Q2 2019 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Franco Nevada Corporation Q2, 2019 results conference call. At this time all lines are in listen only mode. Following the presentation. We will conduct a question answer session.

If at any time during this call you require immediate assistance. Please press star zero for the operator.

This call is being recorded on Thursday August eight 2019, I would now like to turn the conference over to Candido Hayden IR. Please go ahead.

Thank you Britney and good morning, everyone. Thank you for joining us today to discuss Franco Nevada second quarter 2019 financial results.

The company. 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.

Sandip Rana CFO of Franco Nevada will provide a brief overview of our results followed by Paul Brink, President and COO of Franco, Nevada, who will provide for closing summary.

This will be followed by a Q and a period.

Representatives from our Toronto office, our present to answer any questions before we begin formal remarks, we would like to remind participants.

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 Sandeep Rana CFO of Franco Nevada.

Thank you Candice good morning, everyone.

As you will see from the press release issued yesterday the company delivered another quarter of strong financial results.

As you turn to slide three you can see the key financial results for the three and six months ended June Thirtyth 2019.

Compared to the same periods in 2018, the company had a strong quarter with increases across all financial metrics when comparing the two quarters for the six months ended June Thirtyth 2019. The company has achieved a number of financial records compared to the six months ended June Thirtyth 2080. These are all highlighted.

2019 is off to a very strong start.

With the increase in revenue and due to the lower cost nature of our business model adjusted EBITDA and adjusted net income were also significantly higher in Q2 2019 versus Q2 2018.

Adjusted EBITDA was $137.9 million or 74 cents per share and adjusted net income for Q2, 2019 with $64 million or 34 cents per share. These strong financial results continued to showcase the strength of the Franco Nevada business model in particular, the quality and diversity diversity of the assets from an operational standpoint, our royalty and stream assets continue to perform well.

As you turn to slide four the chart illustrates the gold and gold equivalent ounces for each of the last five quarters. The Geos earn for Q2 2019 were 107774 compared to 107 333 in Q2 2018, it was a flat quarter year over year, although geos were stable year over year. The company did have strong performance from its gold npis, such as hemlo and gold strike as well as strong contributions from its PGM assets have hurt the strong performance was somewhat mitigated by lower Geo deliveries by Guadalupe Bald mountain and enterprise.

Turning to slide five we have two charts on the page. The first highlights the total revenue earned by the company for the previous five quarters.

For second quarter 2019 revenue earned was $170.5 million.

This is an increase from Q2 2018 as the company benefited from higher mining asset revenue with both PGM and other mining contributing to the increase in addition to the energy assets had a strong second quarter. The bottom chart highlights the energy revenue and the average WT oil price for the last five quarters Q2, 2019 was a better quarter for energy compared to both Q2 2018 and Q1 2019.

The increase in energy revenue was the result of strong production performance from our Orion asset and the growth in revenue from the continental royalty acquisition venture.

The company did fund $37.5 million during the quarter for the continental royalty venture with an additional $10.8 million accrued in accounts payable on the balance sheet at the end of the quarter.

With respect to this venture the acquisition acquisition pace has been favorable so far this year as a result, the company has agreed to increase the capital commitment in 2019 to 120 million up from 100 million previously.

On slide six we illustrate the commodity mix of our revenue as well as highlight the jurisdiction in which the revenue is generated as shown 84% of revenue for the quarter was generated by gold and gold equivalent assets with 62% being from gold, 10% silver, 9% Pgms and 3% other.

The geographic revenue profile has revenue being sourced 80% from the Americas.

One of the strengths of our business model is the diversification of our portfolio slide seven aims to highlight this the first chart illustrates that only two assets contributed more than 10% of our revenue individually with another being up 6% for the quarter. Those three assets in total generated 29% of our revenue. The company is not economically dependent on any one single asset.

The second chart highlights how revenue is distributed from a legal ownership perspective with no legal entity accounting for greater than 41% of revenue in Q to Q2 2019.

The last chart highlights our operator diversity, our largest exposure to revenue being generated by any one operator is 12%, which is lending mining who operates candle area. We are fortunate to have royalties and streams on many properties mined by some of the most reputable mining companies in the world.

One area that our board and management is very proud of is our focus on cost management, we like to stress the strength of our business model and the scalability.

I think I think that this cannot be illustrated any more clearly even slide eight here, we have highlighted our quarterly revenues and our quarterly general and administrative expenses since our IPO. Since 2008, our revenues have grown from approximately 25 million to $170 million. This quarter. This while our DNA has remained fairly stable over this time period.

General and administrative cost of approximated five to 8 million per quarter for the last 11 years for Q2, 2019, GA was less than 4% of revenue.

Management believes we can continue to add to our portfolio and grow our business without adding significant overhead so the topic.

To add another financing option for the company Franco Nevada recently announced an aftermarket equity program. If you turn to slide nine I will highlight some of the key elements of this program.

It is usually referred to as an ATM program. The program will allow the company to issue from Treasury up to $200 million worth of common shares.

All sales would be at the discretion of management. There is no requirement that mandates actual sales having to take place under the ATM program.

The program provides the company with another tool in managing the balance sheet and the liquidity available to the company. We look at the ATM program, the $1.1 billion in credit facilities and the significant cash the company will continue to generate as sources of capital to help finance future transactions.

There are a number of benefits of implementing an ATM program. Some of these to include a lower commission structure than traditional methods of raising equity increased flexibility and timing of sales and the elimination of any discount in the share price when selling shares.

The two points to highlight when executing an ATM program or that the ATM program is under similar blackout restrictions as company management as a result of Franco Nevada did choose to execute under the ATM there would be no ATM sales from the first day after quarter end until after the company releases its quarterly earnings and secondly, there are volume limitations of how much can be sold into the market on any given day.

The current capital available to the company as highlighted on slide 10.

The company has approximately 1.1 billion available when including working capital marketable securities and Undrawn credit facilities.

As of today, the company has $385 million in debt outstanding which is a combination of 225 million drawn on its corporate credit facility and 160 million one year term loan, which matures in April 2020 overall the company is in a very strong financial position.

Before I turn it over to Paul I would like to mention that there is no update to the international CRM audit currently underway. We continue to provide information and answers answer questions from CR rate. However, the company did receive a proposal letter for two of its Canadian subsidiaries during the quarter. The CRD letters proposed to reassess 2014, and 2015 taxation years.

To increase income by adjusting the timing of the deduction of upfront payments with respect to precious metal streams. The additional federal provincial taxes would be approximately $1.6 million.

This is effectively a timing issue of when taxes are paid if a reassessment is received we will file the necessary objections to oppose it I will now turn it over to Paul.

Thanks, Andy I'll start with our mining assets, and then particular Cobra Panama.

Our team just returned from the latest visit the site and report that the ramp up is progressing well.

The first two trains each for Sag mill and two ball mills are fully operational all full input crushers are also operational.

The first copper concentrates were shipped in June and along with the second quarter reporting first quantum reiterated the 2019 production guidance of Cobra Panama.

[noise] payment timing and as a result timing of Ontario deliveries has been quicker on the initial concentrate sales contracts and what we expect of longer term sales contracts. As a result, we're anticipating the geos delivered to Franco Nevada will be towards the upper end of our prior guidance of 20 to 40000 Geos in 2019.

On other items to the business development team are actively pursuing new transactions and we have good prospects for acquiring additional precious metals assets. This year.

Turning to energy on slide 12.

Franco Nevada has acquired a 1% overriding royalty interest on a portion of range resources acreage in the Marcellus basin for $300 million.

Our strategy has been to focus on the core of the best oil and gas basins that have proven to attract capital throughout the commodity cycle.

The Marcellus is one of the most prolific and active gas and liquids plays in North America.

Ranges acreage was good exposure to the liquids rich portion of the Marseilles, giving it a very competitive cost position.

The assets of strong current cash flow, assuming gas prices of 240 per Mcf 2020 revenues expected to be $25 million.

Range has a strong track record of growing reserves and production from these assets and our revenues expected to grow to approximately 30 million per annum in five years.

These are long life assets with larger Undrilled inventory.

The royalty area contains approximately 2400 undrilled well locations.

Which of the 2018 rate of 78, new wells per year would provide approximately 30 years of growing runway.

The principal focus as the Marcellus formation, but theres also potential upside in the development of the Utica and upper Devonian formations.

The acquisition adds to our commodity diversification through increased exposure to natural gas and natural gas liquids, the economics of the play or under underpinned by liquids, which contributed roughly half of the revenue.

Including the new Marcellus assets, our revenue is still projected to exceed 80% from gold equivalent ounces through 2023.

Geo growth during the period is largely driven by the ramp up of corporate Panama.

We've provided updated guidance for 2019 on slide 13.

Based on the strong results year to date and an increase in expected deliveries from Cobra, Panama. We now expect 2019 geo deliveries to be at the higher end of our previously announced guidance range of 465000 to 500000 Geos.

The Marsalis transaction contributes immediately lead to cash flow, including this new royalty and anticipating continued strong performance of the energy assets, we now expect to generate $100 million to $115 million in energy revenue this year.

This compares to 70 to 85 million previously.

The guidance assumes WT prices of $55 per barrel and Henry hub natural gas prices have to 40 per mcf for the balance of the year.

Hi, gold prices could not have come at a better time for Franco Nevada, we have invested through the downturn and are delighted that the run up in gold prices happening in tandem with the ramp up of Cobra.

We're looking forward to a strong second half 2019, and a growing revenue outlook over the next five years.

That concludes our comments I'll hand, it back to the operator and welcome any questions.

Thank you ladies and gentlemen, we will now begin the question and answer session.

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Your first question comes from Chris Terry from Scotia Bank. Please go ahead.

Hi, guys.

It's Chris here I had a couple of questions today. The first one just in terms of the precious potential opportunities what's your best.

Estimates or what are you seeing in terms of divestments that you expect from the majors and how do you think that the M&A soco my might play out on the on that front from how youre viewing it. Thanks.

Chris its Paul the expect the run up in the gold prices here will be a very good thing for those divestments.

The I think for the seniors looking to monetize some of those assets the they need a stronger environment, where the buyers of those assets can access more capital.

So I think as we move into September you'll see the pace of those divestments pickup.

Okay. Thanks, you think it could be before the before the end of the year rather than 2020.

Yes, I think that prospects this year.

Okay. Okay. Thanks, and then on slide six where you've got the the the revenue mix and energy at 16%.

Just thinking about the mix going forward, you, obviously had cobre, Panama, which increases the percentage of the precious space from from here, though if you were to do more oil and gas deals and you get closer to close the overall level does that mean you have to do I guess, a precious deals at the same time that you would do oil and gas deals or do you think naturally that cobre, Panama or we'll just take up the slack and you can still get you still have room for one or two more oil and gas deals. Thanks.

The what the growth and co brand and also the run up in gold prices like yesterday, there is a little more room for.

Non gold transactions will the focus of the company is on precious metal and the momentum and in terms of active deals I think it's most likely that pemex transactions would be precious metal related.

Okay. Thanks, Thanks for the last one from me just just on Cobra into 2020, and the timing should we expect any delays at the start of 2020 or is it really just take the first quantum gardens.

And and and run that straight through for what you should expect is there I guess is there any difference in timing versus the production for for the for the Franco share. Thanks.

The.

You know as we've pointed out there there is a.

There was a difference in timing when they produce concentrate too when we get our deliveries independent depends on when they get paid for those concentrate sales.

Obviously, while they are still ramping up production, we get some of that lag. So I expect a bit of a lag in 2020.

But it shouldnt be a substantial item.

Okay. That's it for me thank you.

Your next question comes from Cosmos Chief.

She IVC. Please go ahead.

Hi, Thanks, Sandip and Paul.

Congrats on a very good quarter.

Maybe next time for next quarter I will just take what I think are nice is going to be taking on 10% and called out my new estimates.

But.

Maybe my first question is on coil Panama.

Your 20000 to 40000 ounces guidance for 2019 that hasn't changed but now you're saying that you know you're going to be trending closer to 40000 ounces up at the top is that once again, just due to timing and then on that you know say, it's going to be 40000 ounces. How much higher is Q4, you know going to be compared to Q3.

Ah So kosmos yes, it would it just as timing we the part of it that we didn't know was what the timing of those payments would be we had factored in roughly two months.

Which I think is a good estimate for over the longer term, what that timing will be with longer term sales contracts.

Well the initial contracts it it's being just less than a month and so that's what's made up the difference.

But I think.

The yeah, obviously Q4 is going to be greater than Q3, as we ramp up I don't have the piccolo numbers on on the two quarters <unk>.

Maybe sticking with the guidance here you know on the energy guidance Youve increased in part due to the recent acquisition, but I also see that you know and although the assumption right now is $55 per barrel W. T I.

We're not there right now it's you know had some decrease in the past few days could you give us some sensitivities in terms of like you know one dollar per barrel change what does it mean to.

Your potential revenue.

[noise] the cosmos, its Jason O'connell here Hi, Jason.

In terms of sensitivity to the biggest sensitivity is in regard to the Weyburn NRI.

It was about.

Call it 20% of our overall revenue.

And last time, we ran the sensitivities I believe it was a 10% change in.

The price of W.P.I. resulted in about 100, who are sort of 1.1% sorry, 10% change that.

Yeah that is.

Sort of a 12% change in revenue.

Okay.

Maybe sticking with energy here and you know the recent lower oil price you know what do you see that as an opportunity to acquire more energy assets or you know is the volatility right now a bit too much and you rather wait for that to die down a little bit.

No because I think the the volatility is less important than me on the energy side, I think theres lots of opportunity for us regardless of where the.

The oil and gas prices are there are a number of assets sort of as we've discussed before that are available to us in the U.S. in particular.

I don't think the commodity prices is really what's driving the availability of those assets right now I think the issue for us.

There's more strategically and where does our energy ratio set relative to precious metals HM.

As Paul mentioned I think the focus for the company right now is really more on the precious metal side and the energy side.

So while there are plenty of opportunities I think to focus on.

We really are focused right now on me on the personnel side of the business <unk>.

And then on the partnership with Continental here it almost sounds like it's there's a favorable pace in terms of acquisitions that you've increased the commitment from a 100 million to $120 million Sandeep can you remind us in terms of you know how much more needs to be spent to get to that 120 and 2019 and then how much is committed I guess $100 million in 2020, and then how much in 2021.

I can't recall off the top of my head Cosmos I can't remember how much is left for this year, we did find 37 and a half in the second quarter.

It wouldn't be 100 million I Gagnon 2020, <unk>, approximately 40 million and now 2021, I got okay I come back to.

Great and then.

You know.

In terms of the quarter here I guess, we've seen we saw some pretty good results coming out a gold strike you know some pretty good results coming out of Mws quarter over quarter could you maybe comment on those two and more specifically on goldstrike is that sustainable.

Sure. So first with MW at its all about timing of when we get deliveries on that on an annual basis. They typically do about 25000 Geos I'm in terms of deliveries to Franco with respect to goldstrike and part of the the amount was.

Some adjustments to the N.P.I. calculation as we reviewed it can be found some errors that needed to be corrected. So that was part of the increase related to gold strikes I don't it's not it's not sustainable going forward. Although we do expect a matter anti just based upon where the gold price is today.

Great. Thank you that's all I have.

[noise].

Your next question comes from Greg Barnes from TD Securities. Please go ahead.

I think this is a question for Jason as cousins pointed out you have accelerated the payments on the continental is there scope to extend that agreement or add to it and put more money into it.

Yeah, Thanks, Gregg and there isn't you know specific plan to extend that agreement it would be up to the two parties [noise].

Jointly agreed to do so.

I think realistically what will happen is you know we'll evaluate once our full commitment is achieved we'll look at what the opportunities look like and how the assets are performing.

And decide at that point, whether both parties have an appetite to extend the agreement further.

But given the pace of drilling you're seeing so far clearly there are.

Opportunities beyond this.

[laughter] certainly on the acquisition side there have been you know we are somewhat limited in terms of how much acreage continental can actually buy on the ground that is in front of their drill schedule. So.

You know as they progress drilling up there their acreage position it should become more more difficult to acquire royalties.

And so again, we'll just have to evaluate once we get through in the next couple of years, you know how much of that royalty inventory is left to be acquired.

Prices look like at that time.

And lastly, how are the assets performing relative to our expectations. So I think we'll evaluate all those criteria when once we get through the initial commitment period, and then like to make a decision longsight continental at that point.

That's great. Thank you.

Your next question comes from Kerry Macquarrie from Canaccord Genuity Genuity. Please go ahead.

Hi, Good morning, guys. Just a question on the Goldstrike Npis I think you mentioned in your press release, you know that could potentially improve just given the synergies around the new Newmont Barrick JV.

I'm, just wondering with all the potential changes and or flows do you have a sense on how that's going to work on goldstrike and how that will be tracked going forward.

Hi, Karen Sandeep here no visibility right now.

We you know I think they're working it out themselves obviously and.

We will get information as it becomes available, but we have no visibility visibility right now and then we do do annual site visits audit. So I would say within the next six months, we should get some sort of visibility on what the impact will be.

And your Npls at the end of the day is based on the work coming out of the goldstrike.

The facility itself.

It's based on that so theres a theres, obviously, the NSR, which is a royalty based upon the various claims loss when gold strike of which we get various royalty rates and then you have the MPCI, where they get to deduct capital. So what will happen is if that they're allocating or from other other properties. Besides goldstrike and getting processed at goldstrike, we will get credit for operating costs related to those so it is a complicated calculation, but as I said once we get more visibility because shipping.

Okay, great. Thank you.

Yeah.

Your next question comes from Brian Macarthur from Amy Raymond James. Please go ahead.

Hi, Good morning. My question is also an oil and gas.

So first half you did very well you sort of made about close to 50 million at give or take $55 oil, which is what you're forecasting but in the back half.

You should be similar I would think that on top of that.

You'd get some from the new Marcellus plus you've got a ramp more money at Continental and then I think you get the $9 million catch up for the transaction. So if you put that all together I'm surprised.

Guidance is a little higher or is there something else that's happening in the ramp up of the Marcellus deals. So you sort of just sort of indicate $25 million next year. So by just half Thats 12, plus my nine catch up is 21 right. There is there something else going on somewhere else I'm missing.

Not entirely Brian I think the the big drivers for the difference there are weyburn and generally we've earned fluctuates quite a bit depending on the level of capital is coming into the operation.

Often times there.

Capital allocation schedules of it.

Backend loaded in terms of back into the year.

So you may see the Weyburn contribution come down a little bit.

The biggest difference I think.

Is just in the way we look at.

Most of the U.S. assets that we have that are.

Outside of range outside of Continental in terms of forecasting revenue there, it's very very challenging.

To accurately budget for those assets.

We just don't know when that acreage will be drilled and what the royalty rate on individual wells will be and so our approach to touching there is arguably the arguably a little bit conservative in that.

We sort of assume.

Production will remain relatively flat.

Or decline a little bit from natural well decline.

So broadly speaking you're right if everything were to stay the same you would be adding those elements on top but I think the other element to think about are just like in the capital Weyburn oftentimes is backend loaded towards the end of the year.

And we have been a little bit conservative on the U.S. assets, just because of that lack of visibility.

Great. Thanks very much.

I guess, one other element, Brian just as I'm thinking about it there was also a bit of a catch up payment.

Early in 2019 from revenue that we under accrued for 2018.

In other words it was it was revenue in 2018.

And so that's another element to just impacts that math.

Great. Thanks, very much that's very helpful.

Ladies and gentlemen, as a reminder, should you have a question. Please press star.

Hi, everyone.

There are no further questions at this time. Please proceed.

Thank you <unk>, we expect to release, our third quarter 2019 results after market close on November 11, There's a conference call held the following morning. Thank you for your interest in Franco Nevada.

Ladies and gentlemen, this concludes your conference call for today, we thank you for participating and ask that you. Please disconnect your lines.