Franco-Nevada Corp (FNV) 2017 Q2 法說會逐字稿

Good morning.

My name is Daesean, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Franco-Nevada Corporation's Second Quarter Results Conference Call.

(Operator Instructions) Thank you.

I would now like to turn the call over to Stefan Axell.

The floor is yours.

Thank you, Daesean.

Good morning, everyone.

I want to thank you for joining us this morning to discuss Franco-Nevada's Q2 2017 results.

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 review of the results, which will be followed by a Q&A period.

Before we begin our 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 will now turn the call over to Sandip Rana, CFO of Franco-Nevada.

Thank you, Stefan.

And good morning, everyone.

As you all have seen from the press release issued yesterday, the company has reported another quarter of solid financial results.

This continues the strong momentum that was built in fiscal 2016 and first quarter 2017.

The portfolio continues to perform well.

In addition, we continued to maintain our strong balance sheet, which was further strengthened during the quarter with the exercise of the CAD 75 Canadian warrants, resulting in proceeds to the company of CAD 475 million.

The warrants were to expire in mid-June 2017.

The proceeds added to our cash position, and we ended the quarter with an excess of $600 million in cash and cash equivalents while continuing to be debt-free.

As you turn to Slide 3, the chart illustrates the gold equivalent ounces breakdown by commodity for second quarter 2017 compared to second quarter of 2016.

You can see that GEOs in total have increased by approximately 9% compared to prior year.

There have been slight increases in gold, PGM and other mineral GEOs while silver has remained fairly flat.

To see further detail of the movement in GEOs from Q2 2016 to Q2 2017 and how the incremental GEOs resourced, please turn to Slide 4. As you can see from the chart, the portfolio has performed well and has not been very volatile.

There was a slight decrease in silver GEOs as less silver ounces were delivered and sold from Antamina this quarter compared to a year ago, however, this was expected.

With respect to the gold net profit interest royalties, GEOs were higher due to a strong Cobre from our Hemlo NPI.

PGM assets have performed well with GEOs increasing due to slightly higher production year-over-year as well as higher palladium prices, which impacts the number of GEOs earned upon conversion.

The largest increase year-over-year is from gold assets and Candelaria in particular, which delivered approximately 18,000 GEOs in second quarter 2017.

Overall, an increase year-over-year, as GEOs increased from 112,787 to 122,541.

As you turn to slide 5, you will see 2 charts on the page.

The first chart highlights the average gold price and precious metals revenue for each of the last 5 quarters.

Second quarter 2017 generated $150.3 million in precious metals revenue compared to $141.2 million a year ago, a 6.4% increase.

This increase is due to both better overall performance at our assets as well as stronger palladium prices.

On the bottom chart, we have highlighted our increase in Oil & Gas net revenue and the oil price, which has been less volatile recently.

Oil & Gas revenue has increased from $7.8 million a year ago to $9.6 million in Q2 2017.

On Slide 6, you will see the key financial results for the company for the 3 months and 6 months ended June 30, 2017.

I won't get into the specifics, but what I would like to point out is that we have year-over-year increases for most of the financial metrics with new records being set for GEOs revenue, adjusted EBITDA and adjusted net income for the 6-month period.

The increases are the result of the strong overall production at our assets as well as benefiting from certain commodity price increases in particular, palladium and oil.

As you turn to Slide 7. The geographic revenue profile continues to be lower risk with 82% of revenue being from the Americas with Latin America being the largest contributor.

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

For second quarter 2017, precious metals revenue was 92% of overall revenue, with 71% being from gold, 14% from silver and 7% from PGMs.

We continue to stress the scalability of our business model and believe Slide 8 highlights this.

As you can see, there has been a significant increase in revenue over the last 6 years.

Costs have also increased over this time frame, but the largest cost component is the stream and other costs.

Stream costs will continue to increase as the company has delivered more stream ounces, which we consider a positive.

In Q2 2017, the company sold approximately 84,000 stream GEOs.

One item which I believe is important to highlight is the fixed cost.

These are the costs -- these are the company's corporate administration cost, and as you can see they have remained fairly constant each year regardless of changes in revenues.

To further highlight the margin generation of our business model, please turn to slide 9. Here you will see our internal all-in sustaining cost per ounce.

The cost per ounce includes our cost of sales amounts plus corporate administration, taxes are not included.

For Q2 2017, the cost per ounce was $330 (sic) [$320] leaving a margin of $937 per ounce.

The cost per ounce has increased in 2017 when compared to previous quarters.

This is due to the Guadalupe stream.

As you will recall, under the streaming agreement, the company paid $800 per ounce for gold ounces, delivered from Guadalupe versus the more common $400 per ounce.

Regardless, we remain a high-margin business.

Slide 10 highlights the available capital for Franco-Nevada.

When our working capital, marketable securities and credit facilities, net of the $28 million remaining to fund the STACK 2 transaction are totaled, the available capital is approximately $1.9 billion.

As mentioned earlier, the company did see a significant increase in cash during Q2 2017 due to the exercise of the warrants.

And with respect to our credit facilities, none are drawn currently.

Before I turn it over to the operator, I would like to confirm the guidance that was issued by the company.

We are maintaining the GEO guidance range of $470,000 to $500,000 GEOs for 2017.

However, we expect gold equivalent ounce sales for 2017 to be at the higher end of that range.

As well, we continue to maintain our $35 million to $45 million revenue range for Oil & Gas revenue for 2017.

And with that, I would now like to turn it over to the operator.

The management team is happy to take any questions you may have.

(Operator Instructions) Your first question comes from the line of Jorge Beristain with Deutsche Bank.

It's Jorge Beristain with Deutsche Bank here.

Just maybe a question for Sandip, the recent warrant exercise leaves you guys with a ton of cash on hand.

Can you just intone what you are looking at, potentially spending that on in the next few months, dividends, buybacks or more acquisitions?

And then specifically within acquisitions, are you guys lining up more stuff in the Oil & Gas sector that you're looking at?

Jorge, thanks for the question.

Obviously, we're always looking at possible transactions.

Business developments always got activity on the go.

It's never easy to know what's going to come across the line.

One thing we do know is we have to continue to fund Cobre Panama.

So we have -- the guidance was $200 million to $220 million for this year, so we still have a number of months of that to fund.

Other than that, we'll just continue to explore the market on both the mineral side and the Oil & Gas side.

And sorry, what about buybacks?

Buybacks is not something that we would consider at this time.

(Operator Instructions) And you do have another question coming from the line of Scott MacDonald with Scotiabank.

Just a couple of questions, if I may.

First on the STACK 2 acquisition.

Maybe if you can just speak a little bit about what kind of production profile you're expecting.

Is it kind of similar to the previous STACK acquisitions?

Or any color there will be helpful.

The -- I think, that's the best way to characterize it.

It's a similar type of land as to the original STACK acquisition.

It's one of the newest and the most prospective place in the U.S. tight oil space.

We're expecting that it will be growing over time.

The -- as with these place, exactly putting your handle on when the grills move on your property, it's difficult to tell.

But we know that there is a -- the well in place there is quite substantial.

And it's one of those investments we expect will do very well over time.

Okay.

But it's a similar kind of profile to the previous one, I guess growing over the next 5 or 10 years and all, is your kind of expectation?

That's exactly the right ballpark.

Okay.

And then just a -- further on the Oil & Gas side.

I guess is your focus still sort of similar to what we've been seeing over the last year or so with kind of putting together smaller deals focused in the higher quality plays in the U.S. Is that still kind of your focus like $100 million plus or minus type deals?

The -- yes, in terms of the size, we're looking at things I'd say that are $100 million plus.

That's been a sweet spot for us in Oil & Gas.

The -- we're seeing an equal amount of opportunity, some in Canada, some in the U.S. and some are assets that have a greater portion of cash flow but then also a good proportion that are -- tend to be in the Permian and also the STACK, which is a place that we found attractive.

I'd say in the Oil & Gas space, as we have spent more time on it, the -- there are very many opportunities.

So we have put out a number of term sheets in this basin and see that as fertile ground.

Probably to characterize the overall business development, in the last 6 months I think it's -- we've seen an equal amount of opportunities in terms of Oil & Gas and minerals, probably put out similar amount of term sheets on either side.

So and -- as we look forward, we see good opportunities in both areas.

Okay.

And on the precious metals side, is it still sort of focused on new projects.

Is that where you see most of the opportunities?

It's actually what we've seen recently has been a mix.

Some of that has been new projects, both gold plus copper projects with a precious metal byproduct.

So there are prospects on that side.

But also what we've seen are a number of royalties, so those are existing precious metals assets, good-sized royalties and quality assets, again, $100 million plus sort of deals.

So I'd say, overall in terms of range business opportunities, it's quite balanced.

Minerals and Oil & Gas and royalties and streams.

Okay.

And so on the royalty side, there might be something like picking up a portfolio from a minor that's kind of accumulated royalties over the years, or is that -- is that fair to think?

There are some portfolios.

But there are also some large individual royalties that are available.

So there's the opportunity to get something like that done as well.

(Operator Instructions) And I don't see any further questions over the phone at this time.

Thank you, Daesean.

We expect to release our Q3 2017 results before market open on November 6, with a conference call held at same morning.

I want to thank you for your interest in Franco-Nevada.

And this concludes today's conference call.

You may now disconnect.