Franco-Nevada Corp (FNV) 2010 Q2 法說會逐字稿

Good morning, my name is Sean and I will be your conference operator today. At this time I would like to welcome everyone to the Franco-Nevada second-quarter 2010 financial 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). I would now like to turn the call over to Mr. David Harquail, President and CEO of Franco-Nevada. Please go ahead, sir.

Thank you, operator. Welcome to the Franco-Nevada second-quarter results conference call. For this call our comments are supported by a power presentation that you can find posted at our website; it's on our home page under latest presentation at the top right. And that's www.Franco-Nevada.com.

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

I'm David Harquail, the CEO of the Company, and also presenting with me will be Sandip Rana, our Chief Financial Officer. We also have with us here at the Board room table our senior management team and we'll introduce them during the Q&A.

On page 3 of the presentation is a summary of the highlights for this quarter. The second quarter of calendar 2010 is now our 10th full quarter since our IPO. I'm proud to note that all of our quarters have been profitable ones. We have a growing business; in this quarter we are also reporting record royalty revenues and cash flow.

Our free cash flow margin is again at 89%, the highest free cash flow margin that we're aware of in our business. Franco-Nevada has never been stronger financially and, with a pipeline of new royalties coming to fruition, our future has never looked brighter. Sandip will now walk you through our Q2 financial results and how our assets performed.

Thank you, David. As David mentioned, the Company had another great quarter, with record royalty revenue and record free cash flow. Please note that these are non-GAAP performance measures which management believes more accurately reflect the financial performance of the Company. Tables have been included in the press release and at the end of this presentation providing reconciliations of these non-GAAP measures.

With respect to second-quarter performance specifically, please see slide for. Some of the highlights include -- royalty revenue of $45.2 million compared to $32.9 million in the second quarter of 2009, a record. This increase can be attributed to having a full quarter of revenue from Palmarejo and Holloway in 2010 as well as the higher commodity prices year-over-year.

Average gold price was higher by 30% when comparing second quarter 2010 with that of second quarter 2009. In addition, the Company recognized $3.5 million in revenue related to the settlement of audit differences with operators within the oil and gas division. Gold revenue was $28.9 million compared to $23.6 million in second quarter 2009. This represents a 22% increase year over year.

Although net income was only slightly higher by 10% to $27.6 million for the quarter, adjusted net income was $10.7 million for the quarter compared to $1.5 million in second quarter 2009. With respect to free cash flow, it was $40.2 million or $0.35 per share compared to $27.9 million or $0.27 per share in the second quarter of 2009. Again a major contributor to the increase was the strong royalty revenue in the quarter combined with continued control on cost.

For the six months ended June 30, 2010 please refer to slide number 5. Royalty revenue was $87 million compared to $62.1 million in 2009, a 40% increase. The increase is a result of a number of factors, the most significant being six months of production from Palmarejo compared to one month in 2009.

Gold royalty revenue of $56.3 million compared to $42.7 million in 2009, this is a 32% increase over 2009 and a 98% increase over 2008. This is a combination of a higher gold prices year over year and contributions from the acquisitions made over the last couple of years, most notably, Palmarejo, where $18.9 million of gold royalty revenue has been recognized in the six months ended June 30, 2010 compared to $2.5 million in 2009.

Overall total revenue was $1.49 million compared to $78.2 million in 2009. The substantial increase is due to the increase in royalty revenue of $24.9 million. Net income was $35.3 million, or $0.31 per share, compared to $28.9 million or $0.29 per share in 2009. This is a 7% year-over-year increase. However, management believes that adjusted net income is a better measure; it was $19.3 million or $0.17 per share for the six months ended June 30, 2010 compared to $2 million or $0.02 per share in the six months ended June 30, 2009.

Free cash flow of $77.3 million or $0.68 per share was generated for the six months compared to $52.8 million or $0.52 per share in 2009. This results in our continued strong margins with 89% year to date. As you can see, the Company continues to perform well on all financial fronts with continued improvement over 2009 and 2008 results.

With respect to precious metals revenue, please turn to slide 6. One of the key goals of the Company is to be the leading precious metals royalty company. As you can see, for second quarter 2010 precious metals revenue was 71% of total royalty revenue, oil and gas was 26% and base metals 3%. The trend in precious metals royalty revenue has been upward since the Company went public back in late 2007.

This increase in overall royalty revenue, and gold royalty revenue in particular, is due to a number of factors, most notably higher precious metal prices over this period, realizing the contributions from the acquisitions made over the prior two years, as well as new projects coming online. Precious metals revenue has increased 22% when comparing Q2 2009 to Q2 2010.

Please refer to slide 7 for a breakdown as to variances for royalty revenue. In terms of the variance in royalty revenue for the three months June 30, 2010 compared to June 30, 2009, please see the slide as mentioned -- please see the chart mentioned on slide 7.

The largest increases have been Palmarejo with $7.4 million in increased revenue and oil and gas of $5.4 million. Please note that the oil and gas amount does include the $3.5 million related to the settlement of audit differences with operators. In addition, we have earned an additional $1.2 million from Holloway, $0.8 million from Stillwater and $0.7 million from Mt. Keith which is a royalty that was acquired in the fall of 2009. Goldstrike was $3.1 million lower than prior year quarter due to timing of production.

On slide 8 we show the source of royalty revenue. Royalty revenue sources continue to be from politically sound countries with 43% from the US, 28% from Canada, 23% from Mexico and 3% from Australia. In addition, the sources of revenue are becoming more and more diversified across our royalty properties.

Please refer to slide 9 for net income variances. The move in net income for second quarter of 2010 compared to second quarter 2009 is related to some key areas. Increases are a result of $17.5 million related to the change in fair value of derivative assets which is basically Palmarejo; $5.7 million related to the gain on sale of investments, the Company sold some of our Newmont exchangeable shares in the quarter; $5.4 million for oil and gas revenue which includes, as mentioned, an amount for the settlement of audit differences.

Offsetting these increases we have an increase in foreign exchange loss of $22.5 million with minor adjustments related to depletion and income tax. The foreign exchange loss is mainly related to holding US dollar investments within our Canadian entity which has a Canadian functional currency.

With respect to working capital please refer to slide 10. The Company continues to have a strong balance sheet with $800 million plus in liquidity which is a combination of $622 million in working capital, $32.5 million in marketable securities, and $175 million in the credit facility. This full amount is available to the Company to continue to add to our portfolio as the cash flow to be generated over the next three years will be sufficient to cover the Prosperity commitment.

In terms of our portfolio of growth please refer to slide 11. Our organic growth is strong. As you know, in May of this year we entered into an agreement with Taseko to purchase a 22% gold stream on their Prosperity project in British Columbia for $350 million. The funding is contingent on permitting for a Tasiast royalty on which we have a 2% NSR, Kinross Gold is to acquire Red Back Mining for $7.8 billion. Kinross plans to expand and accelerate the drill program. We expect to be earning revenue in 2011 from this royalty.

On Detour Lake for which we have a 2% NSR, Detour Gold issued a positive feasibility study in May 2010. The plan calls for 649,000 ounces of gold annually for 16 years. In addition, the Company did a bought deal financing of CAD282 million in July.

On Holloway we have a sliding scale NSR; St. Andrew Gold announced a resource estimate of 140,000 ounces of gold for the Smoke Deep Zone. In addition, this week they announced that the Holt mine will begin pre-production.

Adding to our portfolio in June, Franco-Nevada acquired and NSR on the Bald Mountain mine in Nevada called White Pine for $8.5 million. In terms of our outlook, looking forward we believe the second half of 2010 will continue to be financially strong. We will be recording the true-up of the Gold Quarry royalty minimum for 2010 which we expect to be in excess of 16,000 ounces for the full year.

We expect a strong second half from Goldstrike, in anticipation of increased production on our royalty lands; as well, full year operating expenses and G&A should be similar to 2009. Overall our outlook is for royalty revenue of $180 million to $190 million for full year 2010. Now I'll pass it back to David.

Thank you, Sandip. And you'll note that that's an increase on our previous guidance on royalty revenue, so it's always a pleasure to be able to not only report record numbers but also to increase guidance. I think it's a reflection that all our expectations for this royalty business are being realized and we have growing revenues and cash flow and yet our overhead costs are staying flat and that's I think a feature of the royalty business.

The value of our future new royalties also is becoming more evident and we're becoming derisked and especially the Tasiast and Detour projects, we're looking forward to a very long-term cash flow coming from those projects that will sustain us.

We made our first monthly dividend payment starting in July and we're confident we can continue to be a leader in paying dividends in the gold industry and we expect to sustain our track record of growing dividends. So, it's a good overview of our Q2 results, Sean, I would like to now open it up for any questions from anyone that's on the line.

(Operator Instructions). Anita Soni, Credit Suisse.

Good morning. Can you just give me an idea of the amount -- on Gold Quarry how many ounces were -- notionally how many ounces were paid this quarter?

Sandip here. I'll have to check. The revenue number was approximately $2.4 million.

I thought it was somewhere in the range of --

It will be pretty easy, Anita, we're going to do 16,000 plus ounces, you say times 1,200, we should be doing close to $20 million for the year out of this royalty. And we've only booked a couple million dollars to date. So --

Right.

So you can really expect a pretty good true up in the fourth quarter on that royalty.

I mean it was down from the first quarter again. The first quarter you weren't really booking much, it was just a minimum payment. What will we expect for the third quarter, similar to first or second and then all of it in the fourth?

We don't know at this time, it's based on whatever production is at the property. But we're -- over 16,000 ounces will be the total ounces we book this year.

One of the big advantages is a good part of now our revenues are actually effectively insured through minimum royalty type arrangements. We have that with our Palmarejo royalty. And at Gold Quarry we're seeing the advantages of that. If we didn't have a minimum royalty commitment we would basically be taking on the brunt, the pit slide they had on the west lay back at Gold Quarry.

And so the only difference is the fact that we know we're going to get trued up in the fourth quarter. It's just our policy on this particular royalty is only to really recognize the cash when it comes in the door. But under the contractual arrangement we know we're going to get this in Q4. So, it makes it a bit lumpy for the year I think. But it's nice to have that backstop in terms of a minimum commitment on the Gold Quarry royalty.

And then just secondly in terms of the depreciation. Is the depreciation rate that you booked this quarter kind of a good run rate going forward on -- I guess just as a relative number versus the royalty revenue?

No, I think Q1 is more accurate. In Q2, as mentioned, we had some adjustments to oil and gas. And associated with that was some extra depletion that was booked just because of the prices that were -- the prices that the royalty revenue booked were based off of and it just affected depletion. So I think going forward Q1 is more accurate of a run rate.

All right, thanks. That's all my question. Thanks.

Thanks, Anita.

Steve Willis, BMO.

Hi, guys, thanks. Anita asked my question, so I'm good. Thank you.

Okay, thanks, Steve.

(Operator Instructions). David Christie, Scotia Capital.

Good morning, guys. Just quickly on your income tax rate that you assume for the rest of the year, what will it be?

We're assuming roughly 30%.

Okay. And just on the acquisition market right now, how are you perceiving the rest of the year and next year? How active are we going to be and what are we looking for?

I'm going to ask Paul Brink, a head of our business development, to comment.

David, I think the outlook is [company] strong. We're seeing a good amount of activity. And I think that's stemming from a couple of areas. We're seeing good [our doing] business in terms of existing royalties, particularly in the US where we've seen sellers that are motivated by changes in some of the tax rules down in the US.

In terms of gold streaming opportunities, we still see a tightness in the debt available to -- particularly in the single asset and junior companies. So we see that as being an area of opportunity. And then lastly, we've seen a couple of opportunities coming out of M&A type transactions and that may be another source of opportunity. So we're looking at a number of things and expect it to be an active year.

And so on the various types of royalties, gold streaming and NSRs, NPIs, where are you guys favoring your searches right now?

We continue to look on both fronts in terms of transaction sizes, the gold streams obviously offer the opportunity of doing larger transaction sizes. Often on the royalties sometimes that's more near-term cash flow. So we continue to target both types of investment.

Okay. That's it, thank you.

Thank you, David.

Cosmos Chiu, CIBC.

Good morning, guys.

Hi, Cosmos.

I see that you sold some of your Newmont shares. Maybe if you can speak on that, the motivation behind it. Is it just based on good prices in the market and do you have any plans for your remaining shares on your balance sheet?

We had Newmont's shares as part of our transaction with the IPO. There was some tax structuring that we did that made it advantageous for us to have some shares and we had effectively 890,000 exchangeable shares when we went public. And I think it was just -- it's always been a source of cash for us, but we were collecting good dividends, we thought it was a good investment, we thought very highly of Newmont's stock.

It's just when it got into the 60s recently we really didn't want to be in the business of being a holding company and we just thought we'd take a bit of our profits off the table. But we're not in any particular hurry, we think Newmont is a great company and there's good upside because it's another exposure to the gold market.

So we've been scaling out; each time Newmont hits a new high we scale out a small portion of our position. And effectively what you saw is Newmont hit a number of highs during the second quarter.

And also looking at your interest income, I guess -- it's down a little bit this quarter compared to last quarter. Maybe if you can speak on that too, just the interest rate that you're getting on your investments (multiple speakers)?

Yes, the interest rate (inaudible) is quite low in terms of --.

And -- and they were earning a little bit higher interest-rate.

Okay. Previously we were holding bonds that had higher interest rates and they've matured and they've been rolled over into T-bills.

Okay, great, that's all I have. Thank you.

We kept all of our treasury very short-term and very liquid, essentially it's all in US and Canadian T-bills right now. So it's essentially cash. We've not been trying to maximize yield on our treasury.

Great, thanks.

(Operator Instructions). Adrian Day, Adrian Day Assets.

Yes, good morning. I just had one quick question if I may. Other than Goldstrike are there any royalties you have, or which royalties are set to decline on a permanent basis soonest?

I'm just trying to think, Adrian. Goldstrike is actually stepping down over time, but it's actually got a very long tail to it because (multiple speakers)

Right.

-- stockpile. They've been stockpiling ore for 20 years at that operation and our royalty applies to those stockpiles as well. So we expect revenues to be continuing for 20 years. But you're absolutely right, it's going to step down over time.

In terms of other significant operations that are maturing, I think there are some small ones like our Mouska mine I think has essentially expired, but that's almost insignificant in Quebec, it's an IAMGOLD operation. But I can't think of anything that's material.

We're blessed in terms of a really long life profile for most of our assets. If you look at a Stillwater, the Marigold, Bald Mountain, they continue to find more ore at those operations and invest in them. I think they're long profile. I think the only one you can really project a consistent decline would be oil and gas because that has the normal depletion curves. But even then our engineers are projecting like an 11 year reserve life to those assets.

We continue to experience new wells being drilled and new recoveries applied, so we expect it's going to stretch out longer than the official reserve report on those assets. So that's why I made the comment, Adrian, is that especially with new royalties coming in like Tasiast and Detour, we expect that's going to more than replace Goldstrike and that's why we're confident we can pay growing dividends for the very long period of time.

Excellent, that's super. Thank you.

David Christie, Scotia Capital.

Hey, guys, just a couple follow-up questions. On the amount that's due for Prosperity, the amount of cash you're sitting on, I guess that's due for that. Do you have it in segregated accounts? And is it earning any interest or is it just sitting there?

No, it's not in segregated accounts. Our commitment is subject to a number of preconditions coming together on the Prosperity, such as permits, such as concentrate contracts being put in in a full financing plan. So we have the luxury of being able to pool all our investments in one category. But we definitely are committed in terms of supporting that project.

Both Paul Brink and I were just out at the property a couple weeks ago just to meet with the management and get an assessment of how that project is coming along. It looked very good on the ground, we're very impressed with the management team at Taseko. So we're still fully supportive in their efforts to get that project off the ground.

And I believe it's sort of representative of what Franco-Nevada can do in the future. We can be a great partner to help companies get their projects off the ground. We have the balance sheet in order to undertake a number of these types of commitments. And we're going to be as supportive as possible to help them succeed.

I know you're protected on the permitting there, but how confident are you that they're going to get their permitting? Is it something you worry about or --?

It's up in the air in terms of -- it's absolutely clear the British Columbia government is hugely supportive of the project. They've already granted the permits and they've granted the mineral leases to the property. So it's kind of an interesting equation. Does the federal government support the provincial assessment on the property or not. And so the jury is out. I think it's really -- I think it's really best for Taseko to try to give you the handicap on what's going to happen.

We've structured our deal so that Franco-Nevada can be totally supportive, but we're not at risk if they're not successful in this transaction or in getting the permits. So, I think it's a good way to structure our deals is that we really shouldn't be making big bets on projects where we can't control all the aspects of it. And so the way this is structured I think is ideal for the type of business we're in.

Yes, agreed. And just one more question. On the little NSRs that are sitting out there in your portfolio that aren't yet producing revenue. Is there any that we're not talking about that might start producing revenue in the next year or two?

Well, David, there's too many in terms of like -- just off the top of my head there's the Duketon Project in Western Australia, which I believe will be in production in the second half of this year. I think we mentioned the Holt mine, they just came out with some comments yesterday.

We have an important sliding scale royalty with St. Andrews on that property. There are a couple of other small ones. I'd have to go through my list, but they were -- the IR people here were cutting me back, I was trying to add too many things to our list of projects.

And I just have to look at my name, but I'm always surprised at how many new things are coming up in the portfolio. And stuff that you thought has been best going to bed and it's sort of representative that in a bull market a lot of our properties are getting financed in advance. And as a result we get the benefit of those efforts.

Another one that we're working hard on is we have an NPI at the Hemlo mine with Barrick. It's a down dip extension, they've begun mining on that portion of the property.

Right.

But all we're trying to do now is work with them in terms of what's the appropriate cost to be allocated to our portion of the property relative to the rest of the property. So we're not there yet, but I think there are good potential levers on that one as well and we hope to sort that out in the next quarter with them.

Good luck. Okay, thank you.

Thank you very much, David.

(Operator Instructions). We have no further questions in queue. I turn our call back over to our speakers.

Well, thank you, Sean, for coordinating that. Thank you, everybody, for your interest in the Company. We're very pleased. I know in a way it's almost a boring quarter, but I think for a lot of businesses boring is good and we intend to be a particularly boring enterprise. But it continues to deliver for our shareholders and we are pleased with the results.

I'd like to point out that our next scheduled Q3 results will be on November 11 and we'll do a comparable conference call the day after the release of those results. Thank you for everybody to take the time to participate and your interest in the Company and look forward to talking again.

This concludes today's conference call. You may now disconnect.