Franco-Nevada Corp (FNV) 2009 Q4 法說會逐字稿

Good morning. My name is Mason, and I will be your conference operator today. At this time, I would like to welcome everyone to the Franco-Nevada Corporation 2009 fiscal results conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. I'll now turn the call over to the Chief Financial Officer, Alex Morrison. Sir, you may now begin.

Thank you, operator. 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'll find it on our home page under the heading "Latest Presentation" at the bottom left of our home page, which is, www.Franco-Nevada.com.

If you refer to page 2 of that presentation, there's a cautionary statement regarding our use of forward-looking statements, which I ask you to keep in mind as we make our comments. I'm Alex Morrison, Chief Financial Officer of the Company, and I will review the fourth-quarter and 2009 year-end results with you. We will then be happy to take any questions.

With us are most of the senior management team, and we will introduce them individually when needed during the Q&A.

Let me first provide some commentary on our 2009 operating results and financial position starting on slide 3.

We are very pleased with another year of strong operating results in 2009, and as you can see from the yellow highlighted items on this slide, we had record results and financial position for many key financial metrics. Royalty Revenue was $142.8 million for 2009 and total revenue for 2009 was just under $200 million. Royalty Revenue for the fourth quarter was a record for the Company at $44.3 million.

Total revenue for 2009 includes a fair value gain of $54.6 million relating to the Palmarejo Gold Stream royalty and reflects the increase in the value of this royalty since its acquisition in January 2009.

Net income for 2009 was $80.9 million or $0.76 per share compared to $40.3 million or $0.41 per share in the prior year.

2009 represented another excellent year of cash generation from our royalty portfolio with $124.3 million of free cash flow or $1.17(Sic-see press release) per share.

Free cash flow as a percentage of royalty revenue was 87% for 2009. Dividends per share were CAD0.28 or share in 2009, an increase of 17% over the prior year. Our working capital position at the end of 2009 stood at $530.7 million, or more than double the working capital position at the end of 2008.

On slide 4, we can clearly see the continuing trend in Gold Royalty Revenue growth since the inception of the Company. Gold revenue continues to be complemented by strong cyclical contributions from other assets within our broad royalty portfolio. Gold revenues for 2009 were 42% higher than in 2008 as we benefited from a higher gold price and initial contributions from Palmarejo and Gold Quarry.

For the year ended December 31, 2009, gold and PGM Royalty Revenue were 78% of Royalty Revenue compared to 56% of Royalty Revenue in the prior year.

Of note is the composition of Royalty Revenue for the fourth quarter of 2009 where gold and PGM Royalty Revenue represent 80% of the total.

On slide 5, we present the composition of our Royalty Revenue for 2009. Two things are most evident. Firstly, that our gold assets contributed 70% of our 2009 Royalty Revenue; and secondly, that we have four very strong foundational assets in the Goldstrike NSR and NPI, Palmarejo and Gold Quarry, without being overly dependent on any single asset. This diversification represents a strength of the royalty portfolio that we continue to build. In addition, our Royalty Revenue continues to be sourced principally from North America with 58%, 21%, and 15% of 2009 Royalty Revenue from the US, Canada, and Mexico, respectively.

The graphic on slide 6 shows the primary items that reconcile the 2008 Royalty Revenue in the left-hand blue bar to the 2009 Royalty Revenue in the right-hand blue bar. The primary contributors to 2009 Royalty Revenue relative to 2008 are Palmarejo and Gold Quarry where the initial 2009 contributions from these two acquisitions totaled $32.7 million.

The primary items which served to decrease 2009 Royalty Revenue relative to 2008 were as follows. One, oil and gas with the record oil prices of 2008 were not repeated in 2009. And two, the Goldstrike NPI, where royalty production decreased through a combination of factors, including the sourcing of material to feed the Gold Strike processing facility from non-royalty ground; royalty production from ground within the Goldstrike pit with a lower applicable royalty percentage; and the Goldstrike pit entering until a weight stripping phase that is projected to last until mid-2010. And also, third item, no copper price participation royalty was received in 2009 from the Robinson mine as royalty production thresholds were not achieved.

The graphic on slide 7 shows the primary items that reconcile 2008 net income on the left to 2009 net income on the right.

The primary contributors which serve to increase 2009 net income relative to 2008 were as follows -- one, fair value gains of $75 million on those assets that are accounted for as derivative assets and are required to be fair valued at each balance sheet date. Included in this $75 million item is $18.8 million in Royalty Revenue from Palmarejo. Two, lower write-downs in 2009 when there were only $0.2 million in write-downs relative to $8.4 million in 2008. And three, higher realized foreign exchange gains as a result of sales of short-term investments in a rising Canadian dollar environment.

The primary items that served to decrease 2009 net income relative to 2008 were as follows. One, lower oil and gas Royalty Revenue in 2009, as mentioned previously. And higher future income tax expense largely related to the fair value of gains on Palmarejo. Please note that cash paid for income taxes was $12.9 million in 2008, and $6.1 million in 2009.

Turning to slide 8, I'm going to take the liberty of speaking on Geoff Waterman's oil and gas division. As you can see, we have now filed our year-end 2009 oil and gas reserve report, which you will find on our website. The take away from this particular slide is we were pleased to report that our oil and gas reserves increased in 2009 and our reserve life index is now 11.4 years.

Turning to slide 9, we are projecting significantly higher Royalty Revenue in 2010 than the $142.8 million we experienced in 2009. Using commodity prices experienced to date in 2010, we anticipate that 2010 Royalty Revenue will be between $155 million and $170 million. This increase is due to the positive contributions outlined in this slide, partially offset by items also listed on this slide.

On slide 10, looking to 2010 and beyond, the outlook for longer-term gold growth for the next five years is very strong. As some of the key development stage assets in our royalty portfolio begin to pay us royalties, we expect new gold revenues from these assets to add between $68 million and $100 million of new Gold revenues in the next five years. Remember these are fully paid assets and require no further investment from Franco-Nevada.

Slide 11, we outline our financial strength that is available for additional royalty investments. Including our working capital marketable investments and our fully available $175 million credit facility, we have over $780 million available for royalty acquisitions to continue the growth of the Company. In addition, we expect to add at least $130 million in free cash flow to the available capital balance in 2010 based upon the application of commodity prices experienced to date in 2010. Where available, these prices have been applied to operator guidance, where available, or management estimates for 2010 royalty production.

Moving to slide 12, we have further information available to you. Our financial statements, MD&A, our annual information form, and our oil and gas reserves report, are now all available on our website.

We also have several key dates for you to take note of. On May 12, we will have our annual meeting, announce our Q1 results and declare our first dividend of 2010. And on May 13, we will have our analyst day. I will now pass things over to David for some additional comments.

Thank you, Alex. As many of you probably saw, two weeks ago, we issued a press release that Alex would be stepping down from his role as Franco-Nevada's CFO. We regret this very much. And I had prepared some flowery language to recognize Alex's contribution, but Alex, he's a true Scott, and he wanted to keep it very simple today.

Alex has agreed to continue to work with Franco-Nevada on several projects for the balance of the year. So, Alex, all of us here, we appreciate all that you've done for Franco-Nevada in the last two years. The Company has never been stronger, and we appreciate your ongoing support as we transition to a new CFO. Yours will be big shoes to fill. And all of us thank you very much.

Thank you, David. I've enjoyed my experience at Franco-Nevada. Thank you.

Yesterday, both Alex and I spent the day introducing the CFO elect, Sandip Rana, to our team and our key relationships. Sandip was with the old Franco, and so he's already worked with many of our team, and he's familiar with our business model and key assets. I'm confident that he will fit in well and should be able to hit the ground running.

With that, Alex and I, as well as the rest of the management team here, are available to take your questions. So, operator, could we open the lines?

(Operator Instructions). David Haughton, BMO.

Good morning, and thank you very much for the update. I noticed that the contribution of gold in 2010 is expected to be around about 70%, down from the 80%. Is that mainly a function of your commodity price mix with stronger base metal and oil and gas prices?

David, it's David Harquail here. It's actually -- we were -- in 2009, we were 70% gold, 78% precious metals, which includes PGMs. So what we are saying is we expect to be pretty much a little higher if anything on gold even using sort of the most recent commodity prices. So we expect to be well north of -- north of 70%. Now barring a big run in gas prices and platinum prices, which we're not really expecting, we are comfortable with saying we're going to be north of 70% and close to 80% on total precious metals.

And would you describe that as your ideal target going forward?

Our ideal target is to stay minimum 70% precious metals. And so we believe we have some room to do some non-gold transactions. Our focus right now is gold transactions. So we would like to take it even higher to give ourselves a broader cushion to do a larger non-gold deal. But our focus is still gold deals, but our mandate is to stay north of 70% on precious metals.

How would you describe then for the gold royalty acquisitions, the landscape as you're seeing it now? Is it a tougher period than what you've encountered previously? Or are there other opportunities opening up? Would you be able to just give us a little bit of an idea there?

The landscape is we've probably never been busier, in terms of we see ongoing opportunities in terms of buying existing gold royalties. We did three transactions in the fourth quarter of last year, and we see a number of them in our pipeline in the tens of millions size stage; they wouldn't be that material to the Company. But they are a good piece of business and we want to incrementally grow the portfolio.

And also, we have a pipeline of mine financing opportunities. And we still see that as a very receptive landscape that the commercial bank lending or project lending is still very tight or very onerous for projects. And we see an opportunity for us to do more substantive investments there, and we're active on that front right now.

With those mine financing kind of opportunities, how would you describe the political jurisdiction in which they are in? Are you looking at more risky elements to your portfolio? Because it's a very safe one now and a little bit more extra risk wouldn't upset the balance too much.

I'm going to let Paul Brink take that one, please. Thank you.

David, I agree with you. Currently what we have is very much in safe political jurisdictions. What we're currently looking at mirrors that. We're not currently looking at anything that steps outside of those jurisdictions. But in concept, we do feel there is a bit of latitude for us to go into countries with a little larger risk, but really driven if we see opportunities in those countries.

Okay. Just changing a little bit, a substantial amount of cash and obviously a lot of firepower. You've got a dividend yield around about the 1% level. Have you thought about changing that to a higher yield?

We'll have a dividend announcement with our annual meeting in May. So if you could just be patient with us, David, we will make an announcement then.

Okay. So watch this space.

Watch this space.

Thank you very much.

(Operator Instructions). Cosmos Chiu, CIBC.

Good morning, guys. A few questions here. In terms of Gold Quarry, you've given a range of Royalty Revenue based on 11,200 ounces to 14,400 ounces. Can you remind us how that's -- the minimum royalties calculated? And when can we be expecting to see if the 14,400 ounces upper bound can be reached? I remember last year it was in May 2009 that the final calculation for the minimum royalty was calculated and that was when we were told that the upper bound could be reached.

Cosmos, it's Paul speaking. The calculation of the minimum there is done on a couple of bases, one of which relates to reserves, another which relates to stockpiles. So if the calculation ends up depending on stockpiles, you will be down at the lower number, the 11,200. If it's based on reserves, it will be at the higher number. And it just depends on where those two numbers pan out.

Okay. In terms of timing, should we be expecting maybe in May that we find out the final calculation? Or is that kind of -- that also depends on what's happening this year?

We'll probably -- we're going to have a visit there shortly, Cosmos. So it's just too early for us to say. And at some point, too, it's actually going to be determined by actual production. We are being conservative saying we assume it's going to be based on the minimum criteria. We're assuming the slide on the pit has deferred the production levels there for maybe a year or two. So that's why we are guiding people just to look at the minimum levels, and it's going to be one of those two minimum levels.

Okay. In terms of the Royalty Revenue guidance you've given for 2010 of $155 million to $170 million, I think you've given some of the assumptions that you're using for gold and oil and gas. But can you give me your assumption also for the PGM prices that you might be using for your forecast?

Jason runs our models here, so I will let him speak to it.

Yes, Cosmos, we were using -- as you saw on that sheet -- we were using $1100 gold or $1106. Oil was $79 a barrel. And platinum was $429. Palladium was $1520 per ounce.

And, also, one more question here. When I look at your interest income, and to me it seems kind of low in context of the cash balance you have. Can you remind us of what you invest in with the cash and how we should be looking at it going forward?

Alex, would you like to take that one?

Sure, absolutely. We, Cosmos, are focused on capital retention at all costs. And yield is a secondary matter for us. But we are yielding currently above expectations in the types of investments that we are in. But we are invested in short-term treasury bills and also very high-quality Canadian corporates. So, with that, you can get a sense for what kind of yield we would have going forward.

Great. That's all I have. Good luck, Alex.

Thank you.

Thanks, Cosmos.

Greg Barnes, TD Newcrest.

I guess along the lines of Cosmos' question, on Gold Quarry, I'm just wondering how you trued up the numbers in Q4 because it was quite a bit above what we were expecting.

In Q4, we had talked up the cumulative payments from January to November up to the annual minimum. So that is something I think we signaled in the first -- in the second and third quarter releases that we would be truing up in the fourth quarter.

And which is the 11,200 minimum you used?

The minimum for 2009 was 14,400.

14,400. Okay, great. Thank you.

Brian MacArthur, UBS.

Good morning. You give some guidance of additions out into the future years past 2010. Other than Goldstrike, is there anything else you think may decline in that period over time the way you see things right now? I mean assuming flat commodity prices? I mean oil and gas you have a pretty good record replacing that. Is there any other royalty that really runs off over that period?

Goldstrike is the only material decline I can think of off the top of my head. We really were blessed with a pretty diversified portfolio. I think we will have some swings in and out on some of our properties. Well, Marigold now, we've got all the sections there, so less so. And no, I think it's actually the big swing factor is Goldstrike at this point, Brian.

Great. Thanks very much.

There are no further questions at this time. I turn the call back over to you.

Thank you, operator, and thank you, everybody, for your interest in the Company. We are now feeling like a seasoned company. We've got two years of financial reporting under our belt. I couldn't be more delighted with the franchise and set of assets and the quality of the team that's come together. We thank you for your interest, and we will look forward to speaking to you again on May the 12, our annual meeting, and our analyst day on May the 13.

This does conclude today's conference call. All participants may now disconnect.