Franco-Nevada Corp (FNV) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen. My name is Aaron, and I will be your operator today. At this time, I'd like to welcome everyone to the Franco-Nevada Corporation 2014 second quarter results conference call. (Operator Instructions). I'd like to turn the call over to Mr. Stefan Axell, Director of Corporate Affairs. Mr. Axell, you may begin your conference.

Thank you, Aaron. Good morning, everyone. We are pleased that you have joined us today for the Franco-Nevada second quarter 2014 results conference call. Accompanying our call today is a brief presentation, which is available on our Website, where you'll also find our full 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 our detailed cautionary note on slide 2 of our presentation.

I will now turn the call over to Sandip Rana, CFO of Franco-Nevada, who will review our Q2 results with our entire management team present during the Q&A period for any questions that you may have. Sandip?

Thank you, Stefan. Good morning, everyone. As you will have seen from the press release issued yesterday, the Company had another solid quarter, which highlighted the diversification of our portfolio with strong contributions from our oil and gas division. In addition, our overall mineral royalty and stream operations continue to perform well.

Turning to slide 3, 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 an overall steady decline with the Q2 2014 gold price averaging $1,289 per ounce. This is an 8.8% decrease from Q2 2013, when the gold price averaged $1,414 per ounce.

The first six months of 2014 continued to be a volatile period for the gold price with it trading as low as $1,221 per ounce and as high as $1,385 per ounce during the period.

Platinum prices were also slightly lower in the quarter, with the average price being $1,447 per ounce.

On the positive side, average prices for both palladium and oil were higher in the quarter compared to Q2 2013. Palladium was higher, with the average price increasing by 14% to $815 per ounce. Oil also averaged higher during the quarter with the price per barrel being over $100 per barrel.

The volatility in commodity prices does impact the Company's mineral asset revenue, which does not necessarily highlight the strength of the portfolio. As a result, beginning last year, we began reporting gold equivalent ounces as we believe this is a better metric for measuring the performance of our assets.

As you can see on the bottom chart on slide 3, the gold equivalent ounces, which we also refer to as GEOs, received by the Company increased 15.4% to 64,734 GEOs compared to 56,085 in Q2 2013. Of the 64,734 gold equivalent ounces, 50,970 ounces were from the gold assets. GEOs from gold, PGM, and mineral assets were all higher year over year.

Turning to slide 4, you will see a waterfall chart illustrating the movement in GEOs quarter over quarter. Over the last 12 months, the Company has spent in excess of $260 million acquiring over 30 royalty and stream assets. These have been predominantly in the gold space.

During the quarter, the Company realized immediate contributions from some of these acquisitions. You will see that portfolio additions contributed 7,164 GEOs during the quarter. These ounces are from Sabodala, a transaction we closed in Q1 that provides us with 5,625 fixed gold ounces per quarter; Kirkland Lake, which contributed 895 gold ounces in the quarter; and Osborne, a royalty acquired as part of the Barrick royalty package that contributed 644 GEOs during the quarter.

Our PGM assets also had a strong quarter with both Sudbury and Stillwater generating higher GEOs quarter over quarter, the increase being 1,561 GEOs.

Other minerals was slightly higher quarter over quarter by 238 GEOs, with other gold assets slightly lower by 314 GEOs.

However, we did have some strong performers during the quarter within the gold sector. Detour contributed an additional 1,275 gold ounces versus Q2 2013 as the project continues to ramp up. Palmarejo contributed an additional 2,500 gold ounces as we recorded some prior-period adjustments related to our NPI during the quarter. Goldstrike was also a strong contributor in the quarter, as we did receive an NPI payment in addition to our NSR royalty.

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 remainder of the year, we do anticipate the spending to begin to decrease, which will benefit our NPI beginning 2015.

Overall, the GEOs increase is due to strong performance from our Canadian and international mineral assets.

Turning to slide 5, you can see that overall revenue earned by the Company was $107.7 million for the quarter, compared to $93.3 million in Q2 2013. This is an increase of 15.4% and is the fourth consecutive quarter of revenue increases. The impact of continued decreases in the average gold price has been more than offset by higher revenue generated by the increase in GEOs year over year as well as strong contributions from our oil and gas division.

The chart on the bottom of the slide highlights the oil and gas revenue for the quarter. As you can see, this division generated $23.7 million in revenue for the quarter compared to $18.2 million a year ago, an increase of 30.2%. This increase is mainly the result of higher realized net oil prices during the quarter, our lower capital spend at the Weyburn NRI.

The bulk of oil and gas revenue, approximately 80%, is generated from the Weyburn unit, where the Company has royalties and working interest. Weyburn revenue was higher by 33% in Q2 2014 versus Q2 2013. The net oil price realized on the Weyburn NRI, which is the largest component during the quarter, was CAD97.26, a 12.6% increase from a year ago.

As you can see from 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 oil prices and the price differentials.

As you turn to slide 6, you will see the key financial results for the Company. Overall, Q2 2014 was a strong quarter across all financial metrics. The Company enjoyed higher revenues quarter over quarter across all commodity categories, gold, PGMs, other minerals, and oil and gas. This led to strong growth in operating income, adjusted EBITDA, and adjusted net income.

As mentioned, the Company had a significant increase in GEOs of 15.4% as well as revenue of 15.4%. However, the Company did record higher depletion during the quarter of $11.4 million. This was partially due to the amortization of the assets recently acquired, which generated revenue, including Sabodala, Kirkland Lake, and Osborne. But, also, an adjustment was made to the units of production depletion calculation for Palmarejo due to the proposed restructuring.

The remaining book value of the asset is now being amortized over the remaining ounces yet to be received to achieve our 400,000-ounce minimum. This resulted in a net increase in depletion for Palmarejo of $2.9 million in the quarter. We expect this change to add an additional $5.3 million in depletion for Palmarejo for the remainder of the year, assuming only the minimum ounces are received.

With respect to some of the other financial metrics, adjusted EBITDA was $87.2 million for the quarter, up from $75.2 million or 15.9% increase, and adjusted net income was $36 million, up from $31.9 million a year ago. On a per share basis, adjusted net income was $0.24 compared to $0.22 a year ago.

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 7. 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.

Typically, we pay approximately $400 per ounce as the ongoing cost. But, for the Sabodala stream, the Company's paying 20% of spot price at the time of delivery rather than the $400 per ounce.

But, I think what is most important to stress 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 time frame.

Corporate admin 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% for Q2 2014. Unlike operators, our business is not directly affected by operating and capital cost escalation.

As you turn to slide 8, the geographic revenue profile continues to be lower risk with 80% of revenue being generated from North America and Australia, with Canada being the largest contributor. The other portion has increased as more royalties and streams are coming from Africa, such as Sabodala, Tasiast, and Subika.

For Q2 2014, 74% of revenue was generated from precious metals with 22% from oil and gas and 4% from other minerals. As mentioned earlier, the oil and gas division had a very strong quarter, as higher oil prices and lower capital spend led to a higher Weyburn NRI payment in the quarter.

Slide 9 provides a reconciliation of adjusted net income from Q2 2013 to Q2 2014. The largest contributors for the increase in adjusted net income is the increase in revenue, $14.4 million, offset by higher depletion of $11.4 million, as mentioned previously.

When factoring in the change in income tax expense and other items, the net result is an increase in adjusted net income from $31.9 million to $36 million or from $0.22 per share to $0.24 per share.

Slide 10 does provide a quick update on the Company's guidance. We maintain our guidance for 2014 of 245,000 to 265,000 GEOs, using pricing of $1,300 gold, $1,400 platinum, and $725 palladium.

However, we are increasing our oil and gas guidance to $70 million to $80 million in revenue from the previous $60 million to $70 million. Pricing is consistent at $95 per barrel with similar differentials to prior year.

On slide 11, you can see that the Company still has a strong balance sheet with over $800 million in working capital at the end of the quarter. When including our credit facility with some of our more liquid investments, our total available capital is in excess of $1.3 billion. We consider ourselves to be in a very good position with our balance sheet to allow us to complete transactions and add additional assets to our portfolio.

And with that, I will now turn the call over to the operator, as the management team is happy to answer any questions you may have.

(Operator Instructions). Andrew Quail, Goldman Sachs.

Hi, good morning, guys, and thanks for taking my question. I've got a couple. Just on Palmarejo, when do you expect contribution from the new 50% gold stream to (inaudible) from the underground? And do you still see minimum attributable ounces coming from this stream?

Andrew, it's David Harquail here. The way it works is the existing Palmarejo stream arrangement continues until the 400,000 ounces minimum is delivered to us. And then effectively, we convert into what we call the Guadalupe new arrangement. But, we expect that to occur sometime in the August or September of 2016 is when we'll be doing the conversion.

Right now, there's no change in the existing Palmarejo economics, no change effectively on the entire property, starting once we received our 400,000 ounces.

Okay. And obviously, a very strong quarter on Weyburn unit. And you mentioned that, obviously, [third] ended with some volatility. Do we sort of expect sort of more normalized sort of the Q2 2014 is a number we can expect as something we can model going forward?

With respect to going forward, Q2 2014, we had less capital spend. And that's mainly due to the harsh winter and the extended breakup we had out in Southeast Saskatchewan. So, I would say it was an exceptional quarter. I would expect that we'd have higher capital spend coming up in the upcoming quarters.

And it's Geoff Waterman speaking, who runs our oil and gas operations.

So, somewhere between the two, 2013 and 2014, Q2.

It's somewhere between the two, yes.

Yes. And last one, guys, just on tax rates, significantly lower than Q2 2013. And I know it's hard to sort of give some guidance. But, is there anything you guys sort of think would be your effective tax rate sort of from here?

Yes, so, we sort of estimate on a normal basis without any unusual inflation factors because Mexico is a bit unusual, about 27%. And as we add additional assets and streams, we expect the tax rate to decrease. But, for now, we project 27%.

Okay. Thanks very much for answering those questions, guys.

Thanks, Andrew.

(Operator Instructions). Cosmos Chiu, CIBC.

Good morning, David, Sandip, and team. Thanks for hosting the call. And congrats, again, on a very strong quarter. Maybe going back first to Palmarejo here. Looking through the press release today, you still call it a letter of intent to sort of change the royalty stream agreements. When would we expect it to get finalized? Are there any other steps that we should watch out for?

Cosmos, it's Lloyd here. We're working towards getting the definitive agreements finalized and executed before the end of Q3.

Okay. So, it's just mostly working through the paperwork and things like that, nothing extraordinary in terms of what else needs to be done.

That's right. We've agreed on all the principle commercial terms. So, it's just a matter of papering it now.

Okay. And then maybe stepping back, if you could maybe give us some more color in terms of maybe how the renegotiations started between Franco-Nevada and Coeur Mining, was it Coeur that approached Franco? And what factors did Franco sort of consider in agreeing to the new terms.

Cosmos, it's -- we've been close to the mine since we made our investment back in early 2009. And so, as we sort of watched the progression, and I guess in our minds, it was inevitable we'd have to do some sort of adjustment because, in order to have more capital to be invested in the property by the operator, there had to be some return to them.

So, sort of watching in terms of what the economics were with the gold and silver prices and in terms of capital for the new project. We were just always open when Coeur finally approached us. I think what really we needed was a definitive capital plan from Coeur.

And so, we've had some discussions earlier. They just had to decide really what was their development plan, especially with the Guadalupe portion of the project when they were able to make some commitments in terms of what that plan might look like and made it very easy to do the adjustment to the formulas that we had on that property.

So, it was really just Coeur making a final call on how they want to do advanced and extend the life of the operation. Once we had that, it was easy to cut the deal.

Yes, of course. That's great. Maybe if I can switch gears a little bit, going to the audit at Hemlo, can you maybe give us a bit more color in terms of what happened? Certainly, it sounds like there was some back payments, some underpayment in past quarters. And is there any kind of read through to other sort of Barrick-operated royalties as well?

No, so, because Hemlo's a component of an NSR and an NPI. And so, with an NPI, you get operating cost deductions. You get capital cost deductions. And so, it was just a case of negotiating with Barrick as to what's allowed to be deductible under the NPI. And it was going on for a fair bit of time. We finally agreed upon what's permissible. And it was just a cash payment related to that.

And the other NPI we have is obviously Goldstrike's on the NPI there. But, that's been in existence for quite some time. And we're pretty consistent on how we proceed in terms of deductions there. So, no issues there right now.

Okay. Great. And maybe one last question, maybe David, could you maybe talk a little bit about your relationship with First Quantum? As we saw, First Quantum is now looking into acquiring Lumina Copper. And of course, Franco-Nevada also has a royalty on Lumina Copper's key asset. How would you characterize that relationship? Is it -- does that help that now there's more of a linkage alongside Lumina Copper as well?

Well, I like to joke we're the business development department for First Quantum since we seem to invest in projects before they do. We're just -- we're happy. I think it's a vindication of Taca Taca, we think will be a great mine. We invested in that about two years ago. And now, we -- so, we'll have an NSR. And we think it'll be something sequential to Cobre Panama.

And right now, with First Quantum, I think all the discussions are constructive. We've had another meeting with them recently. We're in discussions. I think one of the things, it's certain dynamics in terms of there's other partners involved in Cobre Panama. We want to make it easier for us to negotiate something once we know what they elect to do going forward.

So, I still fully expect that we'll have a pragmatic new agreement with First Quantum in terms of -- that's effective for both them and ourselves before the end of the year. So, there's nothing pressing on that matter right now. And as I say, it's a constructive relationship.

Great. That's all I have. Thanks, again.

Greg Barnes, TD Securities.

Yes, thank you. David, I guess this is a general question. We haven't seen a big streaming deal done in quite a while now. I think it sounds like there are a few hovering out there. But, are there pressure or is there pressure on the terms for the vendors wanting higher payments than $400 an ounce? Do they want more value returned to them? I'm just wondering how things are evolving on that front.

Greg, I'm going to let Paul Brink address that.

Hey, Greg. The -- I'd say, overall, in terms of the environment, I'd say it's business as usual. And there are -- we're seeing deals that are royalty deals. They're opportunities that are the bigger byproduct-type streams and then also transactions that are financing gold development companies in production. And I think they're good opportunities across the board. I'd say, if there's anything different in this environment, it's really the shortage of debt and equity capital for the gold developers, which has really given an additional area for growth. So, we're working on all those fronts.

I'd say, overall, in any transaction when you're negotiating terms, people are trying to get the best deal for them. But, I don't think there's any significant change over time in terms of what the ultimate package looks like and what we think we can get as a long-term return on deals.

Just looking at the Palmarejo deal, and you've changed that one, obviously. The payments going forward I think is $800 an ounce I think, if I'm not mistaken, but seems to be some pressure on that payment, upward pressure.

Yes, I would say that was really specific to that particular transaction. And it was recognizing the sort of residual deposit on that property and what the economics are on that particular deposit. I don't think it's a change to the way that we think about stream deals and that ongoing price in general.

You'll see on other deals that transfer price as being 20% of the spot price, which is effectively lower than the $400 per ounce in this environment. So, I don't think it's -- that in itself is a driver of the returns long term.

Okay. Good. Thank you.

(Operator Instructions). We're showing no further questions in the queue. I'll turn the call back over to the presenters.

Thank you, Aaron. A reminder, we plan to release our Q3 results on November 6th after market close, with a conference call the following morning, and want to thank you for your continued interest in Franco-Nevada.

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