Q3 2023 Franco-Nevada Corp Earnings Call
Okay.
Good morning, and welcome to Franco Nevada Corporation third quarter, 2023 results conference call and webcast.
This call is being recorded on November nine 2023.
At this time when lines are in listen only mode.
Following the presentation, we will conduct a Q&A session, where you may ask a question through the phone line webcast.
If you are joining by webcast you may submit written questions through the Q&A session any time during this call by typing your question in the Q&A section the webcast platform.
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I would now like to turn the conference over to your host Candida Hayden senior evidence.
Mr Relations. Please go ahead.
Thank you Jerry.
Good morning, everyone. Thank you for joining us today to discuss Franco Nevada's third quarter 2023 results accompanying this call is a presentation, which is available on our website at Franco Nevada Dot Com, where you will also find our full financial results presentation.
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.
Led by Sandy Brenna, Chief Financial Officer, who will provide a brief review of our results.
This will be followed by Q&A period.
Full executive team is available to answer any questions.
Participants may submit questions by telephone or via the webcast.
We'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 over the call to Paul Brink, President and CEO of Franco Nevada.
Thanks, Ken data and good morning.
We were saddened holding onboard yesterday with an empty seat after passing of Randall Oliphant early in September.
<unk> was a leader in the gold mining industry.
A strong presence in our boardroom for 16 years.
I played a big role in our company's success is missed by all of us at Franco Nevada.
Yeah.
Our core precious metal.
Precious metal assets and Covid.
Third quarter results.
Both precious metal Geos and revenues were up over the same period last year.
Total revenues increased although total geos were slightly down in part due to gold prices being relatively strong gas and oil and gas and iron ore prices.
Fourth quarter, Geos, I expect it to be slightly higher than the third quarter.
Cobre, Panama CP 100 expansion is on track for year end and.
And we expect the core streams to perform well.
As we'd indicated following Q2, we expect to be near the low end of our Geo guidance range for the year.
If oil prices maintain at current levels. It will further boost revenues and financial results.
Cobre, Panama has dominated the news over the last 10 days, that's been substantial social and anti mining process.
Following approval by the National Assembly of the revised concession agreement in October.
Last week, the government enacted a moratorium on granting new mining concession contracts.
They also proposed but didn't proceed with a public consultation.
On the new mining contract.
The Panamanian Supreme Court.
Now considering a number of lawsuits challenging the constitutionality.
Buffalo for Essex.
Production at Cobre, Panama has continued despite the protest activity including road blockades.
We've been in close contact with our partner first quantum as the situation unfolds and together we are continuing to monitor it closely.
Looking forward to 2024, we're expecting added precious metal contributions from a number of new mines.
Most impactful will be the Taco does in your screen, which of your mining benches is progressing construction and as you would expect from that team on time and on budget.
We have a meaningful 3% MSR on equinox and Orion Greenstone project in Ontario, My first goal is expected before midyear.
We recently agreed to acquire an incremental 1% MSR unorganized Medina gold mine to count total N I saw there will slow to 3%.
<unk> achieved commercial production November 1st and continues to ramp up production.
Lastly, Goldfields is Solara smelter project in Chile with.
96% complete at the last report and we expect our first royalty payments in early 2024.
We continue to get good news on the longer term organic growth and the portfolio Ken.
Kendall area received its environmental impact approval from the regional Chilean authorities.
And I hope that paves the way for an expansion of the underground operations that they've been contemplating.
On a similar note Ken Ross and are considering an underground expansion of Tasiast.
Both Hebei and Canadian nickel have released new studies.
On copperweld, where the timeline to production in 2028.
In our feasibility study at corporate Nicholas.
Lundin mining again is having great success with our recently acquired casserole and its mine with.
With throughput well ahead of the acquisition assumptions and aggressive exploration program planned.
Math and gold had a simplified permitting process confirmed.
That would allow that the very deposit expansion be included earlier in their mine plan.
Finally on our balance sheet and outlook.
While developments at Cobre, Panama have added uncertainty and one of them.
Our assets are.
Business is designed to weather such events and regardless of the outcome of our.
Business will remain robust generating strong cash flows with high margins.
We have no debt and a cash balance of $1 3 billion.
Including our Undrawn facilities available capital for deployment is $2 3 billion.
We continue to be the capital provider of choice for many players.
Our equity capital is difficult to raise and debt capital is increasingly expensive.
I'll turn it over to Sandy.
Thanks, Paul Good morning, everyone, our diverse royalty and stream portfolio continued to generate strong cash flows and high margins during the third quarter of 2023.
If you turn to slide four the chart shows gold equivalent ounces sold for third quarter 2023, along with the previous four quarters.
Sold in the quarter were 160848% to 5% decrease relative to second quarter, 2023, and a 9% decrease relative to the comparable period for the prior year.
Of total Geos sold for the quarter precious metals were 125337, an increase of 4% from same quarter last year.
For the quarter, the largest contributors for precious metal Geos, where Cobra, Panama canceled <unk> with.
With the increase year over year being from Cobre, Panama and Guadalupe.
Cobre, Panama delivered 33% more geos in the same quarter in prior year. This.
This was driven by higher copper grades and the continued ramp up of the <unk> 100 expansion project.
Guadalupe Geos sold were higher by 14% relative to the comparable period from the prior year with the increase being due to higher average grades being mined.
One asset, which did have a weaker quarter for us compared to prior year was antonietta.
At <unk>, we had approximately 30% lower geos sold in prior year as the operator was impacted by a tropical cyclone that affected produce northern region in April 2023.
As you will recall there is a one quarter lag for delivery of silver ounces from <unk> to me now that.
Deliveries in third quarter related to production from April to June 2023.
For our diversified portfolio, we did record lower geos and revenue in the quarter as energy prices were lower compared to prior year.
Third quarter 2023 saw continued volatility in commodity prices as highlighted on slide five.
Precious metals did see an improvement year over year with average gold prices higher by 11, 6% silver by 22, 6% in platinum by five 1%, However, palladium and energy prices were down significantly.
A large component of our diversified geos and revenue comes from our energy assets on a barrel of oil equivalent basis production was slightly lower than prior year.
However, as seen on the Bar chart on slide six there was a larger retreat in oil and gas prices WTO averaged $82 26, a barrel in a quarter lower by 10% versus the comparable quarter in prior year.
In natural gas average $2.06 in Mcf lower by 66%.
As a result of lower energy prices impacted our Geo sold and revenue with Geo sold from our energy assets being 43% lower than third quarter of 2023 compared to prior year.
Slide seven highlights our total revenue and adjusted EBITDA amounts for the three months ended September 32023 and 2022.
Folio continues to deliver consistent performance.
Revenue was $309 5 million for the quarter slightly higher than prior year of $304 2 million, while adjusted EBITDA was relatively flat at $255 1 million compared to $256 7 million in third quarter of 2022.
The company continued to generate a strong margin at 82, 4% for the quarter.
As you turn to slide eight you will see the key financial results for the company as mentioned Geo sold were lower for the quarter, but revenue was higher due to higher average precious metal prices.
On the cost side, we did have an increase in cost of sales, which was $48 9 million compared to $42 million in third quarter of 2022.
The largest component of this is the per ounce fixed costs, we pay for stream ounces we.
We sold 97275 stream ounces in third quarter compared to 90237, a year ago.
Depletion remained relatively flat at $68 1 million versus $68 5 million a year ago.
And for third quarter of 2023, adjusted net income was $175 1 million or <unk> 91 per share compared to $159 7 million or 83% per share in prior year.
Slide nine highlights the continued diversification of the portfolio.
As shown 78% of our Q3 2023 revenue was generated by precious metals. This compares to 68% a year ago.
The geographic revenue profile has revenue being sourced 88% from the Americas.
With respect to asset diversification Cobre, Panama was our largest revenue generator at 22% of total revenue for the quarter, followed by candle area named Mackay.
The last chart highlights our operator diversity with first quantum being the largest at 22% of revenue.
Slide 10 illustrates the strength of our business model to generate consistent high margins.
On the slide you can see that cost of sales has remained fairly consistent over the periods shown.
The amount of cost of sales would depend on the mix of royalty versus stream geos, including both mining and energy.
Corporate administration costs, including stock based compensation was less than 2% of revenue for the quarter.
This can fluctuate quarter to 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 is $2 3 billion at the end of September.
The company continues to be debt free and generated $236 million in operating cash flow during the quarter.
Flows for the quarter included $66 2 million to the mining ventures for the remainder of the $250 million stream deposit for Ts at the full deposit has now been funded.
We closed the Pascua Lama royalty transaction for $75 million and the company declared dividends of $65 3 million during the quarter.
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 remainder of the year, we are maintaining our guidance range for total geos sold of 640000 to 500000.
With this we expect to be near the lower end of that range due to the conversion of non gold revenue to geos based on our revised commodity prices.
For precious metals Geos sold range is 490 to 530000 again, we expect to be near the lower end of that range.
Turning to tax matters as you are aware the Canadian government has announced that it will be proceeding with the implementation of the 15% global minimum tax we expect this to be effective January 2024 for Franco Nevada. This will impact the tax associated with the income from our Barbados subsidiary, where the current corporate tax rate is less than 15 <unk>.
<unk>.
However earlier this week, the Barbados government announced that they are proposing to raise favorable corporate tax rate to 9%. In addition, they are proposing to implement an additional 6% top up tax for companies, whose parent entity is subject to the global minimum tax the.
The specific Barbados legislation has not been released at this time we.
We will review and determined the impact once available and.
Now I will pass it over to Gerry as we're happy to answer any questions.
That's cool.
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Now first question comes from the line of Heiko all of <unk>.
H C. Wainwright. Please go ahead.
Good morning pulse on da Vinci.
Okay.
Hey, Anthony in your release you state that.
Production at the mine was also impacted by cyclone Yahoo, which constrained logistics in March and April of this year.
This is reflected in the deliveries we received in Q3 hundred 23, you sort of hinted at this in your prepared remarks, but just to clarify. This again. This issue is completely in the rearview mirror now and given that given the delivery schedule that was agreed upon and we can go back to our prior models almost site correct in other words, there should not be any.
A follow through into this into Q4, yes, yes that that related to earlier in the year and that's been rectified. So that delivery, we would get in November and we will be from production from July to September.
Okay.
That's how I figured it and this was a little bit more open ended I mean, I understand that the charts looking quite pretty goes up 240 bucks over the past year. So within the 120 $130 of its annual high and it's looking quite nice in the five year chart as well.
In the meantime, the Gtx is close to its annual low Franco Nevado shares really arent a big acceptance all of this though is the pre market today is looking quite decent.
In your view as to market the broader market missing something and what are they looking for to properly reward your company and.
Is it more ESG.
Broader base of higher dividends.
These people have been beaten down for too long they don't care anymore.
<unk> you want to share with us that you are seeing from folks who talk with on the phone.
I.
A couple of things there.
Yes.
The obvious one is the impacts of cobre, Panama at the moment.
Yeah.
A clear impact on the stock.
Yeah.
The other one in terms of the performance of the stock and where we have found that the.
The value creation over time as we truly have a business that's not impacted by cost inflation.
And cost inflation has been such a big element thats eaten into the return of mining companies over time.
So walnuts, it's been protected on that aspect of the business.
The other is we have a very deep portfolio in hand.
The cool thing about the mining industry is so much of the value is created at the drill bit and when the industry is able to drill half the capital and can make new discoveries inevitably they do and the beauty of our businesses we are exposed to that.
Sure.
Both with our streams plus an extremely deep royalty portfolio.
That optionality and it's why I spoke to it a bit in my in my comments.
We continue to get good news as to what's happening in the exploration portfolio and I think that's the element that ultimately drives the future value of the company.
Okay.
Fair enough.
Cobre, Panama, obviously doesn't really have a whole lot of impact on the Gtx is really just you, but I agree with the rest of your answer and I'll get back in queue. Thank you so much.
Okay.
Just to remind participants if you would like to ask a question. Please.
Please press the Star then the number one on your telephone keypads.
And there are no further questions I'll stand corrected we have a question from the line of Brian Macarthur of Raymond James. Please go ahead.
Hey, Brian Macarthur of Raymond James You May go ahead and ask you a question. If you have your phone on mute could you. Please on mute.
Good morning.
Sorry about that.
I was wondering if you can just go through the Barbados again, sorry, I may have missed it with my line cut out but.
Sorry.
Is it not just going to be 15% going forward like everything else in global <unk>.
Minimum tax or is there something else you were kind of going through because I sort of heard nine and six when you went through it if you could just go through that again that'd be helpful. Thank you.
Sure.
So the way the global minimum tax works as Brian is that.
Whatever the differences between the 15% and the local corporate tax rate Youll pay a top up you were supposed to pay a top up tax in Canada based on accounting income.
So for example, we were low single digits in Barbados and now the 15% so assume that <unk>, 13% you would pay that 13% based on accounting income. So there would be a cash tax payable Barbados is now increasing their corporate tax rate from low single digits to 9% restate.
Proposed to do so.
As a result that will be based on regular tax tax where you get the deposit treatment and then what they're doing is 30 proposing to implement a top up tax from nine to 15, which would be based on accounting.
And so for there that would be a cash tax payable.
Essentially.
We're still determining the impact, but we think it will be positive.
So just if I'm looking at global portfolio of well Youre not then just pay like on all the screens that are run through their 15% and then the other stuff that's outside the other structured one youll pay the rate in that.
Jurisdiction on a consolidated basis, you'll probably get something just weight it slightly higher than.
15% is that fair or how should I think about that it's just it's the split between what's going to be calculated based on tax versus accounting.
There is there is an impact that we can go offline, Brian I can walk you okay.
Great. Thanks very much.
Okay.
Your next question comes from the line of Adrian Day of Adrian Day asset management. Please go ahead.
Yes, good morning.
I was just wondering if you could update us how you will deal with in the market for new strains.
And possibly royalties <unk> streams.
Yes, yes.
And then readdress in great speaking.
As Paul commented the gold market is quite constrained for capital. So we are seeing good opportunities there.
For additional royalties and streams as you saw with our recent machine no transaction. So we're looking forward to doing more there and I do see it as being relatively full and especially on the gold side.
Mostly development, helping development.
Yes, I think Thats a fair characterization.
Okay. Thank you.
Okay.
And there are no further questions on the phone line at this time.
I'll now turn the Q&A session over to Candida Hayden, who will take questions from the webcast.
Thank you Jerry our first question comes from Alex Richardson.
And then to asset management.
Why do you decide to become reliant on cobre, Panama for future year growth given it is not a growth property.
Alex.
Our businesses has expanded over time in the history of the company as is with both many royalties on gold properties and those have had tremendous shown tremendous optionality and growth over time.
But a lot of the growth in our business as you correctly point out has been buying precious metal streams on big copper assets.
And that has been.
A very good elements.
But I'll add is to grow the business faster principally copper assets tend to be much larger than gold assets. They.
They also tend to have much longer life spans.
So if you look at anthem.
At Mackay Campbell area, all of those we get the precious metal from those copper assets.
Not only have those assets done very well all of them have outperformed our assumptions at acquisition.
They have very long lives and we've also seen tremendous life expansion from those assets probably a good example is Campbell area.
Cadillac area, when we book when we <unk>.
Finance lundy to acquire that asset.
So years ago and had a 14 year mine life.
Lundin Mining's had tremendous success with exploration program.
And when we look forward today that the go forward mine life is in the order of 25 years. So.
They are long life assets, but also have the potential to get better over time. So it's been a good business for us.
Hum.
Our next question comes from a private investor any provisions taken on the Cobra Panama situation.
Hi, no provision as is out there from first quantum and our solid the mine is still operating operating very well.
So there is no provision no review our impairment at this time.
Sandeep. Our next question comes from Vincenzo at seven pillars capital management.
Could you. Please give me some color on the contingency plan, if first quantum Cobra, Panama, where to go into arbitration, how should we think about potential claim.
Franco Nevada it might have.
On an arbitration results or any potential ex appropriate patients.
As cobre, Panama should occur is there any insurance Franco Nevada can claim.
Yes.
So we hope it doesn't go in that direction.
But.
If the concession were taken away from the operators the one root for them is arbitration.
<unk> seen in the past is in some sort of circumstances and national operators have ruled in favor of the mining companies. So you typically have seen settlements called.
The companies that have been meaningful they do have real piece.
So they ultimately.
Do get paid our agreement at our contract is if there is a settlement that we would get a proportionate share of that settlement.
Thank you Paul next question is from Diego <unk>.
First our capital management in a scenario, where Cobra Panama is expertly created what kind of actions would you illegally expected.
Yes, I would.
In terms of the comments that we've already made.
The action to be taken as by the operators.
The arbitration is the most likely course for them, they're again hope they don't go down that cost and then our protection so passengers already outlined.
Thank you Paul there are no further questions from the webcast. This concludes our third quarter 2023 results conference call and webcast, we expect to release our year end 2023 results.
After market close on March 5th with a conference call held the following morning. Thank you for your interest in Franco Nevada.
Okay.