Franco-Nevada Corp (FNV) 2015 Q1 法說會逐字稿

Good morning. My name is Melissa and I will be your conference Operator today. At this time I would like to welcome everyone to the Franco-Nevada Corporation First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer session.

(Operator Instructions)

Thank you. Mr. Stefan Axell, you may begin your conference.

Thank you, Melissa. Good morning, everyone. We are pleased that you have joined us today for the Franco-Nevada First quarter 2015 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 financial results. Sandip Rana, CFO of Franco-Nevada, will provide a brief results of our results. This will be followed by a Q&A period where our entire management team, including representatives from Australia, Barbados, and the US are available here in our Toronto boardroom to answer any questions that you may have.

Before we begin formal remarks, we'd like to remind participants that some of today's commentary may contain forward-looking information and I'd refer you to the detailed cautionary note on slide 2 of our presentation.

I'll now turn it over to Sandip Rana, CFO of Franco-Nevada.

Thank you, Stefan. Good morning, everyone. As you'll have seen from the press release issued yesterday, our overall royalty and stream operations continue to perform well with the Q1 2015 results benefiting from the addition of Candelaria. Operationally and our financial results for the quarter were in line with our expectations.

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. For Q1 2015, the gold price averaged $1,219 per ounce, a 5.8% decrease from a year ago Q1 2014 when the gold price averaged $1,294 per ounce, but at a slightly higher than the average gold price for Q4 2014 of $1,200 per ounce.

During the quarter, the gold price traded within a range of $1,147 per ounce and $1,297 per ounce, somewhat stabilizing. Although the average price for the quarter was slightly higher than fourth quarter 2014, it has seen an overall downward trend in the gold price for the last 24 months.

With respect to platinum prices, they were lower in the quarter when compared to prior year with the average price for the quarter down approximately 16% from Q1 2014. Palladium prices were slightly higher quarter over quarter.

The second chart on slide 3 highlights the gold equivalent ounces received by the Company over the last five quarters. Gold equivalent ounces earned increased 29.2% year over year to 85,100 GEOs compared to 65,800 GEOs in Q1 2014. of the 85,100 GEOs, 88% were from gold assets.

Slide 4 provides a waterfall chart showing the source of the movement of GEOs from Q1 2014 to Q1 2015. The largest source of the increase is the Candelaria addition where Franco-Nevada purchased a gold and silver stream in late 2014 from Lundin Mining. For the quarter the Company received and sold approximately 22,000 GEOs from this asset. In addition the Company received 1,250 gold ounces from Fire Creek/Midas which were sold and revenue recorded. This asset began delivering ounces in June of 2014.

As you can see on the slide, other gold assets had a decrease of 2,437 GEOs in the quarter. This decrease was the result of lower GEOs from our net profit interest royalties. The largest decrease was the Goldstrike NPI where the lower gold price, lower production on our lands, and higher cost resulted in a payout reduction versus the prior year. NPI royalties are highly leveraged to gold price and we would expect to be benefit significantly in a right gold price environment. When you do exclude the NPIs from other gold assets, our non-NPI royalties and streams actually delivered more GEOs in Q1 2015 versus prior year.

With respect to PGM and other mineral assets, they delivered lower GEOs during the quarter due to lower production and price impact at Sudbury for PGM and Peculiar Knob for other minerals.

Turning to slide 5 you can see that overall revenue earned by the Company was $109.2 million for the quarter, a 4.9% increase versus Q1 2014. As mentioned, the GEOs received increased significantly during the quarter compared to prior year. This did result in an increase in mineral asset revenue of 21.4%. However, the reduction in oil and gas revenue did offset this increase, resulting in a lower overall increase in revenue.

As you can see on the bottom chart, oil and gas revenue decreased significantly year over year. Actually oil and gas production attributable to Franco-Nevada was consistent with first quarter 2014 with the decrease in revenue being the result of the lower oil price and foreign exchange.

As you turn to slide 6 you will see the key financial results for the Company. As mentioned, the Company earned high GEOs in the quarter resulting in revenue of $109.2 million, adjusted EBITDA was $83.3 million for the quarter, down slightly from $84.8 million a year ago. The decrease is due to the increase in stream ounces delivered with the addition of Candelaria thus increasing cost to sales.

Net income was significantly lower versus prior year at $19.2 million while adjusted net income was $22.9 million, down from $35.4 million a year ago. On a per share basis, adjusted net income was $0.15 per share compared to $0.24 per share in Q1 2014. Slide seven provides a waterfall chart illustrating the decrease in adjusted net income from Q1 2014 to Q1 2015. The key movements year over year are lower income taxes as a result of lower taxable income, higher revenue of $5.1 million with the increase in mineral asset revenue more than offsetting the decrease in oil and gas revenue. On the cost side with the addition of Candelaria, depletion expense increased significantly during the quarter. Of the $15.6 million increase, $13.9 million relates to Candelaria.

It is important to note that as mineral reserves and resources are added at Candelaria or any one of our other properties, the depletion cost per ounce will decrease as well as due to oil and gas production volumes being consistent with the prior year, the Company reported similar depletion amounts for oil and gas assets in Q1 2015 versus Q1 2014 despite the significant decrease in revenue.

Finally, cost of sales did increase as the Company received just under 54,000 stream ounces during the quarter compared to 32,100 in Q1 2014. We do pay a per ounce purchase price when stream ounces are delivered to us which is recorded in cost of sales. The net result was a decrease in adjusted net income of $22.5 million.

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 eight. 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 is delivered more ounces which is a positive. This has been the case in first quarter with the addition of Candelaria.

What I think is important to highlight 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 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 was greater than 75% for Q1 2015. Unlike operators, our mineral business is not directly effected by operating and capital cost escalation.

As you turn to slide 9, the geographic revenue profile continues to be lower risk with 75% of revenue being from the Americas with Latin America being the largest contributor. For Q1 2015, 93% of revenue was generated from precious metals, 84% being from gold, 9% from PGMs. As well as 5% of revenue was from oil and gas and 2% from other minerals. The Company remains diverse with the number of producing operations. We currently have 45 revenue generating mineral assets.

On slide 10 you can see that the Company still has a strong balance sheet with $670 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 in excess of $1.2 billion. And when deducting our commitments whose timing could fluctuate, the available capital is in excess of $850 million. We continue to have the liquidity to complete transactions and add additional assets to our portfolio.

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) Greg Barnes, TD Securities.

Thank you. Sandip or Paul or whoever is there, the discussions with First Quantum on this streaming arrangement on Cobre Panama are dragging on and dragging on. Where are we now? What is the holdup? Is it the Koreans? Is it small details now? When is this going to conclude?

Greg, it's David Harquail here. First Quantum's having their annual meeting today. So, they're actually in town. You can imagine there's going to be some opportunities for some progress there. I think everything has still been very constructive I think the challenges in operating companies such as First Quantum is they have a lot of challenges to operate, so their focus moves on to different things.

I think we have been -- I think Paul can confirm as we have been having constructive term sheets going back and forth. I guess if one side would stop marking up term sheets, we would be done. But I think we're very close. I think the face to face that will happen this week will be constructive. I'm still very relaxed about the process. I think both sides, because it's a substantial sum of money, we just want to get it right. I don't know if you want to add anything to that, Paul?

No. That's good, David.

So, if you're exchanging term sheets, is the character of the deal changing?

No. Again where we've limited it to just the two issues that we put on the reporting arrangements which I think were concluded on. It's really just on the financial security.

It's documents rather than term sheets.

The documents. Yes.

Sorry. I didn't hear that.

Documents rather than term sheets. Just documents in terms of amendments regarding the two issues that we've highlighted.

Now, also there seems to be some suggestions that the Korean partners have to sign off on this and I know they're very bureaucratic and it takes a long time for them to do anything. Is that in fact the case?

It depends on what the ultimate amendments are, Greg. But it's not clear if they're material enough, whether they need sent or not.

Okay. And just moving on to another topic. You've kind of implied that oil and gas is something or an area that you're very interested in right now, potentially adding more royalties. Are you progressing things on that front? How would you fund that if you do?

Again, what we're trying to do is always keep our alignment to be majority or gold-focused as a royalty Company. So, we will always look at what is the appropriate size within our portfolio. There have been a number of assets already marketed in Western Canada. There's other ones in the market right now. We have a separate business development team that just focuses on those.

So, I think one of the great strengths we have with our Company is that we're the most diversified by commodity and we really are looking along all the commodity fronts and I'm optimistic that something will come along in oil and gas that is as competitive as the deals that our mining team is putting to the table in terms of transactions going forward. So, I can't forecast when we're going to do something or what the next deal will be. I just know we have fishes in the line in both pools and whichever is the best nibble will be the next one that we land.

David, would you do a debt issue to fund an oil and gas transaction?

Remember, we're sitting on a lot of liquidity right now. I think we can actually fund a deal without having to raise any additional liquidity. Remember, we want to do a deal that's proportionate with our overall portfolio. We want to maintain 80% precious metals focus. So, I think you can kind of back out with the relative sizing of what we'd be comfortable in the oil and gas space and so again we are focused on the long-term weighting for precious metals.

Okay. Thank you.

(Operator Instructions) Cosmos Chiu, CBIC.

Great. Thanks, David, Sandip, and team for hosting the call. First off, congratulations on getting added to the TSX 60 as of tonight.

Thank you.

A few questions here, maybe following up on the oil and gas assets. Could you remind me in terms of your exposure to Alberta versus the other provinces? The reason why I ask, as we all know there's been a political regime change in Alberta. There's proposed royalty changes in the province. Certainly there's no direct impact I don't think to Franco-Nevada but have you looked at any indirect impacts that could happen to your oil and gas portfolio in that province?

Cosmos, I've got Geoff Waterman who runs our oil and gas. Right now by far our biggest asset is Weyburn followed by Midale and they're in nice, friendly, right of center Saskatchewan. So, but I'll let Geoff talked about more what assets we have in Alberta.

Hi, Cosmos. With respect to our Alberta assets, as David said, most of our assets are located in Saskatchewan. We've been -- what we expect, or what could happen under this new government in Alberta is they talk about going back and reviewing the royalty structure and we saw that under Ed Stelmach a few years ago and really the impact it had on us is on some of our bigger properties in Alberta the producers just slowed down the rate of drilling they did. It didn't impact the current production level sold. If they do go ahead and do a royalty review, we'll see what happens but I would expect that it would have the same impact as the previous royalty review.

And, Geoff or maybe David, certainly looking ahead, David, as you talked about, there's opportunities in terms of future royalty acquisitions in oil and gas. Does this kind of change how you look at -- you also mentioned Western Canada. Does this change how you look at Alberta as a potential province in terms of future royalty stream acquisitions?

If the underlying resources are good quality resource we're going to look at it. Most of our production is coming from Southeast Saskatchewan and it's oil weighted. Generally Alberta is more prone to gas, especially with our assets. But it just comes back to the quality of the underlying resource and then we'll look at all the other factors when we consider an acquisition.

Right now, Cosmos, just to sort of sum it up, what we're getting from Alberta right now is probably immaterial in our overall revenues and I think in terms of -- I'd like these developments to come out in the market before we buy anything new because I think we just factor that into the pricing, whatever we buy. The biggest impact when we look at something is what's the likely capital to be spent on that property because that's what's the major determinant for the value of the royalty. So, I think to any extent that there's a bigger risk now in terms of more taxes in Alberta, we'll be factoring less capital spend on those properties.

Maybe switching gears a little bit, Sandip, or maybe David as well, on slide number 8 you mentioned the adjusted EBITDA margin. It's still quite high at 76.3% but it's coming down. It's kind of like a double-edged sword from that perspective. As you have more stream royalties coming in, that cost is going to go up but it's also going to give you more leverage. But at the same time, higher margin will give you a bit more safety in terms of a volatile market. Is there a number that you're targeting in terms of EBITDA margin? Certainly it was 80% before. Now it's closer to 75%. Internally speaking, is there a number that you would want to target?

Obviously we'd like it as high as possible. But you are correct. As you receive more stream ounces it's going to continue to decrease. I think in terms of our margin, the component we do want to monitor is the G&A, is the corporate administrative costs. So, we want to make sure that if the margin is decreasing, it's decreasing because we're getting more stream ounces or paying more taxes because we're getting more revenue from our Nevada assets but not because corporate administration costs are increasing. So, obviously we would like this as high as possible but as you said, the more ounces, the more leverage that we do have.

Maybe one last question from me. Certainly I would say 2015, a new royalty that's coming on is the Rubicon royalty. I remember when at first, when you first acquired that royalty, the royalty is on the part of the deposit that's under the lake. I just want to confirm in terms of when it comes into production later on this year in terms of Rubicon, how does it work? Does Franco-Nevada get the royalty right away? I just need a reminder in terms of the part of the deposit.

So, it's Paul here. All of the current reserve and just about all the resources underneath the lake, Cosmos, so any immediate production is all going to be on our royalty land. There are some targets that are underneath the land, but they are longer-term.

Great. That's all I have. Thank you.

Thanks, Cosmos.

(Operator Instructions) There are no further questions at this time. Mr. Harquail, I turn the call back over to you.

Thank you, Operator. It's David Harquail here. I guess the key takeaway in our first quarter, we only talked to you just six weeks ago so really there's not a lot to add. But I'm just very pleased how well the mineral assets are performing. I'm pleased with how Candelaria is performing. And we're expecting our oil and gas assets to do better over the balance of the year.

Also we've had some good news in our smaller assets. We've talked about it in our press release but we didn't feel we'd use this call to elaborate on them.

Our next mark on your calendars, we'll be putting out our second quarter results after the market close on August 10. And we'll have the corresponding conference call on the morning of August 11. Thank you for your interest in Franco-Nevada. Good bye.

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