Franco-Nevada Corp (FNV) 2014 Q1 法說會逐字稿

Good morning, ladies and gentlemen. My name is Sally and I will be your conference operator today. At this time I would like to welcome everyone to the Franco-Nevada Corporation's first-quarter results conference call. (Operator Instructions). Mr. Stefan Axell, Manager of Investor Relations, you may begin your conference.

Thank you, Sally. Good morning everyone. We are pleased that you have joined us today for the Franco-Nevada first-quarter 2014 results conference call. As Franco-Nevada just recently released our 2013 results and provided guidance for 2014 at the end of March, we anticipate this being a relatively short call with Sandip Rana, our CFO, providing our view of the Q1 results. That said, we do have the entire management team including representatives from our Australian, US and Barbados operation here available for any questions during the Q&A.

Accompanying our call today is a brief presentation which is available on our website where you will also find our Q1 2014 MD&A and financial results.

Before we begin formal remarks, we would like to remind participants that some of today's commentary may contain forward-looking information and refer you to detailed cautionary note on slide two of our presentation.

I will now turn the call over to Sandip Rana, CFO of Franco-Nevada.

Thank you, Stefan. Good morning, everyone. Thank you for taking the time to join us on our call to discuss the Company's financial results for the three months ended March 31, 2014. As you will have seen from the press release issued yesterday, the Company had another solid quarter. Our overall royalty and stream operations continue to perform well.

Turning to slide three, you will see two charts on the page. The first chart highlights the average gold price for each of the last five quarters. As you can see, it has been a steady decline with Q1 2014 gold price averaging $1294 per ounce. This is a 21% decrease from Q1 2013 when the gold price averaged $1630 per ounce. The first three months of 2014 continued to be a volatile period for the gold price with it trading as low as $1221 per ounce and as high as $1385 per ounce. Although the average price for Q1 2014 was slightly higher than fourth-quarter 2013, it has been an overall downward trend in the gold price for the last 15 months.

Platinum prices were also lower in the quarter with the average price for Q1 down approximately 13% year-over-year. The volatility in commodity prices does impact the Company's mineral asset revenue which does not necessarily highlight the strength of our portfolio. As a result, beginning in 2013 we did begin reporting gold equivalent ounces as we believe this is a better metric to measure performance.

As you can see on the bottom chart on slide three, the gold equivalent ounces received by the Company increased 11.8% year over year to 65,836 GEOs compared to 58,893 a year ago. Of the 65,836, 54,000 were from the gold assets. This increase is due to a strong performance from our Canadian and international mineral assets.

Specifically the Company benefited from the addition of the Sabodala stream acquisition which was made late last year but closed in Q1 2014. Under the stream agreement the Company received 5625 gold ounces for the first quarter resulting in $7.3 million in revenue. The Company also benefited from the continued ramp [up at Detour]. This property began production February 2013 delivering minimal ounces last year but however in Q1 2014, Franco received approximately 2000 gold ounces which will continue to increase as the property continues to ramp up.

Goldstrike was also a strong contributor in the quarter as we did receive an NPI payment from the property. As you will recall, the NPI was impacted in 2013 due to higher capital spending at the property. Although that spending is still expected to continue for the first half of 2014, higher production combined with lower costs did result in the higher NPI payment of this quarter.

With respect to the gold equivalent ounces from the PGM assets, the Company received 8690 gold equivalent ounces which was lower than first quarter 2013. This was a result of less production from our (inaudible) streams.

Turning to slide four, you can see that the overall revenue earned by the Company was $104.1 million for the quarter. It was a decrease of 4.3% versus Q1 2013. The significant decrease in the average gold price of 21% and the 13% decrease in the platinum price did negatively affect revenue but the impact was partially offset by the higher gold equivalent ounces received in Q1 2014 compared to prior year as well as higher oil and gas revenue.

The chart on the bottom of the slide highlights the oil and gas revenue for the quarter. As you can see this division generated $18.7 million in revenue for the quarter compared to $13.9 million a year ago, an increase of 35%. This increase is mainly the result of higher realized net oil prices during the quarter. The bulk of the oil and gas revenue, approximately 75% is generated from the Weyburn unit where the Company has both royalties and working interest. Weyburn revenue was higher by 42% in the first quarter versus prior year. The net that oil price realized on the Weyburn NRI which is the largest component during Q1 2014 was CAD92 per barrel compared to approximately CAD79 last year, a 17.5% increase.

As you can see on the chart, there is some volatility in the revenue generated by the oil and gas division in 2013. This was due to significant moves in both the oil price and the price differential during the year especially in Q3 2013.

As you turn to slide five, you will see the key financial results for the company. As mentioned, the Company earned 11.8% higher GEOs in the quarter resulting in revenue of $104.1 million. This was 4.3% lower than 2013. Operating income was lower than the prior year due to the lower revenue but also due to higher depletion as a result of the Sabodala acquisition and higher depletion related to the assets that contributed the additional gold equivalent ounces.

Adjusted EBITDA was $84.8 million for the quarter, down from $89.1 million or 4.8%, almost entirely due to the lower revenue.

Net income was the same as prior year at $35.4 million while adjusted net income was also $35.4 million this quarter down from $40.6 million a year ago. On a per share basis, adjusted net income was $0.24 per share compared to $0.28 per share in Q1 2013.

One of the key advantages that we like to stress of our business model is scalability. Our costs have increased over the last few years as you can see on slide six. The increase is mainly due to the addition of streams to our business but these are variable costs. Stream costs will increase as the Company receives more ounces which is a positive. In general you have to pay $400 per ounce for each ounce of gold delivered which after a period of time is adjusted for an inflation factor.

However for the Sabodala transaction, the Company is paying 20% of spot price at time of delivery rather than the $400 per ounce. But I think what is most important on this slide is the fixed costs. These are the Company's corporate administration costs and as you can see they have remained fairly constant each year while revenue has increased significantly over this timeframe.

Corporate administration costs continue to be less than 5% of revenue. As illustrated on the chart, the Company continues to maintain a very strong margin which is 81.5% for Q1 2014. Unlike operators, our business is not directly affected by operating and capital cost escalation.

As you turn to slide seven, the geographic revenue profile continues to be lower risk with 78% of revenue being from North America and Australia with Canada being the largest contributor. The other portion has increased as more royalties and streams come from Africa such as Sabodala, Tasiast and Subika.

For Q1 2014, 79% of revenue was generated from precious metals with 18% from oil and gas and 3% from other minerals. Also please note that the diversification by asset is also expanding as the Company is now benefiting from 47 revenue-generating mineral assets.

On slide eight, you can see that the Company still has a strong balance sheet was $770 million in working capital at the end of the quarter. When including our credit facility and some of our more liquid investments, our total available capital is about $1.3 billion. We continue to have the liquidity to complete transactions and add additional assets to our portfolio.

And with that, I will now turn it over to the operator. As Stefan mentioned, management is here to answer any questions. Thank you.

(Operator Instructions). Andrew Quail, Goldman Sachs.

Good morning, guys. Thanks very much for the update and congratulations on another solid quarter. A couple of questions. The first one on Palmarejo. What sort of trend have you seen into the second half of the year and into next year given there has been a steady decline over the last few quarters?

Thanks, Andrew. With respect to Palmarejo, in that contract we have a guaranteed minimum of 50,000 ounces per year or 4167 ounces per month. So under our agreement we will be delivered that gold regardless of what is happening at the property. So for this year for the rest of the year at this time we would expect a minimum each month and then 50,000 ounces next year.

Okay, look, one on Cobre Panama, do you guys sort of have any timeline when negotiations with First Quantum might sort of conclude?

Andrew, it is David Harquail here. It is hard to forecast. I think we are still expecting to spend or contribute $200 million later in the year. As you know First Quantum has had two apps from us. They want a simplified reporting regime and it is a relief on the security arrangements and we are quite amenable to do something that is mutually beneficial for both sides there.

In terms of timing, it is not really the big spend year for First Quantum. I think the big spending will be next year as well as I think First Quantum telegraphed in the last conference call that they are also working with the Korean partners in terms of seeing how that will develop going forward.

So I think the timing in terms of when we will come to agreement with First Quantum, it is not immediate, it is going to take a bit of time so we hope to report something later this year.

Thanks very much, David.

Cosmos Chiu, CIBC.

Good morning and thanks, David, Sandip and team for hosting the call. Congrats on a very good quarter once again.

Maybe my first question can be on how Franco-Nevada receives your royalty and we know that for example at Detour you received the royalty in kind. Could you first off remind us what other assets would you be receiving your royalty in kind and what is kind of like the general overall policy behind that? What do you prefer?

Obviously on the streams, we receive those in kind and we sell them and that is when we book our revenue and they have a pretty well quick turnaround within 24 to 48 hours, we sell those ounces. On the royalty side, we do receive ounces from Detour, Tasiast, Kirkland Lake and Palmarejo which is under the stream but our internal policy right now is we are not accumulating gold for an extended period of time. I would say that we try to roll over the gold ounces on a 90 day basis.

Great. And then maybe turning to South Africa given continuing labor disruptions in that country, could you maybe summarize for us in terms of the impact of Franco-Nevada certainly at FWS and also maybe at Pandora and maybe some other assets as well in terms of what the impact could be to Franco?

Cosmos, it is David here again. I think on South Africa I think actually we have been pleased both Mine Waste Solutions and Cooke 4 are in stronger hands than they used to be so those operators are sort of able to withstand the buffeting. Also think of Mine Waste if you looked at the numbers last year they were well ahead of the previous year and it seems to be tracking ahead of budget for us. In Ezulwini, it seems to be study, it is not a material producer for us right now, doing fine.

On Pandora, it is a bit of a black box for us right now. It is a profit royalty there. It has never been a significant one but we did get some net profit payments last year on it. We can't predict what we will do in terms of the net profit on that one this year.

The only thing about Pandora is it could be a bit of a sleeper asset. There is almost I think 30 million ounces in reserves on that property and the mining is now moving on to almost fully onto our reserve royalty block. We didn't have the shallower part of the reef but it is now moving deeper.

So it is one of those ones I like. If things can go steady-state in South Africa we think we are sitting on a 5% royalty on one of the largest developed platinum properties in South Africa and it could give us some good leverage with stronger platinum prices and a more steady working environment in South Africa.

But right now it is not a big part of any of our guidance numbers. I don't think we have it in our guidance at all so I just see it as a potential upside for us but I would rather be conservative on the outlook for that.

I only ask, David, given that as you call it, it is a sleeper asset. I remember like three or four years ago out of nowhere I think on a Q4 you received a pretty nice paycheck from Pandora. So I'm just trying to gauge if the same thing is going to happen again but as you call it a sleeper asset, it is nice when you get it I guess.

Yes, exactly right. We actually had quite a few of those in the portfolio; that is what we love to have.

For sure. And then maybe turning to the Regis assets here with the water receding now, could you give us a sense in terms of how the ramp up is going? Are they planning to get back up to kind of full capacity within a pretty short period of time? I am not as close to it so I just want to see maybe get a quick update on that as well -- at Garden Well and also Rosemont.

Cosmos, it is my delight, I have my Managing Director from Australia here, Kevin McElligott. I'm going to give him his claim to fame right now.

I guess a couple of quick notes there. Yes, they were impacted by flooding but they replaced that by processing stockpiles at the plant. So production is down because they are putting lower grade ore through the plant and there are some expectations by the beginning of Q3 so not far away right now. The impact to that point should be gone, they should be back to the parts of the mine that they want to be in, back on mine plan.

And at Rosemont, they've got their small expansion there from 1.5 million to 2 million tons which is also supposed to kick in early in Q3. So the first quarter was pretty rough for them, the second quarter won't be great either. They will have all the tonnage but at low grades but by early Q3, they should be back on track.

Great, thank you. That is all I have. Thanks.

(Operator Instructions). David Haughton, BMO.

Good morning, David and Sandip and also Kevin, (inaudible) those questions. Just circling back to the Cobre Panama, it looks as though First Quantum might have spent more than $1 billion so far and you have not contributed yet. Is there any hang up on your draw down of your funds as far as the contribution goes to the CapEx at Cobre Panama?

David, David Harquail here again. No, actually we are absolutely keen to maintain our interest in the asset. We are very keen to contribute to the operation. I think one of the things you should note is that the reserves have expanded significantly since we made our initial investment under Inmet and since then First Quantum is now engineering an operation that is going to be 17% larger in throughput capacity than when we first invested in it. So we still see lots of gold optionality on this property, we think it is going to be a great long-term investment.

Right now we have a mutual agreement not to contribute until we sort out these two issues that we just talked to about. And I think First Quantum really because they had just taken over the operation they weren't really in a position to provide all the reports that were required under our original agreement. So I think essentially we are giving them breathing space and I think First Quantum is looking at I guess the overall picture in terms of what they can do with this operation.

But we remain committed to it. We are going to negotiate, it is just nothing is really pressing to get these issues sorted because First Quantum has been sorting out their financial arrangements and I think they will get to focusing on our arrangements soon. But I don't see any major issue in terms of what we have here.

I just remind everyone as we have been doing the royalty business now for 27 years if you include the old Franco-Nevada and we have never had a legal fight with any of our operators that we have had to have resolved in a court. We understand what mining is about, that it's a lot of challenges for operators. The last thing we want to be is a challenge or a problem for an operator. We see ourselves as a partner with our operators and we are very pragmatic in terms of going forward. We are looking to accommodate some of First Quantum's desires as long as we can see it as mutually beneficial.

Okay. So can they continue to spend a sizable amounts of money for the balance of the year and you still not contribute if you are in a bit of a holding pattern until these other issues are sorted out?

They have a lot of financial flexibility. They just expanded their credit arrangement. They are just doing a note issue right now. They are generating good cash from their operations so the nature of First Quantum is it is a much stronger company than when we were dealing with Inmet.

So that is why I think they have a good point. Do we need all the requirements that we had under Inmet with First Quantum and that is why we will be pragmatic. I think there is some relief we can give them on some of the provisions of the contract and they have not really had enough time to focus on this particular issue. We are ready and willing to bring this to a conclusion very quickly.

Is there a circumstance where they could go it alone without your contribution?

As far as we are concerned, the gold has already been sold to us. We have made a financial contribution by lending our balance sheet to get this project going forward and so our view is if they never draw on the money, we are still entitled to the gold.

That is quite interesting. I guess with their various additional sources of funding, it almost seems as though they are thinking about that -- going alone without your contribution.

You would have to ask them about that.

In another circumstance, if they were to decide in the worst instance -- and I'm not suggesting that they would -- that they weren't to develop the project, do you have some recourse?

No, I think in terms of we are totally passive except to the operator in terms of their timing and how they execute on a project. Our own due diligence method in terms of looking at properties is we are trying to make an estimate in terms of what is the most likely scenario for these properties to get developed. We believe most operators are focused in maximizing the output from their properties and the development of the resources and we benefit from that. But we are not going to be involved in terms of micromanaging the operators in terms of their own development decisions or their capital timing decisions. So we are willing to defer those decisions to the operators. We have no minimum requirements in this particular contract.

And in your contract are there any provisions where First Quantum could buy you out for instance?

No, there are not.

All right. Thank you, David.

Thanks, David.

Chris Lichtenheldt, Dundee Capital Markets.

Good morning, everyone. Just an accounting question I think. In the investing section of your cash flow statement, you disclosed that you had $30 million of inflow from the sale of bullion. Is that just selling bullion that you received in kind in previous periods?

Yes, it is.

Okay. Where is that on the balance sheet up until the point where it is actually monetized?

It is under other assets.

Other assets, okay. That is all I wanted to know. Thanks a lot.

Robert Reynolds, Credit Suisse.

Good morning, guys. My question relates to your balance sheet. I was hoping you could touch first on what you would see as a minimum cash balance you would want to keep on your balance sheet? And then secondly, taking into account the $1 billion commitment to First Quantum, what do you see as your capacity or funding capacity for further future acquisitions?

Robert, it is David Harquail here. I think as we show we have about $1.3 billion in liquidity right now in this Company. We are generating EBITDA in the nature of about $300 million per year. The way we look at Cobre Panama is that effectively it is going to take three years to build it so the majority of Cobre Panama will essentially be funded from ongoing cash flow from our Company. And so we would actually look at the existing $1.3 billion as available to do other transactions in the marketplace today.

And of course we've got more borrowing capacity and financial capacity beyond that so we actually feel we are very liquid. In terms of a minimum cash requirement, just the nature of our Company is we tend to be very conservative. We hate doing bridge loans in transactions. We hate having net debt because we believe there is enough leverage just to the cyclical nature of the mining industry. So we always tend to manage a conservative balance sheet.

I know in bull markets people say we have a lazy balance sheet but then when we get in these more difficult markets, they are very appreciative of the strength of our balance sheet. So I think we will always operate with a strong balance sheet but I'm not going to say we are always going to have a minimum reserve. We believe having these credit facilities and having the cash on hand it is there to be used at some point.

Okay, great. So no number on the minimum cash balance you would want to see on the balance sheet?

I think what you will see is longer-term what we want is no debt on our balance sheet longer-term. If we're going to have debt, it is going to be very temporary and so that is kind of the number one thing is be a no debt company.

Okay, great. Thank you.

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

Thank you, Sally. For your calendars, we are anticipating releasing our Q2 results after market on August 6, with a conference call being held the following morning. And I want to thank everyone for joining us this morning and your continued interest in Franco-Nevada.

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