Franco-Nevada Corp (FNV) 2021 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Franco-Nevada Corporation Q1 2021 Results Conference Call.

(Operator Instructions) This call is being recorded on May 6, 2021.

I would now like to turn the conference over to your host, Jason [Picciotti].

Please go ahead.

Thank you, Chris.

Good morning, everyone.

Thank you for joining us today to discuss Franco-Nevada's First Quarter 2021 Results.

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

Paul Brink, President and CEO of Franco-Nevada, will provide some introductory remarks, followed by Sandip Rana, CFO of Franco-Nevada, who will provide a brief review of our results.

This will be followed by a Q&A period.

Our full executive team are available to answer any questions.

We would like to remind participants that some of today's commentaries 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 Paul Brink, President and CEO of Franco-Nevada.

Thanks, Jason.

Good morning.

Our diversified portfolio outperformed in the first quarter, generating record revenues and near record margins, an 85% adjusted EBITDA margin and a 52% adjusted net income margin.

Gold equivalent ounces for the quarter were ahead of our expectations.

Strong deliveries from Antamina, ongoing ramp-up at Cobre Panama, and leverage to gold prices at Hemlo made for the largest increases over Q1 2020.

As we progress through the year, we expect higher contributions from each of Cobre Panama and Candelaria due to increased throughput and high grades, respectively.

Energy revenues for the quarter were well ahead of our guided annual run rate.

A strong initial contribution from Haynesville, some high interest wells in the Permian and higher energy prices were the drivers.

We're committed to ensuring that Franco-Nevada is the gold investment that works for all our stakeholders, including our shareholders, our operating partners and our communities.

Along with our asset handbook, we recently published our annual ESG report.

Highlights of the ESG report are our sector-leading rankings, promoting responsible mining through our capital allocation, ongoing contribution to communities and our increased commitment to diversity in our Board and top leadership.

During the quarter, we added 2 attractive precious metal assets, a royalty on Roxgold, Séguéla gold development project in Côte d'Ivoire and a precious metal stream on the Condestable copper mine in Peru.

Both assets with excellent upside potential.

We were delighted post quarter end to acquire a tranche of Vale Iron Ore Royalty Debentures.

With royalty, the Vale interest, along with our Labrador Iron Ore Royalty Company investment add to our base of low-risk, long-life cash flows and further enhances diversity of our portfolio.

With the additions, the portfolio remains more than 8% precious metal focused.

Our recently published asset handbook highlights the year-on-year growth in our reserves and long-life -- and long-reserve lives.

The iron ore assets will further extend both measures.

Turning now to our outlook.

2021 is expected to be a strong growth year for Franco-Nevada, with new acquisitions, mine expansions and new mines all contributing.

We continue to see numerous exploration successes in the portfolio.

Most recently, success at the Copper World satellite to the Rosemont deposit, ongoing expansion of Skeena's Eskay Creek deposit, expansions of East Gouldie at Canadian Malartic and high-grade step-out holes at Wallbridge's Fenelon deposit.

This week, Kirkland Lake provided the latest drilling update on a 270,000 meter drill program at Detour Lake.

The likely expansion of the resource at Detour should be a catalyst for our stock this year.

Strong gold prices and near-record copper prices are boosting the development outlook for our pipeline of gold and copper interest.

The Hardrock, Valentine Lake and Stibnite Gold projects and the Alpala and Taca Taca copper projects, amongst others.

Following the Vale Royalty Debenture acquisition, we revised our guidance and outlook and now expect 25% growth in revenue over the next 5 years.

We announced with our year-end results an increased quarterly dividend to $0.30 a share.

This was our 14th successive annual dividend increase.

The Board has now declared the first of those dividends payable June 24.

The 15% increase is larger than typical and reflects the growth in our business due to Cobre Panama.

A note on Board succession and renewal.

At yesterday's annual meeting, the Honourable David Peterson stepped down as the Chair of the Compensation and ESG Committee after more than 13 years as a Director of Franco-Nevada.

The Board and I would like to thank David for his outstanding leadership and many years of service.

We will no doubt miss his unique abilities for building unity within the Board.

In terms of renewal, you'll recall that Maureen Jensen joined the Board at this time last year.

Maureen has a strong governance background, having previously led the Ontario Securities Commission.

To sum up, our portfolio continues to outperform.

It has built-in growth and tremendous long-term optionality.

We're in a net cash position of $1.2 billion in available capital and are now generating EBITDA at a rate of $1 billion per year.

We're focused on precious metal acquisitions and see good prospects for adding to the portfolio.

I'll now hand it over to our CFO, Sandip Rana.

Thanks, Paul.

Good morning, everyone.

First quarter 2021 continued to build on the positive momentum that Franco-Nevada ended 2020 with.

Our royalty and stream portfolio continues to perform well and ahead of expectations.

Although the gold price in first quarter of 2021 was a little weaker than fourth quarter, Franco-Nevada still delivered a very strong financial quarter with record revenue and record adjusted EBITDA.

On Slide 3, we have highlighted the gold and gold equivalent ounces sold for the 3 months ended March 31, 2021 and 2020.

Overall, GEOs sold increased over 10% compared to prior year, with Q1 2021 GEOs sold being 149,575.

We had a number of strong contributors during the quarter; Antamina, Hemlo, Cobre Panama and Condestable.

The strong performance for Antamina was a combination of higher silver deliveries along with higher silver prices during the quarter.

I'd like to highlight that for Antamina, Franco-Nevada is delivered silver ounces based on a 1 quarter lag for production.

For example, the silver ounces we received in Q1 2021 were related to production from Antamina for fourth quarter 2020.

We anticipate silver ounce production from Antamina to be at the high end of the 2.8 million to 3.2 million range previously provided for 2021.

At Hemlo, we continue to benefit from mining on our 50% NPI ground.

The company recorded 11,675 GEOs sold for the quarter, of which just over 4,400 GEOs related to prior periods.

We do expect mining on NPI ground to decrease in the second half of the year.

Cobre Panama had a strong first quarter for Franco-Nevada with GEOs sold of 29,622, as the project continues to ramp up.

The deliveries were in line with the full year 105,000 to 125,000 GEOs sold guidance we have previously provided.

Finally, we were delivered our first gold and silver ounces for the recent Condestable stream transaction.

Just over 3,000 GEOs sold were reported as revenue for the quarter.

Two assets which did deliver less GEOs in the quarter versus prior year were Sudbury and Guadalupe.

Although KGHM has decided to continue mining at McCreedy West for an additional number of years, it will be at a lower production rate, which was reflected in the GEOs sold in the first quarter of 2021.

As for Guadalupe, the company received and sold fewer GEOs in the quarter because of lower grades than a year ago.

Slide 4 highlights our total revenue and adjusted EBITDA for Q1 2021 and Q1 2020.

As you can see from the bar charts, revenue and adjusted EBITDA has increased significantly year-over-year.

The average gold price for the quarter was $1,794 per ounce compared to $1,583 per ounce a year ago, a 13% increase.

The $308.9 million in revenue in the quarter is a record for the company, as is the adjusted EBITDA of $262.7 million.

As Paul mentioned, margin of 85% was achieved.

Gold and silver revenue increased from $189.1 million in the quarter last year to $237.7 million in Q1 2021, a 26% increase.

First quarter also saw a strong contribution from the energy assets as revenue increased from $26.5 million a year ago to $45.1 million this quarter.

The increase was due to a rebound in oil and gas prices as well as an increase in production.

The company also recorded $7.2 million in revenue from the recently announced Haynesville natural gas transaction.

As you turn to Slide 5, you will see the key financial results for the company.

As mentioned, the increase in revenue and adjusted EBITDA was due predominantly to the increase in GEOs sold and an increase in commodity prices, both precious metals and energy.

On the cost side, cost of sales was lower at $40.6 million versus $43.6 million a year ago.

The decrease was due to less ounces delivered and sold from Sudbury and Guadalupe.

We pay a higher cost per ounce for these 2 streams.

Depreciation was higher at $71.2 million for the quarter, compared to $64.4 million in Q1 2020.

The increase is due to the source that we are mining and energy revenue is derived.

The company recorded higher depletion from Antapaccay, Condestable and Cobre Panama during the quarter.

Adjusted net income and adjusted net income per share increased significantly in first quarter.

Adjusted net income was $160.9 million or $0.85 per share, increases of 47.3% and 44.8%, respectively, over prior year.

Franco-Nevada has always been a royalty company, but has evolved to include streaming as part of the business model.

Slide 6 breaks down the mix between streams and royalty revenue for first quarter 2021.

The streams that we've added have been very successful for the company, adding significant topline growth.

They have become the largest component of our revenue, generating $176.9 million or 50% of revenue during the quarter.

However, it is royalties, whether mining or energy, which generate higher margin and thus cash flow from operations.

As you can see, the costs related to royalties are minimal, with a combined cost of $3.5 million related to the $132 million in revenue generated by the royalties.

We believe our business model of both stream and Royalty assets will allow us to continue to achieve peer-leading EBITDA margins.

With respect to margin, the slide on -- the chart on Slide 7 illustrates how the margin for the company increases as the gold price increases.

Our mining cost structure, which we reflect in our cash cost per ounce includes our cost of sales, less cost associated with the energy business, which are minimal.

Cash cost per ounce usually ranges between $250 to $300 per GEO sold.

The average gold price increased approximately 13% year-over-year, but the cash cost per ounce actually decreased 18%.

This decrease was a result of GEOs with lower fixed costs being sold and more royalty ounces recognized as revenue in Q1 2021.

In a rising gold price environment, we expect to benefit fully as the cost per ounce should not increase significantly, and as can be seen in the first quarter, could decrease depending on the mix of royalties versus streams.

One of the strengths of having a diverse portfolio.

The other cash component for the company besides the cost of sales is our corporate administration costs.

Our Board and Management are very proud of our focus on cost management.

We like to stress the strength of our business model and the scalability.

The chart on Slide 8 clearly illustrates our focus on being as cost-efficient as possible in managing this business.

Here, we have highlighted our quarterly revenues and our quarterly general and administrative expenses since our IPO.

Since 2008, our revenues have grown from approximately $25 million to $310 million this quarter, that is more than a 12-fold increase.

This, while our G&A has remained fairly stable over this time period.

Q1 2021 Corporate Administration was $6.2 million or 2% of revenue.

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

Slide 9 highlights the diversification of the portfolio, which we consider one of the strengths and differentiators of Franco-Nevada.

As shown, 85% of our Q1 2021 revenue was generated by gold and gold equivalents.

The geographic revenue profile has revenue being sourced 90% from the Americas, with South America being the largest at 29%.

With respect to asset diversification, Cobre Panama was our largest revenue generator at 17% of total revenue for the quarter, followed by Antapaccay at 11%.

Those are the only 2 assets that generated more than 10% of our revenue.

The last chart highlights our operator diversity.

Our largest exposure to revenue being generated by any one operator is 17%, which is First Quantum, who operates Cobre Panama.

As was disclosed on April 16, 2021, the company purchased 57 million Vale Royalty Debentures subsequent to quarter end for $538 million.

The debentures allow holders to receive a premium payment based on net sales from a number of Vale's Brazilian mines.

With this acquisition, Franco-Nevada expects to recognize 25,000 to 35,000 GEOs sold for full year 2021.

With the additional GEOs to be received in 2021, we have increased our guidance to 580,000 to 615,000 for the year from the previous 555,000 to 585,000.

The midpoint of this revised guidance range is a 15% increase over 2020 actuals.

Our energy revenue guidance remains the same as disclosed at year-end of $115 million to $135 million.

For the Vale Royalty revenue, the second quarter ending June 30, 2021, we will be accruing revenue for the royalties for the period January 1 to June 30.

So essentially, we will be accruing 6 months' worth of revenue in second quarter.

Thereafter, we will accrue quarterly.

The actual cash payment will not be received until the end of September and then every 6 months thereafter.

With the recognition of 6 months of revenue in Q2, there is the possibility that precious metals revenue could be below 80% for the quarter, depending upon how our precious metal assets perform.

If that does occur, we do expect to again be above 80% precious metals revenue in third quarter 2021.

Also on the Vale Royalty, there is a seasonality for production and thus sales with production being lower in the first half of the year versus the second half.

The split is typically 45:55.

As of today, as seen on Slide 11, with respect to available capital on hand, the company has liquidity of $1.2 billion.

We did fund the Vale Royalty acquisition of $538 million with a combination of cash on hand and $150 million draw on our credit facility, but we continue to be in a net cash position.

I will now turn it back to Chris.

We are happy to take questions.

(Operator Instructions) Your first question comes from Tyler Langton, JPMorgan.

Just starting with the energy revenues of the $45 million in the quarter.

I know you mentioned kind of benefited from production and prices.

Could you give us, I guess, a sense maybe if current prices hold where they are, just kind of what sort of the revenues could look like this year, just given, obviously, you're kind of well on track to hit the guidance?

Yes.

Tyler, it's Jason O’Connell here.

I appreciate the question.

For Q1, we did have a higher than normal revenue number for energy.

Part of that number came from revenue from prior periods.

If you adjust for that prior period revenue, the number for the quarter would have been closer to about $40 million or so.

So we had about $5 million coming from -- really it was wells that were producing last year, but we only received payment this year.

With the higher prices, we do expect to have better revenue.

The prices were a bit above the $55 per barrel WTI and $2.50 per mcf prices that we used in our guidance.

So we benefited from that.

If prices stay elevated for the rest of the year, I would expect that we would come in a bit higher than our guidance that we provided.

During our Analyst Day, we provided a bit of information around the sensitivity to commodity prices.

So there is a bit of leverage associated with our energy portfolio.

If prices on average are 10% higher than the guidance that we gave, the revenue should increase by about 13%.

So again, if prices remain higher, we expect revenues will be higher, and there will be a bit of leverage within that revenue number.

And I mean should that -- I guess, with this production, is there anything when I think of the longer-term guidance, where this is sort of a more temporary benefit for this year?

Or is it -- should we not expect that?

I would say within the -- when you look at the quarter, again, there is the benefit of that prior period revenue that I would not expect to continue going forward.

In addition to that, we did have a good quarter, production or volume-wise.

But we continue to think that our guidance is still relevant that we provided at the beginning of the year.

So some of those assets that had a good quarter made -- the wells on some of those assets will continue to decline throughout the year.

So I was just cautioning not to take the revenue from the quarter and annualize that.

Okay.

Perfect.

And then just a final question on Hemlo.

I know -- I guess, it was around close to 12,000 of GEOs in the quarter, and there was around a 4,000-ounce benefit.

I think you talked about last quarter like a 20,000- to 30,000-ounce contribution.

Makes -- and I know you mentioned that, I guess, the NPI should decrease in the second half.

But just given sort of the Q1 results -- I guess, could you exceed that guidance or at least hit the high end of it for the year?

I think it's still too early to narrow it at this stage of that 12,000.

Obviously, as you said, there's 4,000 related to prior period.

Right now, I would say we're probably going to end up in the middle of that range.

But because it is an NPI, and costs do impact the payment, and as expected, there should be lower production on the land towards the end of this year or in the second half of this year.

Still comfortable with that range, not in a position to narrow it at this stage.

Your next question comes from Josh Wolfson, RBC Capital Markets.

Just looking at the Vale transaction and guidance, just so I understand clearly.

So in the second quarter, you're planning to accrue production that would have started from January, is that correct?

Yes, that's correct.

Because we didn't own them until April 16, 2021, but we're entitled to payments for production from January 1. So for June quarter end, we will be accruing 6 months' worth of production or sales.

Okay.

And then the guidance for the -- I forgot what the exact number was, 25,000 to 35,000 ounces.

Did that assume production from Jan or from April?

That's a full year's production, January 1 to December 31.

Okay.

Understood.

And then on the sort of lift shares, thank you for that disclosure.

We've always had this large short-term investment dollar amount that we could never understand what it was, which looking back at that deal, it looks like those shares were acquired -- just started to be acquired at least maybe 5-plus years ago.

We didn't get this at the Analyst Day.

But strategically, what's Franco thinking about this, this large share position?

Obviously, the current share price is a lot higher than where it was acquired.

But what's the ultimate sort of goal here for the company?

Josh, we think of the investment really just as a royalty holding.

Labrador Iron Ore income fund is run with very little G&A.

So it's effectively just a straight pass-through of that interest.

So we're very happy just with the current position we hold.

But stock has traded very well.

And so not looking to acquire any more at these prices, as you know, for our focus on adding new assets really is on the precious metal side.

But it is an attractive asset.

If it was ever trading at a far lower prices, we would consider adding more.

(Operator Instructions) Your next question comes from Cosmos Chiu, CIBC.

Maybe my first question is on LatAm, Latin America, here.

Certainly, the COVID-19 situation isn't great in LatAm, and a number of your assets or royalty and streams are in Latin America.

For example, I think there was a bit of an outbreak at Antamina.

Could you maybe comment on your understanding of the situation right now?

And has it impacted you in any way so far in Q1, or I guess, we're into Q2 now?

And how have you factored that in?

Cosmos, you're absolutely right.

The -- Latin America has been heavily impacted by COVID.

Of the assets, the only outbreak we're aware of is at Antamina, but we haven't heard anything yet in terms of that impacting production either through the first quarter this year or through the rest of the year.

So to date, as far as it were, they're able to manage that without impacting production.

Okay.

For sure.

Maybe now moving from Antamina to West Africa here.

You made a number of acquisitions in the past quarter.

One that didn't really get a lot of attention was Séguéla.

But I think it's actually one that could have good upside potential here, although it's fairly small.

But I guess my question is in 2 parts.

The first part is, with a recent combination or proposed combination of Fortuna Silver and Roxgold, they've really talked of potential here of some of the pits, (inaudible) and some of the other ones.

I just want to confirm that the Royalty is on all the different or the entire land package?

Cosmos, this is Eaun.

Yes, you're right.

It does cover the mining license, which covers all of those targets and prospects.

Great.

And then, Eaun, are you getting more excited now with the proposed acquisition or merger of Fortuna Silver and Roxgold, potentially now with Séguéla being part of a larger company?

Do you see more upside potential from here onwards?

We love the deposit.

It starts and ends in terms of geology for us.

And the technical team really liked it.

And so we were very happy to partner with the team at Roxgold there.

And we're also very happy to see Fortuna now come into the picture.

Bigger company, lots of potential.

And we hope to maintain good contact and relations and would also be keen to do something bigger there if ever needed.

Of course.

And then on the flip side here, now that it is within a bigger company, could you, Eaun confirm with us, I believe there's a buy-down right at the Royalty.

How that works and -- within a larger company now?

Do you think that buy-down is going to get exercised more so than previously?

Sure.

And so a little bit of background.

There was another pre-existing royalty that existed on the properties prior to our transaction, and it had a 100% buy-down.

Our deal would allow the company to buyback half at a predefined price effectively equivalent to the price at which we bought in.

And that was an arrangement that worked for both parties, and we were able to do due diligence.

And obviously, you see some of the great things there like Sunbird ahead of time, which made it a very compelling acquisition for us.

So it's a bit of back and forth in terms of negotiation, but we cut it at 50%, and it's very possible they'll do that, but we're still happy with the royalty and being part of the project.

Of course.

Maybe 1 last question here.

And coming back to Canada here.

As you mentioned, Paul, in your opening remarks, there's been a new discovery made by Agnico Eagle and Yamana at East Gouldie at Canadian Malartic.

I haven't gone through your entire sort of asset handbook yet.

But I'm not sure how much you can comment at this point in time.

But with that new discovery potentially fall within your royalty grounds, and can you talk about the extent of your Royalty on that land package here in terms of the area?

Thanks, Cosmos.

The royalty claims that we have at Canadian Malartic don't cover the full property position.

We've got -- I think, it's 5 separate claim blocks that we cover into a bit of a checkerboard.

One of the claims covers what is our understanding that the center of the East Gouldie deposit.

The extensions that they have now made are to the east of that.

We do have another claim block that falls to the east.

And so it's early days, but it looks like that part of that extension may be on one of our other claims, and so we're very excited about it.

Your next question comes from Brian MacArthur, Raymond James.

I just have 2 questions, both related to the 5-year guidance.

There was a comment made earlier in the call today about Sudbury potentially being lower than expected.

And I know originally when you gave that 2025 guidance, Sudbury, the assumption was it was going to continue out then.

Is that still the case?

And my second question is, can you just remind me when the MWS Royalty?

Is it in the 2000 -- is it in the 5-year guidance too or does the 325,000-ounce cap kick in before then?

Brian, it's Sandip here.

Sudbury, yes, it's going to continue mining on McCreedy West till 2026, is the current life of mine plan.

As we highlighted at the end as part of our year-end, it will be at half the rate it was for 2020.

And so if you look at Q1, it's on pace for that profile.

So it's within our expectations for 2021.

So it will be about 10,000 to 12,000 GEOs per year for the next 5 years.

Great.

So that hasn't changed at all...

That hasn't changed, that hasn't changed.

It's just year-over-year.

It's a lot less than it was last year, but that's the reason because they're mining at a reduced rate.

With respect to Mine Waste Solutions, we expect the cap to be reached in 2024.

So it is not included in our 2025 5-year outlook.

There are no further questions at this time.

Please proceed.

Thank you, Chris.

We expect to release our Q2 2021 results after market close on August 10, with the conference call held the following morning.

Thank you for your interest in Franco-Nevada.

Thank you.

Ladies and gentlemen, this concludes your conference call for today.

We thank you for participating and ask that you please disconnect your lines.