Franco-Nevada Corp (FNV) 2016 Q2 法說會逐字稿

Good afternoon. My name is Kirk, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Franco-Nevada Corporation second-quarter results conference call. (Operator Instructions)

Mr. Stefan Axell, you may begin your conference.

Thank you, Kirk. Good morning, everyone. Thank you for joining us this morning to discuss Franco-Nevada's Q2 2016 results.

Accompanying our call 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 review of our results, which 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 the presentation.

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

Good morning, everyone. As you will see from the press release issued yesterday, the Company had another strong quarter of solid financial results. This is a testament to the quality and strength of our portfolio and overall success of our business model.

The portfolio continues to deliver growth and generate significant cash flow, with it being further enhanced with the recent Antamina and Antapaccay stream transactions.

With respect to our financial results, second quarter of 2016 was another quarter of records. The Company recorded its highest amounts for gold equivalent ounces, revenue, and adjusted EBITDA this quarter, which was due to a combination of higher GEOs received, as well as stronger gold and silver prices.

It has been some time since the average gold price for a quarter was this high, with it being $1,259 per ounce in second quarter.

Turning to slide 3, the chart illustrates the GEO breakdown by commodity for second quarter of 2016, compared to second quarter 2015. You can see that GEOs in total have increased over 36% year over year.

This increase is due to increases in both gold and silver ounces received, primarily the result of the Antamina and Antapaccay transactions.

Actual gold ounces have increased 26% versus prior year, while silver GEOs are up over 260%.

Slide 4 provides a breakdown of where the GEO growth arose when compared to second quarter of 2015.

Our core gold and silver assets did produce less GEOs during the quarter, which was mainly due to the timing of production and recognition of revenue by the Company.

A large portion of the decrease is due to Candelaria. But you will recall that 2015 was an abnormally high production year for Candelaria, with 2016 to be more representative of what expectations are going forward.

Year-over-year GEOs from Candelaria are lower, but are in line with our expectations.

The PGM assets delivered less GEOs, but this is due to the impact of pricing when converting platinum and palladium ounces to GEOs. The actual production at the mines for platinum and palladium, especially Sudbury, was significantly higher than prior year.

If platinum and palladium prices do recover, you will see the impact through higher amount of GEOs and revenue being realized.

Our gold NPIs delivered more ounces during the quarter, as Goldstrike performed better, benefiting from the thiosulfate project. And the Canadian NPIs at Hemlo and Musselwhite, benefiting from lower Canadian dollar exchange rate.

And as you can see, the largest component of growth has been the acquisitions. This significant growth represents Antapaccay, Antamina, and Karma.

Second quarter was the first full quarter of deliveries from Antapaccay, which contributed 19,581 GEOs to our account.

The Karma stream started delivering gold ounces in March, with second quarter being the first full quarter of expected deliveries. Unfortunately, due to timing, the Company only received 2,500 gold ounces versus the expected 3,750 gold ounces. The additional ounces will be carried over into Q3.

And Antamina had another strong quarter, delivering approximately 12,000 GEOs to our account. Year to date, the asset has delivered approximately 30,000 GEOs to Franco-Nevada.

As you turn to slide 5, you will see two charts on the page. The first chart highlights the average gold price and precious metals revenue for each of the last five quarters.

Second quarter of 2016 continued the positive momentum for gold prices we have seen over the last few quarters.

The average silver price was also higher, averaging $17.17 per ounce versus last year.

These higher average gold and silver prices, along with the increase in GEOs delivered, resulted in a significant increase in precious metals revenue to $141.2 million in the quarter, compared to $96.4 million a year ago.

On the bottom chart, we have highlighted our oil and gas net revenue. And you can see that the oil price did recover somewhat in second quarter of 2016. We did benefit from this increase in average prices with a rebound in our oil and gas revenues.

Production at our oil and gas royalty and working interest asset has remained stable.

As you will turn to slide 6, you will see the key financial results for the Company for the three and six months ended June 30th, 2016. I will not get into the specifics. But what I would like to point out is that we have had year-over-year increases for all the financial metrics across the board, with the new records highlighted by the boxes.

The increases are the results of the additions to the portfolio previously discussed, in addition to the higher gold and silver prices during the quarter.

As you turn to slide 7, the geographic revenue profile continues to be lower risk, with 84% of revenue being from the Americas, with Latin America being the largest contributor.

One of our core goals that we highlight is to build a diversified portfolio with a focus on precious metals.

For second quarter 2016, precious metals revenue was 94% of revenue, with 72% being from gold, 16% from silver, and 6% from PGM.

The Company remains diverse, with a portfolio of 43 revenue-generating mineral assets currently.

We continue to stress the scalability of our business model and believe slide 8 highlights this. Our overall costs have increased over the last few years with the addition of streams, but these are variable costs.

Stream costs will continue to increase, as the companies deliver more stream ounces, which we consider a positive. This has been the case in second quarter, with the first full quarter of deliveries from Antapaccay.

With respect to stream costs, I would like to mention that the 400,000 ounce minimum for Palmarejo has been met. The agreement has now terminated and the Guadalupe agreement is in effect.

Under this agreement, the per-ounce cost increases to $800 per ounce versus the $400 per ounce previously under the Palmarejo agreement.

One other item I would like to point out 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 the changes in revenue.

Corporate admin costs continue to be less than 5% of revenue, and for second quarter of 2016 were approximately 5% of adjusted EBITDA.

As illustrated on the chart, the Company continues to [remain] a very strong margin, which was greater than 78% for Q2 2016.

Unlike operators, our mineral business is not directly affected by operating and capital cost escalation.

Slide 9 highlights the capital available to the Company. With our working capital, marketable securities and undrawn credit facility, the Company has slightly less than $1.4 billion in available capital, with no debt.

In terms of commitments, the Company expects to fund $120 million to $140 million for Cobre Panama for the year, with $35 million to $45 million expected in third quarter.

During second quarter of 2016, the Company did fund $37.7 million, and to date has funded $376 million of our $1 billion commitment to Cobre Panama.

At this time, we'd be happy to take questions. Our management team is here in our boardroom and available to answer questions.

And with that, I would like to turn it over to Kirk.

(Operator Instructions) Cosmos Chiu from CIBC.

Congrats on another strong quarter here. A few questions. Maybe first off on Cobre Panama. Sandip, as you mentioned, you're now looking for contribution or funding of $120 million to $140 million. That's a bit lower than what you had previously expected.

Is that just based on the fact that the spending at Cobre Panama, is it at a slower rate than previously expected?

No. I think in second quarter First Quantum gave an updated number on what they expected to spend this year, which is in line with what they had originally.

Just that we're further into the year, we have a more accurate number.

Okay.

That's all it is. I think we reduced it by $10 million.

Yes. Okay.

From $130 million to $150 million, to $120 million to $140 million.

And, Sandip, could you remind us, when are you expecting any kind of contribution coming from the Cobre Panama royalty?

So Cobre Panama should start up towards the end of 2018, with first real production to Franco in 2019.

Great. And then in terms of, as you mentioned, the total obligation is $1 billion. When would you be expecting to fund the remainder of that $1 billion?

So the remainder would be over the next three years. So we've --

Okay.

-- given the guidance for this year. So we would expect 2017, 2018, and 2019, [for the balance].

Okay. Great. Yes. And maybe a broader question here, Sandip. As you mentioned, you have the revenue in Q2, 51% was coming from Latin America. Is that by design or is that just happens to be where all the different opportunities are?

As we can see, it was a lot of precious metal byproduct production coming from base metal assets. Is that sort of like the key opportunity at this juncture?

Yes. So it's not by design. It's where the opportunities are, the large deals that we've completed over the last two-plus years. And if you go back to Cobre Panama, the large copper assets with the byproducts are predominantly in Latin America, and that's where the opportunities are.

We still look at assets in other parts of the world. Just the recent transactions has led to that 50% of revenue being contributed from Latin America.

Great. And then maybe one last question here on Palmarejo. Sandip, when was the minimum reached in Q3? So how should we model that in terms of how much of the quarter is going to be the old kind of agreement and how much of that would be under the new agreement?

So it was just recently reached this month. So two-thirds of the quarter would be under Palmarejo and then one-third would be under Guadalupe. There will be a drop in production under Guadalupe, because there is no minimum in place now. But initially it shouldn't be that significant a drop.

Yes. And actually, maybe one more question here on Goldstrike. As we can see, it was a good quarter in Q2. Was that in any way due to the fact that it is an NPI and, inherently speaking, NPIs provide a bit more leverage?

If that's the case, are there any other NPIs that we should be aware of?

So Goldstrike, yes, the NPI was the largest component of the increase, although, the NSR was higher as well over the prior year. So it was an increase in production on our lands.

In terms of the other NPIs, the significant ones are Hemlo and Musselwhite. We have an idea as to how they're performing. But usually we get true-ups in Q4. And over the last few years --

Okay.

-- that's when we really (inaudible) the more accurate NPI, I would say, and it's always been more positive than what we've expected.

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

Jorge Beristain from Deutsche Bank.

Congrats on the results. Question on Antamina. It was performing above your initial 40,000 ounce guidance. Is there a revised guidance number at this point?

We have not given a public guidance number. But we do expect it to beat the 40,000 GEOs that we had provided previously.

Okay. And then can you just comment about where we are in the CapEx cycle for mining companies at this point?

You guys must be on the cutting edge there of people coming to you with projects. Do you think we are 6, 12, 18 months away from really the miners starting to put the shovel in the ground to build new projects? Can you just comment about that?

So, Jorge, I guess we're seeing two things, and really it's split between the different industries, gold and the base metals. Base metals are still in the cycle of de-leveraging. And so we're seeing opportunities coming out of that.

Obviously, on the gold side, that has changed. We see a good amount of projects as people are now looking to move to financing. Streaming may be a portion of that. It really depends on what the equity markets look like. Currently the equity markets are pretty strong.

So I think it should see in the next 6, 12 months, a number of projects getting to the point of being fully financed in the gold sector.

Okay. So, sorry. Just to recap. Six to 12 months in the gold sector?

Yes.

Okay. Thanks very much.

(Operator Instructions) Greg Barnes from TD Securities.

Is the de-leveraging in the base metal side still happening? You suggested it was, but it seems to have slowed down. Are the big opportunities still out there now or have they started to dry up?

I think we're still seeing a good mix of opportunities, Greg.

I agree with you in terms of the pace. But I think there's still some good prospects.

Okay. And just a little clarity on the Sudbury, we don't get a lot of information there. The PGM production was up this quarter in terms of ounces.

How do you see that trending going forward? And what kind of mine life is there left?

And so Q2 was a very good quarter in terms of production. We don't have full visibility on what to expect going forward. But it was one of the higher production quarters. So it could be a one-off.

In terms of visibility and mine life, we're expecting production from the Levack Morrison mine up until 2022. So it does have significant life still. It's just that with the underground mine, the reserves are just two to three years out.

Right. Right.

And, but the mine life is to the -- in excess of 2020.

And the exploration has still been --

Yes. Yes.

-- positive there? It's still open at depth?

And it's getting higher grades as you're going deeper.

Yes.

So we, very, very confident that the mine life will be extended.

Okay. Great. Thank you.

We have no further questions at this time. I'll turn the call back over to the presenters.

Thank you, Kirk. I just want to remind you that we expect to release our Q3 2016 results on November 7th, with a conference call held the following morning. And want to thank you for your interest in Franco-Nevada.

This does conclude today's conference call. You may now disconnect.