 95 million tonne per annum rate.
And expect by year end, it'll operate sustainably at the 90 million ton per annum rate.
<unk>.
At Detour Lake Agnico have discussed their plans to produce greater than 1 million ounces per year for the expansion work was ongoing through the quarter and I hope to meet the near term throughput target of 28 million ton per annum ahead of schedule.
On the other hand, Stillwater have reduced their growth plans to 700000, PGM ounces by 2027% down from 850000 PGM ounces previously expected.
The other main expansions at Tasiast Macassar Odyssey in island gold.
<unk> progressing well.
We continue to advance our ESG effort on a number of fronts during the quarter, we awarded scholarships to diverse mining students at Mcgill <unk> in Queens we.
We committed 225000 of funding for community programs as part of the <unk> transaction.
A number of programs. We're funding are also currently being implemented.
<unk> community water infrastructure at <unk>.
And education initiative in partnership with Endometrium and community waste management at Cascabel.
In summary, we're blessed with a business model that is high margin largely immune to cost inflation and expose our shareholders to tremendous long term optionality.
With the prospect of global recession, it's great comfort to have no debt $2 billion in available capital and to be generating operating cash flow at a rate that is close to a billion dollars per year.
You'll recall that last year. The board moved the annual dividend review earlier in the year and we expect the same timing in 2023 with a dividend declaration in January for the first quarter dividend that's paid in March.
With that I'll hand, the call over to Sandy.
Thank you Paul Good morning, everyone as Paul mentioned the company saw strong underlying production from our diverse portfolio of assets during the quarter.
The majority of the mining assets performed in line with expectations.
Revenue and earnings were impacted by weaker precious metal commodity prices and timing of deliveries for certain assets.
The one area of the business that continued to deliver strong financial results was the energy Division.
On slide four we've highlighted the gold and gold equivalent ounces sold for the three and nine months ended September 32022 and 2021.
Overall Geo sold were relatively flat when compared to prior year with third quarter Geos sold between 176408 compared to 177, 578% third quarter of 2021.
This precious metal Geos were 120, 542 down <unk> 7150, geos from prior year.
The largest contributors to the lower precious metal, geos, where stillwater and to Mena and Cobra Panama.
The lower contribution of Geos from Stillwater was the results of our mine production being temporarily suspended as a result of flooding in the area in late June the.
The mine resumed operations in late July .
Also the amount of Geos sold from Stillwater was lower due to the impact of lower platinum and palladium prices on a conversion to geos.
Brian <unk>, we expected 2022 to be a more normalized year with silver ounce deliveries to be in the range of $2 8 million to $3 2 million ounces. This is what is transpiring for the first nine months of the year.
However, we've recorded last Geos sold and expected as the gold to silver ratio has weaken this year, resulting in last Geo sold on conversion of silver ounces.
At Cobre, Panama first quantum achieved record production during the third quarter. However, due to timing of shipments gold and silver deliveries and ounces sold were lower than expected for Franco Nevada during the quarter, we expect higher deliveries from cobre, Panama in fourth quarter.
Offsetting the lower Geos sold from the assets mentioned.
We had strong third quarter performance from candidly area and tasiast compared to prior year.
For diversified Geos are valley royalty resulted in just over 3600 geos for the quarter. This was lower than prior year due to lower production and lower iron ore prices.
Also this quarter the true up recorded related to the period January one to June 30 of 2022 resulted in a revenue reversal of approximately $1 6 million.
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 each year. As a result, you will see these types of adjustments to our accruals twice a year Q1 and Q3.
<unk> increased by 54% year over year as we benefited from continued higher energy prices.
Slide five highlights our total revenue and adjusted EBITDA amounts for the three and nine months ended September 32022, and 2021 as you can see from the bar charts revenue adjusted EBITDA have decreased year over year for the three months the company recorded $304 $2 million in revenue in third quarter and 200.
$56 7 million in adjusted EBITDA, a margin of 84, 4% was achieved.
Partially offsetting the lower contribution from precious metals in the quarter was a continued strong contribution from the energy assets as revenue increased from $55 1 million a year ago to $83 $8 million this quarter.
The West, Texas intermediate oil price averaged just over $91 per barrel during the quarter, a 30% increase from prior year.
Natural gas prices were also higher with Henry hub, averaging $7 91 per mcf during the quarter compared to $4 32 per Mcf a year ago.
For the nine months year to date, both revenue and adjusted EBITDA are higher than prior year and New records for the company.
As you turn to slide six you'll see the key financial results for the company. Although geos were relatively flat revenue as mentioned declined because of lower commodity prices.
On the cost side, our cost of sales was flat, which is consistent with the flat year over year Geo sold cost of sales is dependent on which assets deliver stream ounces as not all fixed payments per street mounts are equal as well as the cash cost per Geo, which was $238. This quarter will fluctuate depending on the mix of royalty.
Versus stream geos, including mining and energy, but at current average gold prices. The company continues to generate significant margins.
Depletion decreased to $68 5 million versus $73 million a year ago depletion is based on actual mining geos sold in barrels of oil equivalent received on the energy side of the business as we received last geos from and to Mena valet and Cobra, Panama. This impacted depletion as those assets are higher per ounce depletion assets.
Yes.
With respect to taxes, the effective tax rate for the quarter was 16, 2%, 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 $159 7 million or <unk> 83 per share for the quarter.
Slide seven highlights the continued diversification of the portfolio, which we consider one of the strengths and Differentiators of Franco Nevada as shown just over 70% of our Q3 2022 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 42%.
With respect to asset diversification Cobre, Panama was our largest revenue generator at 15% of total revenue for the quarter, followed by candle area and <unk>.
Cobre, Panama continues to be the only asset greater than 10% of revenue and.
And the last chart highlights our operator diversity, our largest exposure to revenue being generated by any one operator is 15%, which is first quantum who operates cobre Panama.
The other cost component for the company. Besides the cost of sales as our corporate administration cost the chart on slide eight highlights our quarterly revenues and our quarterly corporate admin and share based compensation expense since our IPO as you can see revenues have grown significantly over the period shown while corporate costs have remained fairly stable.
For Q3, 2022, corporate admin, including share based comp was $5 1 million or less than 2% of revenue Manny.
Management believes we can continue to add to the portfolio and grow our business without adding significant cash overhead to the company.
On slide nine we reiterate our guidance for the year based upon commodity updated commodity prices as highlighted on this slide and our expectations of production from our royalty and stream interests for fourth quarter. We are forecasting that we'll be at the high end of the total geos sold guidance of 680000.
740, <unk> also we expect to have a higher contribution of Geos sold from our diversified asset than a regional plan.
I will now turn it over to Ian who will speak to our recent Regina transaction.
Thank you Sandeep.
In October we were very pleased to complete the <unk> royalty and equity finance.
We are delighted to work with the <unk> team and its bank syndicate to provide a financing solution for the project, which is expected to go into production next year.
The project design is conventional from a technical standpoint and is located in excellent mining jurisdiction, Ontario.
We believe that there is good potential in the broader land package over time and this exciting district next to island gold, where we also have a royalty.
We've included key project parameters on this slide and highlight the recent quarterly update we're arguing noted the machina project.
Excuse me is now 70% complete.
Moving to the next slide Slide 11, we highlight our available capital of $2 billion.
Equity valuations of mine developers remained particularly depressed in this high inflation environment and we believe we can put capital to work partnering with some of the best development projects and help them to differentiate themselves.
With that I'll hand, it back to the operator for any questions. Thank you.
Thank you.
During the Q&A session. If you would like to ask a question simply press Star then the number one on your telephone keypad.
I would like to withdraw your question. Please press the star followed by the Q.
Thank you for joining us on the webcast. Please submit your questions through the Q&A session.
Section sorry of the webcast.
Yes.
Your first question on the phone lines from.
Hey, Phil.
H C. Wainwright. Please go ahead.
Hi, everyone. It's heiko.
Sure.
And the small extend my congratulations to <unk> I have the pleasure of working with them.
I mean, it was a pleasure.
Congratulations to all of you.
Yeah.
I hear more and more about.
More and more both for sellers in the market I mean Thats. Just one example that I understand this is not a perfect comp.
$50 million deal happened today, where the solar specific we stated that the deal removed the financing overhang.
Obviously this is a sort of a special situations thing, but can you provide some insights on what youre seeing with pricing of distressed sales.
In the market and also the sizing in the development stage that these potential streams might be in <unk>.
<unk> hinted at some of this in your release when you go weaker gold price environment has led to the increase in demand for royalty and stream financing, but maybe if you could just provide some more data points if you could.
Sure Heiko, it's Ian speaking here.
Thank you for the question, it's an excellent observation.
I think what we see at the moment is a number of companies specifically in the precious metal space, where there is an acute need for capital.
I think our transaction that we announced with <unk> is a good case.
Case in point is the type of financings that were looking at at the moment.
And we see good potential within the precious metal space to continue to do more of these kind of medium sized transactions.
So hopefully going forward there'll be more like that.
<unk> on the guidance I think is more towards the intermediate.
Overall size.
And pricing wise.
Pricing I think the market remains relatively competitive, but where we try to differentiate ourselves is to work with partners that value, what we do and the solution that we provide and we try to be nimble in that respect and provide value to our counterparties.
And hopefully as a result also offer our shareholders attractive returns on the deals that we do.
Fair enough. This was a wonderful lead into my follow up question and with the caveat that I never really headed pointed out to me quite like this on a call or rather in the earnings release.
With all the push towards ESG and I mean, you actually breaking down in quantifying some of your longer term ESG goals in this release today.
Are you actively avoiding investments with operators that you believe do not fulfill your longer term ESG requirements I guess, what I'm asking is in addition to having their social license to operate which I assume is always a prerequisite would you actively not invest into something because of board composition or other.
ESG.
Airports failures.
Heiko, It's Paul Yes, ESG is very important in the way we think of ourselves as we are allocating capital on behalf of our shareholders.
We want to make sure that we do and we want to make sure that they're comfortable but when we allocating capital. It is into good projects. So a lot of our due diligence is focused on environmental and community impacts.
And absolutely there are there are projects that we look at whether it's either.
And existing environmental condition, maybe something in their planning that we're not comfortable with.
Just for community relationship.
There are deals that we've turned down for all those reasons in the past.
Make sure that we are supporting good projects.
Interesting I appreciate the insight I'll get back in queue. Thank you so much.
Thank you the next.
Question comes from John Tumazos of John Tumazos, very independent research. Please go ahead.
Thank you.
Is it fair to say.
Sure.
Investment criteria automatically get a little more rigorous with lower metals prices because.
Yes.
Spot gold price, rather than estimated future gold price and making investments.
Seek to bottom quarter.
Oscar.
In addition.
In the current period of rapidly rising interest rates.
At 4% and getting higher.
Would you raise your hurdle rate of return.
So it reflects current market conditions.
John Paul again.
I'd say the best way to characterize it is.
We want to be a consistent source of capital throughout the cycle and we try to be as consistent through the cycle in terms of what that cost of capital as well.
What tends to happen is when things get overheated in the sector nobody hits, our term sheets, because they can get cheap.
Cheaper capital, particularly from the equity markets.
When the markets are weak when.
When the cost of when other cost of capital to come higher that's when we see that people tend to hit out term sheets.
So it's less so that we try and change the way we price deals. It's just that we're trying to be consistent through the cycle.
So youre using the same numbers today as you would have used on March one.
2000.
No.
<unk>.
When we present when we look at things, we always have a view as to what our current prices. We also have a view as to what our long term prices, we try and look at every deal through those two lenses.
The art of it is picking a point somewhere in between the two.
But we're trying to make sure that the deal makes sense to us both on current and long term prices.
Do you worry that it's too hard.
Do deals and do large deals because of the capital and competition in that sector or is it better to just sit on the sidelines and let other people pay too much.
There is more competition in the sector no doubt about it.
But our view is.
This is a very capital intensive sector, it's a very volatile sector and that if you're patient good assets will come available and there'll be good opportunities to grow our company.
Thank you.
Okay.
Thank you once again, ladies and gentlemen, if you do have a question on the phone lines. Please press star one at this time.
Next question comes from Tanya asking Nordic.
Scotiabank. Please go ahead.
Good morning, everyone I think Thats me.
Just wanted to circle back and fill I understand correctly so Ian.
When you said you had.
Being more back end loaded than mid range.
For pricing.
That $100 million to $300 million range that we talked about in Q2.
Hi, Tanya.
Yes, I think thats a reasonably.
A fair way to characterize it I wouldn't put hard bounds on that there's potential both bigger and smaller.
As we negotiate and look at transactions.
That is generally where we're seeing the majority of the opportunities at the moment and it is pretty active.
And the ones under $100 million in <unk> royalties silicon deals that youre seeing in so many streams would be greater than 100 would that be fair.
Not necessarily.
I think we see.
Both types of opportunities bigger royalties as well are also out there.
The royalties like <unk>, and Ontario, 2%, MSR, it's pretty much bread and butter type of business, we like to do those even if they are a little bit under $100 million as you pointed out.
Okay.
You mentioned in the precious metal space and your focus and that just project financing continues to be the main main opportunity.
Yes, I think project financing Thats, a fair assumption that that is the majority of the opportunities, but we see others as well and there are also kind of byproduct base metals deals out there that we look at.
Okay. So those are back on the radar again.
I don't know if they ever went off but yes, there are some of those out there.
Thank you Ian for that if I could ask a bit of guidance from sandy.
Just looking out for the remainder of the year.
You're telling us.
Sites on Cobra, Panama, so expecting a stronger Q4.
Hamlin will look like it came in that guidance and I think it was that $5 million to $6 million.
Madian per quarter, or thereabout, and I think you had mentioned.
Distributed Q3, Q4, just wondered about valet, hence we look quite off on that Tom.
At that time.
Contribution any guidance for Q4 on that one I know, we don't have the accrual happening, but anything you can give that would be appreciated or any other asset class.
The key for performance.
Sure.
So Tony I guess.
<unk> I would expect similar to Q3 and fourth quarter and then specifically on finally, obviously iron.
And where prices have come down.
So I would expect something similar to third quarter, obviously backing out the revenue reversal of $1 6 million that was part of that number.
Okay and the other assets in Q4 that you think you should flag for us.
No as I said I think underlying production at most assets was good in the quarter. It was just timing of deliveries in Cobre Panama.
Specifically so.
I think it's business as usual I think most assets will come in similar.
Okay. That's I appreciate it. Thank you so much and I will look forward to that dividend in January .
Thank you.
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 we have two questions then berny picchi palisade capital and the first one is can you quantify the myth that occurred because of shipment delays at cobre Panama.
What would that mix be picked up in Q4.
Sure. So the delivery that was delayed to Q4 for Cobra was about seven to 8000 Geos.
Is that so we have received that have not will be sold off in this quarter. Obviously, you cant predict on timing of shipments so.
So theres nothing to say that there is a delivery that could potentially be received at the end of December it doesn't get pushed into January but.
That is the quantum of the shipping delay for for Q3.
Thank you and the second question is on bringing is it would appear that acquisitions of non precious metals and not front and center at this time.
Any comment.
We continue to look outside the precious metal space as well I think what we would note. However is there is a preponderance of deals to do in the precious metal space and in the current pricing environment, that's where we're focusing a great deal of our attention.
Ian.
Last question is from Vincent <unk> of <unk> capital does Franco Nevada afford any physical gold unaccounted.
We do so we have three royalty stack pay us inclined at Tasiast Detour Kirkland Lake.
Roughly 66000 ounces per.
Per quarter.
We do hold that on the balance sheet and we sell that on a regular basis.
And then the last question.
And there are no further questions from the webcast.
Is there a third quarter of 2020, <unk> conference call and webcast.
We expect to release our year end 2020 results estimated close unmatched.
Call held the following morning. Thank.
Thank you for your interest in Franco Nevada.
Yes.
Ladies and gentlemen, this does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
Okay.
Yes.