Franco-Nevada Corp (FNV) 2012 Q1 法說會逐字稿

Good afternoon, everyone. Thank you for your interest in Franco-Nevada and for joining us either in person or over the phone. Before we begin the formal remarks, 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 at the beginning of our presentation.

We have a number of presentations planned, beginning with our Q1 results, followed by our analyst and investor day presentation. Our annual general meeting will begin at 4.30. And finally a reception at Vertical patio next door. For those listening over the phone, the presentations are available at our website at Franco-Nevada.com. Where you'll also find our full Q1 MD&A and financial results, as well as our inaugural asset handbook under the key document section of our website. We do have our entire management team here today to answer any questions. We will hold a brief Q&A following our Q1 results. But ask anyone listening over the phone to please hold off questions until the end of the analyst and investor day.

I will now ask Sandip Rana, our CFO, to come up to discuss first-quarter results.

Thank you, Stefan. Good afternoon, everyone. As Stefan mentioned, I'll take a few minutes to go over the first-quarter March 31, 2012 financial results. As you will have see from the press release that was issued this morning, Q1 was another strong quarter for the Company. It was actually the fourth consecutive quarter where we achieved over $100 million in revenue. Just to put that in perspective. When the Company went public back in December '07, our first full quarter, Q1 2008, we actually did $27.5 million. So we have had substantial increase since then.

If you look at slide number 6, you can see that we have had significant growth across all our metrics. Whether they are IFRS-based or non-IFRS-based. Revenue was $105 million for the quarter compared to $73.1 million last year. Net income of $46.8 million compared to $21.2 million, translating down to $0.33 per share compared to $0.18 last year. So we have had significant growth. As well on the non-IFRS measure basis, again, we have had substantial growth. Whether it be precious metals revenue, adjusted EBITDA adjusted net income, both on an absolute basis and a per-share basis.

So why have we had this growth? A number of factors. Firstly, commodity prices. The gold price averaged $1,690 in the first quarter 2012, a 22% increase over last year first quarter. As approximately 70% of our revenue is gold-based, we definitely benefited from that gold price increase. As well, acquisitions.

March 14, 2011 was the date we completed the acquisition of Gold Wheaton. Last year we were only showing two weeks worth of financial results for Gold Wheaton. This year we have the full quarter. So we are benefiting from the acquisition. In fact, Gold Wheaton generated $29 million for us in Q1 compared to $8.9 million last year in revenue in Q1. There has been some other acquisitions, as well, which have flowed through for Q1 2012. The Edikan royalty, although smaller at this time, it added to our revenue in Q1. As well as the Weyburn acquisition in the oil and gas, on the oil side, that we did complete in Q1 2012. However, that deal, the revenue was retroactive to January 1, 2012. So, as I said, acquisitions have benefited us significantly.

And lastly is the organic growth. Every quarter, every few quarters, we happen to benefit from new royalties coming online. In Q1 2012, compared to last year, we have Musselwhite and we have Tasiast. As you know, Tasiast started paying us in Q3 of 2011 and the Musselwhite NPI came in at the end of last year. So we again benefited from that in Q1 2012.

So overall, the portfolio performed well for us in the first quarter 2012. We did have a couple of underperformers. Firstly, Goldstrike generated less revenue than it did in Q1 2011. You probably saw from our Barrick's release last week, they are doing some retrofitting and maintenance at Goldstrike and, as a result, they didn't produce as many ounces as expected. However, they have maintained their guidance for the year and are forecasting a stronger second half of the year.

As well, Stillwater. Stillwater didn't perform as well as last year and that is a combination of two things. One being Stillwater didn't produce as much PGMs in the first quarter. As well as the commodity prices, actually, for platinum and palladium, the average prices for the quarters were down versus Q1 2011. So those were the two somewhat underperformers for us.

Turning to slide 7, it basically illustrates the growth this Company has experienced in revenue over the last five years. And you can see in Q1 2008 we generated $27.5 million of revenue versus this quarter $105 million. What is interesting is that back in 2008, oil and gas was approximately 50% of our revenue on an absolute basis. It's about the same are now. However, our gold percentage has increased 500%. We generated about $12 million in Q1 2008 from gold revenue and we're just about $75 million right now. So significant increases, all based upon, again, commodity prices, acquisitions and the organic growth.

Turning to slide 8. Historically we've had a tendency to have quarter over quarter growth. As you can see from 2008 to 2012, our Q1s have increased each year, as have our other quarters throughout the year. So we have had a track record of delivering results.

The beauty of our business model is the scalability. If you look to slide 9, you will see that. Back in Q1 '08, the red bar represents our G&A. And it's pretty well stayed constant over the last five years. That is the beauty of our model. We can add revenue, which we have done, as you can see from the chart. From just over $20 million to in excess of $100 million right now. And our G&A has stayed fairly flat. On a cost-wise basis, you can see stream costs have increased but that is due to the new business model of streaming where we pay $400 per ounce. So our business is definitely scalable.

In terms of revenue sources, 81% of our revenue is from North America and 89% is from precious metals. Our largest jurisdiction for revenue generation was Canada with 32% of our revenue for Q1 2012, followed by Mexico and the United States. Africa is at 14%, and that has increased due to the acquisitions of Mine Waste Solutions, Ezulwini and then Adica and Tasiast generating revenue for us now, as well. Our mix between gold and PGM, 72% was gold revenue in the quarter and 17% was PGM.

Slide 11 provides basically a waterfall chart comparing or showcasing how net income has moved from Q1 2011 to Q1 2012. So obviously the largest movement has been in revenue. And again for the mentioned factors been commodity prices, acquisitions and organic growth. So that increased $32 million. Last year we had some foreign exchange losses which reversed out. We are actually in a positive component for Q1 2012, which is a combination of FX, as well as some mark-to-market on some more warrants. So that has been a positive movement.

On the negative side depletion has increased, which is due to the acquisition of Gold Wheaton. As well as last year we had booked some gains on the sale of Gold Wheaton shares as part of our transaction. Cost of sales has increased, which is the $400 per ounce we pay on our stream ounces. As well as income tax expense which is, again, due to higher revenue, higher income. So basically year over year we've gone from $21 million in net income to $47 million.

In terms of our 2012 Outlook, we are maintaining our revenue guidance of $430 million to $460 million for the year. With stream ounces accounting for 110,000 to 130,000 ounces, gold equivalent ounces. As you will have seen in Q1 2012, we will have a full year of Mine Waste Solutions in February in our financial records. We are going to still benefit from smaller asset startups, or full-year benefit of smaller asset startups, and NPI such as Musselwhite. And Goldstrike, as mentioned, they have maintained their guidance for the year and we do expect a stronger second half of the year. Palmarejo we're at this time still maintaining our annual minimum based upon operator guidance. And, as we mentioned at the end of last year, Ezulwini, last year we had guaranteed minimums on the property which we don't have in place in 2012. So, as I said we're going to maintain our revenue guidance at this stage.

So overall we had a very good strong first-quarter 2012. So that's a quick summary of our financial results for first quarter. If there's any questions, more than happy to answer, or someone from the management team. With that I will pass it to David.

I think it is more effective doing these conference calls is on the phone. We usually have a whole list of questions. So in person I guess we can stare you down and not have as many questions. We are going to have a longer question period when we finish our analyst and investor day. This is where we are happy to kick this off. And actually we're going to be introducing a number of new concepts here.

I think one of the things that we've done, we've been public 4.5 years, coming up to 5 years now, as a new company. And we've been working to do that extra mile in terms of getting our disclosure and corporate governance up to market expectations. One of the biggest questions we always get is what are our reserves, what are our resources. We are a royalty company. It's a bit different because we don't actually own projects outright and mine ounces.

We often have a gross royalty or we have a profit royalty or stream. So counting those up in different ways is probably not the most representative way. And we wanted to do something that would be effective for our investors. So we have spent a fair bit of time. Every one of you now should have this book, the asset handbook, that we were handing out. It is our new inaugural effort to actually try to do the best demonstration of what are the gold ounces behind each of our assets. So we will be introducing this new concept.

But before we do that, I want to introduce actually the rest of the management team. You've seen a lot of Sandip and myself and Paul Brink. But really delivering the results and putting together the disclosure and the financial statements couldn't be done without the large team that we have behind us. And also in terms of doing the transactions that have added so much value to this Company. We have invested just in the last 15 months about $1.3 billion in new assets. It has been a lot of work, 12 different new royalties and streams added to the Company. And all of these have been value accretive.

That effort reflects the support team that we have for this and the execution team. So we have all of these people here. We'll have a bit of a break before we start our annual general meeting, and as well we're having a reception tonight. You will be able to identify them. They're all going to have little deputy badges with the Franco-Nevada sticker on that. So please get to know some of the individuals we have behind us. We have, including representatives from our Australia office, and our Barbados office, as well, that are up here today. Tomorrow we go into our management meetings, and it is great when we have the entire team working together.

One of the things that we're going to be walking through, we'll be exposing a few additional people on the presentation today. Besides Paul and myself. And I think this is an inaugural presentation for Kevin McElligott who runs our Australian division. And then we have our technical representative, Phil Wilson, who's also going to be presenting. And Jason, I'm not sure if you have done any analyst day presentations yet. So I want to go real easy on them because this is their first time doing the presentations.

And what we're going to do is make an effort, at least in the presentation today, there will be a bit of an introduction in our business model. But what we want you to do is understand the different types of royalties that we have. The respective economics on them. And the best way of adding them up, if you want to get our entire exposure. So we're going to spend a little more than an hour going through that. And then we would love to take your questions on any of the assets. And then I'm sure you will have dreamed up some Q1 tough questions for Sandy at the end. So please ask as those, as well.

So with that, I want to make sure everybody should have their asset handbook before we start this. If you don't, raise your hand and we will get one delivered to you. And with that, I would like to ask Paul just to talk about our business model. Paul?

Thanks, David. David asked me to speak a bit about our business strategy. I feel a bit inadequate in doing that just because the strategy is so simple and it changes so little. So you have all heard it before. In terms of types of royalties that we hold, there really are three broad types. NSR, or gross override royalties. Which really are a strict percentage of revenue. They're the streams which are very similar in that they are a percentage of revenue, except that they have a fixed cost component. Which we pay per ounce.

And then they're also the net profit interest. And a net profit interest, we're not contributing capital to the project but we are exposed to what the profitability of the project is. To put it in perspective, roughly 50% of our current revenues come from streams, about 40% from NSRs, and about 10% come from net profit interest. So put another way, 90% of everything that we hold has either no-cost or fixed cost component. So it is not exposed to inflation of operating costs.

What are the things we look for when we are doing deals? The first is when we are acquiring royalties or buying streams, we always say we'll pay a fair price for what is there today. What we can comfortably say will get mined out. But then what we do like is to participate with the operator if there is any exploration success on the property. And really what that means is we are exposing ourselves to exploration success. For the most part it is brownfield exploration success. We always believe that the best place to find a new mine or additional ounces is the head frame of an existing mine. And it really is that exploration success around currently built mines that drives the future of our Company.

We like to be in politically safe jurisdictions. And really what that means for us is being in a country that has got a good system of mineral tenure. That ideally we can register a royalty, then that royalty is attached to title. It is the best form of security that you can have. We also want to be in a country where there is a rule of law so that we can enforce that. We are currently with our assets in very good countries, predominantly Canada, the US, North America, Australia. We feel we have a bit of latitude to go outside of that so long as we stick to those tenets of ensuring that we have good security on the property.

With a royalty, one of the benefits is that your first ore in is your last. Once we've made the investment, that is the only exposure we have. We're not required to put additional capital into projects. We're not required to fund additional ongoing operating costs. It means we get an option on future exploration and able to minimize many of the negatives that you can have in the mining industry. We're trying to minimize encroachments. Fortunately royalties have not been much of a target in terms of resource nationalization and governments trying to take a bigger piece out of projects. We also, when we're structuring stream transactions, try to do that so the agreement we have is one to purchase metal. So we, as much as possible, fall outside of the gambit of the area where governments may look to take a larger piece out of projects.

We have a great luxury in our business model in that we don't operate the mines. We are very fortunate that amongst a suite of operators we've got some of the top operators in the gold industry, with Barrick, with Goldcorp. If the Mine Waste transaction goes through, we'll soon add Anglo Gold to that list of top-tier operating companies. What it that means for us is we don't need to spend our time operating those mines. It does mean that we can have a big team that is focused really all the time in looking for new assets that we can add to our Company and grow the Company.

This is the list of assets that we have added over the last year. I will run through it very briefly. Really just to illustrate some of the reasons for why did we do these deals, how do they fit with our model in terms of Gold Wheaton. Hopefully when you saw the great increases we have had in our Q1 results largely through being able to acquire the Sudbury and South African assets that have been tremendous contributors to our cash flow. Also, if the first uranium sale of those two assets, Mine Waste and Ezulwini go through, it would be an illustration of one of the things we always look to, to say we always think good assets ultimately will move into stronger hands. With Mine Waste we are hopeful that will go through, and that with Anglo Gold we will have a strong operator.

With Canadian [Melodic], a tremendous management team that I think has impressed everybody in how they have moved that asset forward. We have put ourselves in a position of buying the royalty claims that we have, both with one claim that is right on the current pit, that we get current cash flow. We'll certainly get a good payback from what we have there. But also have a number of claims that fall in the area where they are doing exploration. And if this goes successful in exploring in those areas, we will participate in that success.

With Edikan I was very pleased to see David Horton has put out a report yesterday where he had looked at 76 mines. I think all the mines that have been developed in the universe of companies that he covers. I was very pleased to see that the second-ranked mine out of all the 76 is Edikan, ranked on a number of criteria, but I think largely focused on the potential for economic return in the projects. In that list of eight objects -- I like to list a lot, David -- was also [Ada], which we have a royalty on, as well as Perama Hill, which Eldorado is developing. The Phoenix Gold project with Rubicon, it's a very high grade project. It is in the Red Lake Camp, it's close to infrastructure and very good exploration upside. So there's no doubt the mine will be built and we'll have a good option on that exploration success.

The Lumina transaction was one where we acquired a package of royalties. The key royalty in that was Relincho, which is a large copper porphyry, it's being developed by [Tech]. It will be the next couple copper mine that Tech develops after they finish expanding some of the existing operations, feasibility is due out later this year. When we looked at that transaction, the purchase price we paid was justified with that asset alone. There were a couple of other exploration assets in there. Already one of them is shaping up to be just a terrific exploration success.

Taca Taca which is in Lumina royalties, the Ross Beaty company. Since we have acquired it, it has gone from looking like a 1 billion ton resource, now expanded up to 2 billion tons. It is a world-scale copper porphyry. The copper equivalent grade there is over 0.75% copper. They have now been able to define a starter pit on the deposit, 200 million tons on a copper equivalent basis, now grading more than 1% copper. So it is looking like just a terrific asset and will be a great success for Franco.

With Lake Shore Gold we have brought royalties on the Timmins properties. The Company had some issues as they put those into production. They seem to be working their way through those now. Stabilizing those operations. They have a tremendous property position. Again we think huge potential for exploration upside. And it should be a good long-term contributor.

We have also added some assets on the oil and gas side. Weyburn is a unit that we already have exposure to. Geoff Waterman has added an asset that will give us additional exposure to that. Weyburn is one of the best oil-fields in Canada. One of the main reasons being that it has such a low decline rate. So when we got the opportunity to get more exposure to the asset, we jumped at it.

With all that we have acquired, we are still sitting on total available capital of roughly $1 billion. It is a very active market right now for royalty opportunities. Part of that is, as you all well know, we have had 10 years of very strong commodity environment. That means a lot of projects have been funded through development. A lot of projects have gotten to the point where they have defined their feasibilities.

All they need is the financing to now move themselves into production. So it gives us a good universe. Both for the volatility in the gold price, also with equity markets being tight, credit markets are tight. The availability of financing is limited. So that does give us some good opportunities in terms of financing those projects. We also have over the years added more to the gold side of the portfolio. We feel that we have a bit of latitude now so we can take advantage of opportunities if they are in the gold space or if they're in other commodities.

With that, I hand it over to Kevin.

Thanks, Paul. I'm going to spend a few minutes talking about royalty option values. What do we mean by this term? The best way to illustrate it is look at a few of our big wins over the years. These are all ones that you know very well if you follow the Company. So I won't talk about them in too much detail. But I just want to give you an idea of how they changed in value from when we acquired them to today or going forward.

First, of course, is the Company maker, Goldstrike. Original purchase price was just under $3 million. Total royalties paid $650 million and we're looking at over $1 billion over the life of the project. Number two is Detour, which is expected to come into production next year. Again, the purchase price was $2 million and we are expecting over $1 billion from that one over the life of the project. And the third big one is Tasiast. Just under $3 million again, and looking at $600 million over the life of the project.

And to give you an example of the option value in our portfolio that we have accumulated over the years, we just want to give you another good example in some detail of something that has developed really nicely over the last couple of years. This is the Duketon project. It is a 2% NSR in Western Australia, just north of [Calgirly] operated by Regis Resources. Again, the book value is about $2 million and that was fair value at the time we bought it, just like those other royalties. And it was not in production. It was around for a number of years, had difficulties due to the grade. It wasn't economic and also the management had issues with the capital structure and ownership structure.

But a couple years ago those get resolved and it got into production. So in August 2010, they developed the first mine called Moolart Well, it's got a 2 million ton per annum plant and it produces, over the life of the mine, 90,000 ounces a year. Recent production was just over 100,000 ounces a year and that's a trend, actually, with Regis, they always seem to over-achieve. So in our first full year of royalty revenues there we have $3 million. And we're just getting started. So next quarter, they're starting their second mine there at Garden Well. Expected to produce just over 247,000 ounces its first year but on an average over its nine-year life it is just under 200,000 ounces a year. It's a 4 million ton per annum plant so it's even larger than Moolart Well and that'll bring their total production to 300,000 ounces a year.

And then there's more. There's eight other deposits in the [Stupeton] area. The two most advanced ones are Rosemont, and down in the south is Erliston. To describe these a bit better, all of these deposits are covered by our royalty area. This is a question we get asked a lot because there is ten different deposits over a large area. Except for a very small portion of Erliston in the south, I think 11% of the reserves there are on mining leases outside of our royalty area.

Now the next one up for development, I can't say too much about it now. A definitive feasibility study is expected from Regis in the next two or three months. But what they are planning is a $35 million crushing and milling circuit with slurry to be pumped to Garden Well. And they figure they can add 100,000 ounces a year production without displacing any production at Garden Well. So that gets them up to near 400,000 ounces a year. Erliston is a bit different, it's not as far developed, we're not expecting any immediate announcement there, unlike Rosemont. More likely it is probably just going to be, the ore would just be trucked to Garden Well so it is effectively extending the life of that operation. So if it comes in earlier it'll just be displacing production there. So they'd be maintaining their production around 400,000 ounces a year.

And here we recently had an RBC analyst report which came out with that 400,000 ounce estimate. It's funny, at the time that was only a couple months ago, it seemed a bit aggressive. But they've already caught up to it and passed it a bit, I think. By coming out with some very firm plans for Rosemont. And this 400,000 ounces doesn't really include anything from these other satellite deposits that have been sitting there for many years undeveloped. So our potential just on 400,000 ounces a year is $13.5 million a year royalties and that's within the next two years. I think the plan for Rosemont, again, if we see the DFS with a positive outcome in the next two or three months, they'd be planning on starting construction in Q3 with production in Q3 next year. And just to reiterate, this is something that we started out with a book value of $2 million four years ago and that was fair value at the time.

We have gone into detail on one of the assets that has done well over the last few years. So just to step back and take a look at the optionality in the entire portfolio. Because we've put together a very large collection of these small assets over the years and every year one or two of them we get a pleasant surprise on. Everybody focuses on the producing assets and the big advanced assets. But we have also got a large number of exploration assets, and even in the advanced assets. And when I talk about the surprises, the positive surprises, they don't just come from exploration and discovery, they come from these producing assets. Just look back at Goldstrike, Goldstrike was a producing asset, it was at 50,000 ounces a year? 35,000 ounces a year? That's why $3 million for the royalty was fair value. So we get positive surprises across the board there. We don't know where they are going to come from, but we've just got so many assets that they do come up.

So that is putting it in terms of numbers of assets. This final slide just goes through it in terms of the area that our royalties cover. So the total area is all spread out very well across the United States, Canada, Australia, international. Oil and gas as usual gets separated out, although that is all going to be in Canada, I believe. And with a total of 10 million acres, 40,000 square kilometers, an area the size of Switzerland.

Next up is Phil Wilson talking about reserves and resources.

Thanks, Kevin. We're going to talk about reserves and resources. And first of all, look at a more traditional way of looking at the ounces on our property. And then, as David alluded, we will roll out an alternative concept which we believe is more appropriate for the royalty model.

The easiest way you can do this, you can just look at the assets in the portfolio, the operator's disclosure, make any adjustments, whether they are proven or probable, they're included in the M&I or they're excluded in the M&I. Make any further adjustments for attributable share and just simply add them up. The big advantage of that is all the information is in the public domain. With that said, it does have its limitations. Not least of which is that not all of the ounces are covered by the royalty property. And secondly, it really doesn't respect the relative value of an NSR, for example, versus a stream, or a stream versus an NPI. And we'll look at those relative values later on.

Notwithstanding all of that, we do do this because it gives us a pretty good indication of the direction of the Company. The graph here just shows, since IPO, the ounces that are associated or on properties with which we are associated. And it's really a pleasing growth trend, as you can see. It's also worth adding that these numbers here are excluding New Prosperity and they're excluding Gold Quarry, as well, for various reasons. So taking the same database and looking at it on a per-share basis, we see that we got the same pleasing trend. And more importantly, the proven and probable ounces are growing at a more rapid rate than the M&I or the inferred, which is good news.

But as mentioned, it has its limitations. The values of the NSRs, the NPIs and the streams are all different. The economics of the royalty streams are different to the operators. Reserves and resource ounces and so forth. So we believe that we have come up with an alternative concept which levels the playing field. And it allows us to look at the various economics and take into account the ounces that are attributable according to the royalty, the land holdings and so forth. This is a concept that we are calling the REU, which is the royalty equivalent units. We'll go into that. But before we go too far into that what we'll do is have a look at the economics of the various royalty models.

So in its simplest form we have the NSR. Just for illustrative purposes, what we have done here is do a simple calculation where we say, if we assume we got a gold price of $1,700, for all practical purposes on an NSR, there is no applicable cost. So the margin is $1,700. And in an example, if we use a 4% NSR, for every ounce that comes off the property, that is $6 to $8 to our account. The next one along is if we look at a stream. In this instance, we have to pay for the stream ounce so we have a deduction of typically $400 per ounce. So the margins come down a little bit, $1,300 per ounce. Assuming they get the same mass, you got the 4% royalty. And you're getting $52 for every ounce that comes off the property. In other words, this stream is worth 76% of an NSR ounce. Or alternatively you need 1.31 stream ounces to make the equivalent of an NSR.

Next up, the third column there is we got an NPI. So we're broken the NPIs out into developed and undeveloped NPIs. Typically in the developed NPI, typically the cost of operation is a little bit higher than the cost, say, for a stream. That is the applicable cost. So your margin is down a little bit. And in this particular instance we are using applicable cost of $780. So we're left with a margin of $920 per ounce. Run through the math, and to us it is worth, say, $37 per ounce or it's worth 54% over an NSR ounce. So you need 1.85 NPI ounces to make the equivalent of an NSR.

And then the last one we're using for an undeveloped NPI. This one, as well as the anticipated operating costs, we've also got to make an allowance for CapEx. So using this example of $975 an ounce all-in as the cost. We can run through the math and we come out with an undeveloped NPI worth roughly 43% of an NSR. Or 2.34 undeveloped NPI ounces equals 1 NSR ounce.

So in this manner, using REUs, we can represent NSRs, streams, NPIs on an equivalent basis. Which also represent the attributable share of the reserves from the resources, as well.

So what we're going to do now is walk through a handful of examples from the portfolio. We're going to start with a simple NSR. We're using Detour Gold project as an example here. So what we have, the starting point, we've got the proven and probable reserves. In this instance 15.5 million ounces. They're straight from the operator's disclosure. The royalty covers 100% of these reserves and resources. We've got a 2% NSR royalty. So the math is fairly straightforward. It's 100% times the reserves times 2%, so it's 311,000 REUs.

So what does that mean? Effectively it means that deliverable to our account are the equivalent of around about 311,000 ounces of gold at these price levels over the course of the project. If you want to look at the M&I, as well, because we believe there's high probability that they will be converted to reserves at some point, the math works out to 514,000 equivalent REUs. And then we have also got the inferred resources out there, as well, which is potentially a further 155,000 REUs. So it really does not get any simpler that that as for as the math is concerned.

The next example we will look at is Palmarejo. This is a typical stream. In this instance, the stream covers 100% of the operator's reserves and resources. It's applicable to 50% of the stream. So the math here is just 100% times 50% of the reserves and resources. But this time we have to introduce that conversion factor. Because we need 1.31 stream ounces to make the equivalent of an NSR ounce. So we apply that factor and it is like having 260,000 ounces deliverable to our account over the life of the project. If you look at it from the M&I perspective and it goes up to 330,000, 340,000 ounces. And then if you want to take the inferred into consideration, as well, there's a further 230,000 ounces.

Next up we have got a simple NPI. We use the term simple loosely. There's isn't such a thing as a simple NPI. But in this instance again we have the proven and probable ounces out there, 2.28 million. And that is operator's disclosure, 100% basis. We believe the royalty covers 100% of those ounces, and have a 5% NPI. So work through the math and got 100% of the reserves times 5%. But this time we are applying our NPI factor. And in this particular instance, where we believe that we need about 2.43 NPI ounces to make the conversion to the NSR ounce. So it works out around 47,000 REUs. If you look at it, M&I basis, it is up to 50,000 REUs. And then if you want to take the inferred into account, it's a further 19,000 REUs.

So then we can roll them all up into more complicated ones now. We're using Goldstrike as an example here. So in this instance, we got interest in multiple claims, multiple agreements, which we believe covers around about 80% of the total reserves and resources on the property. The NSR varies between 2% and 4%. The NPIs vary between 2.4% and 6%. So we work through this thing and we estimate that on aggregate, it's the equivalent of 4.5% REUs. So run through the math, 80% of the reserves times the 4.5% and it is 444,000 REUs. On the M&I basis, 514,000 REUs. And then if you look at the inferreds again, then a further 30,000 REUs.

The final example I'm going to go through here is a situation where we've got a smelter deductible. In this particular one, also a conversion from a different metal. So we're going to use Stillwater as an example here. Proven and probable reserves are straight from the operator's disclosure. We believe that the royalty covers around about 91% of these reserves. And it is a 5% NSR royalty. So what we have to do then is, first of all, we got to convert the platinum to PGMs to a gold equivalent. Take a view on the [pril] split, convert them using your view on platinum or palladium prices. And then in this instance, we've got a 14% deduction which covers the smelting and refining charges which we apply to the equation, as well. And also, when you look at your asset handbook, you'll see that we made a similar deduction on the copper and nickel assets, as well. So in this instance it works out that after all of the conversions and so forth have been made, it is the equivalent to 443,000 REUs from Stillwater.

So to wrap it up, we converted all of the major assets in the portfolio. The details are all contained in the asset handbook. And then we just split it out here by categories. So you can see the REOs according to the category, whether it's from proven and probable, M&I, inferred, or whatever. This, by the way, is just the precious metals. We can look at it from a location basis, whether it's international, US, Canada, Australia, whatever. Then we have also broken out by type, as well. So we've got NSR, the stream with its appropriate conversion rates, and also the NPI with its appropriate conversion rates. So we have done that, we've added it all up, it is all there in the asset handbook.

And next, Jason is going to take that and he's going to tell you how you can use that and analyze it.

Thanks, Phil. Basically Phil has given you the methodology behind how we've gone about calculating these royalty equivalent units. And what I really want to do is take things one step further and look at how we can use those REUs to assess value, value for the Company. In analyzing royalty companies, people often want to benchmark Franco-Nevada royalty companies with an operating company. But in essence they are fundamentally different. The operating companies have costs in terms of capital cost, operating costs, environmental and closure costs, and exploration costs. So what we have done in providing an REU is to essentially develop an NSR equivalent or a cost-free unit. So what you can essentially do is take that cost-free unit, pick a commodity price, and develop a value. The advantages of an REU is that it really is a better representation of the difference in economics between a royalty company and an operating company.

The other advantage is that it allows you to look, because we have put them all on our asset handbook on an itemized basis, it allows you to look at all those assets and determine the relative value of each asset based on the REUs. So it is helpful just in identifying where the major value is within the portfolio. The other advantage is that it does reflect the difference in value between the various types of royalties that we have, with a difference between an NSR, an NPI or a stream. And it basically standardizes all of those different structures and allows you to compare things on an apples-to-apples basis.

One of the disadvantages of these royalty equivalent units is just that there is a degree of opaqueness behind how those calculations work. Because operators don't necessarily always disclose the reserves and the resources in a manner that we can tie them back to the property, you can't necessarily know when a royalty covers only a portion of the property what REUs would be attributable to our account. So there is a bit of a degree of difficulty just in tying those ounces back from an operator's guidance, or published ounces to our own. Another case where that is problematic is in the case of an NPI where typically those royalties aren't paid out until all the capital is paid back. Again, you can't apply that to the company's public disclosure just because the information is not available. So you basically have to rely on our assessment of those economics. And what we've done is we've taken mine plans from our various operators and back calculated the various royalty rates in order to develop an REU.

One note that we'll make is that an REUs really only affects the life of mine economics. So you can really only look at ounces in a reserve or resource fashion. You can't look at it on an annual basis. And that is because the value of the royalty, particularly with respect to NPI, changes over time. So for example, at Goldstrike, when we provided a 4.5% REU rate, that is probably overly aggressive in current years. And it actually under-estimates the value relative to the operator in later years because the operator will be processing stockpiled or essentially prepaid ounces, and our royalty will become more valuable in later years. So it really has to be done on a life of mine basis.

This table sets out our precious metal REUs by region. And you can see that we have broken things out here by United States, Canada, Australia and international. And as well for our PGMs. So what we are trying to do here is really look at the aggregate value of the Company. Or at least our precious metal assets. And you can do this depending on whether you want to look at reserves or resources. On a reserve basis, there are three 3 million almost REUs that generate a value $5.1 billion. On a total REU basis using resources, that value would be up to $12.6 billion. So on a reserve basis it is probably a little bit conservative in that many of the royalties we have, for example, on Rubicon's Phoenix project or Alamos' Agi project in Turkey, those assets don't yet have reserves. They would not be counted in this exercise. On the other hand, total resources, if you include all of the inferred resources, it would probably be a little bit overly optimistic, as not all of those ounces will be mined over time.

This slide basically builds on the previous slide. What we're doing here is taking our precious metal REUs and adding to that REUs from our copper and nickel divisions. So it's the same principle. We have created a cost-free unit here for the base metals, which you can multiply by current commodity price and assign a value to those divisions. Of interest here is that on a copper basis, royalties like Relincho, Rosemont, and Taca Taca, contribute to a value of somewhere between $700 million and $2 billion on an aggregate basis. When looking at our nickel royalties, assets like Falcondo and Mt. Keith, at current nickel prices generate a potential value of somewhere between $400 million and $600 million in value.

Our oil and gas assets, they have a value of $600 million. And what we've done there is just taken an independent engineers report, which we had delivered to us. And they look at our proven and probable reserves. And this is at a 0% discount rate. And they assigned a value of $600 million. And that also includes the recent acquisition of our Weyburn interest that Paul had mentioned.

So when you add all of that up in aggregate, and you take into account the $1 billion in cash that we currently have on the balance sheet, you get a value somewhere between $7.8 billion and $16.8 billion. Depending on what your view on reserves and resources is and the conversion of resources over time. So this is really a potential value. And I'd just draw your attention to the fact that this value does not account for taxes. It does not account for metallurgical recoveries. And it's obviously an undiscounted value so it does not account for the time value of money and when those ounces will ultimately be recovered.

The table in the previous slide showed basically what is included in our major assets and our cash flowing assets. And in our major advanced and development assets. And you can see that there is 51 assets on the gold side, 3 assets in PGMs, 7 assets in the other categories. So it really is our currently cash flowing assets and our advanced assets. What that analysis does not show is that there are a number of assets that were not included in that calculation. The biggest of those is Prosperity. Prosperity is an asset that has not yet received its permits. So we have taken a conservative approach and left it out of this evaluation. But Prosperity would be a significant contributor to the REUs and would obviously have a lot of value.

Also, there are some outlier assets that we have not included in here, like our Peculiar Knob iron ore royalty, and our Arctic Gas assets. And in addition to that, there are all the exploration assets that Kevin had mentioned. There's over 100 exploration assets on the minerals side and 150 exploration assets on the oil and gas side. So there's a lot that is not included. More importantly, though, what this really shows is, the numbers that we've shown in the previous table show a snapshot of where the value of the Company is. Or the potential value of the Company is today. So, it's where we are at this point in time. And what it doesn't show is the real value of the royalty model which is the optionality that Kevin explained earlier. So as operators spend money on their properties and on those exploration properties, and ounces are discovered over time, those will come into the value of the portfolio. And more importantly, they'll come into the value of the portfolio at absolutely no cost to Franco-Nevada.

So with that I will hand it over to David to wrap things up.

Thank you, Jason. We have thrown a lot at you and that's why we have actually written the book in terms of what we have given you here today. And we think these REUs is something that we're going to build on over time. So you can actually have an appreciation of what the magnitude of different transactions and what they mean to us. And this exercise is not to do the analysts' jobs for them in terms of adding up reserves and resources. We actually think it is a good way to understand respective values between assets. And what we think is, we just couldn't do proper justice by going to traditional reserve resource reporting and quoting the same ounces as the operators have. Because we are not in the same business as operating companies.

And one of the things that we always point out is that royalty companies are very different, in that we are in between gold ETF space and the gold operating company space. What has been happening is there has been a migration, right or wrong, of investors looking for alternatives besides gold operating companies to invest in. And there's been an explosion where gold ETFs come from nowhere 10 years ago to where they are occupying almost over 25% of the investment space of investable dollars that might otherwise be in gold equity operating companies. And the latest growth area now is the gold operating companies where we are increasingly becoming a separate component of conferences and gold investment destinations, where the royalty companies are seen as another investment destination with a different set of parameters to invest in.

One of the things we did yesterday, we had our board meeting where we were trying to approve -- or, we did improve our first-quarter numbers. But just reviewing that. We have some attributes that are, I think, the best parts of both sectors. We can have lower risk than an operating company both in CapEx and operating costs. But we can do something that gold ETFs can't do in that we can give dividend and yield and growth that a gold ETF can't deliver. So we're a bit of a hybrid business model, that provides some unique characteristics.

One of the things that we noted as a board, is that we have tremendous following in the US. Over 50% of our shares are held by large US funds, in Europe, but Canada now is the third destination for holding our stock. And we're sitting there and saying why. And one of the reasons we think that is occurring is that we look expensive. Compared to, we are slotted in and compared to other gold operating companies, the respective multiples or P to NAVs look high. And one of the things that we are trying to look at is we have a different risk metric than most operating companies. We think if you do a P to NAV, that there is a lower risk discount that should be applied in our particular set of assets in our business model.

And the same thing with our cash flow multiples. We believe that our models can generate real free cash flow without other encroachments. More so than an operating company. So we believe there should be a different set of metrics applied to the royalty companies. And effectively the market is doing that right now. When you look at all the larger royalty companies relative to the rest of the operating companies, there is a different valuation benchmark for those companies.

And I think also, for all of our companies, it is not just our own, there has been an outperformance relative to both the gold price and to the rest of the gold index. And I sincerely don't want to show this chart forever. I really do believe that gold operating companies have been too severely discounted. That they have to start coming up. But I believe still our business model is something that can continue to generate returns, both in bear and bull markets. But it is a model that can give you, on a risk-adjusted basis, a decent return.

We have had a great run for 4.5 years. I think if you have seen more of the management team here today, we're still relatively young. We are adding more bench strength. We have never been more active, as Paul mentioned, on the transaction side and pipeline. We still feel like we are one of the growth areas in the gold sector. And we expect to execute on that.

So that is a lot of information and data dump. We want you to take the books back. I expect to be challenged by a number of the gold analysts on the approaches we have taken. But we think it is an interesting exercise going forward. And we would like to work with you in terms of expanding the REU analysis and maybe it could be a metric for all the royalty companies going forward.

And with that, Stefan, I'm going to open up the floor to any questions. We've got actually lots of time. We actually expected to have more time on our first-quarter results. But I guess they were too boring. So we will take any questions on Q1, and anything on this new analysis, or anything you want about the Company. We have the entire management team here available to you. If you have any questions, there's a microphone because we do have some people listening on the webcast. And so we are open to any questions for the Company. Please. Cosmos, please.

Thanks for the update. On the REUs, the calculation is pretty sensitive to your gold price assumption in terms of, for example, the conversion factor of 1.33 for the stream agreements. Have you had a chance to do some sensitivities in terms of what it would look like at different gold and platinum prices?

Actually, Cosmos, it is not too sensitive. Because if you look at them, most of the REUs are coming from NSRs or the streams themselves. So, for NSRs, there's no sensitivity whatsoever. Our set number of ounces does not change in respect of the gold price. The margin does change on the streams, to some extent, but it is not a huge sensitivity. I totally agree, the biggest sensitivity is on the net profits interest.

It gets a bit extreme because you can have a bit of fun. We can say, at $900 gold, we'd actually have all the economic profit for a lot of the mining operations. And then we can we should in theory count 100% of their ounces. That doesn't quite work. So that's why we thought we needed to constrain some of these calculations. And we wanted to do it in more normalized types of environment.

But in our next book, I promise you, we debated whether we should introduce the sensitivities, as well. The way we're going to do this is introduce this level of complexity at this stage. Then the next time we're going to start doing the sensitivity tables on it. Also, we wanted to test this a bit in the marketplace. But I think our next book will give you some more sensitivities. But you will find, because the dominant number of REUs or NSRs is not too sensitive. We only have three or four major NPIs in our portfolio. The rest of it are fairly robust NSRs.

And my other question is, I appreciate Kevin's conversation of optionality. And how some of these royalties in the past you did not really pay much too much money for are now generating a lot of revenue. Maybe, can you give me what is the tax treatment behind it? I would imagine there's not a lot of taxable basis for depreciation for tax purposes. As these come in, are we going to see higher cash taxes?

On the royalty side, definitely if it is held within Canada. So for example, like a Tasiast, our tax basis on Tasiast was the $2.7 million that was paid for at the time of the IPO. So, yes, when we are booking $45 million, or whatever it is, in revenue per year, we'll have cash tax associated with those assets. The historic assets have low tax basis. So, yes, there will be corresponding taxes associated with it. From a rate-wise, it just depends on the country. The US is 35% tax rate, Canada's 25%. And that is where predominantly the royalties are held at this time.

We've been lucky. Our effective tax rate has actually been declining over time. Partly because we have been in Canada, we've been blessed with lower corporate taxes. And also because we're doing more of this offshore streaming business as a component of our business. And also the royalty companies, if you look at it, we have not had the government encroachments in terms of people specifically targeting royalties for extra taxes or trying to take a piece of our business.

So I think, in a way, we have been under the radar and so it has been a good place to be. We are going to cross our fingers that continues for as long as possible. Also, we think paying cash taxes is a sign of success. That we've got a real profitable business, we're making a return beyond our investment. David?

Thank you, David, for the update, and Sandip and team. If you are introducing REUs to express your mineral endowment, would you think about it from a reporting point of view to show how many REUs or ounces you are actually getting in addition to the millions of dollars?

You're suggesting endowment beyond the quoted resources of the Company?

No, just looking at your quarterly. For instance, there's a page that all the analysts would look at, the assets and what they produce by way of revenue. Another column there for what ounces came out would be quite useful. So that you can reconcile the depletion rate of your REUs, as an example.

That's an interesting exercise in terms of showing depletion by REU. I think that would be very useful. David, let us work on that exercise. I'm exhausting a few of our team members here right now, as you can see, that's taken the book. But now that we have the basis, I think a depletion exercise per REU ounce could be quite useful. We will try to do that exercise.

Also in the first quarter, a nice win on the taxation front. It was an adjustment on the way the Mexicans do their tax adjustments. What should we be thinking about as your tax rate going forward?

Yes, it was, I wouldn't say unusual but it had a benefit to us in the quarter, the Mexican FX and the way the taxes are done down there. If you were to back that out, our tax rate would have been 27%. So I think 27%, 28% is a normalized tax rate going forward.

Thank you.

John go ahead. You have a question for us.

I just want to thank you for the REU presentation, doing the analyst job. I think it is great.

We're not trying to do the analyst job. (laughter)

No, it's good. If your attorneys let you put the software for anybody to download, just to put their own gold price or discount rate.

Do you want our entire corporate model? Would that help? (laughter)

That, too. There is a number of the assets where the operator hasn't finished all the work. That might be very good. Like the Rubicon, the Alamos that you mentioned. And there is a number of recent investments that we might not be as familiar with as Goldstrike, Weyburn. And I just ran across a company that called on me. Noble Exploration, where you might have put $4 million in Timmins. In addition to this fabulous REU model, if you could talk about the assets where the revenues aren't obvious yet. Because I think as an analyst, that is probably where I overlook your virtue. And please tell us about the virtue.

That is the biggest thing, and this is why we are now putting out the book. Because any investment relations presentation, we just can't talk about 207 mineral assets. And that is before get into oil and gas assets. So generally, people's eyes, we've noticed, glaze over by number seven. You can only talk about that number.

So now we are finding the best thing is we talk about our portfolio in large, broad, generic categories. And now we're going to be leaving this asset handbook behind when we do our one-on-one investor meetings, saying -- anything you're particularly interested in, there is a page on it in your book. And, really, we can only write up, with credibility, something where the operators have reported a resource or a reserve.

But in a way, what we are doing with the rest of the pipeline is our own exploration side. We're planting, I guess, the lottery tickets. And I know some people don't like us using that for the future. The Noble one you mentioned is, we are doing actually a number of these exploration type investments. We don't even mention it in our quarterlies or press releases, they're so small. But we're doing private placements, as little as $200,000 where we are obtaining rights on royalties. Or we are lending money for juniors to acquire forestry land.

For instance, up in the Timmins Camp. So there's this junior where we have effectively lent $4 million to them. They could acquire 144 square miles of patented land. And why we like that is, not only they get the surface rights or the forestry rights, but they also get the mineral rights. And they get to keep that forever by just paying the property taxes. So we bought into this. It is an investment, essentially a loan. We'll have a right to up to a 5% royalty when they repay the loan.

So we're not going to have a big investment longer term. But it gives us, then, 144 square miles of exploration optionality immediately northwest of the Kidd Creek mine, which is one of the greatest base metal mines in Canada. And immediately north of the Timmins Camp, which is one of the greatest gold camps in the world. There will always be miners in this camp. There are always going to be people that want to explore this property. We just like to have the right real estate and underlying rights.

It was exactly the same model that got us in the Detour Camp. We did a $2 million, effectively, loan to acquire a 2% royalty of Detour. We think that is going to be worth $1 billion to us at the end of the day. The only negative on this is that you often have to wait a decade to 15 years. Which is beyond, I think, the holding time period for most of our investors. So we generally cannot talk about the new ones because it is not going to be that relevant for the new investors in our stock.

But some stuff that we did 10 years ago is just coming to fruition. And Pierre and I, we sort of elbow each other. It's been 20 years waiting for Hemlo to be mined. Our extension, the depth. And you'll see there is a page in our book. It is going to kick in this year. It took us 20 years but now we have on the down dip extension 50% of the profits that Barrick will be mining on the deeper portion of the Hemlo mine.

There's only 200,000 ounces there right now but it is open to depth and they're mining into it now. And they have effectively recovered their initial costs for developing that portion of the mine that is coming in now. Not huge in that but that seed was planted 20 years ago. We are now benefiting from that.

So today's management looks brilliant. What we are doing is planting some seeds, and we were joking that probably some of these seeds only Jason's going to benefit from. Where is he sitting right now? The youngest guy on our team. We're going to make him look good 15 years from now.

I think the biggest difference -- people ask us how do we compete with different groups. And there's other royalty companies that come in, and there is a lot of private equity now with being sponsored by the banks and pension fund-type firms. But they all have a fundamental flaw. A lot of them have these seven-year to nine-year monetization time frames. And we look at and say, in the copper business, you are just getting started.

Most copper mines are found in one cycle and developed the second or third cycle afterwards. And you have to be looking in 10- to 15-year type time periods in terms of getting a real return in this business. And our advantage is we can buy stuff right now that is going to be long term. Like the Taca Taca is just developing right now. I think it's going to take 10 years before we see our first royalty check on it. Relincho is probably going to be the same. But then they're going to be great assets for this Company 10 years from now.

And we've got a model right now with these initial key producing assets and advanced assets, that actually have taken care of our next 10 years. We are now planting those seeds and lottery tickets for the 10 years and beyond. But we have to do a lot of them. And our experience right now is we trade dollars on 19 out of 20 deals that we will get our money back and some return.

But 1 in 20 is going to give us a real big return that we are proud of. And we start pounding the podium about the big wins. We call them our big wins or winning example type categories. And the rest of them we do okay. But it is a game of numbers, and it's a game of being very long term in terms of your investment focus. And also making sure you have absolute strong tenure so you can survive, you can be there for the long-term.

You don't have to start always putting money to preserve your interests. That is the strength of our business model. Sorry, it was a long answer. You gave me time to do a commercial here, so I took advantage of it. Any other questions? Yes, please.

Sam Crittenden from RBC. Just a question on the $1 billion war chest. Do you see yourself investing that in several assets? Or would you look at doing something big? Do you have a dollar value which would be a limit that you would want to sink into one investment? Or a percentage of a project? Can you comment on that?

It's actually bigger than $1 billion because, if you think about it, it does not count our revolver that we have. I think RBC is part of that. There's another $175 million. Plus, as you can see, we're doing revenues north of $400 million a year. So net-net of the stream costs and dividends and that, we are going to have free cash flow of another $300 million-plus per year. So that actually creates a lot of additional firepower to reinvest in the business.

I think the best way to look at it is just what we have done just in the last 15 months. We did a big M&A. It was north of $1 billion to acquire Gold Wheaton. And then we executed, as Paul showed you on the list, without showing our small exploration deals, another seven or eight transactions to add to the portfolio. And I think what we have always communicated, it is a bit of a barbell. We're going to be doing lots of smaller deals on a regular basis.

We expect every quarter to be talking about at least one or two deals that we have added to the portfolio. We did three deals in the first quarter. But we say anything that is $100 million or less are small transactions now. But it's going to be a regular part of our business.

But we also expect to do meaty type transactions north of $500 million, I hope at least once a year. That we will have that. The large transactions, a lot of things have to come together in terms of complete financing packages, permitting. They're often tied to a mine's financing. We actually need to work with other parties to make it all come together. And because those are so granular, we can't do a large number of them. But we only need to do something that is significant we think once a year.

For a $6 billion market company, we should be hopefully reinvesting about 10% of our market cap per year. So I hope we can do a run rate of at least $600 million a year. We're doing a lot better than that right now. We are actually, as Paul alluded to, we have a very full pipeline. With the tightness now in the equity and the debt markets, we seem to be a very popular destination. So we expect to do lots of those deals.

Okay, thanks.

If there are any other questions? You have been a very good crowd here. Pierre, did you want to add anything?

Nobody is talking. We actually have the whole Board of Directors here today. We were invited by David. And we thought it would be a good occasion to see whether or not management is telling us the same thing it is telling you guys. Because we are so pumped. Like we said -- gee, these guys are going to be in the sky.

No, joke apart, it is a great occasion. And one of the slides that was shown, it showed, if you look at the last 4.5 years since the company came back public, it has delivered approximately 27% return to shareholders. The old Franco, over a 19-year period, was about 36% per year compounded.

Sorry. (laughter)

I know, I know. They are slacking off a little bit. But we did start with $2 million. So the basis was not exactly the same as this one. So we will give David a break here. But the point that I wanted to make is that the key to this Company, and what made our shareholders money, is that free perpetual option that we get with every royalty that we buy. And that is never included in the NAV that I have seen coming from any of you. That is what made our shareholders rich.

And that free perpetual option is what has given us Goldstrike. It's what has given us a Tasiast. It's what has given us Detour. It's what has given us Duketon. And in that 139 projects out there, there is another one or two of those coming. I don't know where they are. But I know they are in there. Because over the 25 years we have been in business, we've already had three. And it is not because we are lucky. It's because they are out there and the business model works. And that is what really I want to emphasize.

And when we are looking at acquisition internally, that is always my question. Is that free option, how big a land package do we get with it? Right now we are at 10 million acres, which is the size of Switzerland. That is a heckuva free option to get on that kind of land package. Give me land, give me a free option perpetual. It takes time, you've got to be patient. But patience is rewarded. That Hemlo that we bought, again, I don't know why, 2 million seems to be a good number. I bought that for $2 million. It's 20 years ago. It is going to pay -- my view? (laughter)

Okay. I can't say anything. A lot. That's all I will say. It's going to do very well for the shareholders. So I think the Franco business model that we created, Seymour and I back in 1985, really, that's when we started the Company, is one of the most powerful business models that I have ever seen. And it continues to be powerful, and it continues to deliver the results to the shareholders, and I'm very proud of that. So that's all I will say for now.

Last chance for any questions? Good, all right. Pierre, you take it. Please, go ahead.

Individual investor. I just have a question about what is the rationale for paying a dividend instead of just keeping the cash in the Company? I don't want to pay any taxes.

We were just talking about that basically.

Just keeping gold. Just hold the gold.

Pierre, you handle this one.

Look, I just came back from the Berkshire Hathaway annual meeting. I was there this weekend, actually listened to Mr. Buffett. Incredible meeting. And that question was brought up, of course, by a shareholder. That very same question. And his answer was very simple. Over 50 years of business, I have delivered to the shareholders 20%-plus per year compounded rate of return. So therefore, why should I pay you a 1% dividend?

You're far better off to sell your stock, sell as much stock as you need, and let me reinvest the money for you. I can do better for you than giving you the money back. And frankly, it is a very appropriate answer because he is unique. There is not very many companies who can tell you that. Because if you look at most companies, they don't do 20% return for 50 years. That is a very rare accomplishment.

In the case of Franco, we have done exceedingly well. We have actually beaten the track record in the first 19 years, but we started with $2 million. So I'll grant you that. But so far we are doing pretty good, as you can see. But also, in the Franco, both Seymour and I felt that it was how to share between giving to shareholders a cash return on an annual basis and what are the opportunities to reinvest the money.

And because we are essentially a free cash flow company, our revenues are $400 million, we have taxes of 20%-some, $12 million overhead, everything else is free cash flow. We don't have any capital or operating costs. So it's a question of what are the opportunities for growth vis-a-vis the dividend that we pay.

And essentially over the years what we have said is that anything between 15% to maximum of 25% free cash flow was a decent return, or good return to give back to the shareholders in terms of dividend. And the rest, 75% to 85% we can reinvest in a much better fashion for the shareholders. And that is the breakdown that we have come down over the years and it seems to have done okay.

I understand that. I think it still doesn't really answer my question about why. But there's another model out there that's done probably just as well as Berkshire, if not better. Very small company, Texas Pacific Land Trust. You may be familiar with this. But they buy their shares instead of giving dividends. Again, it must be satisfying someone.

Yes. Buying the shares back is also an attractive proposition if they sell at a discount to NAV. To look at Berkshire, Buffett has said that up to 110% of book value, he's happy to buy his share back. And he has, a little bit, when the shares came down to that. Because the built-in value he feels is far superior to that. That means, his book value does not represent what he thinks his company is worth. And he is right about that. He went into a one-hour-long discussion about that very topic.

In the case of Franco-Nevada, you guys calculate an NAV. Our belief is that the value of the Company is actually a lot higher than that because of the free option. And at a price, I think I would recommend to the board that we buy our stock back. It is an absolutely fabulous use of money if our stock gets on a discount.

I just need to add, too, you have to remember where the gold industry has come from. 10 years ago we were 10% of the market capitalization of where we are right now. And the reason we have been able to grow so much is we expanded our base from what used to be a retail base, like yourself that has a tax issue, and the gold-specific funds. All they wanted was growth of ounces, et cetera, in the Company.

But when we became public 4.5 years ago, it was $1.2 billion. It was the largest mining IPO ever done on the Toronto stock exchange. We had to appeal beyond that base to the dividend funds, the growth at a reasonable price funds. And they need to have some yield in order to qualify for those funds.

So it was part of the Faustian bargain coming back and saying to get a larger investor base, we had to appeal to the Fidelitys and the T. Rowe Prices, the Oppenheimers. They're all big shareholders of ours today. And we had to qualify by paying a dividend.

So I think in terms of we got such a large part of our investor base, we're less than 20% retail today, that we have to be cognizant is this what they need. It is important to maintain our share prices by making sure they can still qualify for this investment. So I think, apart from that, I think we need to make that dividend payment.

And also, if I may add, if we try to differentiate ourselves from the ETFs, and be a model in between, the ETF doesn't pay any dividend. Like you're buying an ETF, in fact you get charged 38 basis points. In our case, you buy our stock you get plus 1%, 1.4% yield at today's price, for example. And yet, your risk on a CapEx and OpEx are not there. So the dividend gives us an advantage over the ETF, and positions the Company, I think, very well for shareholders.

We are supposed to maximize the share price of this Company. We've probably exhausted ourselves trying to convince analysts that they should buy us relative to an operating mining company because in their metrics we look expensive. But then we're saying now we have listed on the New York Stock Exchange, we could provide a yield. We are effectively an ETF on steroids and growth. And we're only $6 billion of $124 billion in gold ETFs right now. We just need a small percentage of that to make a difference to this Company.

So we think that is a good IR direction for this Company. And it is one of the benefits. When we have time, we will eventually start marketing ourselves to more of a retail base in the US. We think that is an opportunity for our stock. So that is, I think, one of the opportunities for us in the future.

Daniel McConvey, Rossport Investments. I would like to hear your perspective, David, on NPI royalties. 20 years ago, almost never a payout. Things have changed a bit. But it might have proved to be a little disappointing given where commodity prices are. How attractive are they to you now versus, say, 10 years ago? And how high are they on your radar screen?

The simple answer is we hate NPIs. Because they're just so much work. I think we have burdened a number of our directors because every NPI involves a heated discussion with the operators in terms of what are the deductions that are going to apply against it. If you look at Musselwhite, we just got our first payment last quarter. But Goldcorp has been showing this highly profitable mine for the last five years. And I think Placer Dome before that. It just got payout last year.

We have a totally different perspective on a lot of these mines that seem to have different economics when we are presented the statements than they are publicly presented to the investment community. So we much prefer, because we're trying to build -- if you look at it, we're trying to build a portfolio that once we bought it, it should be easy for Sandy to do the audit. Our best ones is where we can actually just look at their 10-K, we know what they produced. And we say okay, we got paid the right amount. NPIs, it's management time-consuming relative to the benefit it provides us.

But the one advantage is it does give you that extra leverage in the higher gold price environment. And if you look at Goldstrike, a lot of people saw Goldstrike as a dying asset. When we did our IPO, I can remember a lot of the analyst projections. It was at 2 million ounces a year. Everyone knew it was going down to 1.2 million or 1 million ounces a year.

Surprisingly, despite production going in half, our revenues have been going up. Because the NPI has been more that compensating for the decline in the production volumes, which has impacted our NSR. So it has been a wonderful thing to have.

And then we've actually put very little value on the other NPIs that we've got. Like when we first became public, because, as you said, it usually means no payment intended. And this shows you we are truly in the bull market of bull markets. All the NPIs seem to be kicking in right now. I can't think of NPIs that we don't think --

McCassick just kicked in last quarter, as well. Or fourth quarter of last year. And we got part of that South mine discovery that they have. Musselwhite, thanks to Sandip. Embarrassing, I think, the operator there, that they actually were profitable. And Hemlo is about to kick in. So those things are nice to have. We have some really small ones in the portfolio.

But my fear is I just don't want to tie up what we call tar babies where you have to spend a lot of your management time and effort fighting issues. We really want to have essentially a portfolio, like a dividend portfolio, we have all these dividends coming in without a lot of effort. So we can have the luxury to focus on future investments, not be managing historic investments. So the NPIs are there, but we always will go for the revenue royalty when we can.

If there's no other questions, I would like to just invite everybody, this is why we keep our G&A low. We're actually doing a two-fer in this room. We're going to have our annual general meeting, which will be less technical, lots more pretty pictures. And Pierre will be doing his gold outlook forecast, as well. If you stick back for that, we're doing that at 4.30. And you're welcome to it. And then after that, anyone who really wants to see more of management here, we're having a reception.

Or if you want to skip the AGM and just join us. We're just going to be on the patio. It looks like a good evening this evening, right just on the other side here, at Vertical restaurant. We are, for the first time in our history, going to buy alcoholic drinks. But we are doing it at a licensed establishment so we don't have the liability for it. And we invite everybody to share with us how pleased we are with the success and how pleased we are to have your support. Thank you.

You may now disconnect.