Franco-Nevada Corp (FNV) 2015 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the Franco-Nevada Corporation third quarter results conference call.

(Operator Instructions)

Mr. Stefan Axell, you may begin your conference.

Thank you, Sally. Good morning, everyone. I want to thank you for joining us today to discuss Franco-Nevada's Q3 2015 results. Accompanying our call today is a presentation which is available on our website at Franco-Nevada.com where you also find our full financial results. Sandip Rana, CFO of Franco-Nevada will provide a brief review of our results and Paul Brink, Senior Vice President of Business Development will discuss recent updates to our asset portfolio. This will be followed by a Q&A period.

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

Thank you, Stefan. Good morning, everyone. As Stefan mentioned, I will be providing further detail on the financial results for the quarter. A quarter in which the Company continued to achieve GEO growth during a lower commodity price environment. Paul Brink will speak to the increasing strength of our asset portfolio. In particular, the recent stream addition on Antamina as well as provide updates Cobre Panama, a key development asset for us, reserve increases Candelaria and the recent activity on the rest of our portfolio. He will also speak to our financial flexibility to continue to add to our asset portfolio a component of which is the increase to our credit facility to $1 billion with a $250 million accordion. After that, David Harquail will provide some closing remarks.

With respect to our financial results, you will have seen from the press release issued yesterday our overall royalty and stream operations continue to perform well despite the volatile commodity market. We are seeing the benefits of having a diverse portfolio with 46 producing mineral assets, the majority being gold assets. This portfolio continues to deliver. The operational and financial results for the quarter were in line with our expectations. While there were some assets which may not have performed as expected, there were some that were better than planned. Overall, it was another solid quarter for the Company.

As 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. For the third quarter, the gold price averaged $1,124 per ounce, a 12.3% decrease from the prior year. Third quarter 2015 continued the downward trend of lower gold prices. We have not seen average gold prices this low since early 2010.

Gold was not alone when it comes to volatility. Both platinum and palladium also pulled back significantly versus prior year. As you will have seen, this did have an impact on our PGM GEOs and PGM revenues during the quarter. Platinum prices averaged 31% lower than prior year and palladium prices were down 29% for the same period. However, when you get down to the basics, the production from our properties the GEOs received from our assets, the Company continued to have year-over-year growth.

The second chart on slide 4, highlights the gold equivalent ounces received by the Company over the last five quarters. Gold equivalent ounces earned increased 22.2% year over year, to just under 86,000 GEOs compared to [70.1000] a year ago. Slide 5 provides a waterfall chart showing the source of the movement year over year. As you can see, PGM assets had the largest decrease, which is a combination of lower production from the PGM assets and impact of prices when converting to GEOs.

Gold assets, excluding NPIs in Candelaria, had a small net GEO decrease during the quarter. On a positive note, our gold NPIs had better performance in the quarter. Hemlo benefited from the lower Canadian dollar as it is a Canadian operation and we do expect a NPI payout in Q4 also. GEOs from Goldstrike were higher in the quarter under both the NSR and NPI. The operation is beginning to benefit from the thiosulfate process addition. The largest source of GEO stream in the quarter, was from the Candelaria addition. For the quarter, the Company received and sold approximately 19,000 GEOs from this asset.

Turning to slide 6, you can see that the overall revenue earned by the Company was $103.7 million for the quarter. It was a slight decrease over the prior year. What is important to note is that the revenue decrease was only 3.8% during a period where the average gold price was lower by 12.3% and oil prices were lower by over 40% when compared to prior year quarter. The increase in GEOs received during the quarter compared to prior year did result in an increase in mineral asset revenue of 10%. However, they reduction in oil and gas revenue, as can be seen on the bottom chart, did result in a decrease in overall revenue. Actual oil and gas production attributable to Franco-Nevada was fairly consistent with third quarter 2014, with the decrease in revenue being the result of the lower oil prices and foreign exchange.

As you turn to slide 7, you will see the key financial results of the Company for the three months and nine months ended September 30, 2015. As mentioned, the Company earned higher GEOs in the quarter, resulting in $103.7 million in revenue. Adjusted EBITDA was $78 million for the quarter, down from $88.7 million in 2014. The decrease is due to the increase in stream ounces delivered with the addition of Candelaria, thus increasing cost to sales. Net income was also lower versus prior year at $15.2 million, while adjusted net income was $19.4 million, down from $34.5 million a year ago. On a per share basis, adjusted net income was $0.12 per share compared to $0.23 per share in Q3 2014.

Slide 8, provides a chart illustrating the decrease in adjusted net income. The key movements year over year are on the cost side. With the addition of Candelaria, we had an increase in depletion expense during the quarter. It's 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 the oil and gas production volumes inconsistent with the prior year, the Company recorded similar depletion amounts in Q3 2015 as Q3 2014, despite the significant decrease in oil and gas revenue.

Also on the cost side, cost of sales did increase as the Company received approximately 50,000 stream ounces during the quarter compared to 33,000 ounces in third quarter 2014. We pay a per ounce purchase price when stream ounces are delivered to us, which is recorded in cost of sales. These cost increases were partially offset by lower income taxes as a result of lower taxable income. As mentioned, the net result was a decrease in adjusted net income to $19.4 million.

We continue to stress the scalability of our business model and believe slide 9 highlights this. Our overall costs have increased over the last few years. The increase is due to the addition of streams to our business but these are variable costs. Stream costs will continue to increase as the Company has delivered more stream ounces, which we consider a positive. This has been the case in third 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 regardless of revenue increasing or remaining stable. Corporate administration costs continue to be less than 5% of revenue and for third quarter 2015, were slightly above 6% of adjusted EBITDA. As illustrated on the chart, the Company continues to maintain a very strong margin which was greater than 75% for Q3 2015.

As you turn to slide 10, the geographic revenue profile continues to be lower risk with 79% of revenue being from the Americas with Latin America being the largest contributor. For Q3 2015, 90% of revenue was generated from precious metals, a breakdown of 83% from gold and 7% from PGM's. The Company remains diverse with 46 revenue generating mineral assets.

With that, I will turn the call over to Paul Brink to provide an update on our recent asset developments.

Thanks, Sandip. In the quarter, we acquired for $610 million of stream on the silver attributable to Teck's 22.5% share of Antamina. The Peruvian mine is one of the lowest cost major copper mines in the world. The first silver delivery for due to be received in a couple of days, November 15, and so, the stream will be immediately accretive on all measures. We believe Antamina will be a long life asset and the investment exposes us to the tremendous exploration potential of the property.

Slide 12 covers Cobre Panama. We finalized in the quarter a replacement agreement with First Quantum. This streamlined the reporting and provided greater financing flexibility to First Quantum. The first payment of $337.9 million was made on November 3, and the next draw is expected in early 2016, and the total draws for 2016 are expected to be approximately $180 million. Capital cost for the project are being revised down approximately 7% to $5.95 billion. And a few days ago, First Quantum reported the project is 35% complete and remains on track for first concentrate production by year-end 2017, and a phase commissioning and ramp up over 2018.

Slide 13 has pictures of the progress at Cobre Panama. You can see preparations being made to place the mill shells on their foundations, pre-stripping of the Botija pit, progress on the Tailings storage facility and the erection of the concentrate storage building.

This year has been a good one at Candelaria. As a reminder on slide 14, the open pit reserves were updated in April and increased 24%. In Q3, the reserves were further updated. From the time we did the deal, the contained metal in reserves is up 25% without taking the 18 months of depletion into account. Or if you take that depletion into account, they are up about 35%. Included in that is an increase in the underground reserve from 12 million to 46 million tons. The best indication I have [roughly] of the ongoing success of the underground drilling is the increase in the underground resource, which has increased from 37 million to 184 million tons. Those numbers are inclusive of the reserves.

Following on from these updates, the new mine plan now projects 26% more GEOs over the next four years. While almost all the developments with the portfolio were positive this year, at the Phoenix project where we hold a small NSR, Rubicon announced the temporary suspension of mining while it reviews its understanding of the oil body.

Slide 15 gives the long list of good news this year. Many of our North American mines that you know well have had great exploration success. But you should also have Regis Resources on your radar with their recent successes at Baneygo and Tooheys Well on the Duketon property. We have a group of assets with news when new mines or additional deposits are actively being advanced.

The most recent development is Kinross announcing this week that they are starting a phased expansion at Tasiast that may see production increased from the current 8,000 ton per day for the first phase to 12,000 ton per day and a second to 38,000 ton per day. The first phase would cost approximately $290 million and production would be at 368,000 ounces per annum. We have also seen a few of our assets move into stronger hands or in the case of Hardrock, received sponsorship from deeper pockets.

Our available capital is shown on slide 16. With the increase in our credit facility, we have available capital of $830 million. There continue to be a number of stream transactions in the market and we feel we are in a good position to compete for them.

With that, I will hand it over to the moderator and welcome any questions.

Actually Paul, I have a few comments first. Thank you, Paul and Sandip. As you have heard from them, it has been both a solid and busy quarter for Franco-Nevada. I also want to thank our enlarged syndicate of bankers for their confidence and support in further extending our credit facility. I believe that will be finalized today. And we are now using a modest amount of that facility and we appreciate the flexibility from these banks to allow us to do more.

Just a couple of heads-up. This company always maintains shelf prospectus. Our existing facility is expiring I believe at the end of this month, and we will be renewing it as a $1 billion US shelf prospectus. Don't read anymore into this filing beyond it being a renewal. We have no plans for an equity issue. Any broker that sends us an equity term sheet will go to the back of the line.

Secondly, for our investors outside Canada, you will no doubt be aware that we have a new liberal government. What you might not be aware of is that the liberal election platform promises to double the tax rate on option gains. We don't know when and how that will be implemented. But I expect that a number of our directors and management that have been sitting on option gains for eight years will want to recognize at least a part of those gains. Again, don't read anymore into these exercises than that.

I have almost all the management team with me here at the table. Operator, we are now happy to take any questions.

(Operator Instructions)

Cosmos Chiu, CIBC.

Good morning, David, Sandip and Paul and congrats on yet another very strong quarter. A few questions from me here. Maybe first off on to Antamina. You've stated that beginning about 12,300 to about 15,000 ounces of GEOs in Q4. Is there any kind of lag between production and sales attributable to Franco-Nevada? In essence, are you going to see any kind of revenue from those ounces?

Cosmos, Sandip here. Yes, so we get delivered 45 days after quarter end. So we should be expecting our first delivery next week. To us, it is inventory that we are buying from Antamina from Teck. For us to record it as revenue, we have to sell it. So the plan would be to sell those ounces before the end of the year and record the revenue.

So the majority of those ounces will likely turn into revenue for Q4 purposes?

Yes, I would expect all of this ounces to be sold in Q4 before the end of the year.

Maybe on Antamina as well, congrats again on getting that done. As we saw after your acquisition of Antamina, one of your competitors essentially acquired a stream on the same asset. Maybe David, what are your comments in terms of potential syndication? That's a question that we hear about quite often in terms of the industry, in terms of potential for cooperation between the royalty companies and streaming companies and hopefully, helping returns for the industry itself. How would you look at that?

I would welcome it, Cosmos. I think that'll be the sign of maturity if we act like commercial banks and start syndicating and spreading any portfolio risk with for any individual company. I think the opportunity to syndicate is broader than just within the royalty companies themselves. I think as you see the returns start climbing on royalty or streaming deals, there's going to be other parties that will be interested in participating in these types of structures with us. So I see there is a way of us to punch above our weight in terms of the capital available and the deals that we could do by working with other parties. I think anything that maximizes our flexibility is a positive.

Maybe switching gears a little bit. Looking back beginning of the year, you gave us the GEO guidance for the year. There's the upper end, a lower end and now, it seems like you will likely reach the bottom half, at least for the gold GEOs for 2015. What would have needed to happen for you to reach the higher end of that guidance? And what has changed in 2015?

I guess the MPIs. They are very leveraged to the gold price and obviously, there is cost associated when you do determine what the amounts paid to the Company are. With the lower commodity price, it has had an impact. So the Hemlo NPI as well as Goldstrike, which is still ramping up for the thiosulfate, there has been some delay I guess you could say in terms of the expectation there. So that's been impacted.

The other impact has been on our platinum and palladium ounces. We convert those to GEOs based upon average prices. And with the platinum palladium prices decreasing more significantly than the gold price, there has been less GEOs attributable to Franco-Nevada. Those are the main components of being at the lower end of the guidance range.

Of course. And maybe one last question from me. You mentioned in the MD&A as well in terms of the situation at Rubicon. Certainly a very unfortunate situation to a lot of people out there. Not a huge investment for Franco-Nevada, I believe only about $20 million though was put in upfront. But maybe can you talk about how your due diligence process differs from a smaller investment such as Rubicon versus some of the bigger ones that you have done of late?

Thanks, Cosmos. There are a couple of different elements to our business and you will recall at the old Franco, the principal business was buying third-party royalties. And they often are smaller investments and more numerous. In those cases, you often don't have the case, you don't have the opportunity to do due diligence because you are dealing with a third-party versus an operator.

Where we are doing stream investments, you are dealing with the operator and obviously, they are much larger investments and you can do a much more fulsome due diligence. So we continue to do both. We think they're both good businesses but the key is on those smaller assets, you don't have the same opportunity for due diligence and so you can't put the same amount of capital to work.

Great. That is all I have. Thank you. Congrats again.

(Operator Instructions)

John Tumazos, John Tumazos Very Independent Research.

Congratulations on doing so well in such a tough market. Today as some of the metals make new multi-year lows, copper, gold, et cetera, could you refresh us on your risk criteria? I guess a lot of mines are a little bit under pressure at these prices. Both as it regards to risk of the mine, the risk of the parent corporation and the risks of the host country, are you looking for the bottom quartile, the bottom half of the cost curve, et cetera?

John, this is David here and thank you for your congratulations. How we look at projects is, we always start with the property and the project itself and the nature of how can we make our title as defensible and secure as long as possible. I think we generally start with one, do we like the property? Can we demonstrate through our due diligence to the Board that in pretty well all scenarios we can get our money back? And then, what is the optionality beyond that? And then, how can we make sure that we are absolutely secure for the very long term on our assets?

I guess one of the key things is it's absolutely, at Antamina, at the lowest quartile of the copper curve, production curve, is going to be a survivor in the cycle. But probably even more important to us, is the nature of our title in the asset. What we are always looking for is to make sure that we have an interest in land or something that's defendable in a court of law that respects property rights. So you will see all of our contracts are essentially with, when we instigated them, were with Western operators, there in Western courts of law, that if push comes to shove, we don't rank behind banks in any of our investments, and that we can survive even the temporary care and maintenance or a halt in operations in any individual operations because we are taking a long-term view.

We want to preserve our optionality on those precious metal ounces for multiple cycles. And from time to time, we will have mines that go in the care and maintenance but then they will come back in the next cycle. We take a long-term view. A key thing is title on the properties and being sort of have as little possibility from encroachment on our margins as possible.

Thank you.

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

Thank you, Sally. I want to remind people that we expect to release our fourth quarter 2015 results as well as our new asset handbook on March 10, and look forward to speaking to you then. Thank you for your interest in Franco-Nevada.

Ladies and gentlemen, thank you for your participation today. This concludes today's conference call. You may now disconnect.