Q2 2023 Franco-Nevada Corporation Earnings Call
Good morning, and welcome to Franco Nevada Corporation second quarter 2023 results conference call and webcast. This call is being recorded on August 19 2023.
At this time all lines are in a listen only mode. Following the presentation. We will conduct a question and answer session will you may ask a question to 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 muted assistance during the call. Please press star zero for an operator and I would like to turn the conference over to your host Candida Hayden Senior Analyst Investor Relations. Please go ahead.
Thank you Sylvia and good morning, everyone. Thank you for joining us today to discuss Franco Nevada's second quarter 2023 result.
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.
Presentation is also available to view on the webcast.
During our call this morning.
<unk>, President and CEO of Franco Nevada will provide introductory remarks, followed by Sandy Brenna, Chief Financial Officer, 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'd 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 .
Thanks, Good data and good morning.
For Q2, our core assets returned to normal production and deliveries at Cobre, Panama and added Mackay caught up from the disruptions in Q1.
Revenue from our diversified assets was impacted by lower oil gas and iron ore prices compared to the relative highest in the prior year period.
As a result, we expect total geos for the year to be at the low end of our guidance range.
With the Cobre, Panama CP 100 expansion physically complete we started to see the benefit of high throughput for the quarter.
First quantum expects to exit the year at 100 million tonne per annum throughput rate.
Following public consultation the refresh concession contract was signed by the government and first quantum and is expected to be presented before the National Assembly during the current city.
The mining continues to do a tremendous job with the construction of the Taco does in your gold mine in Brazil.
We have now funded $183 million about totaled 250 million Scream deposit.
And the project is on track for commercial production in the second half of 2024.
The quarter saw first production from a couple of new mines, Argonaut's Machina mining in Ontario, and <unk> mine in Cote d'ivoire.
Goldfields expects first production from <unk> Norte, essentially before year end.
We added a number of royalty interest during the period.
In Chile, we acquired 264% gold royalty on bags Pascal property.
Also acquired a one half percent MSR from Charles Mining's, Balkan Gold project.
And we increased our holding on Lundin Mining's casserole, and it's top of mind.
So we now own a total of five 7% peso on the mine.
In Canada, we acquired an additional one offset MSR in marathons Valentine Gold project.
And we now hold a total 3% peso on the project.
During the quarter, we entered an agreement to provide royalty financing to exploration stage combination partnership with the <unk> royalty Corp.
Great respect for <unk>. This team on the ground geologist and they'll be responsible for sourcing the transactions.
We were active with community contributions over the three months.
Contributed to survive you still waters community initiative in Montana and to the I 80 fund, which support small businesses and rural Northern Nevada.
We also partnered with perpetual resources to build social capacity Stibnite Gold project.
Franco Nevada is debt free is.
It's growing its cash balances and at the end of June we had $2 3 billion in available capital.
Our business development team is active.
So many operators and developed as royalty and stream financing is currently the lowest cost available capital with.
With high rates debt financing its expensive and there's little depth in the market for new issues all equity.
With that I'll hand, the call over to Sandy.
Thank you Paul good morning, everyone.
Diverse portfolio continued to generate strong cash flows and high margins during second quarter 2023.
And to Mackay and Cobra, Panama returned to normal operations, our key contributors to the strong financial performance in the quarter.
As well as the remainder of our mining portfolio performed in line with our expectations.
With a diversified assets the retreat in iron ore and energy prices from 2022 did result in a reduction in diversified revenues and associated Geos in second quarter 2023 compared to prior year.
On slide four we highlight the gold equivalent ounces sold for the last five quarters overall Geo sold for second quarter were 168550 <unk>.
John from second quarter 2022.
For the quarter precious metal deals for 132033 up slightly from same quarter last year and up 19% from first quarter 2023.
For the quarter the largest contributors for precious metal Geos were entered Mackay Cobre Panama.
And I had to pick high Geos delivered and sold were higher in the quarter compared to prior year. Following the temporary suspension of operations and constrained logistics experienced in Q1 2023 operations returned to normalized levels in March resulting in significantly higher deliveries to Franco Nevada with 19680 <unk>.
In the quarter compared to just over 10000 Geos in Q2 2022.
For Cobra, Panama operations ramp back up to full production.
Following an interruption due to export restrictions in first quarter.
Together with the benefit of additional processing facilities related to the CP 100 expansion project, we received strong deliveries from Cobre, Panama with 36650 Geos sold in the quarter.
Meryl Golden Tasiast were also strong contributors during the quarter due to mine sequencing and higher grades and recoveries respectively.
A few assets, which performed below expectation, where Anthony Guadalupe and Stillwater.
France, Mena, we had lower Geos sold in prior year as the operator was affected by a tropical cyclone that affected cruise Northern region. In March 2023. This also affected production in April which will impact our third quarter deliveries.
Waterloo based the operator mined less ounces from Lance covered by our suite.
<unk> seen lower Geos delivered installed.
And at Stillwater production was impacted by an incident that damage shaft infrastructure in March 2023. This was remediated in April however, the decreasing geos compared to prior years also reflects a less favorable PGM to Gulf conversion ratio.
Q2, 2023 saw continued volatility in commodity prices.
Slide five shows the average commodity prices for Q2 2023 and prior year.
<unk> metals did see an improvement year over year with gold silver platinum, averaging higher however, palladium iron ore and energy prices were down significantly.
A large component of diversified Geos and revenue is energy production has remained strong and was 25% higher on a Boe basis during the quarter. However, seen as seen on slide six the bar charts highlight the retreat in oil and gas prices year over year.
W. Ti averaged $73 78, a barrel in second quarter down 32% versus prior year natural gas averaged $2 32, SaaS per mcf down 69% versus prior year.
As a result, the sharp fall in energy prices impacted our geos sold generated by our energy assets, which were 28683 for the quarter compared to 50387 in Q2 2022.
As you will recall energy prices saw sharp increase in 2021 and 2022 due to many factors with the largest being geopolitical tension.
Slide seven highlights our total revenue and adjusted EBITDA amounts for the three months ended June 32023 and 2022.
Revenue and adjusted EBITDA have decreased year over year.
The decrease is the result of lower contribution from diversified assets, partially offset by better performance from precious metals.
The company recorded $329 $9 million in revenue in second quarter, and $275 $6 million adjusted EBIT.
Margin of 83, 5% was achieved.
As you turn to slide eight you will see the key financial results for the company.
As mentioned Geos and revenue were lower in the quarter compared to prior year on.
On the cost side, we had an increase in cost of sales, which was $47 1 million compared to $45 5 million in Q2 2022.
The largest component of this is the per ounce fixed cost we pay for stream ounces. We sold 102785 stream ounces in the second quarter compared to 98163 a year ago.
Depletion increased to $75 1 million versus $69 6 million a year ago.
Depletion is based on actual mining geos sold and barrels of oil equivalent receive from energy assets as we received higher geos from <unk> and Cobra, Panama, which are higher per ounce depletion assets. This resulted in higher overall depletion expense.
For second quarter 2023, adjusted net income was $182 9 million or <unk> 95 per share compared to $195 8 million or $1 two per share in the prior year.
Slide nine highlights the continued diversification of the portfolio as shown 79% of our Q2 2023 revenue was generated by precious metals. This compares to 69% in Q2 2022.
Geographic revenue profile has revenue being sourced 89% from the Americas.
With respect to asset diversification Cobre, Panama was again, our largest revenue generator at 22% of total revenue for the quarter, followed by active Mackay and candle area.
And the last chart highlights our operator diversity, our largest exposure to revenue being generated by any one operator is 22%, which is first quantum who operates cobre Panama.
Slide 10 illustrates the strength of our business model to generate high margins on the slide you can see that cost of sales has remained fairly consistent over the period shown.
Cost of sales will depend on the mix of royalty versus stream geos, including mining and energy.
During second quarter 2023, the cash cost per Geo, which essentially cost of sales divided by gold equivalent ounces sold was $280 per deal.
This compares to 238 per Geo in second quarter 2022.
Corporate administration costs, including stock based compensation was less than 3% of revenue for the quarter. The total can fluctuate quarter over quarter, but it has tended to average approximately $8 million quarter historically.
In a rising commodity price environment, we expect to benefit fully as we do not expect our cost structure to change significantly.
Slide 11 summarizes the financial resources available to the company when including our credit facility of $1 billion.
Total available capital at June 30 of $2023 $2 3 billion the company is debt free.
And on Slide 12, we reiterate our guidance for the year based upon updated commodity prices as highlighted on the slide and our expectations of production from our royalty and stream interest for the second half of the year, we are maintaining our guidance range for total geos sold of 640000.
To 700000.
However, we expect to be at the lower end of that range due to the conversion of non gold revenue to geos based on our revised commodity prices.
Now I will pass it over to the operator as we are happy to answer any questions.
Thank you Sir.
Ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your Touchtone phone you will pan here <unk> prompt acknowledging your request and if you would like to withdraw from the question queue. Please press star followed by two and if you are using a speakerphone you will need to lift the handset before pressing any Keith. Please go ahead Brett.
<unk> one now if you have any questions.
And your first question will be from <unk> Parikh of credit Suisse. Please go ahead.
Hi, Thanks for taking my question as you think about the diversified commodity prices of iron ore.
Energy prices being lower does that in any way changed what you're focusing on in your deal pipeline I know in the past you've talked about counter cyclical investing so I just wanted to kind of.
Tie that in with how the commodity prices are moving.
Thanks.
The point is.
As you say.
Try to be opportunistic investors.
Our focus is always on precious metals.
And we're investing in other commodities, where we're looking to get better entry points.
That I have any speed based on lower commodity prices or at least that we can.
Used lower longer term prices in battling the deal.
So when you do have price weakness that that as an opportunity.
Okay, and then just on the balance sheet, just given the strength of the balance sheet.
$1 2 billion of cash.
Undrawn revolver.
But can you just walk us through maybe how youre thinking about use of capital in the context of there aren't that many large deals out there.
Just trying to think of how.
The balance sheet will be utilized thanks.
I am sure Sandeep here and really there is no no change in strategy.
<unk> has always had a strong balance sheet and we are happy having cash on the balance sheet.
Obviously dividend is important but the number one priority is to deploy that capital to add assets and we know it's a cyclical business. There is times when our capital will be needed and Theres other times, where we might not be as active.
So we're happy accumulating cash on the balance sheets, but Chad SaaS and most important thing is the dividend, which we intend to raise as we have done in the paas.
Okay, great. Thank you.
Thank you next question will be from Josh Wolfson at RBC capital markets. Please go ahead.
Yeah. Thanks.
On the global item and tax with the draft legislation.
In Canada, I'm wondering if there's been any further.
Further clarity on what the potential impact is and whether this is something that is expected to be.
Affecting 2024.
Taxes paid.
Yes, Josh no change as we said last quarter, the estimated 3% to 4% of our NAV based on GMT being implemented January one.
No changes.
Okay, and then just to confirm that that is consistent with I guess the initial interpretations of the.
Legislation, yes, correct, okay. Thanks, and then.
We can give.
Counter cyclical investing.
Perhaps asking with the Pascua Lama royalty purchase.
It's obviously, a reasonably well known assets, but sort of a larger dollar value I guess for an option style of royalty I'm wondering if there's any.
Additional views the company has on on the potential there or this is.
Just sort of a tuckett long term option with no further interpretations at least based on what we've heard from Barrick last couple of years.
Hey, Josh it's the.
We think one of our competitive advantages given the long dated nature of our portfolio is that we can buy some of these long dated interests.
We'd like to do it and what we found is is greater damage.
Ones that ultimately get developed also the ones that get better over time.
Pathway is certainly one of those one of the best undeveloped gold deposits.
So I think you're right and think you are at an account the cyclical sense.
We've done this before Great example was with <unk>.
Quinn.
<unk> built that mine.
An underground mine had abandoned it in.
We were able to buy a royalty on it.
In a sense in the darkest days.
Ultimately, it's become a very successful mine.
We like to think about these things.
Whereas the cost of deposits.
These have operators.
Looking to spend capital on it it's in a good secured jurisdiction.
Have you is it gets developed over time, and I think there'll be a tremendous investment.
Great. Those are all my questions. Thank you.
Thank you.
Question will be from Michael <unk> of H C. Wainwright. Please go ahead.
Heiko please on mute your line.
Oh, sorry can you hear me now.
Yes, we can hear you.
Hello, Paul that will still have sorry about that.
As you would as you correctly identified.
I personally thought interest rates would be topping yellowed or potentially some leveling off by now clearly that hasn't really happened, but I was curious with longer term interest rate assumptions that you use in.
In your models, given your future funding commitments and things like expansion of underlying streams and also even for future acquisitions. Please.
I think it shortly.
We're in the very fortunate position, we don't have any debt.
So as rates go up while many people are constrained we're not.
Really puts us in a position that I think we've got more latitude in investments than many other people who are constrained by that.
But I assume that with.
With commitments that you have in the future you have some sort of internal models that you use to place yourself against your competition now.
We have our models, but as we don't have that and typically we don't carry that as a long term.
Source of financing when we've had it we've repaid it quickly.
It doesn't factor heavily into our cost of capital.
Fair enough I think I think it will take this one offline.
And then also can you provide some color on your planned depletion year by year through 2027, I saw you've got the longer term outlook in your presentation in just like a rough estimate by year.
I don't have those numbers in front of me HEICO, we can take that offline.
Perfect and then last one I had just looking at the remainder of the year what assets do you think it.
Might make the biggest difference between planes for your outlook and what we actually come in in other words, what do you think is there anything that al what should we look at it particularly closely.
I think we've reiterated our guidance. So the ranges that we had provided as part of our March guidance I think we're comfortable that.
Our core assets will achieve those targets in which case it results in us meeting our guidance levels in the second half of the year.
Fair enough I appreciate it I'll give you guys a call back later, okay. Thanks Heiko.
Thank you next question will be from Cosmos <unk> at CIBC. Please go ahead.
Great. Thanks, Paul Sandeep.
Maybe my first question is on your guidance as well Paul as you mentioned, you're now targeting the lower end of your guidance range.
You've kind of answered my questions, but I just wanted to confirm.
If I just look at your precious metals guidance, you're actually tracking pretty well.
So the fact that youre targeting for total Geos the lower Ed is that really just due to you know.
Lower sort of diversified prices energy prices iron ore prices or is that too simplistic of a way to look at it.
No Cosmos Youre essentially correct.
When we did our original guidance at the iron ore price, we used was higher than what it is average thus far in.
2023, and what we're using going forward staying with the energy prices and so.
And the other side the gold price is higher than what we had in our original guidance. So.
You got a double impact on converting non gold revenue too.
POS and that's essentially the reason for guiding to the lower end.
And then.
In terms of some other corporate development yet.
You talked about in your MD&A.
The partnership with <unk> ex royalties, it's not new but at least.
Right now I guess youre, putting a number to it joined acquisitions lots two and.
$5 $5 million.
You bet.
I guess my question is.
What does each of the parties, bringing to the table I kind of know the answer but I just wanted to confirm and could this be just something thats bigger down the road or is this really the niche in terms of <unk>.
Smaller earlier stage royalties.
Utilizing say the technical expertise.
Yes.
<unk>.
As Scott and I'll say, a couple of things there we know the team well we'd like to team.
Part of the DNA of our business is is to keep on bidding on the smaller royalties, where we see value.
Our issue is how we prioritize that time.
Most of the time is engaged on bigger transactions.
So.
One of the great benefits for us in this transaction is the.
Amex team is targeting these transactions.
We pay a bit of a carry on the deal.
Our capital being available means that they can approach parties with more capital to put to work.
So those are the main elements of it.
And the overall strategy here is it a bit to what I alluded to in the overall comment.
Capital really is constrained for the gold development sector, and particularly for the earlier stage exploration sector.
So we think we can profitably put dollars to work in an area that really needs for capital.
Yes, that's good to hear.
Maybe one last question more asset specific here.
And so in the MD&A you highlighted the exploration potential.
I've got a bunch of this.
Coral co heiko.
So I will take a lot of it is away from <unk> could you maybe talk a bit more about that in terms of timing in terms of upside potential and you know what.
We could well be.
Good luck.
So cosmos, it's a bit of background on that property and as you'll recall. The first mine on that property was 10 timeline by BHP was the Scone deposit.
The second <unk> is a porphyry deposits so on a parallel track.
On that same trend is to tie a is <unk> not the <unk> deposit.
Total metal value, it's about three quarters of Watson and Mackay.
But the grades are slightly higher.
So that's a project that.
The Glencore has known about for quite some time <unk> been looking at developing it.
They are scoped it apps as different iterations of underground and open pit.
Proportions of that.
They are currently working on building social license with the communities.
With a view that.
Once they know that they've secured that that they would look to push that project forward in terms of development.
Don't have an exact timeline on when it might start contributing.
But I think the way to think about it is.
That at least by the time added Mackay.
It comes down and there is a replacement deposit and so you'd see production continuing for for a long period.
Great. Thanks, Paul Sandeep and team and clearly your pronunciation is much better than mine. So I've got a few ticks.
Sure. Thanks, Scott.
Sure.
Thank you next question will be from Martin Pradier at Veritas investment Research. Please go ahead.
Thank you.
In terms of the volumes.
At Valley volumes that were down 11% and I was expecting more.
So the question is why.
What is your spectation going forward.
Alright volumes related to which.
Value.
We run our volumes.
Yes. So there was two components one is.
Valley.
That is usually lower in the first half of the year versus the second half of the year. So we've always guided 45% of our Geos will be in the first six months of <unk> 55 in the second six months.
But there was lower production at the mines themselves and then with the lower iron ore price.
<unk> and lower revenue from Valley, and then when you convert to Geos at a higher gold price. It results in lower Geos. So theres no real cooking Geos I'm talking simply if you take the iron ore number yes, that's lower is 11% lower.
And my expectation is that they would produce more.
Yes, so the revenue number it's our best estimate at this time right. So we don't we don't receive a number from valley, we're making our best estimate so it could be a case of we will be making an adjustment in Q3 based upon what the actual numbers come out from Kibali.
And what is your expectation going forward because that acid was supposed to grow and it doesn't seem to be growing much. Yes, obviously they've had.
<unk> challenges.
Which hopefully get rectified, but.
They have a threshold in late 2020 for early 'twenty five.
Where our royalty there will kick in so for our for Franco Nevada, We do expect higher production from that royalty going forward, but that won't kick in until end of 2024.
Okay.
The tax was rather low.
The tax rate was 13%.
Which is lower than what I expected.
What should I expect in terms of tax for the year.
So the rate was lower because.
It's a mix of where the income is earned because we had higher stream ounces from cobre, Panama and Mackay.
Our Barbados subsidiary was a larger contribution of our of our net income which resulted in a lower tax rate and we had lower energy revenue, which comes out of the U S and Canada.
Going forward, we typically guide to about 15%.
Effective tax rate.
Okay perfect. Thank you very much.
Thank you next question will be from Tanya <unk> connect at Scotia Bank. Please go ahead.
Yes. Good morning, everyone. Thank you so much for taking my questions.
Just wanted to follow up on Pascua Lama, if I could.
Just wanted to know does the royalty on the Goldman Conference hover.
All of Barrick reserves and resources on the Chilean side.
Yes, Tanya that's right the royalty applies only to the land side of the border, but it does cover all of the current resources on that side of the border and in fact, there is an area of interest.
That is broader than barrick's property position itself.
So if I this will take about like go into Barrick.
Reserves and resources and take 60%.
I remember it was about 60% of the asset sets on the Chilean side versus 40 on Argentina would that be how you kind of view that when you paid your 75 million on that.
Yeah, you'd have to look at barrick's disclosure to try to form a view of of resources on the on the Chilean side. Our view was was a bit higher than that we our view is more like 80%.
So when we used when we were looking at our economics, we were using closer to 80% of the resource on the Chilean side.
Okay.
That's helpful. Thank you for that and maybe just again on the on the.
M&A franchise transaction front.
Paul should we be surprised to see you do.
Energy and our iron ore deal ahead of our goal deal right now because the price because of where the prices are.
Our preference is always to add more precious metal.
But we always say, we're open oil commodities, it's driven by good deposits.
So you shouldnt be surprised if you see.
And iron ore and oil and gas deal.
You should expect that it would be on a great deposit.
Okay and on all of these opportunities that Youre looking at are we still in that.
500 million range I'm, just trying to still see whether we're in that I think with like 100 to 350.
I forgot that.
On all of these that you are looking right now is that the range I should be thinking about.
Yes.
Most of what we're looking at is a modest size. So you are accurate.
Under the 300 area.
Yes.
Okay perfect.
And then sandy maybe if I can come to you to just ask about <unk>.
A year or so so you've given us guidance at 55% of the production obviously pricing has an impact on the <unk> in the second half of the year.
Oil and gas or the energy division to be lower and the second half is there anything on the growth side is it evenly distributed I know Cobra, Panama ramping up I, just don't know what the timing of your sales should I be thinking.
Even distribution on the gold side.
At this stage, yes, Ken Kenny I would expect Q3, and Q4 would be pretty similar.
If cobra, Panama ramps up with a stronger Q4, there's other assets that we will.
Do better in Q3, and Q4 is just we don't have the exact detail by by quarter site IC essentially there will be similar.
Okay.
Yes, that's it from me. Thank you so much.
Thank you.
Minder, ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your Touchtone phone.
And your next question will be from Brian Macarthur.
Raymond James Please go ahead.
Hi, Good morning, and thank you for taking my question just following up on Paas law.
Can I ask whether the copper royalty came with the gold royalty and I guess, where I'm going to SaaS.
Whether you paid very much for the copper royalty settlement.
Fox with different individuals.
And really the question then is do you see something different paths for where we'd be getting copper going forward or was most of the bid price space assuming on the two 7% MSR goal.
Yes, Hi, Brian .
The royalty that we bought was primarily based on the value and the goals for the two 7% MSR at today's gold prices. The copper the small copper royalty came attached to that we did buy it through different sellers, but each royalty had.
Gold and copper in it so the copper was more a tag along and we don't see as much value in the copper royalty at this stage.
Great that's what I thought and the second part you talked about it being a sliding scale and you gave us about $800, but the worst ones around on the property if I remember that we're scaled pretty aggressively is it still.
Like can I assume it's just two 7% above 800, even with the gold price towards that.
Many times that and the sliding scale part of it is on the lower end or is there a function as we ramp up through certain higher prices that you get an extra kicker.
The the sliding scale tops out at $800 an ounce so at today's prices.
Above $800 an ounce, it's two 7%.
We would obviously just get the benefit of the higher gold price in that scenario.
Great. Thank you very much.
Thank you and at this time, we have no other questions registered. Please proceed with any closing remarks.
Well Q&A on the web.
Thank you sorry, there are no questions on the webcast. This concludes our second quarter 2022 results conference call and webcast. We expect to release, our third quarter 2023 results. After market close on November eight with a conference call held the following morning. Thank you for your interest in Franco Nevada.
Thank you ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending and at this time, we ask that you. Please disconnect your lines.
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