Franco-Nevada Corporation (FNV) Q2 2018 Earnings Report, Transcript and Summary

Good morning, ladies and gentleman. And welcome to the Franco-Nevada Corporation Second Quarter Results Conference Call. At this time, note that all lines are in a listen-only mode, following the presentations, we will conduct a question-and-answer session. [Operator Instructions] Note that this call is being recorded on Thursday, August 9, 2018. At this time, I would like to turn the call over to Ms. Candida Hayden. Please go ahead.

Thank you, Shirley. Good morning, everyone. Thank you for joining us today to discuss Franco-Nevada’s second quarter 2018 results. Accompanying this call is a presentation, which is available on our website at franco-nevada.com, where you will 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 Jason O’Connell, VP, Oil and Gas, who will provide us of our recently announced Continental transaction. This will be followed by Q&A period. Representatives from our Toronto office are present to answer any question. Before we begin formal remarks, we would like to remind participants that some of today’s commentary may contain forward-looking information and we refer you to our detailed cautionary note on Side 2 of this presentation. I will now turn the call over to Sandip Rana, CFO of Franco-Nevada.

Thank you, Candida. Good morning, everyone. As Candida mentioned, I will provide a brief summary of the financial results for the company for the three months ended June 30, 2018. On Slide 3, we have table summarizing the key results for the company. You will see that gold equivalent ounces sold is lower than 2017 and revenue earned is marginally lower in comparable period for 2017. Although the mining asset portfolio did perform well, second quarter 2018 continue to be impacted by lower gold and silver grades and recoveries at Candelaria. We did expect the reduction stream GEOs to be delivered by Candelaria in 2018 compared to prior year, as the operator process lower grade stockpile ore. However the grades have been lower than expected. This is only short term as we expect production levels to recover in 2019. Overall, the Candelaria stream has been a great acquisition for the company with gold ounces to be delivered to Franco-Nevada over the life of the mine 60% higher now than at the time of acquisition and silver ounces to be higher by 47%. Despite the lowered GEOs in revenue, the company did record higher adjusted EBITDA and adjusted net income financial results for 2018. This was due to the mix of royalty versus stream ounces earned during the quarter, resulting in lower cost of sales and completion versus prior year. As you turn to Slide 4, the chart highlights the change in GEOs from Q2 2017 to Q2 2018. The number of gold equivalent houses from gold assets excluding NPI did decrease year-over-year. As mentioned, this is primarily due to Candelaria. We do expect deliveries from Candelaria in the second half of 2018 to be similar to the first six months. For the change in silver GEOs and [indiscernible] delivered less silver ounces in the quarter versus prior year, resulting in approximate 4000 less GEOs in 2018. Turning to slide 5. We have two charts on the page. The first highlights the precious metals revenue earned by the company for the previous five quarters, along with the average gold price over that time frame. As you can see the precious metals revenue amount was lower in second quarter versus the other quarter's presented. The gold price average 1306 per ounce in Q2 2018 compared to 1329 in Q1 2018. This lower average price, along with a lower gold equivalent ounces resulted in the decrease in precious metal revenue. The bottom chart highlights the oil and gas revenue and the average oil price for the last five quarters. Q2 2018 was a very strong quarter for oil and gas. This was due to stronger oil prices and increased production from our newly added US asset. The company is beginning to realise the embedded growth of these US assets. On Slide 6 we provide a breakdown of our revenue by commodity and geographic location. The chart on the left provides a breakdown of revenues, 84% of revenue for the quarter was generated by precious metals with 67% being from gold, 11% silver and 6% PGMs. The geographic revenue profile has revenue being sourced 81% from the Americas with Latin America being the largest component. Slide 7 highlights the diversification of our portfolio. The first chart shows the adjusted EBITDA contributions from our key assets. Antapaccay was our largest contributor at 14% of adjusted EBITDA. The top three assets contributing 32% of adjusted EBITDA. The company is not economically dependent on any one single asset, diversification is our strength. The second chart highlights how adjusted EBITDA is distributed from a legal ownership perspective with no legal entity accounting for greater than 40% of adjusted EBITDA. On Slide 8, we highlight the strong margins the company achieves on a consistent basis. Our all in sustaining cost per ounce was $322 per ounce for the quarter. As you can see the cost per ounce has fluctuated over time. Again, this will fluctuate depending upon the source of GEOs earned. During the quarter, we realized the GEO margin in excess of $980 per ounce, this is reflected by the strong adjusted EBITDA the company achieved during the quarter. Franco-Nevada is proud of its business model and one of our strengths is the scalability of this model. As you can see on Slide 9, the company's fixed costs highlighted in 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. Our margin for Q2 2018 was 78.3%. Before I turn it over to Jason O'Connell, Vice President, Oil and Gas, who will walk us through the Continental transaction, I would like to provide an update on the CRA review that is currently underway for Franco-Nevada. We continue to share information and respond to queries from CRA. As previously disclosed, No issues have been identified at this point in time. The only meaningful change is that the scope has been expanded to include 2015 premiums – previously the review was for the years 2012, 2013 and 2014. I will not turn it over to Jason. Jason O’Connell: Good morning, everyone. This is Jason. I'll talk to you about our latest transaction and our updated guidance for oil and gas. On Slide 10, you will see in our press release on Monday announcing a new transaction to form a strategic relationship with Continental Resources to acquire oil and gas and mineral rights in the SCOOP and STACK plays for Oklahoma. Mineral rights provide an ownership interest in land that has been leased out to operators in exchange for a royalty. This relationship represents a new opportunity for acquiring royalties by teaming with an operator who will manage an acquisition vehicle to acquire mineral rights ahead of their drilling programs. While typical mineral rights acquisitions are carried out with little or no knowledge with respect to the timing of when acreage will be developed, this approach directs acquisitions toward acreage that will be drilled in the near term and thereby maximizes value by pulling forward production volumes. On Slide 11, we'd like to emphasize that this strategy is truly a win-win situation for both the operator and the royalty buyer. From Franco-Nevada’s perspective, we get the benefit of an acquisition vehicle which provides the ability to acquire assets at the grassroots level or directly from individual owners. This is a segment of the market previously inaccessible to Franco-Nevada due to a lack of staff or resources to carry out the smaller scale acquisitions. More importantly, Franco-Nevada benefits from the operators drill plans along with their knowledge of local land title and geology. The operator is able to direct acquisitions to areas that will develop in the near term and to focus on areas with superior geology and well performance. Lastly, the operator will also manage the acquisition vehicle, which means there is little administrative cost or management time required for Franco-Nevada. From the operators respective, Franco-Nevada will carry a portion of the operator's acquisition costs in exchange for having to manage the acquisition vehicle. This allows the operator to effectively increase the economic interest in their land position at attractive values. For both parties this structure results in a significant uplift in value. On Slide 12, our strategic partner for this transaction is Continental Resources with whom it has been a pleasure working together to create a unique and innovative model for acquiring mineral rights. Continental is the best-in-class operator with assets in the Bakken play of North Dakota and the SCOOP and STACK plays in Oklahoma. They recently celebrated 50 years of history and are led by industry veteran Harold Hamm. The company has built a superior land position covering more than 1.1 million net reservoir acres across some of the most prolific parts of the SCOOP and STACK and it is the leading operator in the area with 16 rigs currently drilling and recently announced plans to grow to 18 rigs by the end of the year. The acquisition vehicle will target royalty purchases under the most active portions of Continental's operated land. These acquisitions will complement Franco-Nevada’s existing royalty position in the SCOOP and STACK, which is shown in the map or on the map on the right side of the slide. These are two of the most economic and attractive plays in North America. Continental plans to spend $2.7 billion this year to grow their production volumes. The company has targeted a 20% compounded annual growth rate to 2020 and a good portion of that growth will come from royalty lands. Slide 13 provides a summary of the investment. Upon closing, Franco-Nevada will make an upfront payment of $220 million for the purchase of mineral rights, Continental has already assembled and which will be held in the acquisition vehicle. Additionally, Franco-Nevada has committed to jointly fund that vehicle for future acquisitions. The vehicle will be funded 80% by Franco-Nevada and 20% by Continental. Franco-Nevada share funding for that vehicle will be up to $100 million per year over a three year period. The funding is subject to Continental achieving certain development thresholds related to drilling on royalty lands. Revenue distributions from the vehicle are variable and are governed by royalty volume targets. Franco-Nevada is entitled to a minimum of 50% of revenue distributions and up to 75% of revenue depending on volumes Continental achieve relative to predetermined volume targets. Continental is entitled to a minimum of 25% of revenue and up to 50% of revenue depending on the volumes they achieve relative to those targets. The structure creates strong alignment between the operator and the royalty holder and that it provides incentive for Continental to maximize production, while providing downside protection to Franco-Nevada and supporting our returns in the event of volume shortfalls. Acquisitions will be focused on Continental's operated acreage position in the core parts of the SCOOP and STACK. As mentioned in its quarterly release yesterday, Continental announced accelerated development of its acreage with the initial addition of new drill rigs. This augmented activity will improve the value of our royalties. Slide 14 provides some guidance for the investment. With respect to the $220 million that will be funded at closing, we do not expect the material revenue contribution this year. Revenues are expected to begin earnest and begin ramping up in 2019 and continue to increase over the course of the next 10 plus years. During that period, revenues net to Franco-Nevada are expected to reach a level of $30 million to $35 million per year at current commodity prices and are expected to generate after tax returns of greater than 10% under either spot or script [ph] pricing scenarios. We were fortunate to begin negotiating guild terms at the end of last year and are therefore able to capture the benefits of an upward move in the oil price. These are long life assets with perpetual ownership rights, cash flows which are expected to build and stabilize over a period of more than 30 years. Following that will be a long period of slowly declining revenue, as well as drawdown. While the guidance provided pertains to the upfront $220 million investment, future investments into the acquisition vehicle are expected to generate similar economics on a staggered basis. The above referenced economics are based on only 2 to 3 hydrocarbon horizons. However, upside potential exists in the form of multiple other undeveloped hydrocarbon bearing zones which may become a target in the future. Additionally those economics reflect current expectations of recovery factors. However those recovery rates have the potential to increase over time from improvements in extraction technologies. Lastly, there is also an opportunity to expand upon the commitment with Continental should the parties desire to do so in the future. Turning to Slide 15. Over the past two years Franco-Nevada has invested approximately $344 million into U.S. oil and gas assets. The investments have been focused towards the core areas of the SCOOP, STACK, Midland and Permian basins. We have purposely targeted areas with the most favorable economics for operators and this is evidenced by the chart on the slide ranking counties in the U.S. by rig count. As you can see, royalty acreage related to our – royalty acreage related to our royalties covers the most active counties in the U.S. which is a good proxy for the underlying economics, as operators tend to focus for capital in areas of highest returns. The transaction with Continental will increase our exposure to U.S. oil and gas bringing the total spending to approximately $554 million on closing, with commitments to add another $300 million over the course of the next three years for a total of up to $864 million. On Slide 16. Over the past two years Franco-Nevada has taken advantage of a very favorable acquisition environment for US oil and gas assets. As Franco-Nevada began acquiring these assets, oil prices have increased, rig activity continues to outperform our initial expectations, while product - productivity in the basins continues to improve and we will benefit from a reduction in U.S. corporate tax rates brought into effect under the current administration. As was highlighted by Sandip in the financial discussion, the U.S. oil and gas assets are already beginning to generate meaningful revenue contribution for the company. We are expecting these revenues to grow significantly over the coming years, as operators transition from drilling in order to hold their acreage toward full scale development of their land. Slide 17 provides an update of the company's oil and gas revenue guidance. From that which was provided in the March 2018 financial disclosure. With increased oil prices and strong performance from several assets, we are increasing our 2018 guidance from the prior range of $50 million to $60 million to a range of $65 million to $75 million under a $65 per barrel WTI price assumption. Additionally with the increased prices and new contributions from the Continental acquisition vehicle, we are increasing the five year guidance from the prior range of $80 million to $90 million to a range of $120 million to $140 million, again under a $65 per barrel WTI price assumption. This includes only the Continental assets acquired with the upfront investment of $220 million and our $300 million is expected - further investments with Continental are not included. Recent acquisitions in U.S., along with Continental transaction will result in a significant increase in oil and gas revenue over the course of the next five years. And with that, I'll turn it back to Sandy.

Thanks, Jason. Slide 18 provides a summary of our updated full year guidance for 2018. As Jason mentioned based on stronger - higher oil prices and production, we have increased our oil and gas guidance. With respect to mining asset guidance based upon performance for the first six months of 2018 and expectations for the remainder of the year, the company is revising the GEO guidance to 440,000 to 470,000 from the previously guided 460,000 to 490,000. Slide 19 summarizes the financial resources available to the company, when including our marketable securities and credit facility and after accounting the Continental initial funding of $220 million, we currently have $1.2 billion of capital still available to complete transactions. During the quarter, we funded $89.2 million towards our Cobre Panama Stream commitment and at the end of Q2 2018 we had funded $886 million of our $1 billion commitment. With respect to how the company plans to fund the $220 million for the Continental transaction, we will be using cash on hand, plus drawing down on our credit facility. As you are aware of one of our key business objectives to generate at least 80% of our revenue from precious metals. Slide 20 highlights how that goal has been achieved over the last decade and how Franco-Nevada has actively managed it. At our IPO we were slightly above 50% precious metals revenue. We made a conscious decision at the time to only enter into precious metal transactions until we reached at least 80% precious metals revenue. Even with our recent move into U.S. oil and gas royalties, we are still above the 80% precious metals threshold and with the addition of Cobre Panama with deliveries beginning in 2019, we expect to remain above 80%. This of course does not take into consideration any future precious metal transactions we may complete. And now, I'll pass it back to Sobhi, management is available to take any questions.

Thank you, sir. [Operator Instructions] And your first question will be from Chris Terry at Scotiabank. Please go ahead.

Hi, guys. It's Christy. I just wondered on slide 20, where you talked about that 80% and the mix of the different assets going forward. Can you comment just a little bit about the second half of this year, maybe into 2019? Are you seeing potential deal flows in the more traditional precious space and then just a little on oil and gas space? How is the environment changed with the oil prices going up? Do you see potential for other deals outside of the one that you've just done?

Chris, its Paul Brink here. First of all on the on the overall outlook, we - the environment is good. We’re seeing a good amount of transaction activity. I'd say there are two broad buckets that falls into, the first is on the mining side, of that as you'd expect at the moment is non-gold, but mining related assets. I'd say with the downturn in the gold price what we've been waiting for in the gold sector is for the industry to get back to building a good amount of assets and hoping that would happen in the near term, but I think with a downturn in the gold price we got to push back - expectation back a bit. But as I say there are some good opportunities that we're looking at that are on the mining side, but non-gold and then the other side that continues to be active is on the oil and gas side. And to your question, when we value [ph] most of these assets we typically using a strict price deck and that will - that oil price that still goes down to the low, mid sort of $50 per barrel. So we still see good value in acquiring oil assets in this environment and so we expect it will continue in that direction as well.

Okay. Thanks, Paul.

Thank you. Next question will be from Josh Wilson at [indiscernible]. Please go ahead.

Thank you. A couple of oil and gas questions, I guess first in terms of your investment outlook, you mentioned $864 million spent thus far on the U.S. properties, yes, there was also some money spent in Ryan [ph] for the thermal project there which takes you up to the mid-nines, I recall at one point there was discussion about the total targeted $1 billion in oil and gas. Does this investment with Continental sort of max you out in terms of your energy exposure or would you still continue to look in this space or is there in the interim or longer term?

Josh, it's David Harquail here. You know, right now if we do nothing, we still - we're on track to get close to that 80% limit as we've shown on our slide number 20. But we fully expect the next four years we're going to be seeing additional gold assets or precious metals that was added to the portfolio. The way we look at it is we still have some room to add further. We just are always measuring against our confidence of what would be would have on the precious metals side. And so we feel we still have some room to add on the oil and gas side, but it is going to be measured against the opportunities that we have on the precious metals side.

Understood. Jason O’Connell: Josh, it's Jason here. Just to clarify, you mentioned the $864 million that we spent to date. Just want to keep in mind the $300 million of that will be spent over the course for the next three years. And so that's not all spent to date, that’s future spending as well.

Got it. Okay. Thank you. And then maybe for some more details on the oil and gas side, in terms of the 2022 guidance, does that assume that the additional 300 contingent payments are made and that that would include the revenues from that you know, future dated investment? Jason O’Connell: No that guidance - so the 120 to 140 assumes only the upfront payment of $220 million. And so we provided guidance based on what - basically what we know will be spent, the other $300 million we expect to spend, but we haven't deployed it yet. And so there's no revenue in that guidance attributable to the additional $300 million. That would be in addition to that - the range that was provided.

Okay. So it's fair to say as you sort of commit additional funding your forecast for the revenue side will grow reasonably, considerably? Jason O’Connell: That's right.

Okay. And maybe in terms of some of the specifics on the SCOOP/STACK play and I guess what the outlook is, in terms of your forecast for gas versus oil content what sort of split should we be assuming? Jason O’Connell: It will be variable and it will change over time. In the first year or so the split will be - it would be quite gas, it will be up to probably half, roughly half gas. But Continental in their quarterly call yesterday indicated they're transitioning to a more oil rich production profile, they'll be targeting areas of higher oil content. And so we expect over the course of next couple of years that ratio will change from call it, a half gas, half oil to probably 70% or 80% oil.

Okay. And I'm not sure how to ask this, but I guess looking to slide 16 with the rig counts at least for the SCOOP/STACK which may be representative on the new properties, but the rig count there is I guess a little bit over 100 now. You know, when you look at sort of steady state numbers for the play what sort of number of pay status rigs are you assuming you know, and I guess what would be the equivalent production volume for that? Jason O’Connell: You know, when we value these opportunities we don't anticipate an increase in rig count. And so what we do is we take the current rig levels and greater evaluations from there. We don't have a particular outlook for the overall basin, obviously it's going to depend on commodity prices, the higher the price, likely the more big it will be active. In terms of this particular situation, Continental has announced as of yesterday that they are adding the rate in the SCOOP/STACK, they Are going from 16 to 18 rigs by the end of the year, when we began evaluating the opportunity Continental was up 16 rigs, so that would be a benefit to us over how we value the acquisition and we expect that you know the rigs that they employ in the basin will be directly probably correlated with the price of oil.

Jason, I’ll add to that. Its David here, is if I remember in our first STACK [ph] deal we went in two years ago it was about 70 rigs that we were assuming in our projections and we're now north of 100 rigs. So I think we've been very conservative in the assumptions on the rigs.

Okay. Those are all my questions. Thank you very much.

Thank you. Next question will be from Cosmos Chiu at CIBC. Please go ahead.

Hi, thanks Sandip, Jason, Paul and David. Maybe a few questions from me here, maybe looking at the oil and gas you know, strategic partnership first. Jason, these mineral rights that - you know entity [ph] is going to be purchasing acquiring. Can we look at it? Can you remind us it you know more or less like NSR? Jason O’Connell: Yes. Basically the way it works is in the U.S. mineral rights or land title is privately held by individuals and that presents an opportunity for Franco-Nevada to acquire the underlying mineral title or mineral rights. Those mineral rights are then leased out to operators in exchange for a royalty, so that’s how the royalties are created. The royalties themselves you can think of them as an NSR, basically their growth royalty on production revenue, less some small costs for transportation and processing.

Okay. And then I guess, what's happening here, is that Continental is going to be driving some of the valuation and some of the opportunities, looking at some of the opportunities that you can acquire using this entity [ph]. Looking at some of the mineral rights, now they currently, you know, maybe currently in production and some that are you know part of future production is that how I should look? Jason O’Connell: Yeah, so the premise here is that you know, as a typical mineral buyer you don't have any information on timing of developments, so what Continental brings to the table here is the visibility into when a bridge will be developed or drilled. And that brings forward revenue. And so what they'll be buying is, they'll be buying acreage that is specifically located under their drilling program. And what that does is it creates a very large sort of arbitrage between you know, the typical market and our acquisition vehicle. And so the typical royalty buyer in the market is essentially blind when they acquire royalties, so they'll have assume a conservative set of assumptions around timing. They'll have to say for example acreage may be developed in 5 years or 10 years or 20 years. They really don't know and it has to be conservative and that’s the price. The advantage plus in the scenario is that we can pay that market price for benefit of knowing that our royalties will be developed in the next one, two or three years. So that's what creates value arbitrage that we're taking advantage of. And so yes, Continental as the acquirer will be focused on acquiring the acreage generally underneath, undeveloped lands, but undeveloped lands that will be drilled within the next one, two, three years.

Okay. And that may be you know switching gears a little bit on the accounting side for these - for this new vehicle here. How is that going to work? You know, it's a separate vehicle, but at the same time I would imagine what's being generated as revenue which is going to roll up into Franco-Nevada’s financial statements, is that how it's going to work?

Yes. So Cosmos, Sandip here…

Hi, Sandip.

Hi. It’s a separate legal entity and we will be reporting. So as Jason mentioned, we have the possibility to earn 50% of the revenue up to 75% on volume metrics, if they're met or not. So based on that we will pick up you know, if its 50% percent we’ll pick up 50% of revenue, 50% of any costs that are in that company which will be minimal. So basically it's just that the largest component will be ramping.

Okay. And then I guess the other part is Jason as you mentioned, you know within the next 10 years you're expecting revenue of about $30 million to $35 million coming from this new vehicle here. You know, I guess look at the rig count everything else, how should we look at it, is it like a straight line sort of going to a $30 million to $35 million in 10 years or is it more exponential or is it more like a parabola going up or how should we look at it? Jason O’Connell: Yeah. The expectation Cosmos is that it, it will - it's not a completely straight line. It will be more pushed forward than that. So in the next two or three years you should see significant bump up from basically zero revenue in 2018 to a higher level in the next three years and then it's a slower ramp from there up to $30 million to $35 million 10 years out. So it's more heavily weighted towards the first three or four years.

Okay. And maybe one last question on underscoring [ph] gas here, you know, in terms of STACK and SCOOP play you know previously there had been some comparisons between STACK and SCOOP and potentially the Permian Basin, Jason would you make that comparison? Jason O’Connell: We view the STACK and SCOOP and the Permian basically as [indiscernible] basin, broader basins in North America. The reason is the economics in both those plays are extremely attractive for the operators and that's where they'll focus their capital. Breakeven cost for both basins are very attractive. There are some $30 in the core parts of the play. So they have many similarities. The difference between the two Cosmos is really one of scale. So the Permian is significantly larger in terms of overall area than the SCOOP/STACK and the other difference which has been highlighted lately is infrastructure. And so the Permian has been if you follow the oil and gas world has been experiencing some challenges with - to egress capacity and some of the operators in that area have been experiencing water differentials on their sales. The SCOOP/STACK doesn't have that issue yet, particularly with Continental they have got ample capacity on both the oil and gas side and that play is located very, very proximal to Cushing Oklahoma which is where the WTI reference price is established. And so you know, from an economic perspective they're both very high quality basins. The SCOOP/STACK is smaller scale and has right now the benefit of better infrastructure.

And so maybe one last question for me here, in terms of this new vehicle, how is it being structured, is it is it offshore or is it going to be based in the U.S. and paying full taxes. Could you maybe touch on a little bit? Jason O’Connell: Yes, so it will be structured - it will be held with a subsidiary in the U.S., it will be paying full U.S. taxes. And so we do have the benefit, obviously as I mentioned more favorable tax rates under the under administration. But it is – its a U.S. subsidiary that will hold our interest in that company.

Great. That's all I have. Thank you.

Thank you. Next question will be from Greg Barnes of TD Securities. Please go ahead.

Yes, thank you. Sandip, how are you thinking about the balance sheet as it evolve over the next year or so. You're obviously going to go into the credit line and I know Franco doesn't like to carry that. What's your thinking along those lines?

So Greg, the plan as I've mentioned to fund this Continental transaction will use cash on hand and trawling to the facility. Our expectation is that we will have funded Cobre Panama by the end of this year, so next year we won't have that capital outlay and we'll be generating significant cash flow based upon the growth of Cobre coming in store next year, as well as the continued growth of the U.S. oil and gas assets. So our cash generation is going to be quite significant which will easily pay off the credit facility that is gone down. So at this time, you know, if your question is whether we're going to raise equity, we have no intention of raising equity at this time.

And Jason, you've got a three year plan I guess with Continental, the $300 million going forward, what's the intention beyond that. I know it's success based, but clearly this isn't just a three year investment and then it stops? Jason O’Connell: Yeah. Thanks, Greg. It is a three year investment right now. And so after three years there is no expectation that we would invest more. It's really more of an option for the parties. If the venture is successful, if the gold to oil ratio of the broader company is in line and there's opportunities to invest more in oil and gas then take that opportunity and have a discussion with Continental about investing more dollars into the vehicle. But as it's structured right now it's strictly $300 million over the course of the next three years, and then there are no further obligations beyond that. So it really is an opportunity if we so choose to seize it. But right now 300 is the maximum commitment.

Greg, its David Harquail here. I'll just add – its steps in a relationship. I think this is a unique process here. So we'll see how it works. I can tell you we've been to the Continental offices a number of times now, Harold Hamm has personally been up to our offices as well and its been a very good rapport between other companies because we both have a very long-term perspective in this business. And so we think this is something we can build over a long period of time. And so - and I'd say so far it's very positive relationship but the real test is time. So we'll see how this goes.

Thank you.

Thank you. Next question will be from Steven Butler at GMP Securities. Please go ahead.

Guys, will just be this one to a pulp here on the stock again on 2022 revenues Jason in your $120 million to $140 million guidance range for revenues. What is the approximate contribution from the $220 million deal with Continental in that revenue for just 22? Jason O’Connell: It's slightly less than the $30 million to $35 million that we indicated on the prior slide. As I mentioned the revenue ramp up from basically zero this year to that $30 million level within 10 years or so, and as I sort of explained the Cosmos that's a bit front end loaded. And so within five years in 2022, we’ll expect a little bit less than the $30 million. But certainly more than half of that amount. So you know, somewhere between those two numbers.

Okay. And then 2019 is it a humble start or is it still a decent number in 2019 next year, as your expectations are right now? Jason O’Connell: We haven't given the guidance for 2019 because it's based on Continental achieving their volume target. We don't know whether they'll achieve that number or not at this stage. You know, it ends on your definition of humble, meaningful revenue in 2019, but certainly will be a fraction of that $30 million level.

Okay, sounds good. And I guess, actually looking sequentially guys Q1 to Q2 Midland and Delaware were probably the best contributors to sequential improvement oil and gas revenues and any comments there I guess, I just look at the rig count and I guess you can just maybe sort of do the math, but it sounds like things are - it looks like things are going quite well in Midland and Delaware as well?

Steve, Sandip, here. Yes, the U.S. assets have been large contributors, especially over last year. The first half of the year did include some tax payments from 2017 approximately $2 million to $3 million, so if you were to simply just double up the first six months of the year that's not going to work for the second half of the year.

Okay. Thanks, guys.

Thank you. Next question will be from tiny Tanya Jakusconek at Scotiabank. Please go ahead.

Great. Good morning, everybody. I'll leave the oil and gas and move on to just two other questions that I have. Just on the M&A side, I think you mentioned that you're looking at some mining non-precious, so Dave or Paul, would that be like base metals like copper, zinc, other non-precious metals?

Tanya, its Paul. Yes, you know, as you know in our business we - really what we're trying to do is invest in good resources that we think have got good economics to give us the payback on our the investment you know, plus greater upside and we're open in terms of commodities obviously precious metals are the best for us. But it their base metal deposit box that fit that description, we're also open to those and we're seeing some good opportunities on that side.

Okay, perfect. Thank you there. And then maybe Sandip just for you, just on the CRA and we appreciate another year now has been included under the review. I know you had previously given guidance that if it was a transfer pricing issue and we don't know that's what they're interested in that the impact to you would mainly be on Palmarejo and I think that number had been about $25 million for 2012 to 2014, if we included 215 in that number what would the theoretical back taxes be on Palmarejo. I think that would be the only one paid right?

Yeah. So we -as you know the way the streams work you recover your deposits before you pay tax. So yes, so it was [indiscernible] is one asset and mine waste solutions was the other one, so the end of 2017 – end of 2015 they're sold two. So the number really doesn't change much.

Okay, so..

Yeah…

Okay, perfect. Thank you.

Thank you. Next question will be from Carey MacRury at Canaccord Genuity. Please go ahead.

Hi, good morning. Another question on oil and gas for you Jason, you talked about the $30 million to $35 million and 5 to 10 years from what you can see today is that where you see it peaking at or is there opportunity to go above that on the original 220? Jason O’Connell: There is some opportunity to go beyond that. It all depends on the level of drilling activity that goes on with Continental and our expectation is that as they continue to develop the land there's opportunity for the revenue to continue on beyond that point. So 10 years out is not the absolute peak in revenue, but it's close. We probably have another few years few – three to five years of growth beyond that before it really starts to flatten out. And so there is some capacity on that probably for five years or so.

And I guess secondly, once you hit that level how many years do you think you can sustain it - sustain that you talked about 30 year plus assets here? Jason O’Connell: Yeah, the sort of our expectation based on today's reality on the ground, I guess it all depends on the inventory that Continental has how many locations they have to drill wells and the recovery from those well. As technology sort of improves and recovery rates improve, we expect that you know in reality it will probably be longer than that. There are a number of horizons as I mentioned that were not included in our evaluations that if they get developed in the future would significantly add to that timeframe. So the 30 years that we're talking about includes you know, the formations that are currently being developed, and currently targeted by Continental, if a target future formation that timeframe can get extended quite significantly.

And Carey., This is Carey here, just to experience our to waiver you know big unit field in western Canada and it's been producing for 40 years and we think it has a light for another 40 years over time. And the big advantages of this with these oilfields in these large areas is that you look at them from the traditional recovery horizons as Jason says we're only looking at only three horizons is more rights to be on. But then you go into enhanced recovery and what we experience a waiver is you had the vertical drilling, you had horizontal drilling, you had waterflood you had CO2 injection. No one is yet talking about enhanced oil recovery yet on the on these fracking operations. And so once we even look at other horizons, I think there's going to be a phase in the future where people will be looking at things such as CO2 injection in these wells and because we're only looking at you know in the teens in terms of percent recoveries on existing economics and I'm totally convinced when you have all that infrastructure in place you will be doing enhanced oil recovery. So I think the 30 years represents what we know right now with the technologies have being applied. I'm convinced this is going to be something my great, great grandchildren will still be collecting billions on. So I think that's what's very exciting about this.

So is there an underlying reserve associated with the land position or how does that work?

There is an underlying reserve, although it's Continental's proprietary information, so it's not something that we can share right now. The reserve - again that we based our economics on because a long a way in time and we expect as technology improves and as these future zones are brought into plan that reserve will increase substantially.

And then maybe one last question. Just know you've been focused on the U.S. oil and gas opportunity, how would you characterize the differences between what you're seeing in the U.S. versus what you'd see in Western Canada?

Yeah, there's a significant difference between the two countries and the difference comes down primarily to how land is held. And so in Canada the majority of the mineral rights are held by the Crown and so we can't buy that really from the government. There were one time private mineral rights privately held mineral rights but those have mostly been bought up by PrairieSky or Heritage Royalty which is owned by Teachers Pension Plan and so there's very little private mineral rights that can be acquired right now and so there's not a lot of activity in that space. In the US, as I mentioned that the majority rights are held by individuals, so there's a huge segment of the industry I guess that is focused on buying and trading these mineral rights and there are many sort of private equity backed groups that will go around and aggregate those interests, create portfolios and sort of look to grow them and trade them. And so it’s a magnitude of a - very different magnitude I guess between the two countries in terms of the size of the opportunity. There are some opportunities in Canada that we continue to look at most of those opportunities exist directly with an operator, so rather than buying mineral rights form individuals, we would look to create manufacture royalties as a form of financing for operators and we continue to look at those from time to time. It just depends on the rates of return on a relative basis. And right now we're seeing better rates return in the US for those types of opportunities and we're seeing Canada.

Great. Thank you.

Thank you. Next question will be from Brian MacArthur at Raymond James. Please go ahead. Brian MacArthur’: Hi, good morning. I’ve two questions and they have to do with the revenue distribution sharing. So in the initial 220, you make this statement that you know it's 50% Franco [ph] and its a 25%percent variable in your base assumption of $30 million to $35 million, is it sort of 50% so that if you do extra volume drilling there and when you do better than expect you're going to get a double kick i.e. more rigs and wells, plus you're getting a disproportionate amount to your upside is that how the volumetric function works? Jason O’Connell: Not exactly, Brian. The way that that distribution works is that anywhere really between the - for us the 50% and the 75% we're essentially receiving the same revenue because we get a larger share of the volumes. If the production is lower we get smaller share volumes, if the production is higher. So really anywhere between those two levels we're essentially achieving the same amount of revenue and that's by design. That's what I guess, what we are trying to achieve with the structures that we are that when Continental - when or if Continental was to fall short of their targets. So that revenue that we're showing you on the slide is sort of a protected revenue whether Continental is achieving their full 50% or whether they're achieving only a 25% revenue distribution. Brian MacArthur’: Got it. So it's kind of a downside option as opposed to an upside option if I want to block it that way protection, is that fair? Jason O’Connell: That's right. Anywhere between those 2 percentage we’re protected and it's protected on the downside. We will share the upside with Continental should they achieve beyond the volume targets, which means if we are right there achieving 50% of revenue that's a good thing for us. So the higher - the higher the proportion distributions they receive, well, it is better it is for us if they can get over their target.

So then we’re going that way… Jason O’Connell: Just to think of it as a 50-50 split in our projections and then we have downside protection would take more of Continental doesn't achieve the numbers. I think what is an expression of Continental's confidence they can at least achieve projections that we're using on our 50-50 estimates. So I expect to perform better, but they perform better, we're just getting 50%. Brian MacArthur’: Great. That's very helpful. That's very clear. And just a second part of it then on the 300 that gives in going forward it says you can fund up this you know, 80, 20. But then is that coming out the same way if 50, 25, 25 is different function there going forward. Because you're putting in proportionately more money? Jason O’Connell: Yeah, its the same - it's the same structure. So for that remaining $300 million we continue to fund 80% of it and the distribution structure continues to be - we receive 50% to 75%. Brian MacArthur’: Great. Thanks very much.

Thank you. [Operator Instructions] And your next question will be from Kip Keen at S&P. Please go ahead.

Yeah. Hi, guys. Thanks for taking my question. Were there any labor negotiations in Latin America that you have your eyes on? I don't call or Antamina did they make an agreement yet - it was up in the third quarter, I am not sure. Jason O’Connell: Kip, I haven't seen anything on any labor unrest at any of the operations that we've been involved in.\

But are there any contracts up for negotiation in the near term or two? Jason O’Connell: I'd need to - I don't have that. So, yeah. Kip, we with David here, we do we look at sort of labor as sort of the standard for the business and because we're so diversified we're not selecting individual operation and labor interruptions. The only one we've been watching closely is Cobre Panama because they've had you know - working with their various unions there, that seems to have been all resolved in the last few months and things are proceeding smoothly. But on the other operations because we're buying for 20, 30 years on the on investing these things, we fully expect there'll be interruptions from time to time. Nothing too long. We expect that to be resolved.

Okay. Thank you.

Thank you. And at this time we have no other questions registered.

Thank you, Shirley. We expect to release our third quarter 2018 results after market close on November 5th with the conference call held the following morning. Thank you for your interest in Franco-Nevada.

Thank you, Ms, Hayden. Ladies and gentlemen, this does conclude the conference call for today. Once again thank you for attending. And at this time we do ask that you please disconnect your lines. Enjoy the rest of your day.