Franco-Nevada Corp (FNV) 2018 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Franco-Nevada Corporation second quarter results conference call.

(Operator Instructions) Note that this call is being recorded on Thursday, August 9, 2018.

At this time, I would like to turn the call over to Ms. Candida Hayden, please go ahead.

Thank you, Sylvie.

Good morning, everyone.

Thank you for joining us today to discuss Franco-Nevada's second quarter 2018 results.

Accompanying this call is a presentation, which is available on our website at www.franco-nevada.com where you will also find our full financial results.

Sandip Rana, CFO of Franco-Nevada, will provide a brief overview of our results, followed by Jason O'Connell, VP, Oil & Gas, who will provide a summary of our recently announced Continental transaction.

This will be followed by a Q&A period.

Representatives from our Toronto office are present to answer any questions.

Before we begin formal remarks, we would like to remind participants that some of today's commentary may contain forward-looking information, and we 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, Candida.

Good morning, everyone.

As Candida mentioned, I will provide a brief summary of the financial results for the company for the 3 months ended June 30, 2018.

On Slide 3, we have a table summarizing the key results for the company.

You will see that gold equivalent ounces sold is lower than 2017, and revenue earned is marginally lower than comparable periods for 2017.

Although the mining asset portfolio did perform well, second quarter 2018 continued to be impacted by lower gold and silver grades and recoveries at Candelaria.

We did expect a reduction in stream GEOs to be delivered by Candelaria in 2018 compared to prior year as the operator processed lower-grade stockpile ore.

However, the grades have been lower than expected.

This is only short term as we expect production levels to recover in 2019.

Overall, the Candelaria stream has been a great acquisition for the company with gold ounces to be delivered to Franco-Nevada over the life of the mine 60% higher now than at the time of acquisition and silver ounces to be higher by 47%.

Despite the lower GEOs and revenues, the company did record higher adjusted EBITDA and adjusted net income financial results for 2018.

This was due to the mix of royalty versus stream ounces earned during the quarter, resulting in lower cost of sales and depletion versus prior year.

As you turn to Slide 4, the chart highlights the change in GEOs from Q2 2017 to Q2 2018.

The number of gold equivalent ounces from gold assets, excluding NPI, did decrease year-over-year.

As mentioned, this is primarily due to Candelaria.

We do expect deliveries from Candelaria in the second half of 2018 to be similar to the first 6 months.

For the change in silver GEOs, Antamina delivered less silver ounces in the quarter versus prior year, resulting in approximately 4,000 less GEOs in 2018.

Turning to Slide 5, we have 2 charts on the page.

The first highlights the precious metals revenue earned by the company for the previous 5 quarters, along with the average gold price over that time frame.

As you can see, the precious metals revenue amount was lower in second quarter versus the other quarters presented.

The gold price averaged $1,306 per ounce in Q2 2018 compared to $1,329 in Q1 2018.

This lower average price, along with the lower gold equivalent ounces, resulted in the decrease in precious metals revenue.

The bottom chart highlights the Oil & Gas revenue and the average oil price for the last 5 quarters.

Q2 2018 was a very strong quarter for Oil & Gas.

This was due to stronger oil prices and increased production from our newly added U.S. assets.

The company is beginning to realize the embedded growth of these U.S. assets.

On Slide 6, we provide a breakdown of our revenue by commodity in geographic location.

The chart on the left provides a breakdown of revenues.

84% of revenue for the quarter was generated by precious metals, with 67% being from gold, 11% silver and 6% PGMs.

The geographic revenue profile has revenue being sourced 81% from the Americas, with Latin America being the largest component.

Slide 7 highlights the diversification of our portfolio.

The first chart shows the adjusted EBITDA contributions from our key assets.

Antapaccay was our largest contributor at 14% of adjusted EBITDA.

The top 3 assets contributed 32% of adjusted EBITDA.

The company is not economically dependent on any 1 single asset.

Diversification is our strength.

The second chart highlights how adjusted EBITDA is distributed from a legal ownership perspective, with no legal entity accounting for greater than 40% of adjusted EBITDA.

On Slide 8, we highlight the strong margins the company achieves on a consistent basis.

Our all-in sustaining cost per ounce was $322 per ounce for the quarter.

As you can see, the cost per ounce has fluctuated over time.

Again, this will fluctuate depending upon the source of GEOs earned.

During the quarter, we realized a GEO margin in excess of $980 per ounce.

This is reflected by the strong adjusted EBITDA the company achieved during the quarter.

Franco-Nevada is proud of its business model, and one of our strengths is the scalability of this model.

As you can see on Slide 9, the company's fixed costs highlighted in light blue have remained fairly constant as we continue to grow this business.

Management believes we can continue to add to our portfolio and grow our business without adding significant overhead to the company.

Our margin for Q2 2018 was 78.3%.

Before I turn it over to Jason O'Connell, Vice President, Oil & Gas, who will walk us through the Continental transaction, I would like to provide an update on the CRA review that is currently underway for Franco-Nevada.

We continue to share information in response to queries from CRA.

As previously disclosed, no issues have been identified at this point in time.

The only meaningful change is that the scope has been expanded to include 2015.

Previously, the review was for the years 2012, 2013 and 2014.

I will now turn it over to Jason.

Good morning, everyone.

This is Jason.

I'll talk to you about our latest transaction and our updated guidance for Oil & Gas.

On Slide 10, you will have seen our press release on Monday, announcing a new transaction to form a strategic relationship with Continental Resources to acquire Oil & Gas mineral rights in the SCOOP and STACK plays of Oklahoma.

Mineral rights provide an ownership interest in land that has been leased out to operators in exchange for a royalty.

This relationship represents a new opportunity for acquiring royalties by teaming with an operator who will manage an acquisition vehicle to acquire mineral rights ahead of their drilling programs.

While typical mineral rights acquisitions are carried out with little or no knowledge with respect to the timing of when acreage will be developed, this approach directs acquisitions toward acreage that will be drilled in the near term, and thereby maximizes value by pulling forward production volumes.

On Slide 11, we'd like to emphasize that this strategy is truly a win-win situation for both the operator and the royalty buyer.

From Franco-Nevada's perspective, we get the benefit of an acquisition vehicle, which provides the ability to acquire assets at the grassroots level or directly from individual owners.

This is a segment of the market previously inaccessible to Franco-Nevada due to a lack of staff or resources to carry out these smaller-scale acquisitions.

More importantly, Franco-Nevada benefits from the operator's drill plans, along with their knowledge of local land title and geology.

The operator is able to direct acquisitions to areas that will develop in the near term and to focus on areas with superior geology and well performance.

Lastly, the operator will also manage the acquisition vehicle, which means there is little administrative cost or management time required for Franco-Nevada.

From the operator's perspective, Franco-Nevada will carry a portion of the operator's acquisition costs in exchange for having them manage the acquisition vehicle.

This allows the operator to effectively increase the economic interest in their land position at attractive values.

For both parties, this structure results in a significant uplift in value.

On Slide 12, our strategic partner for this transaction is Continental Resources, with whom it has been a pleasure working together to create a unique and innovative model for acquiring mineral rights.

Continental is a best-in-class operator with assets in the Bakken play of North Dakota and SCOOP and STACK plays in Oklahoma.

They recently celebrated 50 years of history and are led by industry veteran, Harold Hamm.

The company has built a superior land position covering more than 1.1 million net reservoir acres across some of the most prolific parts of the SCOOP and STACK, and it is the leading operator in the area with 16 rigs currently drilling and recently announced plans to grow to 18 rigs by the end of the year.

The acquisition vehicle will target royalty purchases under the most active portions of Continental's operated lands.

These acquisitions will complement Franco-Nevada's existing royalty position in the SCOOP and STACK, which is shown in the map -- or on the map on the right side of the slide.

These are 2 of the most economic and attractive plays in North America.

Continental plans to spend $2.7 billion this year to grow their production volumes.

The company has targeted a 20% compounded annual growth rate corporately in 2020, and a good portion of that growth will come from royalty lands.

Slide 13 provides a summary of the investment.

Upon closing, Franco-Nevada will make an upfront payment of $220 million for the purchase of mineral rights that Continental has already assembled and which will be held in the acquisition vehicle.

Additionally, Franco-Nevada has committed to jointly fund that vehicle for future acquisitions.

The vehicle will be funded 80% by Franco-Nevada and 20% by Continental.

Franco-Nevada's share of funding for that vehicle will be up to $100 million per year over a 3-year period.

The funding is subject to Continental achieving certain development thresholds related to drilling on royalty lands.

Revenue distributions from the vehicle are variable and are governed by royalty volume targets.

Franco-Nevada is entitled to a minimum of 50% of revenue distributions and up to 75% of revenue, depending on volumes Continental achieves relative to predetermined volume targets.

Continental is entitled to a minimum of 25% of revenue and up to 50% of revenue, depending on the volumes they achieve relative to those targets.

The structure creates strong alignment between the operator and the royalty older, in that it provides incentives for Continental to maximize production, while providing downside protection to Franco-Nevada and supporting our returns in the event of volume shortfalls.

Acquisitions will be focused on Continental's operated acreage position in the core parts of the SCOOP and STACK.

As mentioned in its quarterly release yesterday, Continental announced accelerated development of its acreage with the addition of new drill rigs.

This augmented activity will improve the value of our royalties.

Slide 14 provides some guidance for the investment.

With respect to the $220 million that will be funded at closing, we do not expect a material revenue contribution this year.

Revenues are expected to begin in earnest and begin ramping up in 2019 and continue to increase over the course of the next 10-plus years.

During that period, revenues net to Franco-Nevada are expected to reach a level of $30 million to $35 million per year at current commodity prices and are expected to generate after-tax returns of greater than 10% under either spot or strip pricing scenarios.

We were fortunate to begin negotiating deal terms at the end of last year and are therefore able to capture the benefits of an upward move in the oil price.

These are long-life assets with perpetual ownership rights and cash flows which are expected to build and stabilize over a period of more than 30 years.

Following that will be a long period of slowly declining revenue as well as drawdown.

While the guidance provided pertains to the upfront $220 million investment, future investments into the acquisition vehicle are expected to generate similar economics on a staggered basis.

The above-referenced economics are based on only 2 to 3 hydrocarbon horizons.

However, upside potential exists in the form of multiple other undeveloped hydrocarbon-bearing zones, which may become a target in the future.

Additionally, those economics reflect current expectations of recovery factors.

However, those recovery rates have the potential to increase over time from improvements in extraction technologies.

Lastly, there is also an opportunity to expand upon the commitment with Continental should the parties desire to do so in the future.

Turning to Slide 15, over the past 2 years Franco-Nevada has invested approximately $344 million into U.S. Oil & Gas assets.

The investments have been focused towards the core areas of the SCOOP/STACK, Midland and Permian Basins.

We have purposely targeted areas with the most favorable economics for operators, and this is evidenced by the chart on the slide ranking counties in the U.S. by rig count.

As you can see, royalty acreage related to our royalties covers the most active counties in the U.S., which is a good proxy for the underlying economics as operators tend to focus their capital in areas with highest returns.

The transaction with Continental will increase our exposure to U.S. Oil & Gas, bringing the total spending to approximately $564 million on closing, with commitments to add another $300 million over the course of the next 3 years for a total of up to $864 million.

On Slide 16, over the past 2 years Franco-Nevada has taken advantage of a very favorable acquisition environment for U.S. Oil & Gas assets.

Since Franco-Nevada began acquiring these assets, oil prices have increased, rig activity continues to outperform our initial expectations, well productivity in the basins continues to improve, and we will benefit from a reduction in U.S. corporate tax rates brought into effect under the current administration.

As was highlighted by Sandip in the financial discussion, the U.S. Oil & Gas assets are already beginning to generate meaningful revenue contribution for the company.

We are expecting these revenues to grow significantly over the coming years as operators transition from drilling in order to hold their acreage toward full scale development of their lands.

Slide 17 provides an upgrade of the company's Oil & Gas revenue guidance from that which was provided in the March 2018 financial disclosure.

With increased oil prices and strong performance from several assets, we are increasing our 2018 guidance from the prior range of $50 million to $60 million to a range of $65 million to $75 million under a $65 per barrel WTI price assumption.

Additionally, with the increased prices and new contributions from the Continental acquisition vehicle, we are increasing the 5-year guidance from the prior range of $80 million to $90 million to a range of $120 million to $140 million, again under a $65 per barrel WTI price assumption.

This includes only the Continental assets acquired with the upfront investment of $220 million, and our $300 million expected further investments with Continental are not included.

Recent acquisitions in the U.S., along with Continental transaction, will result in a significant increase in Oil & Gas revenue over the course of the next 5 years.

And with that, I'll turn it back to Sandip.

Thanks, Jason.

Slide 18 provides a summary of our updated full year guidance for 2018.

As Jason mentioned, based on stronger -- higher oil prices and production, we have increased our Oil & Gas guidance.

With respect to mining asset guidance based upon performance for the first 6 months of 2018 and expectations for the remainder of the year, the company is revising the GEO guidance to 440,000 to 470,000 from the previously guided 460,000 to 490,000.

Slide 19 summarizes the financial resources available to the company.

When including our marketable securities and credit facilities and after accounting the Continental initial funding of $220 million, we currently have $1.2 billion of capital still available to complete transactions.

During the quarter, we funded $89.2 million towards our Cobre Panama stream commitment and at the end of Q2 2018 we had funded $886 million of our $1 billion commitment.

With respect to how the company plans to fund the $220 million for the Continental transaction, we will be using cash on hand plus drawing down on our credit facility.

As you are aware, one of our key business objectives is to generate at least 80% of our revenue from precious metals.

Slide 20 highlights how that goal has been achieved over the last decade and how Franco-Nevada has actively managed it.

At our IPO, we were slightly above 50% precious metals revenue.

We made a conscious decision at the time to only enter into precious metal transactions until we reached at least 80% precious metals revenue.

Even with our recent move into U.S. Oil & Gas royalties, we are still above the 80% precious metals threshold.

And with the addition of Cobre Panama with deliveries beginning in 2019, we expect to remain above 80%.

This, of course, does not take into consideration any future precious metal transactions we may complete.

And now I'll pass it back to Sylvie.

Management is available to take any questions.

(Operator Instructions) Your first question will be from Chris Terry at Scotiabank (sic) [Deutsche Bank].

It's Chris here.

I just wanted, on Slide 20, where you talked about that 80% and the mix of the different assets going forward, can you comment just a little bit about the second half of this year and maybe into 2019, how you're seeing potential deal flows in the more traditional precious space?

And then, just a little on the Oil & Gas space, how has the environment changed with the oil price going up?

Do you see potential for other deals outside of the one that you've just done?

Chris, it's Paul Brink here.

First of all, on the overall outlook, we -- the environment is good.

We see -- we're seeing good amount of transaction activity.

I'd say that 2 broad buckets that falls into.

The first is on the mining side.

More of that, as you would expect at the moment, is nongold but mining-related assets.

I'd say with the downturn in the gold price what we've been waiting for on the gold sector is for the industry to get back to building a good amount of assets, hoping that would happen in the nearer term, but I think with the downturn in the gold price, we've got to push that expectation back a bit.

But as I said, there are some good opportunities that we're looking at that are on the mining side, but nongold.

And then the other side that's -- that continues to be active is on the Oil & Gas side.

And to your question, when we value most of these assets, we're typically using a stripped price deck, and that will -- and get that oil price deck still goes down to the low, mid- sort of $50 per barrel.

So we still see good value in acquiring oil assets in this environment, and so expect it will continue in that direction as well.

Next question will be from Josh Wolfson at Desjardins.

A couple of Oil & Gas questions.

I guess, first, in terms of your investment outlook, you mentioned $864 million spent thus far on the U.S. properties.

I guess, there is also some money spent at Orion for the thermal project there, which takes you up to the mid-9s.

I recall at one point, there was discussion about total targeted $1 billion in Oil & Gas.

Does this investment with Continental sort of max you out in terms of your energy exposure?

Or would you still continue to look in the space?

Or is there any interim or longer term?

Josh, it's David Harquail here.

Right now, if we do nothing, we still -- we're on track to get close to that 80% limit as we've shown on our Slide #20.

But fully expect in the next 4 years, we're going to be seeing additional gold assets or precious metals assets added to the portfolio.

So the way we look at it is we still have some room to add further.

We just are always measuring against our confidence of what we'll be able to add on the precious metals side.

And so we feel we still have some room to add on the Oil & Gas side, but it is going to be measured against the opportunities that we have on the precious metals side.

Josh, it's Jason here.

Just to clarify, you mentioned the $864 million that we've spent to date.

Just want to keep in mind that $300 million of that will be spent over the course of the next 3 years, and so that's not all spent to date.

That's future spending as well.

Got it.

Okay.

And then maybe for some more details on the Oil & Gas side, in terms of the 2022 guidance, does that assume that the additional $300 million contingent payments are made, and that that would include the revenues from that future-dated investment?

No, that guidance -- so the $120 million to $140 million assumes only the upfront payment of $220 million, and so we've provided guidance based on basically what we know will be spent.

The other $300 million we expect to spend, but we haven't deployed it yet, and so there's no revenue in that guidance attributable to the additional $300 million.

That would be in addition to that -- the range that was provided.

Okay, so it's fair to say, as you sort of commit additional funding, your forecast for the revenue side will grow reasonably considerably.

That's right.

Okay.

And maybe in terms of some of the specifics on the SCOOP/STACK play and, I guess, what the outlook is, in term of your forecast for gas versus oil contents, what sort of split should we be assuming?

It'll be variable, and it will change over time.

In the first year or so, the split will be quite gassy.

It will be up to probably half, roughly half gas.

But Continental, in their quarterly call yesterday, indicated they're transitioning to a more oil-rich production profile.

They'll be targeting areas of higher oil content, and so we expect over the course of next couple of years, that ratio will change from, call it, half gas/half oil to probably 70% or 80% oil.

Okay.

And I'm not sure how to ask this, but I guess, looking at Slide 16 with the rig counts at least for the SCOOP/STACK, which may be representative on the new properties, but the rig count there is, I guess, a little bit over 100 now.

When you look at sort of steady state numbers for the play, what sort of number of pay status rigs are you assuming?

And what -- I guess, what would be the equivalent production volume for that?

We -- when we value these opportunities, we don't anticipate an increase in rig count, and so what we do is we take the current rig levels and create our valuations from there.

We don't have a particular outlook for the overall basin.

Obviously, it's going to depend on commodity prices.

The higher the price, likely, the more rigs that will be active.

In terms of this particular situation, Continental has announced as of yesterday that they are adding new rigs in the SCOOP/STACK.

They are going from 16 to 18 rigs by the end of the year.

When we began evaluating the opportunity, Continental was up 16 rigs, so that'll be a benefit to us over how we value the acquisition.

And we expect that the rigs that they employ in the basin will be directly probably correlated with the price of oil.

Jason, I'll add to that.

It's David here, is if I remember, our first STACK deal we went in 2 years, it was about 70 rigs that we were assuming in our projections.

And we're now north of 100 rigs.

So I think we've been very conservative in the assumptions on the rigs.

Next question will be from Cosmos Chiu at CIBC.

Maybe a few questions from -- for me here, maybe looking at the Oil & Gas strategic partnership first.

Jason, these mineral rights that the entity is going to be purchasing, acquiring, can we look at it -- can you remind us, is it more or less like an NSR?

Yes.

Sure, Cosmos.

Basically, the way it works is, in the U.S., mineral rights or land title is privately held by individuals, and that presents an opportunity for Franco-Nevada to acquire the underlying mineral title or mineral rights.

Those mineral rights are then leased out to operators in exchange for a royalty, and so that's how the royalties are created.

The royalties themselves, you can think of them as an NSR.

Basically, they're gross royalty on production, revenue, less some small cost for transportation and processing.

Okay.

And then, I guess, what's happening here is that Continental is going to be driving some of the valuation and some of the opportunities, looking at some of the opportunities that you can acquire using this entity, looking at some of the mineral rights that are currently -- may be currently in production and some that are part of future production.

Is that how I should look?

Yes.

So the premise here is that as a typical mineral buyer, you don't have any information on timing of development, and so what Continental brings to the table here is the visibility into when acreage will be developed or drilled, and that brings forward revenue.

And so what they'll be buying is they'll be buying acreage that is specifically located under their drilling program.

And what that does is it creates a very large sort of arbitrage between the typical market and our acquisition vehicle.

And so the typical royalty buyer in the market is essentially blind when they acquire royalties, so they'll have to assume a conservative set of assumptions around timing.

They'll have to, say, for example, acreage may be developed in 5 years or 10 years or 20 years.

They really don't know, and it has to be conservative.

And that's what sets the price.

The advantage for us in this scenario is that we can pay that market price with the benefit of knowing that our royalties will be developed in the next 1, 2, or 3 years.

So that's what creates a value arbitrage that we're taking advantage of.

And so yes, Continental, as the acquirer here, will be focused on acquiring acreage generally underneath undeveloped lands but undeveloped lands that will be drilled within the next 1, 2, 3 years.

Okay.

And then maybe, switching gears a little bit, on the accounting side for these -- for this new vehicle here, how is that going to work?

It's a separate vehicle, but at the same time, I would imagine what's being generated as revenue, which is just going to roll up into Franco-Nevada's financial statements.

Is that how it's going to work?

Yes.

So Cosmos, Sandip here.

It's a separate legal entity, and we will be recording -- so as Jason mentioned, we have the possibility to earn 50% of the revenue up to 75% depending on volumes, metrics, if they're met or not.

So based on that, we will pick up -- if it's 50%, we'll pick up 50% of revenue, 50% of any costs that are in that company, which will be minimal.

So basically, it's just the largest component will be revenue.

Okay.

And then, I guess, the other part is, Jason, as you mentioned, within the next 10 years, you're expecting revenue of about $30 million to $35 million coming from this new vehicle here.

I guess, looking at the rig count, everything else, how should we look at it?

Is it like a straight line sort of going to $30 million to $35 million in 10 years?

Or is it more exponential?

Is it more like a parabola, going up?

Or how should we look at it?

Yes.

The expectation, Cosmos, is that it will -- it's not a completely straight line.

It'll be more pushed forward than that.

So in the next 2 or 3 years, you should see a significant bump-up from basically 0 revenue in 2018 to a higher level in the next 3 years.

And then it's a slower ramp from there up to $30 million to $35 million, 10 years out.

So it's more heavily weighted towards the first 3 or 4 years.

Okay.

And then maybe one last question on this Oil & Gas here, in terms of STACK and SCOOP play, previously, there have been some comparisons between STACK and SCOOP and potentially, the Permian Basin.

Jason, would you make that comparison?

Yes.

We view the STACK and SCOOP and the Permian basically as the 2 premier basins, broader basins in North America.

The reason is the economics in both those plays are extremely attractive for the operators, and that's where they'll focus their capital.

Breakeven costs for both basins are very attractive.

They're sub-$30 in the core parts of the play, so they have many similarities.

The difference between the 2, Cosmos, is really one of scale.

So the Permian is significantly larger in terms of overall area than the SCOOP/STACK.

And the other difference, which has been highlighted lately, is infrastructure.

And so the Permian has been -- if you follow the Oil & Gas world, has been experiencing some challenges with respect to egress capacity, and some of the operators in that area have been experiencing wider differentials on their sales.

The SCOOP/STACK doesn't have that issue yet, particularly with Continental, they have got ample capacity on both the oil and the gas side.

And that play is located very, very proximal to Cushing, Oklahoma, which is where the WTI reference price is established.

And so from an economics perspective, they're both very high-quality basins.

The SCOOP/STACK is smaller-scale and has, right now, the benefit of better infrastructure.

Yes.

And sorry, maybe one last question for me here.

In terms of this new vehicle, how is it being structured?

Is it offshore?

Or is it going to be based in the U.S. and paying full taxes?

Could you maybe touch on that a little bit?

Yes.

So it will be structured -- it will be held within a subsidiary in the U.S. It will be paying full U.S. taxes.

And so we do have the benefit, obviously, as I mentioned, of more favorable tax rates under the current administration.

But it is -- it's a U.S. subsidiary that will hold our interest in that company.

Next question will be from Greg Barnes at TD Securities.

Sandip, how are you thinking about the balance sheet as it evolves over the next year or so?

You're obviously going to go into the credit line, and I know Franco doesn't like to carry debt.

What's you're thinking along those lines?

So Greg, the plan, as is mentioned, to fund this Continental transaction, we'll use cash on hand and draw into the facility.

Our expectation is that will have funded Cobre Panama by the end of this year.

So next year we won't have that capital outlay, and we'll be generating significant cash flow based upon the growth of Cobre coming in, in store next year as well as the continued growth of the U.S. Oil & Gas assets.

So our cash generation is going to be quite significant, which will easily pay off the credit facility out that is drawn down.

So at this time, if your question is whether we're going to raise equity, we have no intention of raising equity at this time.

And Jason, you've got a 3-year plan, I guess, with Continental, with the $300 million going forward.

What's the intention beyond that?

I know it's success-based, but clearly, this isn't just a 3-year investment, and then it stops.

Yes.

Thanks, Greg.

It is a 3-year investment right now.

And so after 3 years, there is no expectation that we would invest more.

It's really more of an option for the parties if the venture is successful.

If the gold-to-oil ratio of the broader company is in line and there's opportunity to invest more in Oil & Gas, then we will take that opportunity and have a discussion with Continental about investing more dollars into the vehicle.

But as it's structured right now, it's strictly $300 million over the course of the next 3 years, and then there are no further obligations beyond that.

So it really is an opportunity if we so choose to seize it.

But right now, $300 million is the maximum commitment.

Greg, it's David Harquail here.

I'll just add.

It's steps in the relationship.

I think this is a unique process here, so we'll see how it works.

I can tell you, we have been to the Continental offices a number of times now.

Harold Hamm has personally been up to our offices as well.

I think there's been a very good rapport between our companies because we both have a very long-term perspective in this business, and so we think this is something we can build over a long period of time.

And so -- and I'd say, so far, it's a very positive relationship, but the real test is time, and so we'll see how this goes.

Next question will be from Steven Butler at GMP Securities.

Guys, we'll just beat this one to a pulp here on the STACK again.

On 2022 revenues, Jason, in your $120 million to $140 million guidance range for revenues, what is the approximate contribution from the $220 million deal with Continental in that revenue for just '22?

It's slightly less than the $30 million to $35 million that we indicated on the prior slide.

As I've mentioned, the revenue will ramp up from basically to 0 this year to that $30 million level within 10 years or so.

And as I sort of explained to Cosmos, that's a bit front-end loaded.

And so within 5 years, in 2022, you will expect a little bit less than the $30 million but certainly more than half of that amount.

So again, somewhere between those 2 numbers.

Okay.

And then 2019, is it a humble start?

Or is it still a decent number in 2019 next year, as your expectations are right now?

We haven't given the guidance for 2019 because it's based on Continental achieving their volume target.

We don't know whether they'll achieve that number or not at this stage.

It's -- that depends on your definition of humble, meaningful revenue in 2019, but certainly, it'd be a fraction of that $30 million level.

Okay.

Sounds good.

And I guess, actually looking sequentially, guys, Q1 to Q2, Midland and Delaware were probably the best contributors to the sequential improvement in Oil & Gas revenues.

And any comments there?

I guess I'd just look at the rig count, and I guess, we can just maybe sort of do the math.

But it sounds like things are -- it looks like things are doing quite well in Midland and Delaware as well.

Steve, Sandip here.

Yes, the U.S. assets have been large contributors, especially over last year.

The first half of the year did include some catch-up payments from 2017, approximately $2 million to $3 million.

So if you were to simply just double up the first 6 months of the year, that's not going to work for the second half of the year.

Next question will be from Tanya Jakusconek at Scotiabank.

I'll leave the Oil & Gas and move on to just 2 other questions that I have.

Just on the M&A side, I think you mentioned that you're looking at mining nonprecious.

So Dave or Paul, would that be like base metals, like copper, zinc, other nonprecious metals?

Tanya, it's Paul.

Yes, as you know, in our business, the -- really what we're trying to do is invest in good resources that we think have got good economics to give us a payback on our investment, plus greater upside.

And we're open in terms of commodities.

Obviously, precious metals are the best for us.

But if their base metal deposits box that fit that description, we're also open to those, and we're seeing some good opportunities on that side.

Okay.

That's perfect.

And then maybe, Sandip, just for you, just on the CRA, and we appreciate that another year now has been included under the review.

I know you had previously given guidance that if it was a transfer pricing issue and we don't know if that's what they're interested in, that the impact to you would mainly be on Palmarejo.

And I think the number had been around $25 million for 2012 to 2014.

If we included 2015 in that number, what would the theoretical back taxes be on Palmarejo?

I think that would be the only one paid, right?

Yes.

So we -- as you know, the way the streams work, you recover your deposits before you pay tax.

So yes, so Guadalupe-Palmarejo is one asset and mine waste solutions was the other one.

To the end of 2015, they sold the 2, so the number really doesn't change much.

Okay.

So down to $25 million.

Okay.

Yes, still around that.

Next question will be from Carey MacRury at Canaccord Genuity.

Maybe a question -- another question on Oil & Gas for you, Jason.

You talked about the $30 million to $35 million in 5 to 10 years.

From what you can see today, is that where you see it peaking at?

Or is there opportunity to go above that on the original $220 million?

There is some opportunity to go beyond that.

It all depends on the level of drilling activities that goes on with Continental.

And our expectation is that as they continue to develop the land, there's opportunity for the revenue to continue on beyond that point, so 10 years out is not the absolute peak in revenue.

But it's close.

You probably have another few years, 3 to 5 years of growth beyond that before it really starts to flatten out.

And so there is some capacity on that, probably another 5 years or so.

And I guess, secondly, once you hit that level, how many years do you think you can sustain it?

You're talking about 30-year-plus assets here.

Yes.

It's sort of our expectation based on today's reality on the ground.

Like I said, it all depends on the inventory that Continental has, how many locations they have to drill wells and the recovery from those wells.

As technology sort of improves and recovery rates improve, we expect that in reality, it will probably longer than that.

There are a number of horizons, as I mentioned, that we're not including in our evaluations that if they get developed in the future would significantly add to that time frame.

So the 30 years that we're talking about includes the formations that are currently being developed and currently targeted by Continental.

If they target future formations, that time frame can get extended quite significantly.

And Carey, this is David Harquail here.

Just our experience in Weyburn, a big unitized field in Western Canada, it has been producing for 40 years.

And we think it has a life for another 40 years over time.

And the big advantages of this -- with these oil fields and these larger areas is that you look at them from the traditional recovery horizons, as Jason said, we're only looking at up to only 3 horizons.

There's more horizons beyond that.

But then you go into enhanced recovery, and what we've experienced at Weyburn is you have the vertical drilling, you have horizontal drilling, you have waterflood, you had CO2 injection.

No one is yet talking about enhanced oil recovery yet on the -- on these fracking operations.

And so once we look at other horizons, I think there's going to be a phase in the future where people will be looking at things such as CO2 injection in these wells and because we're only looking at in the teens in terms of percent recoveries, on our existing economics.

And I'm totally convinced, once you have all that infrastructure in place, you'll be doing enhanced oil recoveries.

So I think the 30 years represents what we know right now with the technologies that are being applied.

I'm convinced this is going to be something my great, great grandchildren would still be collecting dividends on.

So I think that's what's very exciting about this.

So is there an underlying reserve associated with the land position?

Or how does that work?

There is an underlying reserve, although it's Continental's proprietary information, so it's not something that we can share right now.

The reserve, again, that be based our economics on, it goes out a long way in time, and we expect as technology improves and as these future zones are brought into plan, that that reserve will increase substantially.

And then maybe one last question.

Just -- you've been focused on the U.S. Oil & Gas opportunity.

How would you characterize the differences between what you're seeing in the U.S. versus what you'd see in Western Canada?

Yes.

There's a significant difference between the 2 countries, and the difference comes down primarily to how land is held.

And so in Canada, the majority of the mineral rights are held by the Crown, and so we can't buy that, really, from the government.

There were, at one time, private mineral rights, privately held mineral rights, but those have mostly been bought up by PrairieSky or Heritage Royalty, which is owned by Teachers' Pension Plan.

And so there's very little private mineral rights that can be acquired right now, and so there's not a lot of activity in that space.

In the U.S., as I mentioned, that the majority of the mineral rights are held by individuals, so there's a huge segment of the industry, I guess, that is focused on buying and trading these mineral rights.

And there are many sort of private equity-backed groups that will go around and aggregate those interests to create portfolios and sort of look to grow them and trade them.

And so it's a magnitude of -- or a very different magnitude, I guess, between the 2 countries in terms of the size of the opportunity.

There are some opportunities in Canada that we continue to look at.

Most of those opportunities exist directly with an operator, so rather than buying mineral rights from individuals, we would look to create manufactured royalties as a form of financing for operators, and we continue to look at those from time to time.

It just depends on the rates of return on a relative basis.

And right now, we're seeing better rates of return in the U.S. for those types of opportunities than we're seeing in Canada.

Next question will be from Brian MacArthur at Raymond James.

Two questions, and they have to do with the revenue distribution sharing.

So in the initial $220 million, you make this statement that it's 50% Franco, and then there's a 25% variable.

In your base assumption of $30 million to $35 million, is it sort of 50%, so that if you do extra volume drilling there and when you do better than expected, you're going to get a double kick, i.e.

more rigs and wells, plus you're getting a disproportionate amount to the upside?

Is that how the volumetric function works?

Not exactly, Brian.

The way that distribution works is that anywhere, really, between the -- for us, the 50% and the 75%, we're essentially receiving the same revenue because we get a larger share of the volumes if the production is lower.

We get a smaller share of the volumes if the production is higher.

So really, anywhere between those 2 levels, we're essentially achieving the same amount of revenue.

And that's by design.

That's -- I guess, what we were trying to achieve with this structure is that we are protected when Continental -- when or if Continental was to fall short of their targets.

So that revenue that we're showing you on the slide is sort of a protected revenue whether Continental is achieving their full 50% or whether they're achieving only a 25% revenue distribution.

Got it.

So it's kind of a downside option as opposed to an upside option if someone have looked at that way of protection.

Is that fair?

That's right.

Anywhere between those 2 percentages, we're protected, and it's protected on the downside.

We will share in the upside with Continental should they achieve beyond the volume targets, which means if we are -- or if they are achieving 50% of revenue, that's a good thing for us.

So the higher the proportion distributions they receive, really, the better it is for us, if they can get over their targets.

Another way just to think of it is a 50-50 split in our projections, and then we have downside protection.

We'll take more if Continental doesn't achieve the numbers.

I think what is an expression of Continental's confidence, they can at least achieve projections that we're using on our 50-50 estimates.

So I expect they'll perform better, but if they perform better, we're just getting 50%.

Great.

That's very helpful.

That's very clear.

And just the second part of it then on the $300 million that gives in going forward, it says you can fund up to 80%/20%.

But then is that coming out of the same way if 50%, 25%, 25%?

Or is there a different function there going forward?

Because you're putting in proportionally more money?

Yes, it's the same structure.

So for that remaining $300 million, we continue to fund 80% of it, and the distribution structure continues to be we receive 50% to 75%.

(Operator Instructions) And your next question will be from Kip Keen at S&P.

Were there any labor negotiations in Latin America that you have any eyes on?

But I don't recall if -- or in Antamina, did they make an agreement yet?

I thought that was up in the third quarter, I'm not sure.

Kip, I haven't seen anything on any labor unrest at any of the operations that we've been involved in.

But there are any contracts up for negotiation sort of in the near term, next quarter or 2?

I'd need to -- I don't have (inaudible), so.

Kip, we -- David here.

We do -- we look at sort of labor as sort of standard for the business.

And because we're so diversified, we're not sweating any individual operation and labor interruptions.

The only one we've been watching closely is Cobre Panama because they've had -- we've been working with their various unions there.

But that seems to have been all resolved in the last few months, and things are proceeding smoothly.

But on the other operations, because we're buying for 20, 30 years on the investing in these things, we fully expect there'll be interruptions from time to time.

Nothing too long.

We expect that to be resolved.

And at this time, we have no other questions registered.

Thank you, Sylvie.

We expect to release our third quarter 2018 results after market close on November 5, with the conference call held the following morning.

Thank you for your interest in Franco-Nevada.

Goodbye.

Thank you, Ms. Hayden.

Ladies and gentlemen, this does conclude your conference call for today.

Once again, thank you for attending.

And at this time, we do ask that you please disconnect your lines.

Enjoy the rest of your day.