Franco-Nevada Corporation (FNV) Q1 2017 Earnings Report, Transcript and Summary

Good morning. My name is Emily, 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. Stefan Axell, you may begin your conference.

Thank you, Emily. Good morning, everyone. I want to thank you for joining us today to discuss Franco-Nevada's Q1 2017 results. Accompanying our call is a 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, which will be followed by a Q&A period with representatives from all our offices including Barbados, Denver and Perth present in our Toronto boardroom to answer any questions. Before we begin formal remarks, we would like to remind participants that some of today's commentary may contain forward-looking information and refer you to our detailed cautionary note on slide two of the presentation. I will now turn the call over to Sandip Rana, CFO of Franco-Nevada.

Thank you, Stefan. Good morning, everyone. As you will have seen from the press release issued yesterday, the company has continued the strong momentum that was built in 2017 with delivering strong financial results for the first quarter ended March 31, 2017. The portfolio continues to perform well. As you turn to slide three, the chart illustrates the gold equivalent ounces breakdown by commodity for first quarter of 2017 compared to prior year. You can see that GEOs in total have increased 23.4%. The largest increase has been from gold ounces, which have increased approximately 31% due to strong performance from a select group of assets. Silver ounces, when converted to GEOs, have decreased slightly year-over-year, due mainly to lower deliveries and sales from Antamina. To see further detail of the movement in GEOs from Q1 2016 to Q1 2017 and how the incremental 24,957 GEOs were sourced, please turn to slide four. You can see from the chart, the largest decrease in GEOs are from silver and gold NPIs. As mentioned, the company did receive less silver ounces from Antamina this quarter compared to a year ago. However, this was expected. Calendar 2016 was an exceptionally strong year for silver production and deliveries from Antamina. We did expect a reduction in deliveries in 2017 due to lower production and grades. However, the mine is still performing well ahead of what we envisioned when we acquired the Antamina stream in Q4 2015. With respect to gold net profit interest royalties, GEOs were lower due to a combination of lower production and higher costs at our Goldstrike and Hemlo properties. On the positive side, the company did receive more GEOs from other minerals, PGM assets and other gold assets. PGM assets performed well, with GEOs increasing, due slightly to higher production year-over-year as well as higher platinum and palladium prices. The largest increase year-over-year for gold assets has been Guadalupe, which delivered approximately 19,000 GEOs in first quarter of 2017. This was due to the delivery of ounces carried over from 2016 as well as higher mine production in 2017. This was well ahead of the company's expectations. We do not expect to receive this level of deliveries each quarter from Guadalupe going forward. The company did benefit from a full quarter of deliveries from Antapaccay as in first quarter of 2016 Franco-Nevada only received 2 months' worth of deliveries in the quarter. Overall, a substantial increase year-over-year as GEOs have increased from 106,621 to 131,578. As you turn to slide five, you will see 2 charts on the page. The first chart highlights the average gold price and precious metals revenue for each of the last 5 quarters. First quarter of 2017 generated $158 million in precious metals revenue compared to $125.9 million a year ago, a 25% increase. Again, this increase is due to better overall performance at our assets, as discussed, as well as stronger commodity prices. On the bottom chart we have highlighted our increasing Oil & Gas net revenue and the oil price, which has been less volatile recently. Oil & Gas revenue has increased from $3.6 million a year ago to $10.9 million in Q1 2017. On slide six you will see the key financial results for the company for the three months ended March 31, 2017. I won't get into the specifics, but what I would like to point out is that we have year-over-year increases for most of the financial metrics, with new records being set for GEOs and revenue. The increase is the result of the additions to the portfolio previously discussed as well as existing asset production benefiting from higher gold and PGM prices during the quarter. As you turn to slide seven, the geographic revenue profile continues to be lower risk, with 81% of our revenue being from the Americas, with Latin America being the largest contributor. One of our core goals is to build a diversified portfolio with a focus on precious metals. For first quarter of 2017, precious metals revenue was 91% of revenue, with 71% being from gold, 14% from silver and 6% PGMs. We continue to stress the scalability of our business model and believe Slide 8 highlights this. As you can see, there has been a significant increase in revenue over the last six years. Costs have also increased over this time frame, but the largest cost component is the stream and other costs. Stream costs will continue to increase as the company has delivered more stream ounces. We consider this a positive. In Q1 2017 the company sold approximately 94,000 stream GEOs. One item which I believe is important to highlight is the fixed costs. These are the company's corporate administration costs, and as you can see they have remained fairly constant each year regardless of changes in revenue. To further highlight the margin generation of our business model, please turn to slide nine. Here you will see our internal all-in sustaining cost per ounce. The cost per ounce includes our cost of sales amounts plus corporate administration. Taxes are not included. For Q1 2017, the cost per ounce was $340, leaving a margin of $879 per ounce. It has increased when compared to previous quarters. This is due to the significant increase in ounces delivered from Guadalupe. As you will recall, under the streaming agreement the company pays $800 per ounce for gold ounces delivered from Guadalupe versus the more common $400 per ounce. With the significant increase in Guadalupe ounces in first quarter, it did impact our margin. However, regardless, we still remain a high-margin business. Slide 11 highlights the available capital for Franco-Nevada. When our working capital, marketable securities and credit facilities net of the $99 million remaining to fund the Midland transaction are totaled, the available capital is approximately $1.5 billion. However, the company has begun to receive proceeds from our C$75 warrants which expire in June of this year. Subsequent to quarter end, we have had exercises of approximately 2.1 million warrants for cash proceeds in excess of CAD 150 million. In total, we expect the warrants, if exercised, to add another $350 million to our treasury, which will increase our available capital to an excess of $1.8 billion, and we continue to be debt-free. And with that, I would now like to turn it over to the operator, Emily. We're happy to answer any questions you may have.

[Operator Instructions]. Your first question comes from Chris Terry from Deutsche Bank. Your line is open.

Well done on a solid quarter. A couple of questions from me. Just in terms of the way 2017's shaping up, you obviously had a strong first quarter and you're well on track to hit the 470 to 500 guidance. Was it mainly just Guadalupe that surprised to the upside in that quarter or were there other assets? I'm just trying to think about the conservatism perhaps in the full year numbers after that result.

Sandip here. Yes. I'd say overall the assets performed according to plan. Guadalupe was the one surprise for us. We did know there was going to be some ounces carried from 2016. That core [ph] had not shipped. So we did get the benefit of that. But the quantum was higher than what we expected.

Okay. And I notice in the release there's a number of projects starting to come through that you've previously invested in, and you've sort of got a pipeline now out to 2020-2021, and including Rosemount now, that most people are talking about again. Are there other projects beyond that, that you're seeing green shoots that could emerge that -- sort of, the next year of projects?

The -- some of the developments that we're looking forward to, one of them recently being announced, just to make sure people didn't miss it, and that was Newmont saying that they'd be going ahead with Subika, both the underground expansion plus the mill there. One of the expansions that we've been looking forward to for quite a while now is -- would be the second phase of Tasiast. As you know, Kinross is studying that and we're hopeful that they would go ahead with that and that would expand that project. Another one that I point to is on Stillwater where, as you know, Sibanye has acquired the project and -- but the -- Stillwater has been developing the Blitz project and that'll increase the output out of the Stillwater complex there, in the order of 40%. So those -- there are a number of expansions that I think will have very meaningful impact.

Okay. And then just a last one on the balance sheet. Are you still mainly focused in the shorter term on oil and gas opportunities, and have they increased potentially with the pullback in the oil price? And I guess leading on from that, if you don't find opportunities during 2017 is there an opportunity to further lift the dividend or to have a special dividend or buyback or something else on the balance sheet, or would you prefer just keep the higher cash for further opportunities maybe into next year?

In terms of the -- well, maybe David and I can answer the different parts of the question there, and I'll start off just in terms of the deal outlook. And we're in the position at the moment, because of the last number of years we've added so many gold and precious metal streams, that we've got the ability both to do more precious metal deals plus oil and gas. So we're completely open to doing both. As you know, the last couple of deals that we've got across the line have been oil and gas deals. We see some particularly good opportunities in that area. So as we look forward, you should expect that we'd be looking to do both oil and gas and mining deals over the next period. And, but you're right, in terms of oil and gas, with prices being a bit lower, it does present a good opportunity.

And this is David Harquail here. I'll reiterate, we still have mining and gold deals in front of us, and so we still see some opportunities. So, we expect to still invest. We just don't see the scale of deals that we had maybe two years ago, but there's plenty of 2-base hits we can do or single-base hits in the business going forward. As to the dividend, we've now had 10 years of increasing our dividend. But the number one thing we want to do is have a dividend that we never cut. We want to have an absolutely sustainable dividend, but we'd like to have lots of cushion in terms of payout protection in case of a downturn. So we're not likely to be looking at any special dividend in the next few years, and what we'd like to do is continue to keep the cushion there so we can continue to do incremental progressive increases to the dividend over the longer term, and we're really trying to play the long game right here rather than trying to make any special dividends in the near-term.

Your next question comes from Cosmos Chiu from CIBC.

Congrats again on a very good quarter. Maybe first off, to follow off, up on the oil and gas sort of discussion here, I guess the past few oil and gas acquisitions that you've made have focused on the U.S. Since that time, we've seen sort of like a change in the marketplace whereby there's been Canadian companies repurchasing oil sands assets in Alberta, and a number of these oil sands companies in Canada have publicly indicated that they would like to shore up their balance sheets. David, I know you've in the past few acquisitions focused on the U.S. But with what's happening in Canada and certainly Alberta, is that, do you see that as an opportunity for you to kind of generate any kind of GORR royalties to help shore up some of these oil sands companies in Alberta?

Cosmos, I'm going to let Jason O'Connell speak to it because he's heading up our team that does oil and gas.

Great. Hi Jason.

So we do continue to see a lot of opportunity in the U.S. It is a much larger, much more fragmented market and some of the opportunities that we're looking at there just have very good returns. In the Canadian market, there certainly is an opportunity to look at oil sands GORRs. There are companies in Calgary that need to shore up their balance sheets and it is a good opportunity to help finance those companies. And I think on the oil sands GORR opportunities, the reason we like to look at those are just the long-life assets so we can get exposure to there. We think it would be a nice complement to some of the higher-growth assets that we're looking at in the U.S. So yes, we would spend some time focusing there. It's just a question of whether we can get something over the line or not.

For sure. Thanks. And maybe switching gears a little bit. Sandip, you had mentioned, I think on slide two, that revenue for gold NPIs had decreased in the past quarter. Maybe, bigger picture, is just, is that just a function of the operators spending more money on their assets or catching up on CapEx and is this going to have any kind of future benefit from what they're spending today?

Yes. So, I'll -- there's different NPIs and so there's different circumstances. Gold price is more a combination of just lower production on the property that then filters through, and obviously commodity prices plays a role here. So that was the main reason for gold price. With respect to Hemlo, it is an underground mine, so they've been doing underground development. So those costs just sort of came through in Q1. So we would expect improvement for the rest of the year.

Okay. Great.

And as you know, Hemlo -- Barrick did put out a technical report and it's very promising, and extending the mine life, so we're very encouraged by that asset.

Great. And maybe one last question for Paul here. Paul, you mentioned the expansion at Ahafo, the expansion at Tasiast; the expansion at the Blitz zone at Stillwater. I just want to confirm, there's really no more CapEx obligation for these expansions on the part of Franco-Nevada, right? And really, the only -- the other part I want to confirm as well, Paul, is that really, the only future obligation in terms of payments commitments is to Cobre Panama.

Cosmos, yes, you're quite right. So, we don't have any capital contributions on any of those projects mentioned or any of the other projects. The only acquisition, if you can call it, or investment that we're still funding is Cobre Panama. So we expect that to play out over the next year or 2 here as they complete the project. And while we're chatting on Cobre, we have -- our team has recently visited at the project. The -- we're very pleased with all the progress that we see there for the company achieving their time line of first production at the end of 2018.

Great thank you. That's all I have?

[Operator Instructions]. Your next question comes from Mike Jalonen from Bank of America. Your line is open.

Thanks. I -- just wondering -- David, you mentioned that you're doing more singles and -- looking at more singles and doubles for maybe future streams, royalties, whatever. But the last little while, I've noticed a number of gold companies talking up megaprojects again. New Gold Blackwater; Cote Gold; Fryam Gold [ph]. Just -- now we've got Cerro Casale back in play. It was fallow when I started as an analyst. My God. And you've got, what else? Well, you get the idea. They're out there again. So, just wanting -- to me, I don't know if you consider them homers, but they're pretty big.

I guess the ones I'm talking about is in terms of what's going to be actionable in the next couple of quarters in terms of making announcements. And so I'd say the larger projects, the full financing packages are still some time away, and we'd be very keen to be part of it. I think part of our future is to be sort of a form of project financing for even the major companies. We have the balance sheet and we have the time frame and appetite to be able to support these types of projects. It's just that I think that the go-ahead decision on the larger ones is probably not this year. And so in terms of, I think the singles and doubles there are this-year type transactions that we can add to the portfolio. I expect the larger ones more likely next-year type transactions.

Okay, thank you.

Thanks Mike.

There are no further questions at this time. I would like to turn the call back to Stefan Axell.

Thank you, Emily. We expect to release our Q2 2017 results on August 8th with a conference call held the following morning, and want to thank you for your interest in Franco-Nevada.

This concludes today's conference call. You may now disconnect.