Franco-Nevada Corp (FNV) 2022 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Franco-Nevada Corporation's Second Quarter 2022 Results Conference Call and Webcast. This call is being recorded on August 11, 2022.

(Operator Instructions)

I would now like to turn the conference over to your host, Bonavie Tek, Vice President, Finance. Please go ahead.

Thank you, Christina. Good morning, everyone. Thank you for joining us today to discuss Franco-Nevada's Second Quarter 2022 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.

The presentation is also available to view on the webcast. During our call this morning, Paul Brink, President and CEO of Franco-Nevada, will provide introductory remarks; followed by Sandip Rana, Chief Financial Officer, who will provide a brief review of our results; and Eaun Gray, Senior Vice President, Business Development, who will provide an overview of our Tocantinzinho transaction.

This will be followed by a Q&A period. Our full executive team is available to answer any questions. Participants may submit questions by telephone or via the webcast. 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 3 of this presentation. I will now turn the call over to Paul Brink, President and CEO of Franco-Nevada.

Thank you, Bonavie, and good morning. We're proud to report our best quarterly and half year results on record. Each of revenues, adjusted EBITDA and adjusted net income were records for the quarter. The low-risk nature of our business is most pronounced in today's inflationary environment.

Our top line precious metals stream and royalty interests helped generate our highest ever margins since adding streaming to our business, over 85% for adjusted EBITDA and 55% for adjusted net income. High energy prices in this environment are positive for us and drove an increase in our diversified GEOs, partly offset by marginally lower precious metal GEOs sold. At half year, our total GEOs sold was slightly ahead at the midpoint of our guidance range, and we're maintaining our previously issued guidance.

In July, we were delighted to announce the financing package for the Tocantinzinho property in Brazil with G Mining Ventures for $353 million. The financing package included a $250 million gold stream, $75 million term loan and a $27.5 million equity financing.

The project is construction ready with first [gold] deliveries expected in late 2024 and is fully financed. The team behind G Mining Ventures is well known in the industry for its record of building mines on time and on budget, including Merian for Newmont Mining and Fruta del Norte for Lundin Gold. We expect Tocantinzinho will be the first of many mine builds for the company, and have ended into a long-term partnership for future financings and acquisitions.

We've been in close dialogue with Lundin Mining on the sink hole that has developed close to the Alcaparrosa portion of the Candelaria operations. Fortunately, all staff and community are safe and the appearance of the sink hole didn't result in any injuries.

Lundin and (inaudible) [GMIN] have experts evaluating the event and hope to have an initial understanding of the courses in the coming weeks. Notable in terms of organic growth news in the quarter was Detour Lake. Agnico Eagle announced a 10-year mine life extension to 2052, and they're looking to expand throughput to 32 million tonnes per year as well as potentially develop an underground mine that could increase production to 1 million ounces or more per year.

The Detour expansion, along with expansions at Stillwater and Tasiast and, of course, Cobre Panama, form the core of our near-term organic growth. We'll also have contributions from 3 new mines in the next couple of years and the construction of Salares Norte, Greenstone and [Seguela] are all proceeding on track. We expect the development of Valentine Lake, Stibnite Gold and Eskay Creek to follow.

With respect to ESG, during the quarter, Franco-Nevada was named the Corporate Knight's 2022 List of the Best 50 Corporate Citizens in Canada. Also as part of the Tocantinzinho transaction, we committed $1 million of environmental and community support programs over 4 years. We also continue to expand our community engagement and contributions with existing partners.

In summary, Franco Nevada continues to deliver with record financial performance, built-in growth and long-term optionality. We're cash flow positive with no debt, of $1.9 billion in available capital and generating operating cash flow at a rate of $1 billion per year. We're focused on growing the company by adding more precious metal assets and are seeing a good pipeline of opportunities. With that, I'll hand it over to Sandip.

Thank you, Paul. Good morning, everyone. As Paul mentioned, the company reported record financial results for second quarter 2022 with our overall royalty and stream portfolio performing ahead of expectations. The quarter once again highlighted the benefits of our diversified portfolio by both asset and commodity.

On Slide 4, we've highlighted the gold and gold equivalent ounces sold to 3 and 6 months ended June 30, 2022 and 2021. Overall, GEOs sold were relatively flat when compared to prior year with Q2 2022 GEOs sold being 191,052 compared to 192,379 last year.

You may recall that in Q2 2021, we did record 2 quarters of GEOs and revenue related to the Vale Royalty we had just acquired. This would have equated to an additional 7,600 GEOs and $13.8 million of revenue recorded in Q2 2021.

Overall, most assets performed as expected during the quarter, with less GEOs delivered by Antamina, Antapaccay, Guadalupe and Stillwater versus prior year.

As we have highlighted previously, 2022 is a lower production year for Antapaccay as the operator is mining through a lower grade zone. We expect deliveries to resume to prior year levels for 2023. For Antamina, we expected 2022 to be a more normalized year similar to previous years with a range of 2.8 million to 3.2 million silver ounces being delivered, which is what is transpiring.

Unfortunately, the Stillwater mine was impacted by a significant flood event in June, which resulted in the suspension of operations at the mine. This suspension will have a slight negative impact on our GEOs and revenue from Stillwater for third quarter.

One of the surprises in the quarter was the Hemlo MPI, which was ahead of our expectations coming in at CAD 10.5 million. This was a result of an increase in mining on Franco-Nevada royalty lands and improvement in operating costs.

As we've mentioned previously, it is difficult to predict what the NPI payments will be on a quarterly basis. For the diversified GEOs, our Vale Royalty resulted in 5,407 GEOs and $10.1 million in revenue for the quarter.

This was lower than previous quarters due to lower production at the mines as well as a lower iron ore price. Each quarter, we make an estimate of what the royalty will be with the actual amount being announced by Vale in late March and September each year. As a result, you will see adjustments to our accruals in Q3. For our energy assets, GEOs doubled year-over-year as we benefited from continued higher energy prices.

Slide 5 highlights our total revenue and adjusted EBITDA amounts for the 3 and 6 months ended June 30, 2022 and 2021. As you can see from the bar charts, revenue and adjusted EBITDA have increased year-over-year for both periods. The company recorded $352.3 million in revenue in second quarter and $301.2 million in adjusted EBITDA, which are both records.

A margin of 85.5% was achieved. Second quarter continued the strong contribution from the energy assets as revenue increased from $47.3 million a year ago to $91.5 million this quarter. The WTI price averaged $108 per barrel during the quarter, a 63% increase from prior year.

Natural gas prices also increased significantly with Henry Hub averaging $7.49 an Mcf and during the quarter compared to less than $3 an Mcf a year ago. Oil prices have pulled back recently to approximately $90 a barrel, but are still significantly ahead of last year.

As you turn to Slide 6, you'll see the key financial results for the company. Some key financial metrics: revenue, adjusted EBITDA and adjusted net income are records for the company for both the 3 and 6 months ended June 30, 2022.

On the cost side, we did record a lower cost of sales amount in Q2 2022 as lower stream ounces were delivered and sold. Cost of sales is dependent on which assets deliver stream ounces as not all fixed payments per stream ounce are equal. Depletion was also lower at $69.6 million versus $77.2 million a year ago.

Depletion is calculated on actual mining GEOs sold as well as barrels of oil equivalent received from the energy business. With lower mining GEOs sold in the quarter and relatively flat energy production, this resulted in less depletion being recorded.

With respect to taxes, the effective tax rate for the quarter was 15.7%, which is slightly higher than the rate we have trended to previously. This was due to the higher income generated in Canada and the United States from our energy assets. Adjusted EBITDA was $301.2 million for the quarter, while adjusted net income was $195.8 million, a 7% increase over 2021.

Adjusted net income per share was $1.2 per share, a 6% increase compared to prior year. Slide 7 highlights the continued diversification of the portfolio, which we consider one of the strengths and differentiators of Franco-Nevada.

As shown, approximately 70% of our Q2 2022 revenue was generated by precious metals. The geographic revenue profile has revenue being sourced 91% from the Americas, with Canada and the U.S. being 42%. With respect to asset diversification, Cobre Panama was our largest revenue generator at 18% of total revenue for the quarter, followed by Candelaria.

Cobre Panama continues to be the only asset in greater than 10% of revenue. And the last chart highlights our operator diversity. Our largest exposure to revenue being generated by any one operator is again 18%, which is first one who operates Cobre Panama.

Slide 8 illustrates the strength of our business model to generate high margins. For second quarter 2022, the cash cost per GEO, which is essentially cost of sales divided by gold equivalent ounces sold, is $238 per GEO. This compares to $246 per GEO in second quarter 2021.

The amount will fluctuate depending on the mix of royalty versus stream GEOs, including mining and energy. But as you can see, at current average gold prices, the company generates significant margins. In a rising commodity price environment, we expect to benefit fully as the cost per GEO sold should not increase significantly.

We consider our cost structure to be essentially fixed. The other cost component for the company besides cost of sales is our corporate administration costs. We like to stress the strength of our business model and the scalability. The chart on Slide 9 clearly illustrates our focus on being as cost efficient as possible in managing this business.

Here, we've highlighted our quarterly revenues and our quarterly corporate admin and share-based compensation expenses since our IPO. As you can see, revenues have grown significantly over the period, while corporate costs have remained fairly stable.

For Q2 2022, corporate administration, including share-based compensation expense, was $5.8 million or less than 2% of revenue. Share-based compensation expense can fluctuate quarter-to-quarter as the company is required to mark-to-market the deferred share units held by directors.

Management believes we can continue to add to our portfolio and grow our business without adding significant cash overhead to the company. Slide 10 summarizes our guidance for 2022. We've updated our pricing assumptions for all commodities for the remainder of 2022 as highlighted on the slide. Our guidance ranges have not changed.

We are guiding to 680,000 to 740,000 total GEOs sold for 2022, of which precious metal GEOs are estimated to be 510,000 to $550,000. I will now turn it over to Eaun Gray, our Senior Vice President, Business Development, to review our recent transaction with G Mining Ventures.

Thank you, Sandip. In July, we were very pleased to complete the Tocantinzinho project financing. We're delighted to be partnering with G Mining Ventures, a team that has successfully and, quite frankly, provided one of the best track records delivering similar projects in South America.

The project is conventional from a technical standpoint has good grades and is located in Pará, Brazil, a season mining jurisdiction. We believe that there's great upside potential in the broader land package as well. We have also worked an agreement into the deal such that the G Mining team will provide us opportunities for a right on future transactions.

We've included key project parameters on this slide and highlights the very recent feasibility study. Franco-Nevada's participation is primarily through a $250 million gold stream, but we'll also be providing a $75 million term loan as described for $27.5 million in equity alongside with La Mancha and Eldorado.

This financing covers the full expected cost to build the mine, plus a buffer. Finally, as part of this financing, we will be contributing to G Minings' efforts to support communities and the environment with the commitment for up to $1 million over 4 years.

On Slide 13, we highlight our available capital of $1.9 billion. Equity valuations of line developers are particularly depressed at the moment in this high inflation environment, we believe we can put capital to work with good developers on good projects. With that, I'll hand the call back to Bonavie.

Thank you to our presenters. Operator, you may now begin the Q&A session.

(Operator Instructions)

We'll take our first question from Adam Josephson in with KeyBanc.

Sandip, quick question about Stillwater. Can you be more specific about the impact you're expecting in the third quarter?

Sure, Adam. I guess they had the flood in late June, and it's very unfortunate, but I don't think there are any injuries or anything of that nature. They are trying to restart it. I don't know if they have restarted it or are close to, but the impact on our GEOs would be approximately -- if they do start in Q3, approximately 2,000 GEOs.

Okay. So not a really consequential -- in terms of...

(inaudible).

Yes. Yes. In terms of your updated price assumptions, I just wanted to drill down upon intended on oil and nat gas for that matter. Obviously, prices have fallen from the recent peaks because of Chinese lockdowns, other demand destruction and -- combined with expectations of further demand erosion as the economy deteriorates.

Perhaps this is best for Eaun. Just based on your conversations with your partners and the production plans that you've seen, I know you raised your WTI full year assumption by $5 a barrel. But can you just talk qualitatively about what you're seeing in terms of energy markets and more specifically energy prices and how resilient you expect oil and gas prices to be based on those production plans?

Yes, it's Jason here. Thanks for the question. I think -- for oil, we've seen a steep run-up in oil prices over a number of months here. Part of that is attributable likely to the Ukrainian conflict. But even before that, there was a run-up in prices really that was, I think, attributable to an underlying supply deficit.

Some of that premium has come out, as you point out, over the last month or so here as COVID concerns continue in China and the overall sort of negative impact to the economy become apparent. Going forward, we still think that prices will remain strong for a while here.

The impact that we've seen on operators is drilling rates and activity rates, particularly in our U.S. operations have been strong. They've rebounded quite significantly from the lows that we saw in 2020. We're still below peak activity levels that we would have seen back in sort of late 2019 before the oil price cap.

So I'd say, looking at it holistically, we're probably 70%, 75% of those peak activity levels. And we'll keep an eye on where those activity levels go up, but are still disciplined in how they are deploying capital. And so I don't expect it to be a strong ramp up here, but I would say it will continue to be robust.

I appreciate that. Do you expect to get back to 100% in the foreseeable future? Or do you think that, perhaps, is a stretch based on any number of constraints that continue to exist?

Yes. I think it will depend on where commodity prices ultimately go and then how long they stay elevated. I think if you see very strong commodity prices, activity levels, inevitably will creep up towards those highs.

But if commodity prices are in the below kind of $90 a barrel range, I don't think you'll see activity rates come back to where they were at their peak levels, which would imply significant growth in overall production volumes in the U.S. I don't think we'll get back to that unless we see very strong commodity prices sort of north of $90 to $100 a barrel. But that's a guess, obviously, on our part.

Yes. And Paul, just one for you. There have been some decent sized deals announced recently, obviously, yourselves included. Can you just compare the prices being paid for deals today to what they've been in previous gold market up cycles and how that's affecting your willingness to transact?

I saw it -- maybe a comment, our industry has become more competitive, no doubt about it. So the real question is, how do you progress the business in that sort of environment, and best you all turn to Eaun Gray. Eaun, if you can comment on how we're thinking about playing in this environment?

Thank you, Paul. In this environment, as I mentioned a moment ago, we do see some stress in the capital markets for miners, and that drives opportunity. We think that we can partner effectively as we did with GMIN with groups that have good projects and good teams and that meet our financing. So that's going to be a key area of focus for us going forward. That really does drive kind of more medium-sized deals, but we think it's a good place to focus the majority of our efforts.

I appreciate it. And Eaun, is it just -- is the stress based almost entirely on the inflation that these companies are dealing with? Or is it because the capital markets also closed to some of these -- what exactly would you attribute that stress? And consequently, how long do you think it's likely to last?

I would say the capital markets are certainly a contributor to that. And markets are fickle, so they can change. But at the moment, equity markets remain pretty tough for medium to smaller developers, and that's an opportunity. And I think the same with high yield. High yield is also a fairly challenging market for a lot of mining companies to access at the moment. So that also drives opportunity.

Go to our next question from Heiko Ihle with HC Wainwright.

Congratulations on the G Mining deal as well for the project, obviously. It's nice to see somewhat larger scale transactions happening again given that we sold in a climate where folks tend to be quite a bit scare. Obviously, with Tocantinzinho, it was only partially for the stream, 9 figures of money were spent on a term loan and the equity private placement.

And you still have a large amount of [tripod] at your disposal, but can you maybe provide a bit of color on what you're seeing in the market with the sellers of streams? Obviously, again, you went into a term loan of a private placement as opposed to a stream for at least part of the money with the big thing being the stream nonetheless. And building all maybe tell us a bit about what you're seeing other ways that you think deals might get done in the future, if not outright streaming?

Thank you for the question. You're right. We did provide a term loan component and a participation alongside La Mancha and Eldorado in the equity rate. it was important, I think, in the current capital environment to provide a fulsome solution. We're happy to participate in doing that.

The lion's share of our financing still was Gold Stream. But going forward, you could see this type of financing as a mall for others. That's entirely possible should the capital markets remain challenging, where you bring a few groups together to complete the picture.

Yes. And then the other end of the spectrum, geopolitical risk factors have become quite a bit more important in 2022 than they've been in many years. We just had another Minister of Mining and Energy in South America, who joined the fray literally today, who's hopefully against mining. You got 49% of our revenue tied to Mexico, Central and South America. Can you just provide a touch of color on which parts of the world you're watching the most intently?

And -- are you thinking about maybe divesting or trading away some assets if things get a little bit more dicey than they are? As much color as you're willing to provide in this setting.

Sure. Heiko, no doubt about it. There has been a shift to the left, particularly in South America. May well have happened in any case, but certainly spurred on my COVID. So we do keep an eye on that. As we think of our portfolio, one of our greatest strengths is diversification.

In mining, you do need to take some risk. The way we think about it is we want to be a low-risk way for investors to participate. We know that most of our capital needs to be in good jurisdictions. We can have some of the exposed areas that have more risk.

So we know we need to continue to participate in some of these countries. It's just a question of what's the dollar exposure that you have to each of them, and is that a reasonable amount in the context of our portfolio.

Yes, obviously, what's happening in the region means you're a bit more circumspect about it. But also what we've seen over time, and quite honestly the same applies to Canada and the U.S. and elsewhere. The pendulum swings from one set of political leaders to the next. We're very long-term investors. So we're happy to hold the interest. We don't spend much time thinking about divesting the interest.

More so as I mentioned, just holding them out, that is palpable in the context of our portfolio and happy to ride out the bumps along the way.

Yes. Internally so you have enough diversification where not one asset will really break you.

We'll take our next question from Lawson Winder with Bank of America.

I wanted to -- well, first of all, about the pipeline. When you say a strong pipeline of precious metal opportunities, are these base metal mines with precious metal byproducts or primary precious metal mines?

Thank you for the question. I would say we are seeing a bit more of a focus at the moment on primary precious metals opportunities. Not to say that the other opportunities don't exist, but I would say they're probably more focused on the primary product.

Okay. Got it. And then I really like your slide where you showed your diversification by operator. And it got me thinking, how does Franco assess operator concentration risk? So for example, what would be maximum threshold -- for example, if one of your top 5 existing streams were to offer the opportunity to materially increase that exposure via other assets in their portfolio, I mean, would that be an easy yes? Or would there be some concerns?

It's something we obviously think about. I wish I could say that there was a single answer or a single number. It obviously depends on the context. It depends on the quality of the assets. It depends on the jurisdictions where they are. It depends on how good that operator is. So no bright lines.

Obviously, something that we pay attention to. Also when operator is building assets, so much more important because your -- the performance of the asset is sort of dependent on that capability of bringing it on in time. So we do focus on operators. We've been very fortunate, I got to say. A theme that's played out for Franco over the time is, over time, good assets move into even stronger hands. And I suppose that also plays in our thinking as we think about investing in assets.

That's an interesting comment you just made, that last one. So if I'm interpreting that correctly, you're basically saying you like the idea of getting streams on assets that could be possible takeout candidates or acquisition candidates?

Also just as we all know, you look at any asset in the industry, any company, there's a great amount of turnover. The geology doesn't change. The country doesn't change. Over time, the operators can change. And we feel if you get the assets right, if you invest in good assets, the chances are they migrate into even stronger hands over time.

Got it. Well said. And then following up on our other question regarding South America, I was actually thinking about one particular country you do not have a lot of exposure to in South America is Argentina. I think that's actually served Franco quite well given the challenges that country's had and is currently facing. What would be Franco's appetite to add material Argentine exposure at this point?

We're open to adding exposure to Argentina. We're -- they -- evaluating it. They -- no surprise to anyone on the call, the geology is fantastic. And the -- think that the -- think that things are moving in the right direction in the country at the moment. The -- so we keep monitoring it. If the opportunity came up, we would spend a lot of time on it, that's for sure.

And we'll take our next question from Tanya Jakusconek with Scotiabank.

I have two really. I will have one to do is just the guidance looking forward. Maybe Sandip, can you help me a little bit? I'm trying to forecast as Hemlo or we had been giving guidance that I think it was like 60% of the revenue is supposed to come out in like Q1. Now we've had a stronger Q2. So what are we looking for Hemlo for the next 2 quarters? Are we seeing any contribution?

So -- Yes, I -- No, I hear you, Tanya. It was a surprise to us as well. Obviously, it's a lot harder to predict because of the cost structure, it's an NPI. My estimate in my forecasting for Hemlo over the next 2 quarters is to be approximately CAD 5 million to CAD 6 million a quarter.

And that's based upon my understanding of what the production level should be and an estimate on cost. So that's what I'm forecasting. Whether that comes to fruition or not, time will tell, but that's the only guidance I can give you.

Okay. That's appreciated. And just looking out for Q3 and Q4, is it safe to assume we've got obviously the 2,000-ounce Stillwater hand up sort of normalizing. Is it safe to assume as we look at Q3 that -- and Q4 that most companies have this that Q4 should have a better performance on a GEO basis than Q3?

Historically, Q4 has been a strong quarter for us. For Q3, the one part that we're not aware of yet is the Vale debenture payment that will get announced on September 30. So obviously, we've made accruals for our royalty there.

But if the dividend that Vale is paying comes in higher, we would make that adjustment in Q3. So all things being equal, yes, Q4 will likely be a little stronger than Q3, but Q3 does have that Vale adjustment, [until] you accrual that, that will come through.

Okay. No, that's helpful. And maybe I can circle back just on the M&A environment and maybe someone can help me understand, you -- number one, I think was mentioned that there are medium-sized deal opportunities. What do you define as a medium size? Are we still in that [100] to [300] range? Or is your medium size [500?] What is your medium size?

Tanya, it's Eaun. I think you've got it. That's, I think, a fair characterization of what we think of as medium.

That 100...

Yes.

And Eaun, when you are looking at these deals, which appear to be mostly on gold companies that are developing on assets, should I be thinking -- again, your focus is on precious metals. Should I be thinking that the new formula for deals going forward right now is, you're going to have a stream plus an equity component plus a debt component, so 3 components to -- for an overall transaction?

I mean, beginning of the year, I started seeing just a stream and equity and now we're stream, equity and debt. Is that sort of how I should be thinking of transactions going forward?

So Tanya -- Paul. The way we're thinking about it and the way we think about our business is -- and the royalty and streams are a terrific instrument, and we want to do as much of it as we can because we love the optionality that you get in it.

But the other element of our business that we need to make itself successful, and I think we're good at is picking the right assets. So it's about the ability to do due diligence and take a view, which are the better assets that you think can do better over time.

So if the market gets more competitive, what we've said is, let's stick to that. Let's really pick the assets that we like the most. And then let's recognize that in this market, other elements of capital structure are hard for folks to reach. If we can get our primary objective of that stream and royalty and help them with their overall financing package, that's the approach that we're taking. And so more than anything, it's get the asset right and be flexible about how you provide the financing.

And as you think about this -- I've been surprised that I've seen such big royalty transactions occurring in the last little while, I'm just kind of keen to understand your view of are you seeing other royalty portfolios that are out there of material size that we're not aware of? Or maybe royalty portfolios are smaller and are you looking at any of those?

Tanya, it's Eaun again. We do see, on an ongoing basis, various opportunities with existing royalties. So that is a component -- but where we are spending a lot of our time, as I mentioned, is trying to work with developers.

Okay. So the big core transactions, there were very few of those left outstanding.

I wouldn't say there's a large number, but there are royalties like that, that exists and they trade from time to time.

Your next question from John Tumazos with John Tumazos Very Independent Research.

In terms of the Brazilian transaction you just did, production is 2 years out, it's a new operator, but they are veterans of many, many campaigns. Clearly, the junior companies, the emerging companies, the new companies have the least depth of management, often not in this case.

But they are the companies that have the hardest time raising money. Could you give us a little more explanation as you might consider the financing of a new mine by a new company, how many years out, you'll go, how many executives they need to have that build how many mines before -- the emerging companies can't afford the full suite of management like First Quantum or Newmont or Barrick, their budgets are tight. Sorting out the depth of management is a challenge.

John, you pick finger in a key industry, a key issue, it's -- the industry often suffers from a shortage of experienced folks, and we see that in particular when it comes to building projects. So something that we spend a lot of time on is looking at the ability of folks to execute, particularly on a build.

Again, I won't say we put it down to an exact amount of people that they have, but we do pay attention to do they have good execution plans, do we believe that they can execute on those plans. We're not -- we're fortunate, again, in that portfolio we've got good growth over the number of years.

So we're not hanging up on trying to add immediate growth. So in terms of the timing of when those deals come in, we can be flexible. But more so when we're looking at the projects' stages of development. You know in our business, none of our global rules is, on your downside case -- you put your money in on your downside case, you want to make sure that you get your money back, that's the worst case outcome, and explore yourself to the upside.

What does that mean in terms of projects and stage of development? It means we've got enough -- it's got to be at a of stage development where we've got enough confidence it becomes a mine and enough confidence that they are the economics and the amount of ore to -- in the downside case, at least make sure that we get our money back and expose sales to upside. So those are sort of the brackets around when we're looking at meaningful capital, what we can and can't do.

If we were to contrast Franco and Nevada, say, to Cisco Gold Royalties or Sandstorm, those companies have invested a bigger slug of their capital in earlier-stage companies. You obviously have a much lower valuation. So maybe staying with the majors is really good for the valuation of your stock.

Yes. The -- rather than thinking it that way, I -- we always hold ourselves out to -- I think a good part of the premium that the company trades at is in 2 parts. One is the built-in optionality and a lot of that comes from the depth of the royalty portfolio that we have.

I think the other part of it is track record. It's -- regardless of what you do, I think if you can demonstrate to shareholders that you can make their decisions and, ultimately, get them good returns on your capital that, that feeds into your premium. So in my mind, I think those are the 2 things that are important in the company to sustain that valuation.

Do you think you'll be investing in more projects that are 2 years or 3 years from production because that's partly the point where the companies need to write the checks, and it's harder for them to raise money in the tough markets before production?

I think there's a good likelihood of it now, and for all the reasons that you say. It's just -- it's where the market is. So those seem to be the people that need the capital the most. So I'm hopeful that we can put more money to work in that area.

We'll our next question from Adam Josephson with KeyBanc.

Appreciate it. Eaun, you mentioned in response to a previous question that more of the streams and royalties that you're looking at are on precious metals mines rather than on base metals. Can you just go into more detail about why you think that's the case?

Sure. I would say, first off, it's probably somewhat symptomatic of the capital markets. And then also, I think on the precious side, you do have a larger number of projects generally, kind of the size that we've spoken about. Also, base metals prices up until quite recently have been quite elevated. So I think that has left a number of balance sheets quite strong.

And so with that in mind, just the latter point, particularly, would you expect that to change in the foreseeable future? I mean, as the global economy weakens, obviously, base metals prices have come down quite considerably in many cases. How long a lag would you expect there to be -- if that were to continue to be the case, at what point might you expect the pendulum to shift back toward base metals mines?

Certainly, this is a cyclical industry and the pendulum can swing fairly quickly, and we've seen that in the past. At the moment, it hasn't to a major degree, but certainly could move relatively quickly.

It appears there are no further questions on the phone line. I will now turn the Q&A session over to Bonavie Tek, who will take questions from the webcast.

Thank you, Christina. We do have one question from Diego (inaudible) of Noster Capital Management. Is your long-term target still to generate less than 20% of revenue from energy assets?

Yes. Our overall target is to be the go-to gold stock, which means we've got to keep the proportion of gold and precious metals in the portfolio high. And our overall strategy is unchanged. We do -- the core thing behind that is markets are cyclical, opportunities come at different times. And then when good assets become available, we want to be able to do them.

So we're going to stay away from putting a particular number out there. So that we have as much flexibility as possible so that when good assets become available, precious or diversified, that we can take them on board, but manage the portfolio so that the vast amount of it is going from precious metal over time to make sure the stock performs as a gold stock.

Where are we right now in the market? We've been so fortunate, energy prices are doing particularly well. It means they are a larger portion of revenues. We look at that as exactly as you do, if you want to capture local run in prices when you have it in different commodities. It tends to be a self-fixing problem. Right now, I think oil prices are particularly weak. Although equity markets are weak, it means some good pice-to-add assets is in the gold sector. I think we have good opportunities. And most likely, the next deals that we'll do will be in precious metals and we'll build up that side of business.

Thank you, Paul, and then thank you, Diego, for your question. There are no further questions from the webcast. This concludes our second quarter 2022 results conference call and webcast. We expect to release our third quarter 2022 results before market opens on November 7, with the conference call also held that morning. Thank you for your interest in Franco-Nevada.