Franco-Nevada Corp (FNV) 2011 Q3 法說會逐字稿

Good morning. My name is Simon, and I will be your conference operator today. At this time, I would like to welcome everyone to the Franco-Nevada Corporation third-quarter 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). Thank you.

I will now turn the call over to Mr. Stefan Axell, Manager Investor Relations. Please go ahead sir.

Thank you Simon. Good morning, everyone, and welcome. We are pleased to have you join us today for the Franco-Nevada third-quarter 2011 review -- results overview.

Accompanying our call today is a PowerPoint presentation which is available on our website at Franco-Nevada.com, where you will also found our full MD&A as well as financial results.

On the line we have David Harquail, President and CEO, as well as Sandip Rana, our CFO, and most of our management team here to answer any questions during the Q&A period.

Before we begin formal remarks regarding our Q3 results, we would like to remind participants that some of today's commentary may contain forward-looking information. In this respect, we refer you to our detailed cautionary note regarding forward-looking statements on Slide 2 of our presentation.

I'll now turn the call over to David Harquail, President and CEO of Franco-Nevada.

Thank you Stefan.

Now that Franco-Nevada is listed on the New York Stock Exchange, we've put some resources into our Investor Relations. Stefan Axell has joined us as Manager of Investor Relations to help us in that area. He's an Honors Mining Engineering graduate from Queens University. On top of that, he has a Masters in Economics and a CFA designation. He comes to us with eight years of both sell-side and buy-side experience, and you'll be hearing and seeing more of Axell over time.

I'm very proud to be part of this management team that's been able to table to you today yet another great quarter. Sandip will cover these numbers with you in more detail, but simply put, all the important financial metrics -- revenues, cash flow, EBITDA, net income, as you'll see on Slide 3 -- are at record levels with year-over-year increases in the area of 100% or more.

Franco-Nevada is truly in a sweet spot. We're benefiting from higher precious metal prices, a growing number of producing assets as our pipeline assets are developed, and the added contribution from our new acquisitions.

On balance, we believe our portfolio remains very robust. For Q3, we saw the start of partial royalty payments from Tasiast, Edikan and Ity. Over the next 18 months, we're likely to start seeing more material contributions from those royalties and additional new royalties starting for Musselwhite, Canadian Malartic, Garden Well, Hemlo, Subika, Detour, and so forth.

We're keeping a close eye on some of our Gold Wheaton assets and so far so good. They're performing pretty much as we expected from our due diligence.

I told you in the last quarter that volatility is good for our business. This quarter, we've closed on or contracted on $100 million of new deals. These include closed deals on new royalties at Osisko's Canadian Malartic in Quebec, Rubicon's Phoenix Gold Project in Ontario, and a new exploration royalty land deal.

In September, we announced the proposed acquisition of Lumina Royalty Corp., and we expect to close that transaction around the end of this month. Adding these transactions to our earlier deals this year, including the acquisition of Gold Wheaton in the first quarter and our acquisition of Perseus' Edikan Royalty in the second quarter, we are now close to having invested $1.3 billion this year alone. That's equivalent to our original IPO back in 2007.

This has been truly a great growth year for Franco-Nevada. Our pipeline continues to be very full, we have no debt, and between our working capital, marketable investments and available credit facilities, we have over $600 million or about $650 million with which to do more.

I believe that the growth demonstrated in our financial results this year, coupled with our acquisition track record, has demonstrated that Franco-Nevada can deliver one of the best growth profiles in the business.

With that, I'm going to ask Sandip, our very capable CFO, to walk you through the details of the quarter. I look forward to your questions after that.

Thank you David. Good morning everyone.

As you've seen from yesterday's earnings release and as David mentioned, third-quarter 2011 financial results were very strong and continue the positive momentum the Company has experienced during the first two quarters of this year.

This morning, I will be providing an overview of the quarter and year-to-date financial results for the Company. 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 am pleased to report that the Company has again experienced growth across all financial metrics for the three months and nine months ended September 30, 2011. If you refer to Slides 3 and 4 in the presentation, the charts illustrate the key financial measures management uses to evaluate performance. As you can see, there has been significant growth for all these measures when comparing third quarter 2011 to third quarter 2010 and the nine months ended September 30, 2011 to September 30, 2010. Boxes highlighted in yellow on the charts represent the record results achieved in the third quarter and year-to-date.

As you can see on Slide 3, the Company achieved record revenue of $113.3 million in the quarter, leading to $44.1 million in net income and earnings per share of $0.35.

There are four main contributors to the financial success of the Company for both the quarter and nine months. Firstly, the benefit of rising commodity prices. The gold price for the nine months ended September 30, 2011 has averaged $1530 per ounce compared to approximately $1180 per ounce in 2010, a 30% increase. For the third quarter of 2011, the gold price averaged $1700 per ounce. As our focus is on gold, we have obviously benefited from this increase.

Second, the Company has benefited from strong operational performance from our existing royalty and stream interest, such as continued growth at Palmarejo resulting in $26.1 million in revenue in the quarter and $72.7 million year-to-date. To place this into perspective, full-year 2010 revenue from Palmarejo was $66.1 million, so we have already surpassed what we realized last year. This is a combination of higher production at the mine and the higher gold prices realized.

Stillwater provided another great quarter for the Company, earning $6.1 million in revenue compared to $2.4 million in the third quarter of 2010, again a combination of higher production and higher PGM prices.

As David mentioned, the Company has benefited from the acquisitions made thus far in 2011. Revenue recognized by the Company of the Gold Wheaton streams was $35 million for third quarter 2011, split 71% gold, 29% PGMs. Please note that revenue recorded for the McCreedy asset was lower compared to Q2 2011 due to Quadra FNX focusing on mining the nickel ores and deferring the mining on the precious metal ores.

Lastly, the Company continues to benefit from the incremental revenue from royalties in our portfolio that are beginning to pay out. Q3 2011 is the first quarter for recognizing revenue on Tasiast, as the 600,000 ounce production threshold was met. The Company recorded $1.5 million in revenue in the quarter from Tasiast as well Ity, a small royalty in Africa, began paying in third quarter also. These all contributed to revenue being 106% higher in third quarter 2011 compared to Q3 2010.

The Company realized 114% increase in adjusted EBITDA for the quarter compared to 2010. On an adjusted net income basis, the Company earned $39.8 million, or $0.31 per share, compared to $13.8 million or $0.12 per share in third quarter 2010, a significant increase for the year-over-year quarter.

On a nine-month basis, net income was $98.6 million compared to $45.4 million in 2010. Adjusted EBITDA of $233.1 million compared to $118.6 million, a 97% increase. For the nine months on an adjusted net income basis, the Company earned $94.3 million, or $0.76 per share, compared to $28.7 million, or $0.25 per share, again significant increases year-over-year.

It is also important to note that these results ended September 30 do not include a full nine months of Gold Wheaton, as the transaction only closed on March 14, 2011.

Overall, the top five revenue producers of Goldstrike, Palmarejo, the Sudbury Basin, Stillwater and MWS generated in excess of $190 million in revenue for the Company for the nine months ended September 30.

From a cost perspective, you can see from the charts that the cost of sales line item has seen a large increase from 2010 for both the three months and nine months ended September 30. With the addition of the Gold Wheaton assets, the Company now records the $400 per gold equivalent 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 included in the cost of sales line item are proceed taxes for Nevada and Montana as well as production taxes on oil and gas royalties which all vary depending upon the amount of revenue earned.

As you can see from the revenue by commodity slide on Page 5, the Company's overall revenue has steadily increased over the last number of years. In Q3 2011, the Company again surpassed the $100 million mark in revenue with precious metals revenue continuing to increase. In third quarter 2011, in excess of 90% of revenue was from precious metals compared to 85% in Q3 2010. But more so, the gold component of revenue has increased significantly during this time frame. Gold revenue is up 97% over Q3 2010 and comprises 77% of total revenue for the quarter. In fact, if we exclude the Gold Wheaton transaction, gold revenue would still have increased in excess of 40% over Q3 2010.

Slide 6 again illustrates the steady increase in overall revenue and in particular gold and PGM revenue for the Company over the last three years. Revenue itself has increased from approximately $40 million in Q3 2008 to over $110 million this quarter. This is in excess of a 175% increase. For Q3 2011, the importance of PGMs to our portfolio is again more evident as 14% of revenue for the quarter was attributable to PGMs.

Slide 7 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 this time frame. However, Franco-Nevada's gold revenue has increased at a faster rate.

For the 12-month period ending September 30, 2011, the increase is due to the following. Firstly, gold prices, price of gold, is approaching $1800 per ounce today, and for third quarter 2011, the average gold price was just over $1700 per ounce.

The Company has made significant acquisitions over the last 12 months, most notable being Gold Wheaton, which contributed $35 million in revenue to third quarter and so far year-to-date $81 million in revenue.

Lastly is the organic growth, whether that be increased production or additional exploration done on our existing producing royalties or our development royalty pipeline seeing royalties moving into the production stage.

The Company always stresses the scalability of our business. That continues to be the case for Franco-Nevada. As you can see from Slide 8, revenue and adjusted EBITDA have generally moved in an upward trend over the last few years while the Company has maintained a fairly consistent cost structure. Administrative costs have remained fairly constant, as have the number of shares outstanding. We have been able to add growth without significantly increasing our cost structure or without significant dilution to our shareholders.

G&A was slightly higher in third quarter 2011 compared to prior year and earlier quarters due to costs incurred related to the New York Stock Exchange listing and filing of the Company's shelf prospectus. However, G&A as a percentage of revenue is still only 4.3% for the third quarter 2011.

As you can see on Slide 9, the geographic revenue profile continues to be lower risk with 77% of revenue being from North America, which is fairly evenly split amongst the US, Canada, and Mexico. The South African portion has increased due to the addition of MWS and Ezulwini.

Also, please note that the diversification by asset is also expanding with the 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, Q3 was the first quarter that the Company booked revenue from Tasiast, up $1.5 million. We look forward to this royalty becoming a significant contributor to our portfolio going forward.

Slide 10 provides a reconciliation of net income from Q3 2010 to Q3 2011. Deposits for the quarter include a substantial increase in revenue which is largely attributable to the Gold Wheaton assets and performance of Palmarejo. As well, there was a reversal of FX losses that we experienced in Q3 2010.

Offsetting this large revenue increase is the increased cost of sales which relates to the $400 per ounce purchase cost of stream ounces, increased depletion due to higher overall revenue, and the addition of Gold Wheaton assets. In third quarter of 2011, the Company recorded approximately $50 million in depletion related to those Gold Wheaton assets, and an increase in income tax expense with an effective tax rate of 30% in Q3 2011.

On Slide 11, you can see that the Company continues to have the resources to complete additional transactions. At the end of Q3 2011, available capital was $628 million, which included the credit facility of $175 million. A new $175 million credit facility was entered into on June 29, replacing the previous facility. The new facility provides additional flexibility to the Company while resulting in lower ongoing and borrowing costs.

What is interesting to note is that the available capital balance is 80% of what it was at December 31, 2010. This illustrates our strong cash generation capability as, during 2011, we have invested in excess of $500 million in cash on acquisitions.

If you refer to Slide 12, as you are aware, in March 2011, the Company provided revenue guidance in the range of $325 million to $350 million in revenue for the year. This guidance was raised in August to $375 million to $400 million. As David mentioned, at this time, management is maintaining this guidance level of $375 million to $400 million for 2011.

Slide 13 provides an update on the current capital structure of the Company. There are currently just over 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 Gold Wheaton, the share amount would be 150.2 million shares.

In summary, Franco-Nevada continues to deliver on all fronts. The Company continues to report record results with a greater than 70% increase in revenue expected this year. The Company has increased its monthly dividend 60% to $0.48 per share effective July 2011. The Company has strong cash generation which will add in excess of $500 million in already available capital. The portfolio continues to be diversified at a lower risk with over 200 mineral interests with management looking forward to additional royalties beginning to pay in future quarters. We look forward to another strong fourth quarter.

Please note that the appendices to the presentation do include reconciliations of all the non-IFRS measures referenced for the three and nine months ended September '11 and September 2010.

Now, I will pass it back to Stefan. Thank you.

Stefan Axell. Operator, we're ready for any questions that participants may have.

(Operator Instructions). Cosmos Chiu, CIBC.

Good morning guys. I've got a few questions here, maybe first off on the Canadian Malartic royalty. I know, when you first bought this, you had said that was going to be kind of lumpy, but I was still hoping for some -- maybe a little bit more guidance in terms of where they might be mining in terms of your seven licenses where you have royalty grounds and what that could mean for your royalty revenue, at least for maybe next quarter and beyond.

We have a map up on our website that shows that essentially our property is the eastern part of the pit, including part of the Ballarat zone and some of the exploration upside that they have a little to the east of the pit. And when they started mining earlier this year, they actually started mining on the claims. In fact, some of the royalty payments actually went to the royalty owner because our effective date actually was after the mining of those particular claims.

So what we've indicated I think in our last conference call is we're going to get some minimal royalty payments in the fourth quarter of this year but nothing material, but we expect it to be more material next year because our understanding of the mine plan is they'll start -- they'll mine -- they're mining right now towards the west end of the pit, but then they swing back to the northern side of the pit which is higher grade and which covers -- which is covered by our royalty claims.

So I think a fair indication is we're expecting a couple million dollars out of it next year, and beyond that I can't get more definitive. I think we'd just say it will be lumpy; it will be in and out of the east and west sides of the pit as they sequence through that. I think that's one of the key things in terms of our portfolio.

We don't worry too much about the annual or quarterly outputs on individual assets especially when they're this size, they tend to average out. We have the same thing with Goldstrike and Gold Quarry where the mining is sort of in and out of our royalty claims, but on average it balances out.

Great. Then I guess looking, again, looking for maybe a little bit more guidance here, Kirkland Lake Gold's Macassa mine I guess you have a pretty different royalty here, either a 20% NPI or 2% or 3% NSR. Where are they currently mining? Are they currently mining on your royalty grounds and what does that mean?

What it is, we have a profit royalty again on just certain claims in this [gold] camp. It's the Gracie and Joseph claims. These are just to the southwest of the -- I guess the South mine complex discovery that they have in Macassa. They actually have been mining to the south partially on the claims this year. And so there is a formula there where we get paid a pro rata share of the operating profits depending on the proportion of gold that comes from our claims.

And so there has been some minor mining done already this year, so we expect to be able to receive a royalty payment in the fourth quarter of this year. So again, it's not going to be too material, but what we like is that a lot of the exploration that they're doing now, the south Mine Complex, is this year or next year onto our claims. So we're quite optimistic that there's going to be a lot more ore found in that portion of the ore body.

I guess moving on to something that actually has been in operation for quite a long time now, the Goldstrike royalty was actually a little bit higher than what I had expected for the quarter, especially given the fact that I guess there was higher waste stripping in the second half of 2011. Could you maybe comment on that and what we should be expecting for the rest of 2011 and again into 2012?

Yes, so for 2011 for fourth quarter, we believe it will be in the range of what we received for Q3. They will be doing some higher grade ore is the guidance we received. Because the stripping was completed this year, we do expect a higher NPI for 2012.

Great, thank you. That's all I have.

Boyd Yahn, Dundee Private Investments.

Good morning and thank you for the call guys. A couple of questions here. Have you looked into paying gold dividends in gold in any serious way? Does the Company hold any bullion in reserves because you're obviously very bullish about the whole gold prospect? If you can answer those, that would be great.

Just in terms of we haven't contemplated paying gold in kind as a dividend yet. Actually we'd have to look at the mechanics of that. But I think your question is a timely one. Have we contemplated starting to hold gold in kind? We don't hold any right now, but we are seriously considering beginning to do that.

Part of the reasons are there are some advantages to us, both from a tax perspective and also because we have the right under a number of our royalties to actually take our gold in kind. So we might start that on some of our royalties starting next year. We don't have any intent to actually hold gold for a long time, but we just think it's more efficient from a tax perspective to start actually holding gold through some of our subsidiaries for a while and maybe selling them forward, at least take advantage of the forward curve on gold, but at least for a short term. So I don't think it's anything that's a material change in our philosophy, but it's just making ourselves a little more efficient tax-wise.

David Haughton, BMO Capital Markets.

Good morning David and Sandip. Thank you for the update. A pretty straightforward quarter on this occasion. Just like Cosmos, I've got a couple of follow-up questions with regard to forthcoming royalties. Having a look at Phoenix, you've got 2% gross royalty. Is that over the entire property, or do you just have a portion of the ground holding there?

At Phoenix, we have it on the entire lake claims. So that's the Rubicon property up at Red Lake. The way that royalty was is the royalty on the land claims and then the royalty, a separate royalty under the lake claims. We only bought the royalty under the lake. But that covers the entire known resource at Rubicon's drill to-date. It tends to be these geological structures often have a surface expression and it tends to be that bay that they're mining that they will be going underground on. So we believe it covers all the known resources on the Phoenix project.

A similar kind of question for the Lumina Royalty, assuming that you're successful there. You've got three properties at which you've got the royalties, the NSRs. Are they also covering the entire property?

There's four different assets to the Lumina [transaction], and so I'm going to pass this to Jason O'Connell, who is more familiar with all the assets in that package.

Yes, for most of the royalties, they do cover the entire property. At Valencia which is sort of the cornerstone asset for that acquisition, it doesn't cover the entire property position that Teck has but it does cover the majority of where the resource is, so it's effectively all of it. On the other properties, it's essentially all of the known resources to date.

All right. A separate question. You've got a sizable holding in investments. One of those are Newmont shares. You've had that pretty much since your formation. Are you happy as a continuing shareholder there?

I don't want to talk our book too much David, but if you watch, the progression is that holdings become more valuable but the actual number of shares has been going down over time. Effectively, we've been selling at progressively new highs on Newmont. I think you can expect that we'll continue to do so. I wouldn't be surprised if we were finished with that position by year-end.

Thank you for the update.

Greg Barnes, TD Securities.

Thank you. David, could you talk a little bit about MWS and where that situation now sits with the South African government and First Uranium?

MWS was part of our Gold Wheaton acquisition. It's been -- it's actually been successfully, as an operation, quite successful. They completed their third gold module in September. We were part of a completion test to make sure it actually achieved its throughput volumes and recoveries and production numbers. It's achieved that quite well. So in terms of the overall operation and its ability to generate cash flow and to pay us royalties, we've actually been quite pleased with it technically.

One challenge they've had has actually been mostly dealing with the various ministries, either the Environmental Ministry or I guess the Uranium Reporting Agency, and the Mines Minister. They've already had a number of interruptions, one before we even acquired the asset, I think they had a permit dispute. Then earlier this year, there was an environmental reporting issue where they had to shut down for a week or so and do that.

Then most recently in September, there was a challenge saying to process these mine tailings that they needed a mining permit. And so that came out in September. First Uranium disagreed saying, no, this is a tailings reprocessing activity, other tailings reprocessing projects in South Africa don't have mining permits, so they said we've achieved environmental approval, we're up and running. This is the first that we realized that we require a mining permit.

So what I've seen now is, for the last two months, they've been discussing this. There's been no interruption. I take it as a positive that the previous times there was a disagreement, they actually had to shut down operations, until they sorted out this disagreement. This one I see as more positive is that there is a disagreement but they're talking about it and the operation continues to produce and continues to pay us our royalties.

So what's going to happen going next is I think you really have to take guidance from First Uranium themselves. I think they have their first-quarter numbers report coming out shortly. I imagine they'll provide an update to shareholders, but I really don't have any other knowledge beyond that.

What about Ezulwini too, David? I know there's some challenges there.

Ezulwini has always been challenging. I think, when we looked at the whole Gold Wheaton package, we had an opportunity to do something at Ezulwini before. It was something that just wasn't going to be the quality of asset that we really wanted. When we looked at the overall Gold Wheaton package, we had to be comfortable that the package would be accretive to us even if Ezulwini wasn't part of the equation. We were discounting it that much.

It's an old mine that's being rehabilitated to be brought back into production. Old mines always have challenges. We've had lots of experiences with that. So really nothing at Ezulwini is really coming out different than from what we expected. We've always had that heavily discounted in our valuations. We always saw the balance of the Gold Wheaton package being able to carry our acquisition price with or without Ezulwini. The longer Ezulwini could operate for us was a bonus and maybe there will be an upside.

I think the biggest advantage we have is the South African rand has gone down and the gold price has gone up. So that's helping what otherwise is a very low-grade and highly-diluted mining operation that's undercapitalized. We are entirely supportive to the company in trying to make that operation work, but it's not core to our valuations or our outlook.

Thank you David.

(Operator Instructions). Sam Crittenden, RBC Capital Markets.

Good morning everybody. I'm just wondering if you could talk a bit more on the Sudbury Basin. I'm just curious to know what the potential impact of this, the new shaft access could be. Then also if you could just remind me on the mine plan at McCreedy and when they're expecting to be mining precious metal ores again. Thanks.

Thank you for that. We were just up at Sudbury with our entire Board and our key management team just in September, so we've got a very good update. In fact, we were there just the day they were announcing their new agreement with Xstrata.

Why the Craig shaft announcement was very important for the Morrison deposit at the Levack mine, it's a relatively deep deposit. The trouble was is they've not been able to rehabilitate the old Levack shaft to its full depth. As a result, they were ramping down I think almost 400 meters from where they could take the shaft down, which meant you almost get dizzy when you ride down that ramp. You have to go in all those twirls to get down there and you can imagine the traffic jam as they're trying to haul both ore and waste and man goods down that rampway to access Levack, the Morrison. Also all the upside for us as we could see was the great depth extensions. Well, as much as the kilometer below the known reserves that they have at the Morrison deposit.

So for us it was absolutely vital that it would be able to access Morrison at depth. What the Craig shaft does, it's right next door. It gives them the entire depth access to below their existing mine workings, and also gives them the setup to put drill stations so they can drill into reserves the depth extension of the Levack orebody. So to us, this was always the upside we were hoping for on the Sudbury Basin component of the Gold Wheaton assets.

I think the Craig shaft is a key step going forward to realize that value. Now, it's going to take us maybe two years before we'll get some real drilling results from that station at depth, but what I expect in the near term, it's going to accelerate the production throughput at Morrison and then, longer-term, we're going to be able to see a longer-term development plan and more reserves which is going to help on your NPV valuations for the Morrison Levack asset that we have the stream on.

The other part of your question is on McCreedy. It's the operation next door. What it is, is one of the constraints that FNX has is they have no mill of their own and no smelter refining. So they have been very dependent on what deals can they cut with Vale or Xstrata at any particular time. A lot of it is tied too in terms of what the terms are in terms of penalties or payment on some of the coal products that come with the ores.

I think what's happened is that FNX, or Quadra FNX has a unique opportunity now to get a better deal for processing nickel ores from Xstrata. They've been able to get an exemption from Vale. So I think there's no -- it's understandable why they want to take advantage of processing these nickel ores while they have this window.

So for us, we don't see any big change in terms of the ultimate mine-ability of our precious metals ores in McCreedy. We think, if anything, there could be a major -- a larger plan for McCreedy down the road. But I think, until they've sorted out their terms with both Vale and Xstrata, that they're just in the middle of their own mine planning and sequencing.

So I think what we'll do is we can be more definitive when they come out with their new reserve and plan numbers, which they'll be completing later this year. But we don't see any -- we just see a deferral of value there and in terms of more important for us was the improvement of value at Morrison which was always more substantial to us.

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

Thank you Simon. We want to remind investors that our full-year 2011 results will be released after market close on March 21 with a conference call at this same time on March 22. We are also expecting to hold an analyst day to review our AIF disclosure in early April.

Thank you for joining us for today's call and your continued interest in Franco-Nevada.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.