Franco-Nevada Corporation (FNV) Q4 2017 Earnings Report, Transcript and Summary

Good morning. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the Franco-Nevada Corporation Fourth Quarter Results Conference Call. All lines have been placed mute to prevent 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, Chris. Good morning, everyone. Thank you for joining us today to discuss Franco-Nevada’s 2017 results and Company outlook. Today’s presentation will be a little longer than our typical quarterly conference call as we will be providing an update on many aspect of the Franco- Nevada portfolio. Accompanying our call today is a presentation which is available on our website at franco-nevada.com where you’ll also find our full financial results. Our Asset Handbook usually released in conjunction with our financial results will be released at the beginning of April to allow us to gather additional disclosure from our partners regarding our assets. 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 two of the presentation. Sandip Rana, CFO of Franco-Nevada, will provide a brief review of our results, followed by commentary Paul Brink, SVP, Business Development; and David Harquail, President and CEO, discussing the Company outlook. This will be followed by a Q&A period. I’ll now turn the call 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 that Company delivered another strong financial year in 2017. We achieved a number of financial records, revenue, adjusted EBITDA and adjusted net income, all benefiting from the record gold equivalent announces earned by the Company for the year. 2017 continued to showcase the strength of the Franco-Nevada business model, the quality and diversity of the assets within the portfolio and the strength of our balance sheet. From an operational standpoint, our overall royalty and stream assets continued to perform well. As you turn to slide five, you can see how the Company performed against the guidance levels that were issued. We were expecting a marginal increase in GEOs in 2017 compared to 2016 after significant increase the year prior. The initial guidance back in March 2017 was 470,000 GEOs to 500,000 GEOs using a pricing of $1,200 per ounce gold, $17.50 silver, $950 platinum, and $750 palladium. In addition, we were guiding oil and gas revenue of between $35 million to $45 million, using $50 per barrel oil. I’m very pleased to report that the full-year actual did reach the higher end of the ranges with oil and gas exceeding the top range. The Company earned 497,745 GEOs from our mineral asset portfolio, a record for the Company. And with respect to oil and gas division, the Company surpassed the $45 million threshold for revenue, generating $47 million. Overall, a very strong year across the board. Turning to slide six and looking back at the gold equivalent ounces received for each of the last seven years, you can see that it has been a significant increase from 2011. We have increased from approximately 230,000 GEOs in 2011 to almost 500,000 in 2017, an increase in excess of a 100% over this period. Year-over-year GEOs have increased approximately 7%. And as you can see, actual gold ounces continued to increase with gold ounces for 2017 being approximately 9% higher than 2016. Slide seven illustrates the movement in GEOs from 2016 to 2017 and how the incremental 33,352 gold equivalent ounces were sourced. As you can see from the chart, the largest negative was our gold NPI assets; Hemlo, Musselwhite and Goldstrike. NPIs are impacted by capital spend by the operator and thus can be volatile quarter-to-quarter. For Hemlo and Musselwhite, that was the case in 2017. We do look forward to benefiting from the development spend in future periods. With respect to Goldstrike, the lower NPI was due to timing and sequencing of mining. The Company did receive less silver ounces in 2017, which was expected with lower production coming from Antamina. Although silver ounces sold from Antamina of 3.7 million was lower than 2016 when we sold 4.3 million ounces, the total is still higher than what was guided to at the time of the acquisition. On the positive side, we have benefited from higher palladium prices, which has favorably impacted the number of PGM GEOs we received and our PGM revenues. However, the largest source of growth for the Company has been our gold assets. The largest contributors were Candelaria, which, despite a weaker fourth quarter, delivered 15% more GEOs in 2017 than 2016. Guadalupe, which had 52,000 GEOs sold during the quarter -- during the year; and Mine Waste Solutions, MWS, which had its strongest year for Franco-Nevada since being acquired in 2011. The fact that our assets have performed well has been further enhanced with the partial recovery in commodity prices. As you can see on slide eight, 2017 saw a mild recovery for certain commodity prices. Gold was slightly higher quarter-over-quarter and year-over-year, while both palladium and oil average prices were significantly higher. Silver and platinum average prices were marginally lower over the same period. Slide nine highlights our precious metals revenue for the last seven years, along with the average gold price over the same period. The Company’s precious metals revenue has increased significantly over the last two years. 2017 was the first year that precious metals revenue exceeded $600 million, reaching $610 million. This increase is due both to performance from our assets and stronger gold and palladium prices, as mentioned. As you turn to slide 10, you’ll see the key financial results for the Company. I won’t get into the detailed numbers, but I would like to highlight that although the number of GEOs earned in fourth quarter 2017 was lower than fourth quarter of 2016, revenue and adjusted EBITDA were higher year-over-year. This was due to the higher commodity prices during the quarter compared to 2016 as well as benefiting from the recent oil & gas additions. Adjusted net income was higher than fourth quarter of 2016 due to higher revenues, but also due to lower depletion recorded and a lower tax expense. Depletion is impacted by the source of the GEOs recorded in revenue. For example, in Q4 2017, Guadalupe was a large contributor, but has a low per ounce depletion rate compared to other mineral assets. With respect to tax, I would like to mention that the Company did record a $7.1 million deferred income tax expense during the quarter, related to the U.S. tax reform. The Company does have a deferred tax asset on its balance sheet related to the U.S. assets. With the reduction in corporate tax rates at the end of 2017, the deferred tax asset was adjusted accordingly. Going forward, the Company will benefit from the reduced tax rate, which is a big positive, especially as the U.S. oil and gas assets begin to ramp up. On slide 11, we provide a breakdown of our revenue by commodity and geographic locations. You can see that 90% of our full year revenue was generated by precious metals in 2017. The geographic revenue profile has revenue being sourced 82% from the Americas. Slide 12 highlights the diversification of our portfolio. The first chart highlights that only three assets contribute more than 10% of our adjusted EBITDA individually. Those three assets in total generate 30% of adjusted EBITDA. And the second chart highlights how adjusted EBITDA is distributed from a legal ownership perspective with no legal entity accounting for greater than 45% of adjusted EBITDA. I would like to again stress the strength of our business model and scalability. As you can see on slide 13, the Company’s fixed cost, highlighted in the light blue, has remained fairly constant as we continue to grow this business. Management believes we can continue to add to our portfolio and grow our business without adding significant overhead to the Company. Slide 14 summarizes the financial resources available to the Company. We currently have $1.4 billion of available capital when including our credit facilities. We recently funded the $90 million for the Delaware oil transaction and expect to fund the Cobre Panama addition shortly. Also, we recently expanded our Barbados credit facility for another year to March 2019, and also expanded our $1 billion corporate revolver to March 2023. And with that, I will now turn it over to Paul.

Thank you, Sandip. We’ve spoken of the different avenues of growth for our business and we’ve seen many different ways over the last 10 years. The current wave has been diversification in the form of oil and gas. I expect the next wave of growth on the mineral side will be project financing as the industry gets back to building mines again. Asset fund management is limiting the amount of new equity available to the sector; and bank capital requirements is limiting the amount of project debt. So, I believe streaming will play a meaningful role in the coming round of mine financings. A list of our recent investments is shown on slide 17. In the last 18 months, we’ve invested $356 million in Cobre Panama and roughly $430 million five oil and gas transactions, four of those in West Texas and Oklahoma and one in Alberta. Technology advances in horizontal drilling and fracing have been the game changer in global oil and gas, and opened up many basins in the U.S. The oil price downtown revealed the two basins, the Permian in West Texas and the SCOOP/STACK in Oklahoma could keep attracting drilling capital, even when oil prices were less than $40 a barrel. These are the basins that have been the focus of our investments. Based on the recoverable oil and gas in just the productive horizons in these assets, we expect to make five to seven times our money over these investments. Turning to page 18. We recently increased our exposure to Cobre Panama. First Quantum recently purchased LS-Nikko’s 10% interest in the project and we acquired a stream to help fund that acquisition. KORES, the remaining 10% partner in the project has also elected to participate in the stream, so the stream now relates to 100% of the project. Shortly after these, investments First Quantum announced plans to increase the size of the project. When we initially invested in Cobre, the plan was 58 million tonnes per annum of initial throughput. On taking over the project, First Quantum increased the planned throughput to 74 million tonnes, and the recent announcement is for 85 million tonnes of initial throughput with plans to expand 100 million tonnes post 2022. Phased commissioning will start late in 2018 with ramp up in 2019. The stream economics are protected to ensure minimum 5% rate of return on our funds, if the project hasn’t achieved 58 million tonnes of throughput by the start of 2019. Our team visited site a couple of weeks ago and were very impressed with the progress. The following slides have some recent pictures from the site. Page 19 shows the first coal shipment arriving. The power plant shown on page 20 is nearing completion. Page 21 has an overview of the plant site. And in particular, you can see the dual conveyor from the in-pit crushers leading to the mill stockpile. And the last slide on page 22 shows the extent of the pre strip. We’re delighted to have been able to increase exposure to not [ph] only large scale couple of projects under construction today that will be a big driver of our growth for the next 3 to 4 years. Turning to our most recent oil and gas additions. Effective September last year, we’ve acquired an interest in Osum’s Orion SAGD operation in the Cold Lake area of Alberta. The operation’s currently producing a roughly 9,000 barrels per day. Expansions are planned to increase production to 18,000 barrels per day by the end of 2019 and the Company has expansion objectives beyond that. The life of mine of the assets will be 3 to 4 decades with these expanded production rates. Osum, the operator is a private Company and well funded to execute its growth plans. We acquired for $101 million a package of royalties on the Delaware Basin and the package is almost entirely mineral title. The Delaware Basin is the western portion of the Permian Basin. You’ll recall that last year we acquired a similar sized package on the Midland Basin that makes up the eastern side of the Permian. We believe that these basins in West Texas and the SCOOP/STACK in Oklahoma are very attractive areas to acquire royalties. They have tremendous reservoirs of oil and gas. They’ve proven to attract drilling capital through the cycle. They are immediately adjacent to Gulf Coast refining capacity. We can get the best mineral title available on private land in the U.S. And lastly, they have multiple packages of royalties available, so we are able to be selective in our acquisitions. Slide 27 outlines the assets that will drive our growth over the next 3 to 4 years. This year, you’ll see the initial benefit of the Tasiast and Ahafo expansions and from Brucejack, Cerro Moro and Sissingue that are new builds. Cobre Panama will be the big growth driver in 2019 and 2020 and expansion of Stillwater from roughly 500,000 ounces per annum, up to 800,000 ounces per annum will be completed in 2021. There is also a stable of projects we expect to move into development. Of the list shown, Rosemont and Hardrock could have the largest impact. And as Hudbay has stated recently that they believe that the permit on Rosemont is imminent. Lastly, exploration growth shown in the bottom right hand of the slide. We’re currently compiling our U.S. smiths as our operators update the reserves, reflecting their 2017 drilling success. I want go through it, but we’ve listed for you the assets where we’re seeing exciting brownfield success. And that’s the lead-in for David to speak to our outlook. David?

Thank you, Paul. And I’ll take you to slide 27 showing Franco-Nevada’s growth over the past 10 years. And you can see, the trend lines for our key metrics have shown strong growth. 2016 and 2017 were exceptionally strong. We’ve been blessed that our recent cornerstones investments have all performed better than our acquisition guidances. On slide 28 is the summary of our 2018 guidance. We tend to be conservative in our assumptions. We’re assuming nothing from Cobre Panama and that Antamina, Guadalupe- Palmarejo will revert back to our longer-term production assumptions. We see lower production at Candelaria and South Arturo in 2018 as temporary and that these will be strong assets for us in future years. The rest is per our press release. If you do the math including our oil and gas business, you’ll note that even with the lower GEO projection for 2018, Franco should be able to match increased revenues this year. Even better, in 2018, we’re going to have a higher percentage of our GEOs coming from higher margin royalties rather than streams. That means we expect to do even better with our EBITDA in 2018. On slide 29, we provide some longer term guidance. Our tradition is not to do yearly guidance, but a rather directional guidance with the target that we expect five years out. That way, we avoid having to speculate about ramp up schedules for individual mines. Out five years, it all tends to average out. You can see that even if we do no investments over the next five years, we expect continued good growth from Franco-Nevada’s portfolio. On slide 30, you’ll see the longer term perspective for both our GEOs and oil and gas business. You can see that we are projecting a significant rebound coming in our oil and gas division. Even with this projected growth, we still have more room to do more investments in oil and gas. I believe this projection makes Franco-Nevada one of the higher growth royalty companies in the business. On slide 31 is what I’m most proud of and that’s our dividend track record. In 2017, Franco-Nevada paid more in dividends than any other gold Company in the world, a US$168 million. We’ve been able to increase our per share dividend each year for the past 10 years. Traditionally, we announced the dividend at our May AGM. I’m highly confident that Franco-Nevada will maintain its tradition of increasing dividends. On slide 32, we show what’s upcoming. As Stefan mentioned, we’re releasing our Asset Handbook after our year-end reporting this year because we’re reporting somewhat earlier than usual and we’d like to accommodate at least all the latest reserve numbers that are coming from our operators. Expect our new Asset Handbook out in early April. And on May 9th, we’ll be reporting our Q1 results and hosting our AGM. We’ll have our global management team here in Toronto and we’ll take some time to celebrate our first 10 years. We’re very well-positioned for that next 10 years. And with that, the management team here would be happy to take your questions. Chris, I’ll turn it back to you to tee up the questions.

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

Good morning, David, Paul and Sandip, and team. And thanks for the call. A few questions for me here; maybe first off on your increased exposure to Latin America. We always see there is ongoing labor sort of contract renegotiations in Latin America. Given your increased exposure, is there anything that we should be aware of in terms of the assets within your portfolio?

Cosmos, it’s Paul. Nothing that we are aware of. I think, your point is a good one. But, in terms of the operations that we’re exposed to, not aware of any issues on the labor side.

And I can add to it, Cosmos, is that our big assets in Peru and Chile, they’re well-established operations and they have a long-term franchise there. So, I think, we expect just business as usual from those operations. And the key one, of course, is Cobre Panama. And we’re watching that very slowly. And right now, Panama is proving to be a very receptive country for investment. We see no pushback from the government; we see them very commercially minded. There we haven’t seen any NGO issues. It’s been very receptive. So, that’s what’s given us the confidence to put more money in that country.

Of course. Maybe switching gears a little bit here. As we saw today, there was actually a royalty deal in the market. Osisko Royalties buying or making an acquisition of a royalty NSR on the Eagle property in the Yukon from Victoria Gold. I’m just wondering, is that something that Franco-Nevada would have been interested in, in terms of size, in terms of working with the PE, or was it something that was too small?

So, Cosmos, we were delighted to see the project getting financed and taken forward to production, and that is because a couple of years ago, we did acquire royalty on the property. So, we’re delighted to sharing their success.

Great. And…

Cosmos, David here again. We thank Osisko because we have royalties as well at Barkerville, at Windfall, and now at Victoria. So, I’m glad they’re financing these properties for us.

For sure. Maybe talking on another existing royalty here, Kirkland Lake Gold at Macassa, certainly the fact that they are thinking a new shaft; that’s going to be beneficial to Franco-Nevada long-term as well; that speaks to the optionality of the royalty model here. But, could you remind us, because I think a part of royalty is actually an NPI -- a 20% NPI. Would this impact what you get as royalty from Kirkland Lake? I don’t believe so, because I was reading over your Asset Handbook, it looks like the NPI is on a currently non-producing portion, that’s on the Southwest or just Southwest of the SMC?

Cosmos, David here, and you’re absolutely right. It’s a bit of a patchwork of our royalty coverage. And so, the majority of the new reserves are coming up on towards the East, back to the traditional old mines. And we essentially have 1.5% NSR on that ground. Our NPI ground, we’ve just been having fractional production from that over the years. And that’s more to the Southwest. And I don’t think in the last quarter, there was any production. We do get a small annual minimum royalty from it, but it has not in significant to us in the past.

And then, maybe one last question here, maybe for Sandip. Depreciation, Sandip, you’ve given us a range of 250 to about $280 million for 2018. How, like which assets are more -- which assets would have a higher depreciation rate and what should we be sort of expecting in 2018? Because I believe in 2017, you record about $270 million that will put it on the higher end, if I were to compare it to 2018 guidance?

Yes. So, Cosmos, obviously, it’s based upon what the source behind the GEOs. So, we’re expecting a down year from Candelaria temporarily in 2018. That’s a higher depletion per ounce asset because it was a larger acquisition that was purchased just a couple of years ago. And David mentioned, a lot of the -- we’re not expecting a decrease in our adjusted EBITDA because we’re expecting revenue from more royalty versus streams and the royalties are just lower depletable assets because they were acquired some time ago. In terms of specifics, Candelaria is the big one that will have an impact on depletion.

Your next question comes from Steven Butler from GMP Securities. Your line is open.

Good morning, guys. Thanks Cosmos for asking all the questions. I guess, I’ll have one over to you Sandip or Paul et cetera. In terms of the commercial production timing, of course, the First Quantum would have ultimately declared for Cobre. Would you guys be receiving any revenues or GEO equivalent pre-commercial production? How would that works, Sandip?

So, Steve, as soon as they sell a concentrate, we get paid on the -- on that concentrate. So, they don’t need to achieve commercial production before our revenue starts.

Okay, sounds good. I think you alluded to there is a level of conservatism in your 2018, to exclude any Cobre contribution this year. Well, I guess, time will tell. The project seems well on its path. But, you have deliberately left out or left it out conservatively from your guidance?

Yes. The point is really just in terms of anything meaningful, we expect in next year.

Okay. That’s it. Thanks, guys.

Your next question comes from Tanya Jakusconek of Scotiabank. Your line is open.

Good morning, everybody. I’m going to continue with Paul, if I could. And Paul, it’s got to do with the 2022 guidance. We were a little light on the guidance and we’re just trying to figure out exactly where. We do see that it’s 50,000 ounces gold equivalent, higher than your 2021 guidance that you gave last year. And I just wanted to go through a couple of the assets, maybe on the Palmarejo and Guadalupe. Given that we have seen increase in reserves, can you give us an idea when you say the majority is under your agreement, what exactly is the majority and sort of what’s the annual production profile there? What would it be in about 2022?

Off the top of my head, Tanya, I have to check, but it’s an Asset Handbook. There should be some…

Given REU calculation in the Asset Handbook. So, you can see the percentages of the reserves includes the resources as well as the inferred and so, you can see the percentage is that and it’s in the neighborhood of 85% to 90%, I believe.

Okay, all right.

Tanya, also, it’s a good guidance. If you look at the presentation materials that Coeur has, it did give us a good breakout of -- you can see the existing Palmarejo concession and then the ground that they acquired in Paramount [ph] acquisition. Obviously our answers are quite everything that was on the original property. And so, you can see the multiple veins that fall -- that’s on the Western side of the property. You’ll see that most of the veins do fall on the original property.

Okay. All right. So, I’ll take peek there. Thank you. And then, can I ask about Gold Quarry? Looking at your asset bucket, looks like that minimum ended in 2021 at 11,000 ounces or thereabout. Is that correct or do we have anything in 2022 for Gold Quarry?

We haven’t received an update, but we do expect it to be reduced by that time.

So, i.e. no contribution in 2022?

No, there’ll be a contribution, but it will be lower than the 11,250 that we currently perceive.

Okay. And then, I mean, we don’t have the expansion in place at Cobre Panama because that’s beyond 2022. Are there any other assets that you’re expecting to have higher than -- obviously, Stillwater, we know that one, anything else that can help us on that 50,000 ounces? We understand part of it is the addition that you bought the Cobre Panama recently, but anything else within that gives us a bit of guidance?

Lots of small stuff, I guess. So, it’s -- we got Sissingue ramping up, Cerro Moro, Ity, Musselwhite we’re expecting more of. We got the expansion at Subika. So, there is a lots of little things coming up. So, I think it’s just a cumulative impact. Right now, we’re counting 49, I think, operating royalties and we’ve got an advanced in the 40s as well. So, we have to sort of break it out. But that’s the blessing we have, Tanya. There are just so many small things that we actually add-up and actually become material on our overall projection.

Okay. That’s helpful. Thank you. And maybe, just on Antapaccay, if I could. And I’m not going to pronounce that deposit, the Coroccohuayco deposit, that’s the high grade. Can you talk a little bit about what’s the mine plan in terms of incorporating that into your -- into the Antapaccay life of mine plan?

Sure. And the deposit is Coroccohuayco.

Yes. Thank you.

That’s with the South African accent. So, it’s an additional deposit on the property. It’s a bit small in terms of tonnage than Antapaccay, but higher in grade. Glencore is looking to go ahead and develop that. They haven’t made a construction decision yet. But, they have allocated substantial amount of funds in their budget this year to keep advancing that project. So, we’re hopeful that soon they will make full construction decision. The impact of that is, they are still limited by the capacity. They run both the Antapaccay and the old Tintaya mill at the property. So, we don’t expect total throughput to sales, but once that or starts moving through the mill, it will be higher grade. So, we should see higher metal production. And obviously then, because you are processing both deposits at the same time, that will extend the mine life for the stream on those assets.

Okay. Thank you for that. And then, my last one for Sandip, if I may. Sandip, with the tax changes in the U.S., can you give us some sort of guidance for your tax rate? I mean, you did mention that it’s going to have a positive impact especially on your oil & gas revenues. And can you just give us a bit of guidance what we should be looking at?

Sure. Our projection for our effective tax rate for 2018 is about 17%.

Okay. And is that something that we should just keep going forward within that range?

Once Cobre Panama starts production, it will decrease, I would say once Cobre Panama is fully ramped up in three years’ time, the effective tax rate, assuming no additional acquisitions is probably closer to 13%.

Your next question comes from Greg Barnes with TD Securities. Your line is open.

Thank you. Paul or whoever else, do you see opportunity in the Permian or wherever else these oil basins in the U.S. do a similar amount of transactions that you’ve done over the past year in terms of -- you’ve done $420 million of acquisitions, is that what you’re looking at going forward?

We’ll, the Jason O’Connell, he’s heading up our oil and gas division. So, I’ll have him speak to that. Jason O’Connell: Yes. Thanks, Greg. I think, in terms of the number of opportunities in the Permian, there certainly is opportunity to spend that amount of capital. The nature of the land holdings in the U.S. is such that most of the mineral title is held by the individuals. And so, there is a tremendous inventory of mineral titles and royalties that we can buy. And there are a lot of private equity backed companies in the U.S. that are looking to sell packages of those royalties. And so, there certainly is a lot of opportunities. It’s a matter of picking the right opportunities and also just balancing off how much oil and gas exposure we want versus gold and other precious metals.

Is it fair to say that this is your focus for the next 12 months?

No. I think, Greg, I’ll answer that. We really have two separate groups here. So, we got a mineral team that’s absolutely focused on further metals type royalties and we’ve got an oil and gas team, and all they do is look at oil and gas transactions. So, I really see them as sort of two parallel businesses. And we really at the Board level are just trying to choose what are the best assets to add to our portfolio at any one time. So, we’re blessed right now as we have opportunities on both sets of asset classes.

That opens up, I’m just curious about the coking coal royalty in Australia. How did that come about? And how -- what are you looking at there?

So, yes, it’s a smaller transaction and just popped up on the screen. Kevin McElligott, who runs our operations down in Australia, he was responsible for sourcing it. We keep looking at opportunities in Australia. And this one is just popped up. It was the original prospector who had found those lands and put them into Macassa coal, written those royalties and he was looking to exit his position. So, we thought it was a cheap option on what is an extremely large resource there. When we look at the total in situ resource, the value of the royalty could be upwards of $600 million Australian. Don’t expect that all those assets get developed, but I think it is a very nice option.

And the revenue stream right now, I’m guessing is around $200,000, $300,000 a year?

It’s fairly limited, because the only current operation is [indiscernible]. The most likely operation there to go into production is Olive Downs which is semi-hard coking coal operation.

Your next question comes from Chris Terry of Deutsche Bank. Your line is open.

Hi, guys, and good morning. I just had a question, it’s probably for Paul. Slide 16 of the presentation where you were going through the current phases. And I guess, I’m leaning off Greg’s previous questions. But, when we’re in the project financing stage that you said now, can you just talk a little bit about that in terms of the pulse of what you’re saying? You’re in a unique position to be able to engage with companies. Do you think that’s still one to two years away, we’re seeing some grain shoots on that? But, do you think the activity will accelerate or how do you think about the timeline and how long that project financing phase will last?

Yes. I think there are couple of things there. And the first is how investors are thinking about these things and how that translates through the management teams. So, there are management teams that have large projects to build that are many billion dollars in capital that are starting to think it’s the right time to go to their shareholders about moving those project forward, that they are nervous about taking on the full amount of capital themselves. So, we do see people starting to think about how do they share the platform large projects. Second question then is, where does all that capital come from, and I made some comments earlier about you do see any growth that you speak to, we’ll tell you that they can’t raise the same amount of new equity in issues these days just because the amount of passive capital. So, if anything is particularly constrained, it’s the availability of equity capital to move these projects forward. The other side of it this has been and it’s been the theme that’s played out over a number of years now, it’s just debt capital is constrained because of the capital allocation. So, I think the first nut that needs to be cracked is that investor sentiment. I suspect that we’re 6 to 12 months away from people -- from shareholders being willing to support these projects. But once they do, as we all know, there has been a lack of capital going into the sector and everything is cyclical. So, we’re sowing the seeds here for the next capital building cycle.

The last one for me is just, I guess, relating to going into coking coal and commodities. Are there any opportunities in the EV space around cobalt or some of the other mine and metals that you might be interested in?

There may be, but by far the larger opportunities for us on the gold and the base metal side, while the EV space is very exciting and a lot of market participants chatting about it, there is just not that many deposits that are as attractive. So, there may be some deals, but I don’t think, we’re going to be building a division out of it.

Your next question comes from John Wolfson of Desjardins. Your line is open.

It’s Josh here. Just quick questions first on Cobre. In terms of understanding how that asset is going to ramp up and accrue to you, I think, the comment earlier was that, as soon as the concentrate is sold, you get paid. Is there any -- is that concentrate sold at the port or is that refined where you get paid? And I’m just trying to understand the delay between concentrate production and when you receive revenues.

So, it will be much like our other deals, Josh. So, we do -- as soon as the operator gets provisional payment, we’ll get payment following that. And then, once there is a final payment that comes from the refiner, that’s often 3, 6 months down the line, then that provisional payment gets adjusted. But, the timing should be very immediate from the time that that concentrate goes on a ship.

Okay. And then, in terms of how the, I guess, catch-up payment works, it would seem to be that based on First Quantum’s guidance that likely is going to be triggered in 2019. How or when do you sort of get that catch-up payment or when would it be accruing as part of your revenues?

So, the way that will work, Josh, is it’s a reduction on the ongoing price that we would pay per ounce. So, if there is a delay, we don’t get revenue sooner. But once the ounces do start flowing, the ongoing amount that we pay per ounces is adjusted to make it up.

Okay. And that would start from -- or I guess when that clause is triggered or is there a delay between clause being triggered and when that discounts starts to be received?

So, you’d see, as soon as we start getting ounces delivered to us, we’re paying less for those ounces as an ongoing price.

Okay. And then one other question, in terms of I guess balance sheet sort of management. Given that the assets have transitioned to much longer life assets and looking at 2022 guidance and obviously even before then, free cash flow is going to be well in excess of I guess what dividend or capital requirements are. Is there any point to which the Company starts to utilize its debt more significantly in terms of managing opportunities in the market or is this high conservatism, sort of low debt strategy likely to be maintained longer-term?

Yes, Josh, it’s David here. We still want to be the risk off gold investment. We want to be the sort of the safest place for institutions if they want to be exposed to gold. So, we always look at our credit facilities and temporary credit card. And it’s possible we’ll use some of it this year because we see other opportunities in front of us this year. But, we’re comfortable with that because we know, as you pointed out, we have the cash flow to repay quickly next year. So, our philosophy is if we’re generating surplus cash, we don’t mind having surplus cash in our balance sheet because we like to -- we know it’s always going to be cyclical business and we like to be positioned, so that we have the check -- ability to write a check when no one else can. So, we think that countercyclical philosophy is going to service very well over the next few decades.

[Operator Instructions] There are no further questions at this time. I will now return the call to our presenters.

Thank you, Chris. Just to remind everybody, we’ll have an Asset Handbook coming out in early April. And then, our next quarterly will be coming out with our aftermarket on May the 9th, same day that we have our Annual Meeting, you’re all invited. Thank you for attending.

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