Q2 2023 Franco-Nevada Corporation Earnings Call
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 asset 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 Geos sold for second quarter were 168515 down from second quarter 2022.
For the quarter precious metal Geos were 132033 up slightly from same quarter last year and up 19% from first quarter of 2023.
For the quarter, the largest contributors for precious metal Geos, where <unk> cobre Panama.
At <unk> Geo 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 19683 Geos.
<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.
Marigold and 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 were aimed to Mena Guadalupe and Stillwater.
Brian <unk>, we had lower Geos sold in prior year as the operator was affected by a tropical cyclone that affected proves northern region. In March 2023. This also affected production in April which will impact our third quarter deliveries.
At Guadalupe base, the operator mined less ounces from Lance covered by our street, resulting in lower Geos delivered and sold.
And at Stillwater production was impacted by an incident that damage shaft infrastructure in March 2023. This was remediated in April however, the decrease in Geos compared to prior years also reflects a less favorable PGM to <unk> conversion ratio.
Q2, 2023 saw continued volatility in commodity prices.
Slide five shows the average commodity prices for Q2 2023 and prior year.
Precious metals did see an improvement year over year with gold silver and platinum averaging higher.
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 per barrel in second quarter down 32% versus prior year natural gas averaged $2 32 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 $28 683 for the quarter compared to $50 387 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 in adjusted EBITDA.
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 costs, 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 in barrels of oil equivalent received from energy asset 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 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 Cobra, Panama was again, our largest revenue generator at 22% of total revenue for the quarter, followed by <unk> 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 the amount of 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 geo.
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 each 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.
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 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 hear a three ton prompt acknowledging your request and if you would like to withdraw from the question queue. Please press star followed by <unk>.
Your line using a speakerphone you will need to lift the handset before pressing any Keith. Please go ahead breast all one now if you have any questions.
And your first question will be from Saturday at 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 change what you're focusing on in your deal pipeline I know in the past you've talked about counter cyclical in Boston. So I just wanted to.
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, but when we're investing in other commodities were looking to get better entry points.
That either needs to be 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 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.
I am sure Sandeep here.
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 sheet, but.
That's the most important thing is the dividend, which we intend to raise as we have done in the past.
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 minimum tax.
The draft legislation out in Canada, I'm wondering if there's been any.
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.
No changes.
Okay, and then just to confirm that that is consistent with ASC initial interpretations of the law.
Legislation.
Correct, Okay. Thanks, and then.
We can give.
Counter cyclical investing.
Perhaps it's asking with the Pascua Lama royalty purchase.
It's.
Obviously, a reasonably well known assets, but a 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 target long term option with no further interpretations at least based on what we've heard from Barrick over the last couple of years.
Hey, Josh it's the.
One of our competitive advantages gift given the long dated nature of our portfolio is that we can buy some of these long dated interests.
Yes.
I would like to do it and what we found is is graded down are the ones that ultimately get developed most of the ones that get better over time.
Pathway is certainly one of those one of the best undeveloped gold deposits.
Yeah.
So I think you're right in thinking of it in a counter cyclical sense.
We've done this before Great example was was detour.
When.
<unk> built that mine.
As an underground mine had abandoned it in.
We were able to buy a royalty on it.
In the darkest days.
Ultimately it became a very successful mine.
Way, we like to think about these things.
Whereas the cost of deposit.
Always have operators.
Looking to spend capital on it.
Good security SD action view.
<unk> is it gets developed over time.
And I think it will be a tremendous investment.
Great. Those are all my questions. Thank you.
Thank you.
Next question will be from Michael <unk> at H.
H C. Wainwright. Please go ahead.
Hi, Joe Please on mute your line.
Oh, sorry can you hear me now.
Yes, we can hear you.
Hello, Paul that will absorb both.
No listen correctly identified.
I personally thought interest rates would be topping yellowed or potentially even leveling off by now clearly that hasn't really happened but.
Was curious with longer term interest rate assumptions that.
In your models, given your future funding commitments and things like expansion of underlying streams and also even for future acquisitions. Please.
I think you 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 our investments and many other people who constrained by that.
But I assumed.
With commitments that you have in the future you have some sort of internal models that you use to place yourself against your competition.
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 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 plane depletion year by year through 2027, I saw you have the longer term outlook in your presentation in just like a rough estimate.
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.
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 should be looking at 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.
Please go ahead.
Great Thanks, Paul Sandeep and team.
Maybe my first question is on your guidance as well Paul as you mentioned, we're now targeting the lower end.
Guidance range.
You 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 yields are lower and is that really just due to <unk>.
Lower sort of diversified prices energy prices iron ore prices.
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 has averaged <unk> <unk> and.
2023, and what we're using going forward same 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 get a double impact on converting non gold revenue too.
And that's essentially the reason for guiding to the lower end.
And then.
In terms of some other corporate developments yes.
You talked about in the MD&A.
Our partnership with Amex royalties, it's not new but at least.
Right now I guess youre, putting a number to it joined acquisitions not.
$5 $5 million on Europe , but 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 lead to something 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 Cosmos there are couple of things there we know the team well we like the 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 on time.
Most of the time is engaged on bigger transactions.
So.
Of the one of the great benefits for us in this transaction is the.
Amex team is targeting in 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.
No that's good to hear.
Maybe one last question more asset specific here.
And in the MD&A you highlighted the exploration potential.
I got a bunch of this.
Coral co heiko.
So about 10 kilometers away from <unk> could you maybe talk a bit more about that.
So timing in terms of upside potential and what we could.
Perfect.
So cosmos a bit of background.
On that property and as you'll recall the first mine on that property was to entire mine by BHP was the scone deposit.
The second <unk> is a porphyry deposits so on a parallel trend.
On that same trend as Tim <unk> <unk> deposit.
Total metal value is about three quarters of Watson and Mackay.
But the grades are slightly higher.
So it is a project that.
Glencore has known about for quite some time they have been looking at developing it.
They are scoped it out as different iterations of underground and open pit.
Those 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 debt that they would look to push that project forward in terms of development. So 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 end up of Cai.
It comes down and there is a replacement deposit and so you'd see production continuing for a prolonged period.
Great. Thanks, Paul Sandeep and team and clearly your pronunciation is much better than mine.
Sure. Thanks, Scott.
Thank you next question will be from Martin Pradier at Veritas investment Research. Please go ahead.
Thank you.
In terms of the volumes.
Good value volumes that were down 11% and I was expecting more.
So the question is why.
What is his spectation going forward.
Alright volumes related to which.
Volume in <unk>.
We run our volumes.
Yes. So there was two components one is.
Valley. The production 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 and 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 unreal coking deals I'm talking simply.
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 Vale.
And what is your expectation going forward because that acid was opposed to grow it doesn't seem to be growing much. Yes, obviously they've had.
Production 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 they expected what should we expect in terms of tax for the year.
So the rate was lower because it.
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 has 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 just disconnect at Scotia Bank. Please go ahead.
Yes. Good morning, everyone. Thank you so much for taking my questions.
Wanted to follow up on Pascua Lama, if I could.
Just wanted to know does the royalty on the gold and copper cover.
All of Barrick.
They're then 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 look we'll take about like go into Barrick.
Is there then we are assessing <unk>.
60% because.
I remember it was about 60%.
The asset that's 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.
Yes, you'd have to look at barrick's disclosure to try to form a view 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 Alright.
Alright, that's all thank you for that and maybe just again on the on that.
M&A franchise transaction front.
Paul should we be surprised to see you do.
Energy and our INR deal ahead of a go 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 are 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.
Sub $500 million range I'm, just trying to see whether we're in that I think with like 100 to 350.
I forget 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>.
The year, so you've given us guidance at 55% of the production obviously pricing has an impact on the deals 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 is 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'd expect Q3, and Q4 will be pretty similar even if cobra, Panama ramps up with a stronger Q4, there's other assets that will.
Do better in Q3 and Q4 is just.
Don't have the exact detail by by quarter site Ics essentially there will be similar.
Okay.
And yes, that's it from me. Thank you so much.
Thank you as a reminder, 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 at famous.
Raymond James Please go ahead.
Hi, Good morning, and thank you for taking my question just following up on past law.
Can I ask whether the copper royalty came with the gold royalty and I guess, where I'm going with this.
Whether you paid very much for the copper royalties.
Talks 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 Gould.
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.
<unk> copper in it so the copper was more a tag along 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 you would give us about $800, but the worst ones around on the property. If I remember that were scaled pretty aggressively is it still like can I assume it's just two 7% above 800, even with the gold price.
Like many times that and the sliding scale partners 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 and anything 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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