Franco-Nevada Corporation (FNV) Q1 2015 Earnings Report, Transcript and Summary

Good morning. My name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to the Franco-Nevada Corporation First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Stefan Axell, you may begin your conference.

Thank you, Melissa. Good morning everyone. We are pleased that you have joined us today for the Franco-Nevada first quarter 2015 results conference call. Accompanying our call today is the presentation which is available on our website at franco-nevada.com, where you’ll also find our full financial results. Sandip Rana, CFO of Franco-Nevada will provide a brief review of our results. This will be followed by Q&A period where our entire management team including representatives from Australia, Barbados and the U.S. are available here in our Toronto boardroom to answer any questions that you may have. Before we begin formal remarks, we would like to remind participants that some of today’s commentary may contain forward-looking information and refer you to detailed cautionary note on Slide 2 of our presentation. I’ll now turn it over to Sandip Rana, CFO of Franco-Nevada.

Thank you, Stefan. Good morning everyone. As you all have seen from the press release issued yesterday, our overall royalty and stream operations continues to perform well, with Q1 2015 results benefitting from the additional of Candelaria. Operationally and our financial results for the quarter were in line with our expectations. Turning to Slide 3, you’ll see two charts on the page. The first chart highlights the average gold price for each of the last five quarters. For Q1 2015 the gold price averaged 1,219 per ounce, a 5.8% decrease from a year ago Q1 2014, when the gold price averaged 1,294 per ounce. But it is slightly higher than the average gold price for Q4 2014 of $1,200 per ounce. During the quarter, the gold price traded within a range of 1,147 per ounce and 1,297 per ounce, somewhat stabilizing. Although the average price for the quarter was slightly higher than fourth quarter 2014, it has been an overall downward trend in the gold price for the last 24 months. With respect to platinum prices they were lower in the quarter when compared to prior year, with the average price for the quarter down approximately 16% from Q1 2014. Palladium prices were slightly higher quarter-over-quarter. The second chart on Slide 3 highlights the gold equivalent ounces received by the company over the last five quarters. Gold equivalent ounces earned increase 29.2% year-over-year to 851,000 GEOs compared to 658,000 GEOs in Q1 2014. Of the 851,000 GEOs, 88% were from gold assets. Slide 4 provides the waterfall chart showing a source of the movement of GEOs from Q1 2014 to Q1 2015. The largest source of the increase is the Candelaria addition where Franco-Nevada purchased the gold and silver stream in late 2014 from Lundin Mining. For the quarter, the company received and sold approximately 22,000 GEOs from this asset. In addition, the company received 1,250 gold ounces from Fire Creek/Midas which were sold in revenue recorded. This asset began delivering ounces in June of 2014. As you can see on the slide, other gold assets had a decrease of 2,437 GEOs in the quarter. This decrease was the result of lower GEOs from our net profit interest royalties. The largest decrease was the Goldstrike NPI where the lower gold price, lower production on our lands and higher costs resulted in a payout reductions versus the prior year. NPI royalties are highly leveraged to gold price and we would expect to benefit significantly in a rising gold price environment. When you do exclude the NPIs from other gold assets, our non-NPI royalties and streams actually delivered more GEOs in Q1 2015 versus prior year. With respect the PGM and other mineral assets, they delivered lower GEOs during the quarter due to lower production and price impact at Sudbury for PGM and Peculiar Knob for other minerals. Turning to Slide 5, you can see that overall revenue earned by the company was 109.2 million for the quarter, a 4.9% increase versus Q1 2014. As mentioned, the GEOs received increase significantly during the quarter compared to prior year. This did result in an increase in mineral asset revenue of 21.4%, however the reduction oil and gas revenue did offset this increase, resulting in a lower overall increase in revenue. As you can see on the bottom chart, oil and gas revenue decreased significantly year-over-year. Actual oil and gas production attributable to Franco-Nevada was consistent with first quarter 2014 with the decrease in revenue being the result of the lower oil price and foreign exchange. As you turn to Slide 6, you’ll see the key financial results for the company. As mentioned the company earned higher GEOs in the quarter resulting in revenue of 109.2 million. Adjusted EBITDA was 83.3 million for the quarter, down slightly from 84.8 million a year ago. The decrease is due to the increase in stream ounces delivered with the addition of Candelaria, thus increasing cost to sales. Net income was significantly lower versus prior year at 19.2 million, while adjusted net income was 22.9 million down from 35.4 million a year ago. On a per share basis, adjusted net income was $0.15 per share, compared to $0.24 per share in Q1 2014. Slide 7 provides a waterfall chart illustrating the decrease in adjusted net income from Q1 2014 to Q1 2015, the key movements year-over-year are lower income taxes as a result of lower taxable income, higher revenue of 5.1 million with the increase in mineral asset revenue more than offsetting the decrease in oil and gas revenue On the cost side with the addition of Candelaria, depletion expense increased significantly during the quarter. Of the 15.6 million increase, 13.9 million relates to Candelaria. It is important to note that as mineral reserves and resources are added at Candelaria or any one of our other properties, the depletion cost per ounce will decrease. As well as due to oil and gas production volumes being consistent with the prior year, the company recorded similar depletion amounts for oil and gas assets in Q1 2015 versus Q1 2014 despite the significant decrease in revenue. Finally, cost of sales did increase as the company received just under 54,000 stream ounces during the quarter, compared to 321,000 in Q1 2014. We do pay a per ounce purchase price when stream ounces are delivered to us which is recorded in cost to sales. The net result was a decrease in adjusted net income of 22.9 million. One of the key advantages that we like to stress of our business model is scalability. Our costs have increased over the last few years, as can be seen on Slide 8. The increase is mainly due to the addition of streams to our business, but these are variable costs. Stream costs will continue to increase as the company is delivered more ounces, which is a positive. This has been the case in first quarter with the additional Candelaria. Well I think it’s important to highlight on this slide is the fixed cost. These are the company's corporate administration costs and as you can see they have remained fairly constant each year while revenue has increased significantly over this timeframe. Corporate admin costs continue to be less than 5% of revenue. As illustrated on the chart the company continues to maintain a very strong margin which was greater than 75% for Q1 2015. Unlike operators, our mineral business is not directly affected by operating and capital cost escalation. As you turn to Slide 9, the geographic revenue profile continues to be lower risk with 75% of revenue being from the Americas, with Latin America being the largest contributor. For Q1 2015, 93% of revenue was generated from precious metals, 84% being from gold and 9% from PGMs. As well as 5% of revenue was from oil and gas and 2% from other minerals. The company remains diverse with a number of producing operations. We currently have 45 revenue generating mineral assets. On Slide 10, you can see that the company still has a strong balance sheet with $670 million in working capital at the end of the quarter, when including our credit facility and some of our more liquid investments, our total available capital is in excess of 1.2 billion. And when deducting our commitments, whose timing could fluctuate; the available capital is in excess of $850 million. We continue to have the liquidity to complete transactions and add additional assets to our portfolio. And with that I will turn the call over to the operator as the management team is happy to answer any questions you may have. Thank you.

[Operator Instructions] Your first question is from the line of Greg Barnes with TD Securities. Your line is open.

Thank you. Sandip or Paul or whoever is there, the discussions with First Quantum on this streaming arrangement on Cobre Panama are dragging on and dragging on. Where are we now? What is the holdup? Is it the Koreans? Is it small details now? When is this going to conclude?

It’s David Harquail here. First Quantum's having their annual meeting today. So, they're actually in town. So you could imagine it’s going to be some opportunities for some progress there. I think everything has still been very constructive, I think the challenges of operating company such as First Quantum, is they have a lot of challenges to operate their focus is on different things. I think we have been, I think Paul can confirm as we have been having constructive term sheets going back and forth. I guess one as at one side would stop marking up term sheets, we will be done. I think we are very close, I think the face-to-face that will happen this week will be constructive. I'm still very relaxed about the process. I think both sides because they are substantial sum of money we just want to get it right. I don’t know if you want to add anything to that Paul?

So, if you're exchanging term sheets, is the character of the deal changing?

No, again we’ve limited to just the two issues that we reflected- the reporting arrangements which I think were concluded on and it’s really just on and financial security.

It’s document rather than term sheets. Documents rather than term sheets. Just documents in terms of amendments regarding the two issues that we’ve highlighted.

Now, also there seems to be some suggestions that the Korean partners have to sign off on this and I know they're very bureaucratic and it takes a long time for them to do anything. Is that the case?

It depends on what the ultimate amendments are Greg, but it’s not clear if they are material enough whether they need [indiscernible].

Okay. And just moving on to another topic. You've kind of implied that oil and gas is something or an area that you're very interested in right now, potentially adding more royalties. Are you progressing things on that front? How would you fund that if you do?

Again what we’re trying to do is always keep our alignment to be majority or gold focused as a royalty company. So, we will always look at what is the appropriate size within our portfolio. There have been a number of assets already marketed in Western Canada and there is other ones in the market right now. We have a separate business development [gene] that just focuses on those. So I think one of the great strengths we have with our company is that we’re the most diversified by commodity and we really are looking along all the commodity fronts and I am optimistic that something will come along in oil and gas that is as competitive as the deals that our mining team is putting to the table in terms of transactions going forward. So, I can't forecast when we’re going to do something or what the next deal will be. I just know we have issues in the line for -- in both pools and whichever is the best nimble will be the next one that we land.

David, would you do a debt issue to fund an oil and gas transaction?

Well remember we’re sitting on a lot of liquidity right now. So I think we can actually fund the deal without having to raise any additional liquidity. Remember we want to do a deal that’s proportionate with our overall portfolio, we want to maintain the 80% precious metal focus. So I think you can kind of back out with the relative sizing of what we'd be comfortable in the oil and gas base. And so again we are focused on the long-term waiting for precious metal.

[Operator Instructions] Your next question comes from the line of Cosmos Chiu with CIBC. Your line is open.

Great. Thanks, David, Sandip, and team for hosting the call. First off, congratulations on getting added to the TSX 60 as of tonight. A few questions here, maybe following up on the oil and gas assets. Could you remind me in terms of your exposure to Alberta versus the other provinces? The reason why I ask, as we all know there's been a political regime change in Alberta. There's proposed royalty changes in the province. Certainly there's no direct impact I don't think to Franco-Nevada but have you looked at any indirect impacts that could happen to your oil and gas portfolio in that province?

Geoff Waterman who runs our oil and gas. Right now by far our biggest asset is Weyburn followed by Midale and they are nice, friendly, right of center Saskatchewan. But I'll let Geoff talked about more what assets we have in Alberta.

With respect to our Alberta assets, as David said, most of our assets are located in Saskatchewan. And what we expect, or what could happen under this new government in Alberta is they talk about going back and reviewing the royalty structure and we saw that under Ed Stelmach few years ago and really the impact it have on us is in some of our bigger properties in Alberta the producers just slowed down the rate of drilling they did. It didn’t impact the current production levels. You go ahead and do royalty review, we'll see what happens but I would expect that it would have the same impact as the previous royalty review.

And, Geoff or maybe David, certainly looking ahead, David, as you talked about, there is opportunities in terms of future royalty acquisitions in oil and gas. Does this kind of change how you look at -- you also mention Western Canada. Does this change how you look at Alberta as a potential province in terms of future royalty stream acquisitions?

The underlying resources are good quality resource we’re going to look at it, most of our production is coming from Southeast Saskatchewan and it’s all weighted. Generally Alberta is more prone to gas especially with our assets. But it just comes back to the quality of the underlying resource and then we look at all the other factors that when we consider an acquisitions. So right now cost was just some of that, what we're getting from Alberta right now is probably immaterial for an overall revenues and I think in terms of - I like these developments to come out in the market before we buy anything new because I think we just factor that into the pricing or whatever we buy. And I think the biggest impact when we look at something is what’s the likely capital, we spent on that property because that’s what’s major determinant for the value of the royalty. So, I think to any extent the bigger risk now in terms of more taxes in Alberta we’ll be factoring less capital spend on those properties.

Maybe switching gears a little bit, Sandip, or maybe David as well, on slide number eight you mentioned the adjusted EBITDA margin. It's still quite high at 76.3% but it's coming down. It's kind of like a double-edged sword from that perspective. As you have more stream royalties coming in, that cost is going to go up but it's also going to give you more leverage. But at the same time, higher margin will give you a bit more safety in terms of a volatile market. Is there a number that you're targeting in terms of EBITDA margin? Certainly it was 80% before. Now it's closer to 75%. Internally speaking, is there a number that you would want to target?

Obviously we would like it as high as possible but you are correct. As you receive more stream ounces it's going to continue to decrease, I mean in terms of our margin component if you want to monitor and is regime the corporate administration cost, so we wanted to be sure that the margin is increasing, it’s decreasing because we're getting more stream ounces or paying more taxes because we’re getting more revenues from our Nevada assets but not because corporate administration cost or increasing. So obviously we would like this as high as possible, but as you said, the more ounces is the more leverage that we do have.

Maybe one last question from me. Certainly I would say 2015, a new royalty that's coming on is the Rubicon royalty. I remember when at first, when you first acquired that royalty, the royalty is on the part of the deposit that's under the lake. I just want to confirm in terms of when it comes into production later on this year in terms of Rubicon, how does it work? Does Franco-Nevada get the royalty right away? I just need a reminder in terms of the part of the deposit.

Paul here, obviously, the current reserve and just about all the resources underneath the lake Cosmos, so any meaningful production is all going to be on our royalty land. There are some targets that are underneath the land, but they are longer term.

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

Thank you, operator. It’s David Harquail here and I guess the key takeaway in our first quarter we only talk to you just six weeks ago, so really there is not a lot to add. But I am just very pleased how well the mineral assets are performing. I'm pleased with how Candelaria is performing and we’re expecting our oil and gas assets to do better over the balance of the year. Also we we’ve had some good news in our smaller assets. We've talked about it in our press release, but we didn’t feel we use this call to elaborate on them. Our next mark on your calendars, we'll be putting out our second quarter results after the market close in August 10th and we’ll have the corresponding conference call on the morning of August 11th. Thank you for your interest in Franco-Nevada. Good bye.

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