Franco-Nevada Corporation (FNV) Q2 2013 Earnings Report, Transcript and Summary

Good morning, my name is Brent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Franco-Nevada Corporation second quarter results conference call. [Operator Instructions] Mr. David Harquail, President and CEO, please begin your conference.

Thank you, Brent. Normally, our head of IR, Stefan Axell, introduces the call, but he and his wife are still at the hospital celebrating the birth of a beautiful new baby girl. And there are some things more important than introducing a quarterly conference call, so I'm very happy to fill in for Stefan today. With me in the Franco boardroom is most of the management team. Sandip Rana, our CFO, will be doing most of the briefing on our Q2 numbers. On the Franco-Nevada website today, there's the PowerPoint presentation that supports remarks we're about to make. All of our materials include cautionary language regarding our use of forward-looking statements. For this presentation you'll see this cautionary language on Slide #2. We ask that you keep this language in mind as we present today. Before Sandip speaks, just a few brief comments that are summarized on Slide #3. Franco-Nevada is a gold investment, so our revenues and results do reflect changes in the gold price. As a gold royalty company, we are a gold investment that is closer to a gold ETF than a gold operating company. Franco-Nevada has a benefit in that it can provide a gold investor an alpha and yield that a gold ETF cannot. At the same time, Franco-Nevada can minimize many of the risks of investing in a gold operating company. We had an uneventful quarter, with results that pretty well met guidance and expectations. When analysts this morning quipped that, "meet is the new beat," and I thought that was very fitting. Franco has no debt, and we don't -- didn't have any material impairments in the quarter. But Franco-Nevada has a diversified portfolio of free cash flowing assets and profitable assets, with a strong, liquid and clean balance sheet. Finally, I believe today that Franco-Nevada has the most net cash of any gold company in the world. This is a very good position to be in. There are many opportunities open to us, but we are being very careful how we deploy that cash. With that, I'm going to ask Sandip, our CFO, to provide an overview of the 2012 results.

Thank you, David. Good morning, everyone. As you will have seen from the press release issued yesterday, the company reported financial results for the quarter and 6 months ended June 30, 2013, which had lower revenues and net income than in prior periods. However, when one considers the continued volatility of commodity prices, in particular, gold and platinum prices, as well as the negative sentiment towards the mining sector as a whole, as David mentioned, management believes that the results continued to showcase the strength of the Franco-Nevada business model and the quality and diversity of the assets within the portfolio. From an operational standpoint, our royalty and stream assets continued to perform well and as expected, as you would have seen from the gold equivalent ounces earned by the company in the second quarter. As you turn to Slide 4, you will see the key financial results for the company. Overall revenue of $93.3 million was lower than second quarter of 2012 of $102.7 million. This reduction is predominantly attributable to the pullback in gold price, as the average gold price was $197 per ounce less in Q2 2013 versus Q2 2012 and also significantly lower than Q1 2013. Within our portfolio, our net profit interest royalties are most affected by movements in commodity prices due to the leverage nature of these assets. With the recent retreat in gold prices, our NPIs did not perform as well during the second quarter when compared to previous quarters. At Goldstrike, with the lower gold price, capital spend and lower production at the mine, the NPI recorded in the second quarter was minimal. Combined with the lower NSR, this results in a $9.7 million reduction in revenue for Goldstrike when compared to second quarter 2012. However, Barrick has stated that it expects…

Actually, I think we can -- I don't have any further remarks, so, operator, we're happy to take questions at this point.

[Operator Instructions] Your first question comes from the line of Cosmos Chiu from CIBC.

My first question is on Gold Quarry. Can you remind me once again how the minimum royalty works given some of the fluctuations we've seen in the gold price of late? I understand that there's an accrual on a quarterly basis, but I believe the actual cash payment doesn't come until the end of 2013. And is that based on the average gold price for the year?

The cash payment is based on the average gold price for the year. So what happens is, at the first quarter of the year, we are told what the expected minimum for the year is, and this year, it's just slightly less than 15,000 ounces. And so each quarter, obviously, the mine is producing and we receive ounces that are our portion of the ounces that are produced on them. And then, we do a true-up based upon the difference between actual production and what the minimum is going to be. But as you said, it is based on average price for the year, and we get paid in the first quarter of the following year, so we'll get payment in January, February next year.

Okay, great. And then, maybe switching gears a little bit here. I'm sure, David, you've taken a look at some of the things happening at Taseko. And as we saw last night, I guess, there's been some positive developments in terms of what's happening at New Prosperity. It sounds like they might start the comment period at the -- for the permitting of the new mine plan these days. Maybe, David, if you can share with us what your thinking is behind the possible royalty. I believe there was a deal that was done back about 3 years ago, but things have changed.

Cosmos, you're right again, as Paul Brink and his team had negotiated a stream to finance the project. It was about 2.5 years ago. But it was subject to permitting and the project producing going forward. So it's really at our option, whether if this project goes forward, whether we want to take up the stream or not. And if we've been very cautious in terms of our projections, this would be a material benefit to Franco-Nevada if the project goes forward. But we've not included it in any of our guidances, including our 5-year guidance because it's been a big question whether they would get the permits and approvals for the project. The original project was approved by the BC Government, but did not get Federal Government approval, as well as a number of the aboriginal groups have been challenging this project. So it's been a bit of a political hot potato. So we continue not to include it in our guidances. We have not put up any money yet for this asset. If it goes forward, I think we would actually be very keen to provide the financing for this project and help it come into production. But until we see a positive permitting announcement, we'd rather be conservative and not include it in our guidance.

Your next question comes from the line of Adrian Day of the Adrian Day Asset Management Firm.

I wanted to ask a question, if I may, about were gold to stay in this kind of current range for several months, obviously, your revenue would go down from royalties. But have you looked -- can you quantify, at all, any existing mines that are in danger of closing or maybe postponing expansions or new mines that wouldn't come on stream that we're expecting? Can you quantify that in some way?

Adrian, it's a good observation. I think we've already had a few -- some of our small, less material mines get into trouble. There's some in Australia, the Bronzewing mine, has gone into receivership. We saw Great Basin's Hollister mine go into receivership. Happily on that one, there's a new owner, and it looks like they're going to be reactivating the mine and our royalty still stays in place. And we've definitely seen a number of expansions get postponed. I guess, most material is the Tasiast one. We were hoping to see that go forward. That's going to be deferred for some time. As well, Alacer has the South Kalgoorlie operations in Australia. That definitely is not going to get expanded. They were talking quite aggressively about that a year ago. But again, the nice thing is we had not incorporated any of these expansions in our guidance numbers when we gave our management day outlook last March. And so, it's not in any of our 5-year numbers. And what I look at is, I'm hopeful that we'll see something beyond the 5-year frame. But in terms of our core portfolio, what's producing right now, we actually don't see any material challenges in the production numbers. We're always constantly testing whether we have to impair our assets. And right now, we actually are fairly comfortable what's producing right now. And I think if gold came back, we'd see some upside in terms of some of these expansions probably coming back on track. So I like to think of our portfolio, compared to most companies, I think we have more upside in our portfolio than we do downside. And if you remember, in the late '90s, we did stress test this royalty business model with the original Franco-Nevada. Gold got down to about $250 an ounce, and even in that environment, where most operations are losing money on a cash basis, we were able to sort of still maintain our core revenues and pay dividends with the original Franco-Nevada. I hope we don't have to stress test this to that same level again. But we feel we're in a very comfortable position.

[Operator Instructions] Your next question comes from David Haughton from BMO.

I've got a couple of questions. Firstly, looking at Cobre Panama, you pointed out that First Quantum is yet to come through with their plans, and that would dictate then the $1 billion timing that you've got for your outlay. Did you pay anything during the previous quarter?

No, we did not. And as you recall, they have to reach their $1 billion spend before we are drawn upon, and that has not been done. And we did not pay anything in Q2.

All right. In your -- now if you did suggest that you may be doing some payments in 2013, do you expect it to be any payments this year? Or are you now reconsidering maybe it's going to start in 2014?

No. I think we still believe there will be a payment this year and likely in Q4. However, magnitude is unknown at this time.

Okay. Presumably, relatively small if they've got their $1 billion yet?

Yes. I think we had recently said $270 million for 2013. It will be less than that.

Yes. Okay. You say that you've implemented the dividend reinvestment plan. Do you have any idea as to what the take-up could be? And as a consequence of that, what the cash saving could be from your dividends?

We really don't know what the take-up is. We're popping it at 3% discount, and time will tell. But there will be some take-up. But it's getting implemented. We'll have to wait and see how it turns out.

Yes, it's David. So much of our shareholder base is institutional, and they generally don't take advantage of that. But it's something that at our directors felt passionate about that they wanted to have that available. And so our guess will be probably less than 10% take-up on our shares, but maybe we'll be surprised.

All right. And see that Tom Albanese has joined the board, is it adding 2 plus 2 and getting 5 by suggesting that maybe you could be looking at an Oyu Tolgoi royalty on the back of all of this?

I think it's actually -- it's more than that in terms of he brings an international dimension that we were looking for, for the board and also a big project and a big company type of perspectives. So I think it's adding a depth that we really think we are in those types of leagues and companies, and so having his perspective is very valuable. We weren't even thinking of Oyu Tolgoi. I can tell you, Dave, that when we invited him on the board, we were thinking of a lot of other possibilities.

[Operator Instructions] Your next question comes from the line of Greg Barnes of TD Securities.

David, given the volatility in the gold price, I guess, is one way to put it, how are your conversations with potential revenue stream sales discussions? What gold prices people are thinking they have to price these things off now?

Okay. I'm going to let Paul Brink speak. He's on the front lines of all those discussions.

Greg, I guess, first and foremost, we're seeing a lot of interest and seeing interest really across the board. Some of that is stemming from more senior players that either have a heavier debt load than they prefer, other players that are building projects where the cash flows that they're leading going forward, and then I expect them to be smaller. And then we're also dealing, obviously, with the developers and explorers. So we're having conversations across the board. I'd say I mean, you're absolutely right, it's a difficult environment and with the gold price moving as much as it is, the -- it's finding a price that people are comfortable with and executing transactions. I don't know that I could tell you a particular price that people have in mind. But I think, as we settle down here, hopefully, and we have prices in a more steady range, I think there are a good amount of people who are looking to do deals and just need a comfort that they can put their pin in at a price that's not too different from what it's been for the next -- for the last 3 to 6 months.

Okay. And what about non-gold or non-precious metal transactions, rather, that are out there? Is there anything at the moment that you're looking at?

Greg, we telegraph every once in a while. We are looking at other things. And I think nice thing is, we're looking at everything. The universe is broad and wide open to us right now. I'd say there's nothing immediate or likely on the non-precious metals side in the near future. Our focus is precious metals deals, and we're going to try to do as many of those as possible. If something comes along or opens up on the non-precious metal side, that'll be great. But our focus right now is precious metal deals.

[Operator Instructions] There are no further questions at this time. Mr. Harquail, I'll turn the call back over to you.

Thank you very much, Brent. On our website today, you'll find the full Q2 financials, MD&A and press release. Our website also has details on our top 60 assets. We provide a very comprehensive Asset Handbook, so if you don't have that, you should obtain that to understand our company. Our Q3 results are scheduled to be released after the close of markets on November 5. You're welcome to participate again, and thank you for your continued interest in Franco-Nevada.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.