Franco-Nevada Corporation (FNV) Q2 2017 Earnings Report, Transcript and Summary

Good morning. My name is Teshan 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. 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. I would now like to turn the call over to Stefan Axell, the floor is yours.

Thank you, Teshan. Good morning, everyone. I want to thank you for joining us this morning to discuss Franco-Nevada's Q2 2017 results. Accompanying our call today is a presentation which is available on our Web site at franco-nevada.com where you'll also find our full financial results. Sandip Rana, CFO of Franco-Nevada will provide a review of the results, which will be followed by a Q&A period. 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 reported another quarter of solid financial results. This continued the strong momentum that was built in fiscal 2016 and first quarter 2017. The portfolio continues to perform well. In addition, we continued to maintain our strong balance sheet which was further strengthened during the quarter with the exercise of the $75 Canadian warrants resulting in proceeds to the company of $475 million Canadian. The warrants were to expire in mid-June 2017, the proceeds added to our cash position and we ended the quarter with an excess of $600 million in cash and cash equivalents while continuing to be debt free. As you turn to slide three, the chart illustrates the gold equivalent ounces breakdown by commodity for second quarter 2017 compared to second quarter 2016. You can see that GEOs in total have increased by approximately 9% compared to last year. There have been slight increase in gold, PGM, other mineral GEOs while silver has remained fairly flat. To see further detail of the movement in GEOs from Q2 2016 to Q2 2017 and how the incremental GEOs were sourced, please turn to Slide four, as you can see from the chart the portfolio has performed well and it's not been very volatile as mentioned there was a slight decrease in silver GEOs has left silver ounces were delivered and sold from Antamina this quarter compared to a year ago, however this was expected with respect to the gold net profit interest royalties, GEOs were higher due to a strong recover from our Hemlo MPI, PGM assets have performed well with GEOs increasing due to slightly higher production year-over-year as well as higher palladium prices which impacts of the number of GEOs earned upon conversion. The largest increase year-over-year is from both assets and Candelaria in particular which delivered approximately 18,000 GEOs in the second quarter of 2017. Overall an increase year-over-year as GEOs increases from 112,787 to 122,541. As you turn to Slide 5 you will see two charts on the page .The first chart highlights the average price and precious metals revenue for each of the last five quarters. Second quarter of 2017 generated $150.3 million in precious metals revenue compared to $141.2 million a year ago. A 6.4% increase, this increase is due to both better overall performances at our assets as well as stronger palladium prices. On the bottom chart we have highlighted our increase in oil and gas net revenue and the oil price which has being less volatile recently. Oil and gas revenue has increased from $7.8 million a year ago to $9.6 million in Q2, 2017. On slide 6 you'll see the key financial results for the company for the three months and six months ended June 30, 2017. I will 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 revenue adjusted EBITDA and adjusted net income for the six month period. They increased as are the result of the stronger overall production at our assets as well as benefiting from certain commodity price increases in particular Palladium and oil. As you turn to slide 7, the geographic revenue profile continues to be lower risk with 82% of revenue from the Americas with Latin America being the largest contributor. one of our core goal is to build a diversified portfolio with a focus on precious metals. For second quarter of 2017 precious metals revenue was 92% of overall revenue with 71% being from gold's, 14% from silver and 7% from PGMs. We continue to stress the scalability of our business model and believe slide 8 highlight 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 cost, stream cost will continue to increase as the company is delivered more stream ounces which we consider a positive. In Q2, 2017 the company sold approximately 84,000 screen GEOs. One item which I believe is important to highlight is the fixed cost. These are the cost, these are the company's corporate administration cost and as you can see they remain fairly constant each year regardless of changes in revenue. So further highlight the margin generation of our business model please turns to slide 9. Here you will see our internal all insisting the cost per ounce. The cost per ounce includes our cost of sales amounts plus corporate administration; taxes are not included. For Q2, 2017 the cost per ounce was $330 leaving a margin of $937 per ounce. The cost per ounce has increased in 2017 when compared to previous quarters. This is due to the Guadalupe stream as you will recall under the extreme agreement the company pays $800 per ounce for gold ounces delivered from Guadalupe versus the more common $400 per ounce. Regardless, we remain a high margin business. Slide 10 highlights the available capital for Franco-Nevada, when our working capital, marketable securities and credit facilities net of the $28 million remaining to fund the stack two transaction or total, the available capital is approximately $1.9 billion. As mentioned earlier the company did see a significant increase in pass-through in Q2 2017 due to the exercise of the warrants. And with respect to our credit facilities, none are drawn currently. Before I turn it over to the operator, I would like to confirm the guidance that was issued by the company. We are maintaining the GEO guidance range of 470,000 to 500,000 GEOs for 2017. However we expect gold equivalent ounce sales for 2017 to be at the higher end of that range as well we continue to maintain our $35 million to $45 million revenue range for oil and gas revenue for 2017. And with that, I would now like to turn it over to the operator, the management team is happy to take any questions you may have.

[Operator Instructions] Your first question comes from the line of Jorge Beristain with Deutsche Bank. Your line is open. Q – Jorge Beristain: Hey guys, congratulations on the results, it's Jorge Beristain with Deutsche Bank here. Just maybe a question for Sandip, the recent warrant exercise leaves you guys with a ton of cash on hand, can you just intone what you're looking at potentially spending that on in the next few months, dividends, buybacks or more acquisitions and then specifically within acquisitions are you guys lining up more stuff in the oil and gas sector that you're looking at?

Jorge thanks for the question. Obviously we're always looking at possible transactions, business developments activity on the go. You know it's never easy to know what what's going to come across the line, one thing we do know is we have to continue to fund cooperate so we have the guidance was $200 million to $220 million for this year. So we still have a number of months of that to fund. Other than that, we'll just continue to explore the market on both the mineral side and the oil and gas side. Q – Jorge Beristain: And sorry, what about buybacks?

Buybacks is not something that we would consider at this time. Q – Jorge Beristain: Okay, thank you.

[Operator Instructions] And you do have another question coming from the line of Scott Macdonald with Scotiabank. Your line is open.

Hi guys, congrats on the solid quarter there, just a couple of questions if I May, first on the STACK 2 acquisition. Maybe if you could just speak a little bit of the kind of production profile you're expecting is it kind of similar to the previous STACK acquisitions or any color there would be helpful?

I think that's the best way to characterize it, it's similar type of plan as to the original STACK acquisition, it's one of the newest and most effective place in the U.S. tight oil space. We're expecting that it will be growing over time, as of these places exactly putting your handle on when the gross move on your property is that tilt that we know that there is a well in place there is quite substantial and it's one of those investments we expect will do very well over time.

Okay. But it's similar kind of profile to the previous one I guess growing over the next five or 10 years and all is your kind of expectation?

That's exactly the right ballpark.

Okay. And then just further on the oil and gas side, I guess is your focus still sort of similar to what we've been seeing over the last year or so with kind of putting together smaller deals focused in the higher quality plays in the U.S., is that still kind of your focus like $100 million plus or minus type deals?

Yes, in terms of the size, we're looking at things I'd say that are $100 million plus as being the sweet spot for us in the oil and gas. We're seeing an equal amount of opportunities, some in Canada, some in the U.S. and some are assets that have a greater portion of cash flow. But then also good proportion that are tend to be in the Permian and also the STACK which is place that we found attractive, I would say in the oil and gas space as we have spent more time on it, there are very many opportunities. So we have put out a number of term sheets in this basin and see that hit our ground probably characterize the overall business development in the last six months, I think we've seen an equal amount of opportunities in terms of oil and gas and minerals probably put out similar amount of term sheets on either side. So as we look forward, we see good opportunities in both areas.

Okay. And on the precious metal side, is it still sort of focused on new projects, is that where you see most the opportunities?

It's actually what we've seen recently has been a mix, some of that has been new projects both gold plus cup projects with the precious metal byproduct. So that prospects on that side but also what we've seen are a number of royalties, so those like existing precious metal assets, goods side through royalties and quality assets again 100 million plus sort of deals. So I'd say overall in terms of range of business opportunities, it's quite balanced minerals and oil and gas and royalties and streams.

Okay. And so on the royalty side, might it be something like picking up a portfolio from a miner that kind of accumulated royalties over the years or is that?

There are some portfolios but there are also some large individual pieces that are available. So there is the opportunity to get something like that done as well.

Okay, so it sounds like it's kind of balanced all around all right, that's it for me. Thanks guys.

[Operator Instructions] And I don't see any further questions over the phone at this time.

Thank you, Shawn. We expect to release our Q3 2017 results before market open on November 6 with a conference call held at same morning, and want to thank you for your interest in Franco-Nevada.

And this concludes today's conference call, you may now disconnect.