Franco-Nevada Corp (FNV) 2011 Q2 法說會逐字稿

Good morning, my name is Mike and I will be your conference operator today. At this time I would like to welcome everyone to the Franco-Nevada second-quarter financial results conference call. After the speaker's remarks, there will be a question-and-answer session.

(Operator Instructions)

I would now like to introduce Mr. David Harquail, CEO. You may begin your conference call.

Thank you, operator, welcome everybody. It's a great time to be in the gold royalty business and stream business, and we are looking forward to your questions after this presentation. For this call our comments are supported by a PowerPoint. That's available on the Franco-Nevada home page. On page 2 of that presentation there's an upfront cautionary on our use of forward-looking statements. We ask you to keep that cautionary in mind.

On page 3 of the presentation is our agenda for today. Sandip Rana, our Chief Financial Officer is going to give you the details of our financial results, and then Paul Brink, our Senior Vice President, will update you on business development activities. But, before they start I have a few comments.

On slide 4 are the financial numbers that I feel really matter. Revenues and adjusted earnings or EBITDA, give a clear picture of how our underlying assets are performing without the accounting noise. Any CEO would be proud of these huge percentage increases, and I won't belabor you with the numbers. But for me personally, what is most important, is that the numbers represent growth from our portfolio well beyond the commodity price increases or our acquisitions.

I'm most pleased to see that an increasing number of our already owned development and exploration assets, some of which we have held for a very long time, are now becoming producing cash flowing assets for Franco-Nevada. This organic growth comes a no cost to Franco-Nevada and will be highly profitable in our future numbers. At a lot of our investor meetings, we're asked about our financial leverage, and we estimate that at about -- for a 10% move in commodity prices from these levels would have about a 13% -- a better than 13% impact on our revenues and cash flow numbers.

But what these financial numbers don't capture, is that in a bull market, our existing operators are investing more capital, and on our development assets they are getting the financing to go into production. We already own a lot of development exploration assets, and as these convert into producing cash flowing assets, it means further growth for Franco-Nevada, beyond the financial leverage numbers. So and we can't quite quantify it, but our leverage is higher than represented by our pure financial leverage.

Franco-Nevada today counts 343 assets. If we take out our oil and gas assets, we count 208 mineral assets. Of those, only 39 are counted as producing mineral assets for this year, another 24 mineral assets that we believe have a reasonable potential to be added within the next 5 years, and then 145 are expiration assets for beyond then. We have a very good long term pipeline.

The other strength of our business model is that we have no material capital or operating costs. In fact, Franco-Nevada has been able to double revenues without a material increase in our G&A costs. We have a very scalable business. In addition, we're experiencing a significant lowering in our effective tax rates. We have also this quarter lowered our stand-by credit facility costs with a new unsecured facility. We have a very strong free cash flow business that works.

On slide 5, as we put in our press release, we are updating our 2011 guidance. In March I reminded you that our 2010 revenues, on an IFRS basis was $227 million, and that we expected to achieve almost 50% growth in 2011, of between $325 million to $350 million. During the quarter at our investment presentations, we were updating investors to say that we expected to at least meet or beat the high end of that range. We should have said meet, beat, or skip. Our updated guidance today is for Franco-Nevada to generate 2011 revenues of between $375 million to $400 million. This comes with the usual caveats about commodity price assumptions and steady state production.

Another takeaway is that volatility in commodity prices is helping to generate more investment opportunities for us. Paul Brink will speak to several new deals we have recently closed. His business development team is very busy right now and I'm confident that he will be reporting on few more royalty acquisitions, both precious and non-precious in our next quarterly.

Finally, we have made the decision to list on the New York Stock Exchange, which has been accepted. Over half our shares are held by large US institutions, but our retail following is small. We believe that Franco-Nevada is the gold investment that works as outlined in slide 6. Our challenge to investors is, why own a gold ETF? With Franco-Nevada you're getting gold leverage with growth and yield, but without inflationary cost risk or concentrated project and geopolitical risk.

Subject to the usual approvals, we expect Franco-Nevada to begin trading on the New York Stock Exchange on September 8. When that, I'm going to turn it over to Sandip, to walk you through the details of our results.

Thank you, David. Good morning, everyone. As you have seen from yesterday's earnings release, the Q2 2011 financial results were very strong, leading to a great first half of the year for the Company when compared to the first half of 2010. I will be providing an overview of the quarter and year-to-date results. For additional information, please refer to the MD&A and financial statements that can be found on our website at www.franco-nevada.com. I'm pleased to report that the Company has experienced growth across all metrics.

As David highlighted, the second quarter and year-to-date results were very strong and have been ahead of plan, resulting in the Company providing updated revenue guidance for 2011, of $375 million to $400 million. If you refer to slide 8 in the presentation, the chart illustrates the key financial measures Management now uses to evaluate performance. As you can see, there's been significant growth from all these measures when comparing second quarter 2011 to second quarter 2010.

Some of the key highlights for second quarter include, continued production growth at Palmarejo resulting in $25.8 million in revenue in the quarter and $46.6 million year-to-date. A full quarter of revenue recognition by the Company of the Gold Wheaton streams of $37.7 million, split 54% gold and 46% platinum group metals. Stillwater provided another great quarter, earning $5.9 million in revenue compared to $3.3 million in second quarter 2010. As well, the Company benefited from the incremental revenue from some of the smaller organic royalties, such as Duketon and Holt. These all contributed to revenue being 112% higher than Q2 in 2010, which in turn results in a 112% increase in adjusted EBITDA. On an adjusted net income basis, the Company earned $33.2 million compared to $6.3 million second quarter 2010; a significant increase.

As seen on slide 9, on a full year basis, the results are just as strong. Please note that the 6-months results as of June 30, 2011 only include consolidated results of Gold Wheaton for 3-and-a-half months, as the transaction closed on March 14, 2011. Overall the key factors for the improved quarter-over-quarter and year-over-year results are due to 3 factors. Firstly, commodity prices. The gold price for the first 6 months of 2011, averaged just under $1,450 per ounce, compared to approximately $1,150 per ounce in 2010, a $300 swing. The Company has obviously benefited from this increase.

Secondly, this quarter was the first full quarter of recording revenue from the Gold Wheaton assets. Just over $37 million was recognized for Sudbury Basin, MWS, and Ezulwini. And lastly, organic growth at our existing royalties, either through startup of operations or expanded production resulted in additional revenue for Franco-Nevada. Overall, the top 5 revenue producers for the 6 months of Goldstrike, Palmarejo, Sudbury Basin, Stillwater, and Ezulwini generated in excess of $110 million in revenue for the Company.

As you can see the cost of sales line item has seen a large increase from 2010. With the addition of the Gold Wheaton assets, the Company now records the $400 per ounce purchase price for each stream ounce, as cost of sales. This is applicable to the 5 Gold Wheaton stream assets as well as Palmarejo. The year-to-date total of stream purchases is just under $25 million. Also included in cost of sales are proceed taxes for Nevada and Montana, as well as production taxes on oil and gas royalties. These taxes total $4.1 million for the 6 months ended June 30, 2011.

As mentioned last quarter, 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 of the timing of when the minimum is actually earned. For Q2 2011, the Company recorded $3.6 million in revenue from gold quarry.

As you can see from the revenue by commodity slide on page 10, the Company's overall revenue has steadily increased over the last number of years. In fact, Q2 2011 was the first quarter where the Company surpassed the $100 million mark in revenue, a milestone for the Company. As a result, precious metals revenue has increased significantly. In second quarter 2011, 90% of revenue was from precious metals, compared to 74% in Q2 2010.

But moreso the gold component of revenue has increased significantly during this time frame. Gold revenue is up over 112% over Q2 2010 and comprises 68% of total revenue for the quarter. If you were to adjust for the gold quarry minimum top-up in each of Q4 '09 and Q4 2010, the trend has been a steady quarter-over-quarter increase in gold revenue over the last 2 plus years.

Slide 11 again illustrates the steady increase in overall revenue, and in particular gold and PGM revenue, for the Company over the last 3 years. Revenue itself has increased from approximately $40 million in Q2 2008 to over $100 million this quarter. This is in excess of a 150% increase. For Q2 2011, the importance of PGMs to our portfolio is more evident as 22% of revenue for the quarter was attributable to PGMs.

Slide 12 is an interesting slide. It illustrates the increase in Franco-Nevada's gold revenue over the last 3 years compared to the increase in price of gold over the same period. As we all know, gold has performed very well over that time frame. However, Franco-Nevada's gold revenue has increased at a faster rate. For the 12-month period ending June 30, 2011, the increase is due to the following -- Firstly, the increase in the price of gold, especially with gold trading over $1,700 per ounce currently. For second quarter 2011, the average gold price was just over $1,500 per ounce.

Secondly, the Company has made some acquisitions over the last 12 months, the most significant of which, being Gold Wheaton. The positive impact of Gold Wheaton is now being realized, with an excess of $37 million being recognized as revenue in the second quarter.

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 production stage with the likes of Duketon, Holloway, Holt, Hollister, and Hemlo. We look forward to this organic growth continuing with Tasiast and Detour coming online. In fact, Tasiast reached the 600,000 ounce threshold for production, in July, and we expect to be recording our first revenue from this royalty in the upcoming quarter.

The Company always stresses the scalability of our business. That is very evident in second quarter 2011. As you can see from slide 13, revenue and adjusted EBITDA have generally moved in an upward trend over the last couple of years, while the Company has maintained a fairly constant cost structure. In second quarter 2011, the Company generated an additional $33 million in revenue over first quarter 2011, yet the administrative costs of running our Company remain fairly constant, as have the number of shares outstanding. We have been able to add growth without increasing our cost structure, or without significant dilution to our shareholders.

As you can see on slide 14, the geographic revenue profile continues to be very strong, with 80% of revenue being from North America, which is fairly evenly split between the US, Canada, and Mexico. 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, as it once was. This will continue to grow as our advanced stage royalties begin to provide revenue. As mentioned earlier, we look forward to recording revenue from Tasiast in third quarter.

If 2008 the Company was earning revenue from just under 20 mineral properties. For 2011, over 35 mineral properties are generating revenue. This will increase in third quarter as Tasiast and our 2 new acquisitions begin generating additional revenue for the Company.

Slide 15 provides a reconciliation of net income from Q2 2010 to Q2 2011. The positives for the quarter -- a substantial increase in revenue, which is largely attributable to the Gold Wheaton assets. 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 overall revenue, and the addition of the Gold Wheaton assets. In second quarter of 2011 the Company recorded approximately $18 million in depletion for the Gold Wheaton assets. And in Q2 2010, we had one-time gains from the sale of investments on the disposition of certain securities.

If you turn to slide 16, you can see that the Company continues to have the resources to complete additional transactions. At the end of Q2 2011, available capital was $567 million which included the credit facility of $175 million. The new $175 million credit facility was entered into on June 29. The new facility provides additional flexibility to the Company, while resulting in lower ongoing and borrowing cost. At present the Company still has an 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 addition, based on our revenue profile, the Company should be able to generate significant operating cash flow going forward.

On slide 17, you can see the strong revenue growth experienced by the Company from 2008. For 2011 we are forecasting a 70% revenue increase over 2010. Going forward, based upon a $1,500 per ounce gold price, and assume no additional royalty or stream acquisitions by the Company, with our advanced projects and development coming online, the Company could potentially earn $500 million in revenue by 2013, a significant accomplishment from where the Company started out just 3 years ago.

Slide 18 provides an update on the current capital structure of the Company. There are currently just under 127 million shares outstanding. The increase from the end of 2010 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 149.7 million.

Please note that the appendices to the presentation do include reconciliations of all the non-IFRS measures referenced for the 3 and 6 months ended June '11 and June 2010. Now I'll pass it to Paul who will discuss the 2 new royalty acquisitions made by the Company since Q1 2011.

Thank you, Sandip. The first of the 2 royalty acquisitions in the quarter was the purchase of an effective 1.5% NSR royalty on Perseus' Central Ashanti Gold Project in Ghana, for over $35 million in cash. The Central Ashanti Project is on the prolific Ashanti trend. The property has reserves of 3.3 million ounces, and total resources of 6 million ounces in a series of open pit deposits. Perseus has very rapidly increased reserves and resources over the last few years and just released the latest set of exciting full results this July. All of which point to excellent reserve expansion potential on this project.

It was an attractive time to acquire the interest. Construction of the mill has just been completed and gold production is expected to start this quarter. Perseus is projecting a production ramp up to 290,000 ounces a year, by their financial year 2014, and they're also discussing further expansions to the milling capacity.

The second acquisition was the purchase of a 1.5% gross royalty on 7 claims on 1 of Canada's largest mine, that's the Canadian Malartic Mine that Osisko has just put into production. The acquisition cost was in the amount of $9.7 million, paid in Franco shares. 1 of the claims, as shown on page 21 of our presentation, covers now what is now the center the expanded pit so the royalties should start paying right away. Some of the current expiration targets also fall partially on the royalty claims, so there's good upside potential on this royalty.

The reserve on the Canadian Malartic property is currently 10.7 million ounces. Average annual production is planned at 574,000 ounces a year, over a 16-year mine life, and we wouldn't be surprised to see an increase in the production rate in the future. Both royalties are great additions to the portfolio. They are on assets run by 2 very entrepreneurial management teams, and will both start contributing right away in this very strong gold price environment. In addition, we're in advanced negotiations to acquire additional gold and non-gold royalties, and we anticipate having further additions to discuss on our next quarterly call. Back to you, David.

Thank you, Sandip and Paul. Operator, we're ready to take any questions.

(Operator Instructions)

Cosmos Chiu, CIBC.

Got a few questions here. On the royalty acquisitions; I believe these are existing royalties. Can you give us more color in terms of how you came about making the acquisition, and was there a competitive process?

In both cases they were royalties that were held by distinct parties, Cosmos. One case it was an individual; the other was a company. They're both royalties we've been aware of for some time, and so when the parties had an interest in selling them, we initiated that dialogue.

Any time you're buying royalties, there's some element of competition. The operator is always interested in buying their royalties back; there are other players. We were fortunate with both of these that we were able to come to an agreement with the parties on what we think were attractive deals.

Yes, that's the reason what I'm asking. The acquisition cost that you paid would be, by my calculations, a lot less than what you can actually get out of those royalties in terms of future royalty revenue. In terms of Perseus, I know there's a hedge in place on the Central Ashanti Project. You're not impacted by that hedge?

In Perseus in particular the hedge doesn't apply, but for our royalties in general, in all cases we simply get the answers that are produced, multiplied by the spot price. We're never impacted by any hedging.

And moving on to your oil and gas royalties, with the recent decrease in oil prices, if the lower prices kind of continue, is there any risk in terms of production at the assets where you have oil and gas royalties?

We have Geoff Waterman here, who's our expert on oil and gas assets.

No, there's no risk that our oil production would be curtailed because of lower oil and gas price -- or oil prices.

(Operator Instructions)

David Haughton, BMO Capital Market.

Got a question for you, perhaps Paul might like to handle this. Looking at the Malartic royalty, the graphic you've got on page 21 shows where that fits relative to the pit, but I don't understand how it fits within the mine sequencing. Will there always be a portion taken out of your royalty claim or will there be periods when there will be no royalty?

We're totally relaxed on it. It's similar to what we have in Gold Quarry or Goldstrike, where we don't cover the entire pit. There will be periods where we don't get mining on our particular claims. We've had guidance from the Cisco, that we will see some production this year and more material production next year, but we don't have a longer-term plan.

We also have been able to infer that there's a good number of reserve ounces on our particular claim and a lot of good expiration potential as well. We have a broad enough portfolio, we actually don't mind having a few swing assets that don't always continually produce, because we think on average they balance out just fine.

Having a look at the EMC royalty in South Africa. Trying to calculate the revenue received for the quarter and for the year-to-date. Is that based on a pro-rata of the minimum for the year of some 19,500 ounces?

Yes, we are entitled to 19,500 ounces for the year. At the end of each quarter they top us up, so for the end of June we have received one-half of that, less what Gold Wheaton would have received for the period that we did not own the asset.

Because you have got other royalties, such as Robinson, where they top up there's in the final quarter?

That's right.

There are no further questions at this time.

Well, you've let us off easy and I think -- I'm hoping it was because it was such a great quarter, and I think the results really do speak for themselves.

On our website you'll find our full Q2 financials and MD&A, and also to best understand Franco-Nevada's many assets. Because we really can't do them justice in a short presentation, please take advantage of our updated website. We have a very expanded Annual Information Form.

We go beyond what the requirements are for that document, but what it does, it gives us a form to give you a lot of the details and guidance for the individual assets that we just can't do in an investment presentation. And you'll get a better appreciation for what's behind our Company.

Our third-quarter earnings release will be on the evening of November 8, and our conference call will be at the same time on November 9. Thank you for your continued interest in Franco-Nevada.

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