Franco-Nevada Corp (FNV) 2009 Q3 法說會逐字稿

Good morning, ladies and gentleman, and thank you for standing by. Welcome to the Franco Nevada third-quarter 2009 financial results conference call.

At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answers session. Instructions will be provided at that time for you to queue up for questions. (Operator Instructions)

I would like to remind everyone that this conference call is being recorded today, Tuesday, November 10, 2009, at 10 a.m. Eastern Time. And will now turn the conference over to Mr. Alex Morrison, Chief Financial Officer. Please go ahead, sir.

Good morning and welcome to the Franco-Nevada conference call. For this call our comments will be supported by a PowerPoint presentation that we have posted on the Franco-Nevada website. You will find it on our homepage under latest presentation at the bottom left of the home page, which is at www.Franco-Nevada.com.

If you refer to page 2 of that presentation, there is a cautionary statement regarding use of our forward-looking statements which I ask you to keep in mind as we make our comments.

I am Alex Morrison, Chief Financial Officer of the Company, and I will review the third-quarter results with you. After David Harquail, the CEO of our company, will make some comments about our longer-term outlook. We are then happy to take any questions. With me is most of the senior management team and we will introduce them individually when needed during the Q&A.

I would refer you to slide three. We are very pleased with our results for the third quarter. Royalty revenue was $36.4 million for the quarter, an increase of 11% from the second-quarter level of $32.9 million. Free cash flow, which we believe is our most important internal metric, was $32.5 million for the quarter, an increase of 16% from the second-quarter levels.

These amounts compare to third-quarter 2008 royalty revenue and free cash flow of $39.9 million and $35.4 million, respectively, in such time when we benefited from very high oil and gas prices.

This quarter for the first time we have added a new non-GAAP measure, adjusted net income. This measure provides a means to evaluate the underlying performance of the Company by excluding the following items from it's determination -- impairment charges, fair value charges for royalties accounted for as derivatives, foreign currency gains and losses, and other unusual items.

We have included a calculation of adjusted net income for all periods presented in the third-quarter financial statements as an appendix to this presentation. Reported earnings per share were $0.11 for the quarter versus $0.10 for the comparable period of the prior year.

On slide four we continue to focus on two key areas, loyalty revenue and free cash flow. Our royalty revenue continues to grow against a background of rising commodity prices, contributions from our Palmarejo and Gold Quarry acquisitions.

As you can see on the left-hand side of this slide our revenue growth shows a very positive increasing trend. Free cash flow also continues to grow. Free cash flow for the third quarter of 2009 is up by 16% from second-quarter levels and 31% from the first-quarter levels. Our free cash flow as a percentage of royalty revenues increased to 89% in the third quarter showing the leveragability of our business model.

On slide five gold revenue continues to show a clear and strong growth trend in both absolute terms and as a percentage of royalty revenue. Gold revenue for the third quarter was $25.5 million. Quarterly gold revenues now have more than doubled from the levels of the first quarter of 2008.

We expect this growth trend in gold revenue to continue into the fourth quarter with stronger contributions from Gold Quarry, Palmarejo, and Robinson.

On slide six, this slide reconciles our royalty revenue for the second quarter of 2009 to that of the third quarter of 2009. The overall increase in royalty revenue of $3.5 million is a result of the following.

First of all, the first full quarter of payments from Palmarejo. As Palmarejo progressed through the start-up phase during the third quarter payments to Franco-Nevada exceeded the minimum monthly amount of the 4,167 ounces in both August and September. Increased oil revenue due to higher oil prices offset slightly by lower production. And, thirdly, higher revenue from Hollister as Great Basin continues its test money.

These increases were partially offset by lower revenues from both Goldstrike's NPI and NSR primarily due to lower production from royalty [ground] during the third quarter.

Slide seven. This slide reconciles our net income for the second quarter of 2009 to that of the third quarter of 2009. Overwhelming reason for a decrease in net income from $25.1 million in the second quarter to $12.3 million in the third quarter is the absence of the $18 million foreign exchange gain recorded in Q2 that was due to the impact of a strengthening Canadian dollar on US dollar-denominated instruments maturing within our short-term investment portfolio.

Absent this amount, with the following key items that serve to increase net income. Lower depletion charges of $3.2 million primarily related to lower royalty production at Goldstrike and higher oil revenue due to higher oil prices offset slightly by lower production.

These items were offset by the following items that served to reduce net income. The increase in the fair value of Palmarejo was lower in the third quarter than in the second quarter by $3.1 million and mineral royalty revenue was $3.1 million lower primarily due to lower revenue from Goldstrike as a result of mine sequencing.

Reconciliations of net income for the three months ended and nine months ended September 30, 2009, to the comparable periods of the prior year are included in the MD&A.

Slide eight. Yesterday our Board of Directors declared a CAD0.14 semi-annual dividend payable on December 18 to shareholders of record on December 4. At these levels our annualized dividend payout is approximately $30 million at current exchange rates. In Canadian dollar terms this dividend is 16.7% higher than the December 2008 dividend in US dollar terms. Franco-Nevada is one of the top yielding gold investments.

I will now hand the presentation back to our CEO, David Harquail.

Thank you, Alex. Appreciate that; it was good presentation. The key takeaways I got from that is that the business model of Franco and the portfolio are performing very well. We are still a young company but just in the short period of time, in seven quarters, gold revenues have more than doubled. Really it's mostly driven from our original IPO assets.

Another nice thing is that our sensitivity is actually increasing with higher gold prices. What is happening is we are getting the step-up of various scaled royalties and also the contribution from NPIs, both our existing Goldstrike one but also some new NPIs in the future. And our Palmarejo interest is also helping on improving our sensitivity to gold.

Right now we are estimating at the $1,000 gold price level each 10% move in the gold price increases our revenues or cash flow from our Gold division by 14%. So it's nice to have the extra leverage to the gold price especially in these market conditions.

What Alex has done is he has given you some guidance in terms of what we are expecting from our portfolio in the fourth quarter. What I like to do is talk to you about what might happen over the next few years. One of the biggest assets in our portfolio is the undeveloped assets that are now looking increasingly promising.

If you look on slide nine, the first column is the current producers that are effectively representing the assets that Alex has already talked about. They are generating the cash flow for us that we just reported on, but what is important to look at is also what is coming in the pipeline over the next few years.

We have not been particularly granular in terms of talking about a lot of these assets because, frankly, we can't time these. We can't deliver the projects for our shareholders. It depends on the performance of operators besides ourselves. But what we are increasingly encouraged is that the news has been so positive on so many fronts and that these projects have been able to get substantial financing to advance them to the next stage.

Some of the highlights we just noted in our press release yesterday was that Holloway poured its first gold last week, so we will actually start seeing some revenues from that in the fourth quarter of this year. This is a restart of operations but it's nice to see it back into production. We have a 5% NSR there at these gold prices.

Also, last week core on our Palmarejo project announced reserves on a new project at the Palmarejo property called Guadalupe. We have a 50% gold stream participation there. Red Back with their Tasiast project, most of you are familiar with it already, have been announcing substantial increases in reserves and resources and expansion potential. So we have a 2% there; we are very pleased.

Barrick now owns 100% of the Hemlo property and future mining now is focusing on the down-dip portion of that ore body which is on our claims. And we have both a 3% NSR and a 50% NPI, so we believe the NSR is going to become more material to us next year and the NPI could kick in a couple of years thereafter.

Detour Gold very pleased with that project. We have a 2% NSR and just last month they raised $250 million for that project. We think that is very constructive and we have got high hopes for that royalty coming in late 2012 or beyond.

All the positive developments in the marketplace are good for our assets. The success of our operators is also our success. What we have done in slide 10 is we have tried to give you an outline of the potential and this is the first time we have done this. The potential for new gold revenues to Franco Nevada over the next three years.

We believe that Franco has the potential from the existing development assets to generate new royalties in the area of $20 million to $30 million per year incremental to the existing gold revenue assets that we have.

Slide 13 really just takes those components and just represents them graphically related to our 2008 and 2009 pro forma projections for gold revenues. We are showing $71 million in 2008 is our actual number. Our 2009 number we are showing as $100 million and simply we just took the little over $25 million we did in the third quarter for gold revenues and added it.

But it's probably conservative given the guidance that we have given and also gold prices are going to be higher than the nine-month average. But I think it's a representation in terms of a pro forma number and what pro forma future incremental numbers could deliver.

If you look at them cumulatively, over the next three years we see the potential for a material addition on top of our existing royalty base that should more than offset any depletion or maturity that we are getting on some of our existing assets. And I think -- we are comfortable; we have sat here as a team looking over our longer-term projections.

But Franco-Nevada is reasonably confident that with the assets already in place and assuming no further increase in gold prices that Franco-Nevada should be capable of producing increasing gold revenues and gold cash flow over the next five years even if the gold price doesn't get any higher than it is today.

And so we are in a very comfortable position. We have profiles beyond the five years, but we are happy is that we believe we can give the guidance that our portfolio is strong and can be growing for the next five years just with what is in place.

On slide 12 we have outlined our royalty interest in other commodities, mostly PGMs and oil and gas. You can see in that division of our company the revenues have been roughly tracking with the commodity prices. We haven't seen any major production curtailments from the producing assets and we are now seeing some strength again in some of the commodity prices.

We believe our shareholders are going to benefit from higher revenues as the commodity prices improve for some of these non-gold commodities.

Finally on slide 13 in terms of just talking about current numbers is a snapshot of our balance sheet as of September 30. Sometimes accounting statements are a challenge when you do mark-to-markets but I think what is always a key factor is the cash growing in the treasury? Are we generating cash? And that is what has happened over the quarter.

When I look at my working capital and marketable securities we are at now $618 million. We have no debt or hedges against that and we haven't touched the available credit facility open to us. So we are in a very strong financial position and I like seeing that quarterly improvement.

We are well-positioned to do deals. So with that I would like to talk to you about one deal that we announced this morning and that is a new royalty that we have acquired for evaluation that we put on this transaction of $58 million. And that is to acquire a 2% NSR on the Ahafo South property that is being operated by Newmont.

Ahafo used to be known as Yamfo-Sefwi and it's on one of the great geological trends, the Yamfo-Sefwi belt in Ghana. When Newmont bought Normandy it was this project that turned out to be one of the jewels in that acquisition. Production at Ahafo began in 2006 and is now averaging about 500,000 ounces or a bit better a year.

Ahafo is a long trend and so Newmont breaks it into both a North and South project. The operating facilities are at the south end. And at the south end Newmont has identified in reserves 6.1 million ounces and to date over half the ounces have come from the royalty property, about 850,000 ounces to date.

Our royalty is covering essentially parts of most of the pits that are on that property and also it covers what we believe is the down-dip extension of the Subika expansion project that Newmont is beginning to emphasize in their presentations.

What we like about Ahafo is that it gives us the classic attributes that we are looking for in a Franco investment. It's on one of the great geological gold belts or gold trends, the Yamfo-Sefwi. It has a major gold endowment that is proven. It's already in production with a world-class operator in the form of Newmont and it's a focused asset for that company.

As I mentioned already, 850,000 houses have been produced from this ground and there are several million ounces in reserve on the royalty ground. And there is a potential for additional resources which Newmont is indicating the potential of 4 million to 7 million ounces. Of course it's subject to further work that they are undertaking.

They have indicated they expect to start an underground program early next year. It has all the attributes that we like and so there is a section on slide 15 that focus on the geology of it. It has got the potential to have very high grades underground with large thicknesses so it's amenable to bulk 10 inches and it's wide-open at depth. We believe there is no reason why this can't continue to depth much further.

We felt it was very important to be exposed to such a rich endowment. We believe this going to be a great long-term asset that is going to serve not only the Company well starting around 2012 when the royalty begins paying but a service for the very long term so that many of my successors will enjoy the cash flow from this asset.

The other smaller transaction that we just wanted to highlight as well is we did buy also on another great geological trend, on the Greenstone belt in Western Australia, over 200 square kilometers of NSR gross royalty exposure for nickel on basically the Mount Keith belt. We put a chart there.

There is two sets of royalties -- one, the ones that are shown in the red there, are part of the tenements on BHP for their Mount Keith nickel operation. The tenements to the north, the Kingston ones, I think Norilsk is a party to those concessions.

Great potential; there is a number of showings along the belt. It's in production right now. Our royalty -- we closed this transaction in October so that the royalty will -- I think the effective date of the transaction I believe was September 1 so we will be able to show some NSR revenues from this in our fourth quarter.

We do have a small NPI on Mount Keith already, which as NPIs work they are sort of subject to the profitability of the operations. It was good numbers for us last year, probably not so much for this year. We will probably be reporting Mount Keith, both the NPI and the NSR, as a single line item going forward but it should be a steady contributor.

We see at least 14 years of reserves ahead of this operation and there is potential to convert a lot of the resources to make it a much longer life asset for the Company.

So we have a summary of attributes of the Company but I am sure you have lots of questions, both on our financial results and our new transactions. So both Alex and the rest of the management team here would be very happy to take your questions.

(Operator Instructions) Cosmos Chiu, CIBC.

Good morning, guys. Congrats on the acquisitions. With the two acquisitions now we are seeing two smaller sized deals. My question is, are these the best IRR projects coming across the table these days?

It's a very active royalty market right now, Cosmos, and there is sort of different categories of deals. Probably the best IRR ones are just actually some real small ones; you could look at $5 million, $6 million type deals. But we don't even put out a press release or make mention. We have been having royalties to our portfolio but they are just not material in terms of disclosure purposes for the Company.

I think the larger category deals that are happening right now is sort of the streaming type deals where we are financing mines into production. There is quite a number of opportunities out there for all the royalty companies and we have been examining those.

Those tend to be those long negotiations. They have to be done in conjunction with joint venture partners or other banks involved in the projects and so it takes a while for them to be all aligned. But the advantage is that you can make a substantial capital investment that could be made very material for the Company for the long term.

Then you get the category of deals where one is -- they look expensive. We characterize this as a bit like the Gold Quarry deal they look expensive originally because it's hard to demonstrate on known reserves what the IRR return is. But what we are looking at is we believe that based on what we know is there already and has been drilled off that we are going to get a decent return on what we are getting. But the upside and optionality on the properties is so great.

And that is what we are seeing with the Ahafo property is that we know it's going to be a good return and what we see is just the open-pit reserves that are remaining on the property. But the underground potential is just so open that we believe having that participation going forward is important.

When you look at the Mount Keith deal too it's a bit that way too. We are going to get a good, decent return on existing reserves that we see right now on Mount Keith but that is sitting on a fraction of the Greenstone belt that is there. And is there a potential to develop other Mount Keith, other nickel deposits on that belt? Absolutely. And we can get those for free.

So you might be challenged on the initial short-term IRR but we are looking at the longer-term return that we can get from these assets. What we like to say is we are going to get a fair return on what we are buying for right now, but we get all the upside for free. Both these deals have a lot of upside and that is what has us excited about them and this is why we wanted them to be part of our portfolio.

We have the advantage. We can take a real long-term perspective on it. So, Cosmos, come back and ask me in five years what was the real IRR on these deals and I can give you a better demonstration.

Great. And in terms of the acquisition of the Ahafo royalty, I think it's being structured as an acquisition of the Moydow company. Are there any assets or liabilities or other stuff that you are acquiring through the Company that we should be aware of?

We are doing it as clean as possible. Maybe what I will do is I would like to have either Paul Brink or Sharon Dowdall maybe talk about the structure of the deal and why we really see this as an asset deal rather than a corporate deal.

Sure. There were two pieces to the deal. The first, Cosmos, is the $13 million acquisition for cash really takes advantage of the tax attributes they have in the company and gives us basis on a portion of the asset. The reason that the rest of the deal is being done as a share-for-share exchange is to provide a tax-free roll for the Moydow shareholders.

But there are, as you had mentioned, some other assets in the company. What is happening is that as part of the plan of arrangement those other assets will be transferred into a separate entity and that entity is being acquired by the principals behind Moydow. So what we will inherit will be a clean shell where the only asset is the Ahafo royalty.

And maybe a question for Alex on the quarter. I found that depreciation was kind of low compared to previous quarters as a percentage of revenue. What should I be expecting going forward or should I be looking at it in a different way?

The depreciation is difficult to calculate just on the face of the financial statements, Cosmos. But the reason we had a decrease in this third quarter is because we decreased revenue from oil and gas due to lower production and also from Goldstrike. Though I would say that for Q4 if you were to take a similar level of depletion as we had for the third quarter then you wouldn't be too far off.

Great. That is all I have. Thank you.

Mike Jalonen, Bank of America Merrill Lynch.

Just I guess -- I thought it was very impressive what you guys put together here, these future forecasts; very helpful. And I guess just sort of going along on that segue you have the two new acquisitions; I noticed there was no forecast.

I was looking at Moydow's second quarter MD&A this morning and they were saying at about $950 gold the Ahafo royalty would spin-off about $5 million of income when it starts up. They had actually late 2010. Was that -- when it starts up in 2012 would that be a fair number, $5 million to $6 million a year?

Mike, I think all bets are off right now because at the September Denver Gold Show I think Newmont talked about the potential for additional resources of 4 million to 7 million ounces at Subika. I think what they want to do is get underground, see what the potential is, and see how much could be developed in conjunction with the open pit mining they are doing at Ahafo.

So we think -- that is why we believe there has been a paradigm shift in terms of how to look at this asset and the upside on it versus when everyone was looking at just a series of open pits over a long trend. So I think it's a little early for us to give guidance until we get a little more information from Newmont that is public.

They wouldn't be mining underground though in 2012 would they?

They will be underground doing exploration. They are starting in the first quarter of 2010, that was their indication at the conference and I think their November presentation. Could there be something supplementary? It's possible. I expect most of 2011 will be exploration on the property.

But once they are underground I wouldn't be surprised they would be supplementing with the highest grade available and the highest grade available would be from the underground side. So it would be just speculation on our side, Mike.

We are not buying it on 2012 cash flow. We are buying it on what we think is the longer term ultimate ounces that could be produced from this property and we are going to be very patient. But I can't be specific about a specific year at this stage.

How about Mount Keith then? What would be the annual revenue from that?

We showed you the nickel tons of 30 million to 45 million tons a year of nickel and we got a 0.375%, so you do the math on it. Essentially if it's at the lower end of the range that is 30,000 tons a year, we paid 10 times cash flow. If you go to the upper end of the range at 45,000 tons a year at $8 nickel, we paid 6.7 times cash flow. So that gives you the range.

Production right now is between those two extremes. So I think that gives you a feel for we are paying fairly normal multiples for a base metal asset on something that has, we think, expansion potential and reserve and resource addition potential. And also potential for other discoveries along that 200 square kilometers.

Okay. Well, thank you.

David Haughton, BMO Capital Markets.

Good morning, David, Alex, and Paul. Just further questions on this Moydow acquisition. Just wondering what we should be thinking about with regard to the split of production going forward because Newmont doesn't divide it into the areas that you have got the footprint over.

Should we be thinking that it would be half of the open-pit production that could be coming out of Ahafo South and maybe all of Subika underground? What would you recommend?

It's a bit earlier and what we need to do -- we would like to talk more with Newmont in terms of what we say about it versus what they are comfortable with us speculating about it. So it's early stages; we treasure our relationship with them so, David, give us a bit more time.

What we gave you is we gave you the historical facts that over half the production has been coming from the royalty ground. It is split between four pits but the only pit that seems to be completely on the royalty ground is the Subika pit because it dips to the south and the east. And so as the mineralization goes to depth it goes increasingly on to the royalty property.

So I think it's a reasonable projection to say that the majority of the underground or additional resources at Subika should be entirely on royalty ground. And so that would be, based on their own projections, the 4 million to 7 million ounces total resources should be fully on royalty ground. I would speculate that just by the weight of where ounces are located that you would see an increasing percentage coming from royalty ground because that is where the ounces are.

All right. With Mount Keith you have got a pre-existing NSR over the property.

An NPI actually.

NPI, sorry. So is the new NSR the same footprint as the old NPI?

That is a good question. I would actually have to go back and look at it. I don't believe it's as large a footprint as this so I think it's more specific to the Mount Keith mining property proper. But, David, you got me on that detail. I would have to go look at the land maps on that one.

All right. Now it's probably on the same theme of footprint; Goldstrike going into fourth quarter more likely to be mining outside of the royalty areas for the different NSRs and NPIs. Do you expect for it to be coming back into the royalty area sometime in the future in 2010 or outwards? What is your anticipation there?

Alex, why don't you speak to that one? You are close to it.

What we see, David, is that they are moving on to claim blocks that have lower percentage royalties, not necessarily moving entirely off of our royalty grounds. We have received some information from Barrick that would suggest that we are going to just have slightly less gold royalty ounces coming from Goldstrike over an extended period of time.

Okay. So there could be more than just the fourth quarter? We are probably talking into next year as well and who knows from there.

Yes.

It's a difficult one to project, David, because we get quite a bit of leverage on the NPI too on these royalties. So the price movement makes it a little more complicated for us to predict because we do enjoy that leverage as the gold price comes up on the NPI side of these calculations.

Okay, last question. The Moydow settlement, when do you expect for the deal to close with the issue of the shares and it all being wrapped up?

I will pass this one to Sharon Dowdall. Why don't you speak to that?

The end date in the agreement that we signed is January 31 and that is what -- the end of January. We expect it to close in January of 2010.

Thank you very much.

(Operator Instructions) We have no further questions at this time. Please continue.

Ladies and gentlemen, thank you very much for the interest in the call. As we said, we are very pleased in just the general performance of the Company that we have now delivered seven steady quarterly earnings for shareholders. We are also pleased to have announced now our fourth dividend, which will be paid to shareholders in December.

We are looking forward to buying more transactions and further growing the portfolio on top of the growth that we have highlighted that already exists within our existing portfolio.

In the absence of a major transaction, probably our next call will be later in March. We will put out a release in terms of a specific date which will include our year-end numbers. We thank you very much for your interest in the Company and look forward to talking to you next time.

Ladies and gentlemen, this concludes our conference call for today. Thank you for participating and please disconnect your lines.