Franco-Nevada Corp (FNV) 2011 Q1 法說會逐字稿

Good morning. My name is Chrissy and I will be your conference operator today. At this time, I would like to welcome everyone to the Franco-Nevada Corporation first-quarter 2011 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, CEO of Franco-Nevada Corporation. You may begin, sir.

Welcome, everybody, to the Franco-Nevada Q1 results conference call. We have picked an auspicious day, Friday the 13th, to report our results. So it is very appropriate. The air conditioning in our office is kaput today, so we are going to try to keep this relatively low-key.

For this call, our comments are supported, as always, by a PowerPoint presentation and you will find that on our website on the right-hand side under Latest Presentation. On page 2 of that presentation, as always, there is an upfront cautionary regarding our use of forward-looking statements. We ask you to keep those in mind because we will be making many such forward-looking statements.

You will then see on slide 3 of the presentation that we have a larger than usual agenda for a quarterly results call. We felt it was very important, especially for the analysts that cover us, that we spend some time explaining the impact on our numbers from both the two-step acquisition of Gold Wheaton that we completed on March 14 and our conversion to IFRS accounting standards. Sandip Rana, our very able CFO, and his team have been very busy since the quarter end to get all this accounting done. They have done a first-class job and we are going to share that with you.

Before Sandip gets into the accounting detail, I would like to make a few higher-level observations about our first-quarter numbers and Franco-Nevada's outlook for 2011 and beyond.

On slide 4 are the numbers that I feel really matter -- top-line revenue growth and adjusted earnings or adjusted EBITDA growth. These are the numbers that get through all the noise of FX and investment gains and losses. These numbers give a good indication of how the underlying assets are actually performing. I am very pleased to see that these numbers are showing growth far beyond commodity price increases.

We are benefiting from better than forecasted performance on average at operations, organic growth and new acquisitions. I am especially pleased with these first-quarter numbers as they included only two weeks of contributions from the Gold Wheaton acquisition.

On the top of slide 5, we put a reminder of the guidance we gave you just in March. We estimated that our 2011 GAAP revenues would be in the range of $325 million to $350 million, using then consensus pricing. With our first quarter, we have already done $73 million towards that annual target. But for illustrative purposes, if we had consolidated Gold Wheaton from January 1 or for the full quarter, we would have realized $100 million of revenues in the first quarter. We will have that advantage in coming quarters.

If commodity prices remain at the original consensus levels or even better at even today's levels, which are higher than that consensus, we believe that that $100 million of revenues per quarter is a good indication of what our asset portfolio can achieve in the coming quarters, especially as we will be helped by a number of assets that are incremental or growing in these coming quarters.

In summary, again, with the caveat on commodity prices, indications are that Franco-Nevada should meet or beat the high end of our previous guidance.

Another useful takeaway, we estimate a 10% move on commodity prices from these levels would impact our pretax operating cash flow by 13.5%. Our levers comes from streams, profit royalties and scaled royalties.

And another takeaway is that volatility in commodity prices helps to generate more investment opportunities for us. Our development team is very busy right now and I'm confident that we will be reporting on a few more royalty acquisitions on our next quarterly report.

Slide 6 is a graphic of our longer-term revenue expectations. Not only does Franco-Nevada have the potential for more than 50% growth in revenues in 2011, we believe we will continue to build on that -- on top of that in future years as Tasiast, Subika and Detour, among others, all become new revenue generators. We couldn't be more upbeat.

And finally, before we get into all the accounting detail, just a reminder on slide 7 that Franco-Nevada has, since its IPO, outperformed gold. Our challenge to investors is why own a gold ETF. With Franco, you get gold leverage, growth and yield without inflationary cost risk or concentrated project or geopolitical risk. So with my commercial done, I would like to turn it over to Sandip, our CFO, to go through the results and the accounting.

Thank you, David. As you have seen from yesterday's earnings release and David's brief overview of Q1 2011 financial results, the Company is off to a great start in 2011. First quarter had a lot of activity take place as the Company completed its acquisition of Gold Wheaton in addition to moving to IFRS for reporting purposes from Canadian GAAP. This has led to a number of changes to the Company's accounting policies and disclosures, which are reflected in the Q1 financial statements. More importantly, with the move to IFRS and the addition of the five Gold Wheaton stream assets, management has reassessed the metrics used to measure performance.

As you will recall from the year-end discussion, the non-GAAP measure, royalty revenue, is no longer used. Management now considers revenue itself of being reflective of performance in our business, especially as derivative accounting for revenue is no longer applicable. In addition, management will rely on EBITDA and adjusted EBITDA as evaluation metrics going forward.

If you refer to slide 9 in the presentation, the chart illustrates these key financial measures management now uses to evaluate performance. Some of the key highlights for first quarter include continued revenue growth at Palmarejo, resulting in $20.8 million in revenue for the quarter; higher Goldstrike NPI in the quarter, which was $6.5 million compared to $4.8 million in Q1 2010; initial revenue recognition by the Company of the Gold Wheaton streams of $8.8 million. These five stream assets would have generated in excess of $35 million in revenue for the full quarter.

Stillwater provided a great quarter earning $7.3 million in revenue. This is the best quarter from Stillwater since Franco-Nevada went public back in 2007. These all contributed to revenue being 56% higher than Q1 2010, which in turn resulted in a 38% increase in adjusted EBITDA.

On an adjusted net income basis, the company achieved a 158% increase to $21.4 million versus $8.3 million in Q1 2010. As you can see, the cost of sales line item has seen a large increase from 2010. With the addition of Gold Wheaton, the Company now records the $400 per ounce purchase cost for stream ounces as cost of sales. This is applicable to the five Gold Wheaton stream assets, as well as Palmarejo.

Also please note, as mentioned during our 2010 year-end call, the Company will no longer be recording the Gold Quarry minimum top-up in Q4. Rather the minimum is now recorded throughout the year based upon planned production at the mine, which management believes better reflects the timing of when the minimum is actually earned. For Q1 2011, the Company recorded $2.8 million in revenue from Gold Quarry.

As you can see from the revenue by commodity slide, the Company's overall revenue has steadily increased over the last few years. The chart on page 10 illustrates that precious metals revenue has increased significantly. In first quarter 2011, 86% of revenue was from precious metals, but more so, the gold component of revenue has increased significantly during this timeframe. Gold revenue is up 63% year-over-year and comprises 72% of overall revenue. If you were to adjust for the Gold Quarry minimum top-up in each of Q4 2009 and Q4 2010, the trend has been a steady quarter-over-quarter increase in gold revenue over the last two years.

Slide 11 again illustrates the steady increase in overall revenue and in particular gold revenue for the Company over the last three years. Revenue itself has increased from just under $30 million in Q1 2008 to over $70 million this quarter. Gold revenues increased over 300% during this period.

Slide 12 illustrates the increase in Franco-Nevada's gold revenue over the last three years compared to the increase in the price of gold over the same period. As we all know, gold has performed very well over the last three years. However, Franco-Nevada's gold revenue has increased at a faster rate. This is due to three main contributors. Firstly, obviously, the increase in the price of gold is a key contributor. Secondly, the Company has made some key acquisitions over the last three years, particularly Palmarejo and Gold Quarry, with the positive impact of Gold Wheaton still to come.

But most importantly is organic growth, whether that be increased production or additional exploration done on our existing producing royalties or our development royalty pipeline seeing royalties move into the production stage with the likes of Duketon, Holt, Hollister, Hemlo, etc. We look forward to this organic growth continuing with Tasiast and Detour coming online.

What is great to see is the scalability of our business. As you can see from slide 13, revenue and adjusted EBITDA have generally moved in an upward trend in unison over the last couple of years while the Company has maintained a fairly constant cost structure. As you can see, there are dips after both Q4 2009 and Q4 2010. Again, this is due to the recognition of the Gold Quarry minimum top-up in each of those quarters. This top-up will no longer be the case.

What is also a great positive is that this growth has occurred without a significant dilution to our shareholders. This scalability will be further evidenced in the coming quarters with the addition of Gold Wheaton assets. They will add significant revenue for the Company with minimal ongoing G&A cost additions.

As you can see on slide 14, the geographic revenue profile continues to be very strong with 88% of revenue being from North America. Also, please note that the diversification by asset is also expanding with revenue being sourced from more and more properties resulting in the Company being less economically dependent on certain royalties than it once was. This will continue to grow as our advanced stage royalties begin to provide revenue. As an example, the Company is looking forward to Tasiast to begin paying in Q3 2011. With the addition of Gold Wheaton, it is expected that no one asset will generate greater than 20% of revenue on a full-year basis for 2011.

Slide 15 provides a reconciliation of net income from Q1 2010 to Q1 2011. The positives for the quarter include a substantial increase in revenue, which is a result of a combination of higher commodity prices, higher production from royalty and stream properties and the addition of Gold Wheaton. Offsetting this large revenue increase is increased cost of sales, which is mainly a result of recording the $400 per ounce purchase price for the stream ounces, increased depletion due to higher revenue and the addition of the Gold Wheaton assets and in Q1 2010, recognizing a one-time gain on the sale of investments on the disposition of certain securities.

On slide 16, you can see that the Company continues to have the resources to complete additional transactions. At the end of Q1 2011, available capital was $536 million, which included the credit facility of $175 million. At present, the Company still has in excess of $500 million of available capital. This is a great position to be in considering that the Company spent in excess of $500 million in cash to acquire Gold Wheaton in Q1. In addition, based on our revenue profile, the Company should be able to generate significant operating cash flow going forward.

Slide 17 provides an update on the current capital structure of the Company. There are currently just over 126 million shares outstanding. The increase from the end of the year is mainly due to the 11.6 million shares issued as part of the Gold Wheaton transaction. On a fully diluted basis, including the warrants inherited from the Gold Wheaton transaction, the share amount would be 147.5 million. As mentioned on our year-end call, the Company did inherit warrants with the transaction with Gold Wheaton, which could result in approximately 6 million shares being issued.

Now to provide a brief summary of the Gold Wheaton transaction, please refer to slide 19. As you are aware, Franco-Nevada purchased a 34.5% block from Quadra FNX on January 5, 2011. This led to ownership in Gold Wheaton of approximately 37%. As a result, until the time of gaining control, Franco-Nevada was required to equity account for the interest. For our Q1 financials, you will see a $1.7 million loss related to equity investing in the statement of income. The loss in Gold Wheaton resulted due to Gold Wheaton expensing all of the transaction costs related to the deal during Q1 2011 and as a result, Franco-Nevada recording its portion of those costs.

On March 14, 2011, Franco-Nevada gained control of Gold Wheaton and has subsequently consolidated the company. As part of the transaction, two new subsidiaries have been added to our organization structure -- Franco-Nevada GLW Holdings, which is a Canadian company and holds the Canadian assets and Franco-Nevada Barbados Corp, which holds the South African assets.

From an accounting perspective, the transaction resulted in a number of new items in Q1 2011. Please refer to slide number 20. As mentioned, recording the loss from equity investing of $1.7 million, the Company recorded a gain of $13.4 million on the disposal of the Gold Wheaton shares it did own at the time of control, which was netted against the transaction costs incurred by Franco-Nevada of $7.7 million. The net $5.7 million is recorded as a gain on acquisition of Gold Wheaton on the statement of income.

Management has prepared a preliminary purchase price allocation under which a value in excess of $870 million has been assigned to the five stream assets acquired. The approximate value at this time assigned is 55% to the three streams in Sudbury, 30% to MWS and 15% to Ezulwini. On an annual basis, depletion on these assets is estimated to be approximately $60 million to $65 million based upon the preliminary purchase price allocation.

The assets are structured very favorably from a cash tax perspective. The South African assets are held in Barbados where the tax rate is very favorable and the Sudbury Basin assets are held in Canada. Under current tax legislation, the income earned is not cash taxable until the initial purchase deposit used to acquire the streams has been fully amortized.

With respect to the impact of IFRS on our financial statements, please turn to slide 22. As you are aware, Q1 2011 is the first quarter under IFRS. The compares for Q1 2010 have also been converted to IFRS. With this implementation, the Company was required to go back to January 1, 2010 and adjust its opening balance sheet for a number of adjustments related to the conversion. The main line items on the balance sheet which were affected were royalty and stream interest, deferred income taxes and retained earnings. As well, there were some presentation changes made to the statement of income. Revenue is now shown as a standalone line item with additional disclosure in the notes to the financial statements. As well, the cost of sales line item has added note disclosure in the financial statements.

The next two slides provide a comparison of the balance sheets as at January 1, 2010 and December 31, 2010 between IFRS and Canadian GAAP as reported. As you can see, the overall magnitude of the changes is approximately 10% of the assets. Also, as I mentioned previously, the three main line items affected are the royalty and stream interest, deferred income taxes and retained earnings.

There are a number of slides which follow that provide additional detail as to what is incorporated in the changes, but I will take this time to provide a summary of what the most significant changes were. If you would like additional details, please refer to those slides or to the financial statements as they include a number of pages with charts and notes explaining each adjustment.

For the royalty and stream assets, there were a number of adjustments that were made. Under IFRS, management can elect to choose fair market value or cost as the deemed cost of the asset on January 1, 2010. Management prepared a fair value analysis of its mineral and stream interests as at January 1, 2010 and upon review, it was decided that the deemed cost for six royalty interests would be fair value. This resulted in a $50 million downward adjustment. The Company does intend to post updated net book values of core values on our website in the coming week.

In addition, when the Company went public back in 2007, the assets acquired from Newmont had a tax step-up of $75 million included in mineral and stream interests. Under IFRS, the tax step-up does not get recorded. As a result, mineral and stream interests has been reduced by $75 million on January 1, 2010.

As well, as we mentioned on our year-end call, under IFRS, Palmarejo and Hislop are no longer accounted for as derivative assets. As a result, the fair value adjustments that had been recorded in 2009 have been reversed out. This amount is $56.2 million for 2009 with an additional $27.9 million in 2010. However, please note that Palmarejo and Hislop will now be depleted on a units of production basis, similar to the other royalty and stream interests. In terms of depletion, IFRS requires us to go back to the time of production startup and begin recording depletion from that point forward.

As well, one final adjustment to the royalty and mineral stream interests is the re-class of 12 million paid in [EVA] on the Palmarejo transaction. This balance was previously recorded in pre-paids, but has now been re-classed to mineral and stream interests and will be depleted under IFRS.

If you turn to slide 28, you will find a reconciliation of the adjustment to retained earnings that have occurred for 2010 (inaudible). The two largest adjustments are the Palmarejo and Hislop fair value reversal adjustment and the election to fair value certain royalties.

Of the remainder, the only significant change is the foreign exchange adjustment, which relates to foreign exchange on foreign-denominated debt securities. Under Canadian GAAP, any foreign exchange that resulted on our corporate bonds, T-bills, etc. would be recorded in other comprehensive income until the security was sold, at which time the foreign exchange would be recorded in a statement of income. Under IFRS, all foreign exchange movement related to these securities will flow directly to the statement of income.

This is a quick overview of the main adjustments resulting from the implementation of IFRS. What does it all mean? If you refer to slide 29, you will see a reconciliation of what net income under IFRS would have been compared to Canadian GAAP for the three months ended March 31, 2010 and December 31, 2010.

As you can see, the most significant change is the derivative fair value reversal of $27.7 million for the full year 2010, as well as the foreign exchange adjustment of approximately $17 million.

With respect to the change on depletion expense, assuming the same level of production at our mineral and stream interests, we would expect slightly lower depletion going forward due to lower depletion for oil and gas. As under IFRS, depletion is now based on proved and probable reserves compared to only proved under Canadian GAAP, reductions in the asset base for mineral and stream interests due to the reversal of a tax step-up and the fair value election on certain royalty interest. However, these two reductions would be offset by taking depletion on Palmarejo and Hislop.

At the end of the presentation, there are appendices. They include reconciliations of all the non-IFRS measures referenced for Q1 2011, as well as updates on expected tax rates for 2011 and beyond, as well as tax balances for the various tax pools.

With respect to the net book values of our significant royalties, the information will be posted on our website in the coming week. Now I will pass it back to Chrissy and we will be more than happy to answer any questions you may have. Thank you.

(Operator Instructions). Cosmos Chiu, CIBC.

Good morning, guys. Congrats on a good quarter. I have a few questions here. First off, can you talk a little bit more about Falcondo? As you said, that operation has started. If I am not mistaken, the operation generated about $14 million of revenue back in 2007. I think it is a little bit complicated. I think it is an equity interest -- it is a dividend payment that gets paid out, so not sure if you have any kind of guidance at this point in time. Just wondering when you might be expecting some kind of contribution from that royalty or ownership this time around.

Yes, Cosmos, you are absolutely right. It is an equity interest of 4.1%. One of the advantages though is it is a contract under the Parliament, a parliamentary law in the Dominican Republic. So they actually can't accumulate too much cash in the company. It forces them to pay out dividends rather than accumulate cash in the company. So we have always looked at it as the same as net profits interest.

But the reality is it has been shut down for the last three years. They have accumulated debt against the operation. They have spent some capital looking at converting the power source to LNG, a power source rather than from oil. And so actually, we haven't seen the annual report yet for the year-end. So I don't expect any dividends out of this till at the earliest mid-next year. But what I am hoping to see is that with this new conversion, that it is going to be a lower cost nickel operator and can be more of a steady-state dividend producer.

Historically, it was always a very swing type producer and the $14 million I have to point out was a spectacular one-time event for that operation as they sold a lot of inventory. So I wouldn't take that as indicative of what it could do on an annual basis.

Historically, at lower nickel prices, it did a couple million dollars a year for us. We are at higher nickel prices, I am hoping at a lower cost, but we will attend next year's management meetings down at Falcondo and we will probably be able to give better guidance early next year. But this year assume nothing.

Okay. And also, David, as you mentioned in your report, PGM has become a bigger portion of your portfolio with the acquisition of Gold Wheaton. How should we look at this as a percentage going forward? What is your view on PGM within Franco-Nevada?

Well, PGM we regard as precious metals. We believe the valuation of platinum companies is comparable to gold companies, so that is why we are conscious. We say we will stay at least 70% precious metals in the Company. We have always included PGMs in our mind in that, so we see ourselves going into the high 80%s this year in terms of precious metals revenues for our Company and even higher next year.

And I think it is actually a very unique business. We now have PGM streams from five different operating mines now in the world. Four of them -- actually five of them -- six of them actually -- there is two in East Boulder and Stillwater, three in Sudbury and then we have the Lonmin Angloplat joint venture in South Africa. All of them are operating right now. So we think it actually almost could be a standalone royalty business if it made sense for us to do it on that basis.

But we are seeing it as up to almost 20% of our revenues depending on what the relative commodity prices are by next year. So it is a very important division. Poor Geoff Waterman here who runs the oil and gas division, he is seeing himself being leapfrogged by our PGM division. But it is a nice Hollywood problem to have, so we have a lot of maybe opportunities to restructure the Company in the future. But we have no immediate plans to do that right now because we don't see any value added from it.

Great. That is all I have. Thank you.

(Operator Instructions). David Haughton, BMO Capital Markets.

Good morning, David and Sandip. I have got a question -- just to make sure that we are understanding the way that you are reporting Gold Wheaton. When we have a look at page 17 of your release, you provide the mine-by-mine revenue. You have broken out each of the items for Gold Wheaton in gold and also in PGMs.

David, remember, you asked for that last quarter, so we are (multiple speakers).

Excellent. Very happy, of course. Is that the revenue or is that net revenue?

That is the revenue. So that is the gross revenue received and then our cost of sales would have the $400 paid per ounce.

Okay, great. So then when I go to note 8 of your statements, I can see mineral streams there of 29.5, of which the Gold Wheaton is a subset, together with Palmarejo. And then when I look at note 9, I see the costs and that is what you are paying away to be able to get that revenue.

Right.

Okay, great.

(multiple speakers) at Palmarejo.

Okay, just wanted to make sure that I was reading it correctly. You had mentioned that you are moving, in the case of Gold Quarry, from a year-end top-up to a spread-out recognition of revenue through the course of the year. You have got the same kind of arrangement at Robinson and also there is a minimum at EMC. Are you also looking at spreading those out or are they a kind of different situation?

Yes, those are actually production thresholds, so if they achieve a certain level of production, we get a top-up payment. So it is all conditional, so that we can't record any revenue associated with those until they surpass those thresholds.

Okay, so Robinson will be a year-end bump-up?

Yes, (multiple speakers) I believe 2007.

Right. Okay. And David, you tantalizingly had mentioned more acquisitions announced in the next quarter. Are these acquisitions that are incremental or are they step-change kind of things and are they more gold or outside of precious?

No, incremental. We are seeing a lot of individual royalty owners. They want actually to capture what they think is a spike in commodity prices and so they have been waiting for an exit. So on a steady basis, we generally don't put out a press release on any transaction that is less than $20 million or $30 million. We have enough of them that are advanced that I am confident we will have a couple more to talk about and you have seen that in previous quarterly results we talk about. A couple I think in our fourth quarter or our third quarter, we had three transactions. So we are aiming to do at least a couple per quarter and right now, we are up to about 204 I think mineral royalties. And so our ambition is just to keep expanding our portfolio because we just believe it gives us more optionality for the longer-term future, especially if we can get land positions on promising mineral trends. We can actually buy things that might be good for us maybe in subsequent cycles of the commodity ups and downs.

And the kind of transactions you are talking about, are they cash-generative now or are they prospective cash flow?

It is a combination of both.

Okay. All right, well, thank you very much, guys.

Greg Barnes, TD Securities.

Yes, thank you. David actually hit most of my questions, but one, you mentioned last quarter, I think it was, David, that you were thinking about getting involved in M&A where you would help finance some of those transactions by paying us an upfront payment on our royalty. Is that still something you are looking at?

It is not as busy right now on that front. There is one thing that seems, I guess, very early stage that we have been interested. So it is interesting. We work on transactions and they keep coming and going. So I think your investment bankers know the feeling. So actually I don't mind working on a lot of things because I am also confident we are sort of putting in the groundwork for ultimately doing a deal down the road. So I think it is just a matter of the stars aligning on a few of these, but I see it as an opportunity for us to do something that is something that could move the needle for the Company, create some royalties. We are willing to be very inventive on these. But I would say right now it is not our highest priorities or our highest opportunities. We have got other opportunities.

Okay, good. Thank you.

There are no further questions in queue at this time, Mr. Harquail. I turn the call back over to you.

Thank you, operator. Just to point out that we have our annual meeting next week. It is going to be in the Toronto Stock Exchange Broadcast Center at 4.30 on Wednesday, May 18. You are all welcome to join us for some non-alcoholic beverages. You'll also get -- you will also see, as Sandip mentioned, our full detail on our Q1 financials and MD&A are up on our website and as well, take advantage of our newly expanded annual information form. We have had a team here that has really tried to give as much detail as possible on all of our assets because we can't possibly walk through all those in our investment presentations.

Our second-quarter earnings release is going to be on the evening of August 9 and the conference call will be at this same time on August 10. So thank you for your continued interest in Franco-Nevada.

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