Franco-Nevada Corp (FNV) 2014 Q3 法說會逐字稿

Good morning. My name is Michelle and I will be your conference operator today. At this time, I'd like to welcome everyone to the Franco-Nevada Corporation 2014 third quarter results. (Operator Instructions) I would now like to turn the call over to Mr. Stefan Axell. Please go ahead.

Thank you Michelle. Good morning everyone. We are pleased that you have joined us today for the Franco-Nevada third quarter 2014 results conference call. Accompanying our call today is a presentation, which is available on our website at Franco-Nevada.com, 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.

For today's call, Sandip Rana, CFO of Franco-Nevada, will provide an overview of our third quarter results, with our management team available during the Q&A period for any questions that you may have. I will now turn the call over to Sandip, CFO of Franco-Nevada.

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

Before I discuss the financial performance of the company for Q3, I wanted to take a minute to provide a quick summary of what the company has accomplished thus far in 2014. As you turn to slide 3, you can see that the company has been very active on many fronts. We have spent or committed in excess of $900 million year to date in 2014 on transactions, adding a number of new streams and royalties to the portfolio, many of which are producing and gold focused.

In addition, earlier this year, we raised our dividend for the eighth consecutive year, by 11%. And finally, the company completed an equity issue in August of $500 million, allowing us to continue to maintain our strong liquidity position and financial flexibility.

Now with respect to our financial performance for the quarter, if you turn to slide 4, 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 on an overall steady decline with the Q3 2014 gold price averaging $1,282 per ounce. This is an 3.5% decrease prior year, when the gold price averaged $1,328 per ounce.

2014 has continued to be a volatile period for the gold price, with it trading as low as $1,150 per ounce recently.

Platinum prices were also slightly lower in the quarter, with the average price being $1,434 per ounce in Q3 2014 compared to $1,451 per ounce in Q3 2013. The third quarter also saw pull back in oil prices, with oil price averaging CAD96.52 per barrel compared to just over CAD104 per barrel a year ago.

In addition, the quality differential was also higher this quarter, both of which then impacted our revenues on the oil and gas side.

On the positive note, the average price for palladium was higher in the quarter, with the average price increasing by 19% versus prior year.

As you are aware, subsequent to quarter end, commodity prices have continued to be very volatile, with some setting new lows for 2014. This volatility in commodity prices does impact the company's overall mineral asset revenue, which does not necessarily highlight the strength of our portfolio. As a result, the company does report 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 4, the gold equivalent ounces, which we also refer to as GEOs, received by the Company increased 23.6% to 70,071 GEOs compared to 56,683 GEOs in Q3 2013. Of this total, 81% were from gold assets; 15% from PGM assets; and 4% from other mineral assets.

Turning to slide 5, you will see a waterfall chart illustrating the movement in GEOs from Q3 2013 to Q3 2014. As mentioned, the company has been active on the acquisition front over the last 12 months.

During the quarter, the Company realized immediate contributions from some of these acquisitions. You will see that portfolio additions contributed just over 11,000 GEOs during the quarter. These ounces are from Sabodala, a transaction we closed in first quarter, that provides us with 5,625 fixed gold ounces per quarter; and the Fire Creek/Midas transaction, from which we sold 3,860 gold ounces during the quarter.

In addition, Kirkland Lake contributed an additional 944 gold ounces in the quarter and Osborne, our royalty acquired as part of the Barrick royalty package, contributed 533 gold equivalent ounces during the quarter.

Our PGM assets also had a strong quarter with both Sudbury and Stillwater generating higher GEOs quarter over quarter.

Other minerals was slightly lower, while other gold assets was slightly higher, with an additional 775 GEOs.

We did have some strong performance during the quarter within the existing gold group, with them being Detour, Goldstrike, Cooke 4 and the Hemlo NPI. Overall, the GEOs increase is due to strong performance from all jurisdictions; Canada, US and international.

Turning to slide 6, you can see that overall revenue earned by the company was $107.6 million for the quarter, compared to $98.8 million in Q3 2013, an increase of 8.9%. Despite the significant increase in GEOs during the quarter, the lower commodity prices did reduce the impact on 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 $20.5 million in revenue for the quarter compared to $22.3 million a year ago, a decrease of 8.1%. This decrease is mainly the result of lower realized net oil prices during the quarter.

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 lower by 5.6% in Q3 2014 versus Q3 2013.

As you turn to slide 7, you will see the key financial results for the company. Overall, third quarter was a strong quarter. The company enjoyed higher revenues quarter-over-quarter from our gold assets. This led to strong growth in adjusted EBITDA, but relatively flat adjusted net income.

Operating income was lower than the prior year, due to an increase in noncash cost of sales and depletion. The noncash cost of sales relates to the Midas/Fire Creek transaction, which amounted to $3.4 million. We record a noncash per ounce cost of sales amount for each Midas/Fire Creek ounce sold.

The increase in depletion of 6.2 million is due to the additional depletion related to the acquisitions of Sabodala, Kirkland Lake, and Osborne, but also the adjustment to Palmarejo depletion, which we discussed last quarter.

With respect to some of the other financial metrics, adjusted EBITDA was $88.7 million for the quarter, up from $80.3 million or 10.5% due to higher revenue. Adjusted net income $34.5 million, down slightly from $35.3 million a year ago. On a per share basis, adjusted net income was $0.23 per share compared to $0.24 per share in Q3 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 can be seen on slide 8. The increase is mainly due to the addition of streams to our business, but these are variable costs. Stream costs will continue to increase as the company receives more ounces, which is a positive.

But what I think is important to highlight on this slide is the fixed costs. They 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 82.4% for Q3 2014. Unlike the operators, our business is not directly affected by operating and capital cost escalation.

As you turn to slide 9, the geographic revenue profile continues to be lower risk, with 79% of revenue being generated from North America and Australia, with Canada being the largest contributor. The rest-of-world portion has increased as more royalty streams come from Africa, such as Sabodala, Tasiast and Subika.

For Q3 2014, 78% of revenue was generated from precious metals, with 19% from oil and gas and 3% from other minerals.

Slide 10 provides a reconciliation of adjusted net income quarter-over-quarter. The largest contributors for the change in adjusted net income is the increase in revenue of $8.8 million, predominantly from our gold assets, offset by higher depletion of $6.2 million, as mentioned previously and higher cost of sales of $4.5 million.

When factoring in other items, the net result is a decrease in adjusted net income from $35.3 million to $34.5 million.

Slide 11 provides an update on the company's guidance. Earlier this year, we had stated that our guidance range for gold equivalent ounces was to be between 245,000 to 265,000 GEOs.

Based upon performance thus far and what our expectations are for the remainder of the year from our existing mineral assets, we are increasing our guidance to 260,000 to 270,000 GEOs. We have used pricing of $1,225 per ounce gold; $1,275 per ounce platinum; and $775 per ounce palladium for the fourth quarter, in determining our guidance.

In addition, we recently closed the Candelaria stream transaction and are expected to sell and record as revenue an additional 20,000 to 30,000 GEOs in fourth quarter from this new asset. Therefore, our revised GEO guidance for 2014, with the inclusion of Candelaria is 280,000 to 300,000 gold equivalent ounces.

With respect to the oil and gas division, we had raised the revenue guidance in Q2 2014 and are maintaining the $70 million to $80 million revenue range, using $80 per barrel oil with similar differentials to the prior year for the balance of 2014.

On slide 12, you can see that the company still has a strong balance sheet with over $1.3 billion in working capital at the end of the quarter. However, when adjusting for the Candelaria transaction and purchase of shares in Lundin Mining, both of which just recently closed, the company has in excess of $1.1 billion in available capital when including our $500 million credit facility.

We consider ourselves to be in a very good position, having a strong balance sheet to allow us to complete further transactions and add additional assets to our portfolio.

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

(Operator Instructions) Cosmos Chiu, CIBC.

Congrats again on a very good quarter. I have a few questions here. Maybe first off on the recent gold price environment, certainly we've seen a decrease in the gold price and it continues to be under pressure. Has this enhanced how you can approach the business? Does this allow you to be even more aggressive in terms of royalty acquisitions? How should we look at it?

I'd say the environment over the last 12 months has been a good environment and that capital has been tight, but we've still seen people progressing with building projects and that's the sort of environment we like to be in. There's growth in our business in most scenarios, but particularly growth areas and financing new projects. So, we do like to see a market where there's enough capital to do that.

As this market changes, it really just changes the type of opportunity. I expect that you're going to see more M&A activity if prices stay at this level and I think that's also the sort of activity that we can participate in. So I expect in all environments, we'll be able to continue to add assets.

Maybe if I can switch gears a little bit and turn to First Quantum. Looking at the MD&A yesterday, it looks like the guidance on the timing, in terms of funding of Cobre Panama has changed a little bit. I'm not sure how much more you can tell us, but would you be able to give us a bit more color in terms of how that's going, negotiations and certainly the timing of the funding for the project?

I'd say everything is constructive with First Quantum. If you listened to their call last week, they totally acknowledged that we have an agreement, that we're only negotiating on the security and reporting aspects. I think we've been making progress on both those fronts. And I think right now First Quantum has been focused very much on some other matters and I think actually the focus will turn towards Cobre Panama for sure next year. That's a big construction year. So I fully expect we're going to have an agreement with First Quantum soon and we'll be contributing funding. So I don't see any major issues there.

And Dave or maybe Paul, two of your more recent acquisitions have been in Africa and certainly we've seen some recent instability in the continent. Has that changed your view? Are you still comfortable with your exposure to the continent?

Cosmos, as you know, we're very long-term investors, so I think in short, it hasn't changed our view. We always start with the deposits and look for attractive deposits and then in terms of the countries, we look at it from a portfolio perspective and see what's a manageable amount of exposure to a country or region in our portfolio and I think we're very comfortable with the balance that we've got at the moment.

Maybe one last question here. On Candelaria, just to confirm, the Q4 expected production, that's about six months' worth of production in that one quarter, am I correct?

Yes, because of the way the transaction ended up working out and having the effective date being back in July and the closing only happening in the fourth quarter here. That amount of production between the effective data and closing will all accrue to us in the fourth quarter. It will be depending on the timing at the end of the year. We'll see what amount of that attributable production we're actually able to sell in the year.

And when would you expect sales to be equal to production? Can you explain how that works again in terms of timing, given that I'm seeing that guidance in Q4 production is higher than sales, but when should that kind of equate?

So the way the transaction works is gold is deliverable to us when Candelaria gets a payment for an off-take. So, effectively when the concentrate goes on a ship. Most of the contracts allow for payment in the order of 90% as a provisional payment and then the other 10% follows four or five months after that on average. So that's the relationship that our receipt of gold would be, relative to production coming out of the mine. And then from the time we receive it, it's up to us to decide when we'd want to sell it.

Coming into the end of this year, just because we know we've got a large amount coming near the end of the year, we just wanted to make sure that we've got some flexibility in terms of when we receive it and when we sell it.

Greg Barnes, TD Securities.

Sandip, can you give us some sense of how your oil and gas revenue would look at $75 to $80 per barrel oil price?

Actually, at $75 to $80, at $80 I believe it would be lower by about $6 million. I don't have the exact numbers in front of me.

So the $70 million to $80 million revenue would be $6 million lower?

Yes, likely.

At $80 per barrel WTI?

Yes.

David Haughton, Bank of Montreal.

Thank you for the update. Paul, something that you'd mentioned in answering Cosmos' question was interesting. You had mentioned more M&A ahead. There are two ways to read that. One is you're participating to help the acquirer bridge the gap with the vendor, like Candelaria, or Franco directly participating in M&A. What was your intention in that answer?

It's certainly more of the former there, David. We see a number of parties who are looking to acquire assets and we've been speaking to some of them about how we might assist in that process.

I guess that speaks to the appetite for streams and royalties. Are you seeing more interest from the gold producers or more from the base metals with a byproduct gold/silver stream?

It's been a bit of both, David. Having both areas, you've got people looking to sell assets and people looking to buy assets. I think both areas should be active.

Just switching topics again, clearly with the metal price, we end up with a lot of people kind of mark to marking their view of the metal price to what we're seeing today and we've been receiving quite a few questions about stress testing different portfolios, including your own. Have you looked at what royalties or streams you would consider within your portfolio the weakest at lower prevailing metal prices?

Yes, we do look at our portfolio across the board. Obviously assets such as Mine Waste Solutions are higher cost producers for us, for the operator. So those are more at risk. But our significant revenue generators are at a lower all-in cost. There is a long list of assets that we do look at on a quarterly basis as to how operations are performing.

And for one that's quite meaningful, Palmarejo, have you considered what that might be with sub-$16 silver prices?

Not at this stage.

And also this morning, we heard from Paul Rollinson that if the current metal prices were to prevail, that the decision for expanding Tasiast would not go ahead or would be deferred. Have you considered the implication of that within your portfolio, too?

I'll speak to that. I don't think the Street's giving us much value for any expansion on Tasiast. We have a book value of just over $2 million on that asset and we've (inaudible) $6 million or $7 million a year on it, so I think we're quite pleased with the performance on it. And I just see it as when the gold market comes back, I see that as one of the most likely expansion projects in the world and we'll benefit. We're very happy to be patient on assets like this and I just see upside, no downside.

So I'm just sharing with you some of the sort of questions that we're getting from investors and I'm sure that you'd be fielding those yourself.

When we explain to people our book value is just over $2 million, they're pretty comfortable.

(Operator Instructions) Brian MacArthur, UBS.

I'd just like to go back to Cosmos' question about accounting for Candelaria. So technically this is backdated to the beginning of the third quarter. For those GEOs that you presumably already got, do you get to credit them at the gold price of that quarter? Do you actually receive delivery going forward in the fourth quarter, so you get the gold price then? How does that actually work? Because it looks like there's two things going on. Obviously there's a timing delay always with concentrate, but then we've got these three months of catch up that's all being booked in the fourth quarter. Can you just go through exactly what's going on there?

Sure. So as Paul mentioned, we'll receive provisional payments. That provisional payment will be in physical gold ounces or credits to our gold bullion account, at which time we will basically record inventory because we are required to pay the $400 per ounce to Lundin. And then it's up to us to book revenue at the time we sell it. So the key transaction that has to take place is for us to actually sell that physical gold and that will be at the prevailing market prices at the time. And that is when we will record revenue.

Right, so you're going to get those ounces, let's just say for the past three months, whatever you get them sometime in November, so you get them as of that date and that's my true update where you receive them and you can start to sell them. There's no back credit with Lundin and Freeport that you can go back and get the $100 higher or whatever it is for Q3?

No. And if we received all the ounces now and we decided not to sell them before the end of the year, you would see no revenue from Candelaria.

Then going forward, all we have to think about is there will be production, you're getting paid at concentrate; it's just a timing delay when it gets unloaded on the boat and then your decision of what you actually decide to do on inventory. Those are the two things that we've got to think of, versus production versus sales?

Correct.

(Operator Instructions) Shane Nagel, National Bank.

Just a quick question on Candelaria, guys. It's my understanding that there was a couple of underground deposits that Freeport had some internal resources on and then when Lundin comes out with their revised reserve and resource statement here in the New Year. Is there any payments that adjust the purchase price on those deposits or are those technically part of the 150 square kilometer area where you have an option to add your stream to those resources?

Shane, yes, there is the potential for a small adjustment. So it's expected that those reserves will come in early next year. If they come in as expected, there's no adjustment to the purchase price. If they come in a little bit above or below, you get a small adjustment to the purchase price up or down. But we should know the answer in the second quarter next year.

Order of magnitude, we're just talking tens of millions or so?

Tens of millions, exactly.

At this time I have no further questions in queue. I'll turn the call back over to the presenters for closing remarks.

Thank you Michelle. We plan to release our fourth quarter and full year 2014 results, as well as a copy of our updated asset handbook on March 25, 2015 after market close, with a conference call to discuss the results to follow in the morning. I want to thank you for your continued interest in Franco-Nevada.

Everyone, this concludes today's conference call. You may now disconnect.