Franco-Nevada Corporation (FNV) Q2 2024 Earnings Report, Transcript and Summary

Good morning and welcome to Franco-Nevada Corporation's Second Quarter 2024 Results Conference Call and Webcast. This call is being recorded on August 14, 2024. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a Q&A session, where you may ask a question through the phone line or webcast. If you're joining by webcast, you may submit a written question for the Q&A session at any time during this call by typing your question in the Q&A section of the webcast platform. [Operator Instructions] I would now like to turn the conference over to your host, Candida Hayden, Senior Analyst, Investor Relations. Please go ahead.

Thank you, Laura. Good morning, everyone. Thank you for joining us today to discuss Franco-Nevada's second quarter 2024 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. The presentation is also available to view on the webcast. During our call this morning, Paul Brink, President and CEO of Franco-Nevada, will provide introductory remarks followed by Sandip Rana, Chief Financial Officer, who will provide a brief review of our results. And Eaun Gray, Senior Vice President, Business Development, who will discuss our recent transactions. This will be followed by a Q&A period. Our full executive team is available to answer any questions. Participants may submit questions via the telephone or via the webcast. 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 Slide 2 of this presentation. I will now turn over the call to Paul Brink, President and CEO of Franco-Nevada.

Thank you, Candida and good morning. Our Q2 results benefited from record gold prices. Revenues and cash flow from operations were up, compared with Q1. Results were lower, compared to Q2 last year without the contribution from Cobra Panama, and due to lower production at Candelaria and Antapaccay. Lower quarterly production at the two operating assets is a short-term bump, and we expect to return to normal operations at both for the balance of the year. These are two of our best performing assets over the long-term. We look forward to the potential underground expansion at Candelaria and to the future development of the Coroccohuayco at Antapaccay. Our business development team have had great success in recent months and we're very pleased to have added two long-life assets to the portfolio. A gold stream on SolGold's Cascabel Copper Gold development project in Ecuador and a royalty on Newmont's Yanacocha operations in Peru. Eaun will give more detail on the acquisitions later in the call. Initial contributions from Yanacocha and the growing contribution from the Salares Norte, Greenstone and Tocantinzinho gold mines that all started production in recent months will boost our results in the second half of the year. With that, I'll hand it over to Sandip.

Thanks, Paul. Good morning, everyone. I'll turn to Slide 4, to give an overview of the financial results for the quarter. Overall, GEOs sold were 110,264 for second quarter 2024. This compares to 168,515 for the prior year quarter and 131,865 for the prior year quarter when Cobre Panama GEOs are excluded. As you are aware, Cobre Panama continues to be on preservation and safe management. In terms of operating assets and GEOs delivered and sold for the quarter, we did receive less ounces from Candelaria and Antapaccay, compared to prior year. GEOs delivered were both less than - doubled, but less than our expectations. At Candelaria, GEOs delivered and sold in Q2, 2024 were lower than those sold in Q2, 2023 as mining rates were impacted by the interface of the open pit and historic underground mining stopes. This required more stockpile ore to be processed, which reduced grades and recoveries. With access to higher grade ore anticipated in the second half of 2024, Lundin Mining anticipates stronger production and has maintained the production guidance for Candelaria. At Antapaccay, GEOs delivered and sold were also lower in second quarter, compared to prior year. Mine scheduling was adjusted in part due to a geotechnical event, which temporarily limited pit access, resulting in the lower production. Glencore anticipates stronger production in the second half of 2024 and Franco-Nevada expected stream deliveries for the full year, to be within its initial expectations of 50,000 to 60,000 GEOs. Hemlo NPI was also weaker than expected in the second quarter 2024. There was less mining on royalty land along with higher costs, which resulted in a lower NPI paid to Franco. It continues to be difficult to estimate what the Hemlo NPI will be going forward. For the quarter, precious metal GEOs were 82,350. This compares to 95,383 in prior year when Cobre Panama GEOs are excluded. Precious metal GEOs represented approximately 75% of total GEOs for the quarter. For diversified GEOs, total GEOs sold were 27,914, compared to just over 36,000 in Q2, 2023. Iron ore GEOs sold, were relatively flat year-over-year, while energy GEOs were lower at 22,100 for Q2, compared to 28,683 a year ago. Decrease in GEOs is a combination of lower revenue, due to weaker natural gas prices as well as the impact of converting energy revenue to GEOs, by higher gold prices. Also in Q2, 2023, revenue included a catch-up royalty payment related to new wells in the Permian Basin, which was not present in Q2. As we look at total revenue, revenue was $260.1 million for the quarter, compared to $329.9 million a year ago. When you exclude Cobre Panama from prior year revenue, revenue was actually up from $258.2 million. Q2, 2024 saw continued volatility in average commodity prices. As you see on Slide 5, gold and silver average prices were significantly higher for the quarter, when compared to prior year. However, platinum and in particular palladium average prices were lower year-over- year, which did negatively impact conversion of PGM revenues to GEOs. Oil prices were higher as well, while natural gas average prices were essentially flat. Slide 6 highlights the financial results for the quarter and year-to-date 2024. As mentioned, GEOs sold and revenue were lower year-over-year. Adjusted EBITDA was $221.9 million, while adjusted net income was $144.9 million. On a per share basis, adjusted net income was $0.75 for the quarter. On the cost side, we did have a decrease in cost of sales, compared to prior year as we did not incur the ongoing fixed cost per ounces delivered by Cobre Panama and had lower GEOs delivered and sold from Antapaccay and Candelaria. With respect to the arbitration costs for Cobre Panama, the company incurred costs of 800,000 in Q2, 2024 and have incurred $2.3 million year-to-date. We expect approximately $3 million to be incurred for the rest of the year. Depletion decreased to $52.9 million versus $75.1 million a year ago. Again, the decrease was due to no depletion recorded for Cobre Panama, as well as lower depletion recorded for Antapaccay, because of the lower deliveries in the quarter. One additional item to note in Q2, 2024 is the tax adjustment recorded in May 2024, the government of Barbados enacted legislation to implement tax measures also in response to the OECD's Pillar Two global minimum tax initiative. Measures include an increase of the Barbados corporate tax rate to 9%, and the introduction of a qualified domestic minimum top-up tax, which together aim to ensure that the Barbados effective tax rate payable, subject to Pillar Two is at least 15% going forward. What's important to note is that of the $122.8 million total tax expense recorded for the six months ended June 30, 2024, 49.1 relates to an adjustment for prior years, and the actual incremental tax expense related to 2024 is about $21 million, because of these changes. Going forward, we estimate that our effective tax rate, will be about 19% to 20%, depending upon where taxable income is generated. Slide 7 highlights the continued diversification of the portfolio. From the charts, you can see that 75% of our second quarter 2024 revenue was generated by precious metals, with revenue being sourced 82% from the Americas. Slide 8 illustrates the strength of our business model, to generate high margins. For Q2, 2024, the cash cost per GEO, which is essentially cost of sale divided by gold equivalent ounces sold was $264 per GEO. This compares to $280 per GEO in Q2, 2023. This amount will fluctuate depending upon the mix of royalty versus stream GEOs, including mining and energy. But as you can see at current average gold prices, the company generates significant margins. Margin was approximately $2,100 per ounce in Q2, 2024. A rising commodity price environment, we expect to benefit fully as the cost per GEO sold should not increase in its income. As we turn to available capital, the company has $2.4 billion as at June 30, 2024, as highlighted on Slide 9. Please note that subsequent to June 30, 2024, the company has funded a number of transaction. The acquisition of a royalty on Newmont Yanacocha property for $210 million, which Eaun will speak to shortly. $23.3 million advanced to SolGold as part of the $525 million stream commitment agreed to in July. Purchase of shares in G Mining Ventures as part of the reunion gold business combination for $25 million. And the funding of a five-year $35 million loan to EMX Royalty. Even after funding of the above, the company still has a strong balance sheet to complete additional transaction. Also during the quarter, the company amended its $1 billion unsecured revolving term credit facility, to extend its term to June 3, 2029. Finally, with respect to the GEO sold guidance for 2024, 480,000 to 540,000 total GEO sold and 360,000 to 400,000 precious metal GEO sold. We reiterate those guidance ranges, but expect to be at the lower end of both ranges. We anticipate stronger delivery from Candelaria in the second half of the year, and new contributions from Tocantinzinho, Greenstone and Salares Norte. And with that, I will now pass it over to Eaun, who will speak to the recent business development transactions completed.

Thank you, Sandip and good morning. As Paul mentioned, we were happy to announce Gold Stream financing on SolGold's Alpala project in July. We view this as a world-class copper-gold porphyry. Stream is tailored to SolGold's needs, allowing for de-risking with initial pre-construction tranches and funding construction once key stage gates are met and funding is secured. Transaction was syndicated 70%/30% with Osisko Gold Royalties and we believe represents a prudent capital allocation and risk-adjusted return. The Alpala deposit stands out amongst copper gold projects globally, based on its size and grade. To summarize the recent pre-feasibility study, which demonstrates a robust project, and look forward to management steps to advance and de-risk the project. Our team sees great upside at Apollo and on the broader Cascabel concession, which the Stream covers. Projects like Tintaya [ph] increase the value of the stream in our view. Our experience is that these types of deposits also tend to cluster and we see great potential in the drill. The transaction includes a number of risk mitigates, to determine when funding takes place and various protections for streamers should there be delays or risks opening of the project. An acquirer would benefit also from the ability to reduce the stream, but to do so would have to provide a payment to Franco-Nevada and Osisko. We along with the Osisko look forward to the steps management is taking to advance the project. I believe that Cascabel will be a meaningful contributor to Franco-Nevada for years to come. We'd also appoint investors to SolGold's recent update, released this morning providing information on their steps to add value to the project. Moving to the Yanacocha Royalty acquisition from Buenaventura, which was announced yesterday, we're happy to add this asset to the portfolio. Royalty will contribute immediately given significant oxide production, and we expect would step up significantly with the sulfides project. We're very positive on the sulfides and see great potential from the existing footprints to extend the life for many years, beyond what is currently in place. The royalty also covers the Conga and Killish projects providing excellent upside. We're able to visit the site as part of our review and have good institutional knowledge of the asset dating back to Newmont and maintain an excellent relationship with Buenaventura providing comfort in the long-term potential. We view this as another world-class geological setting as evidenced by past production and extensive resource. We see great potential to contribute significant production for decades to come and further potential in the ROFR that we maintain on the additional royalties. With that I'll hand it back to the operator and Candida for any questions.

Of course. [Operator Instructions] Our first question comes from the line of Josh Wolfson from RBC Capital Markets. Go ahead please.

Yes thanks very much. First question on the Yanacocha transaction. The returns that we calculate would be comparable to some of the - I guess mega type of returns we saw maybe 2015-2016, which I would note you know ultimately worked out fairly well for the company. If we're looking at these deals today like Yanacocha, and maybe others that could be on the horizon what's the sort of appeal here. And I would note from our perspective like the main bulk of the economics, are not really the project hasn't really been developed, versus some of the historical low return deals, we're large producing known assets, just a bit more insight on what the company sees, versus what we know in the market today?

Thanks, Josh. It's Eaun speaking. We see great potential in the asset. It's been a huge producer over the years. It's a brownfield site with a very large resource endowment. We do get the benefit of existing oxide production and expect in the short term, there should be a decision on the sulfides. We were able to do an on-site diligence as part of the transaction, which provided additional comfort especially in the sulfides. We see that as a great project. The Newmont's, we expect will advance. I think they've put off a decision until 2025. But then on top of that, you have fantastic projects on the site, which really incentivizes maintaining production in our view. You have the Congra project, which not that long ago was advancing. And in the fullness of time, there is potential there in the Killish project, both very, very large. And so you have the benefit both of the immediate cash flow and fantastic optionality longer term. So that is why we find it attractive, and it's a great partner. Newmont's, as I'm sure you know, has a great track record of both advancing projects and operating successfully. So we're happy to be involved there.

Great. And then just in terms of the opportunity for maybe more of this style transaction that skews towards the optionalities. Are these the type of opportunities you're seeing out there? Or there's been a focus, at least from commentary from other companies about project financing type of deals?

We see both in short. I think there is certainly opportunity for project financing type transactions, operating assets. There's a pretty rich deal environment at the moment. So we'll continue to advance on all fronts.

Thank you. And one last question, just on one of the deals that was done earlier this year on the energy side of things for Haynesville. I'm not sure if this is an anomaly for the quarter, but Haynesville production or revenue hasn't really improved that much and there was a large investment made in the first quarter. When should we start to see the increased royalty revenues from this asset?

Josh, it's Jason speaking. You're right. We did add incrementally to Haynesville at the end of last year. And despite that, revenues were sort of flat. A lot of that is timing and commodity price. So gas prices, as you probably know, have fallen off fairly dramatically in the period we're speaking about. That impacts the royalty, both in terms of straight royalty economics that also impacts the way the operators are managing the production. Low gas prices in Haynesville have resulted in softer drilling rates and at times, operators start back to the production levels to try to rebalance the market. So there's a bit of a -- there's a large commodity price, I guess, impact there in two ways. We're also onboarding or continuing to onboard the assets that we acquired at the end of last year. It does take some time for all the ownership interest to transfer over. So I think as you'll see commodity prices rebound here in the coming quarters, I think you'll see volumes and revenues normalize a bit.

Those were all my questions. Thank you.

Thank you. Our next question comes from the line of Lawson Winder from Bank of America. Go head please.

Yes, thanks operator. Good morning Franco team. Thanks for taking the question here. I wanted to ask, first of all, about the deal in Yanacocha. Congratulations on getting another big deal done. What was the assumption in terms of the startup of the sulfides when you got to an IRR that you were comfortable with for this?

Thanks Lawson, Eaun again here. In terms of the sulfides, I think what Newmont has said is 2025, that's possible that they'll adjust it. It's worth noting that the oxides are currently in production. And I think our diligence would indicate there's potential there to continue to do leaching if there is a delay. But I think we are expecting something around the 2029 timeline production.

Okay. Great. Very helpful. And then just thinking about the deal pipeline and the relative metal mix, I mean, that's improved - I shouldn't use the word improved, but that's swung back in the favor of gold and silver and the Precious Metals quite significantly in Q2 versus Q1, where it dipped to quite a low level. So you're now back to 70% of revenue from gold and silver. In that context, how do you think about adding new streams in terms of metal mix? Is gold and silver still a continued priority here? Or does the rebound in gold and silver prices and the move to the metal mix as a result perhaps shift your focus now going forward more to non-precious deals?

Lawson, it's Paul. Thanks for the question. Focus is always is Precious Metals, and it starts, as always, with asset quality. Anytime we're looking at stuff, it's - what are the great assets. That is the biggest driver and what generates the best returns over time. And then we get on to commodity mix. So first is, do we like the asset. And second, can we get it done within the guidelines of what we do with the commodity mix. So as always, gold and Precious Metal is number one on list in terms of what we'd like to do. But always open minded if they grade assets in other commodities. We think we'll get long-term returns, happy to add those, too.

Okay. That's great context. Thanks very much, Paul. Thank you.

Thank you. Our next question comes from the line of Tanya Jakusconek from Scotiabank. Go ahead please

Hi. Good morning. Thank you so much for taking my questions. I'm just going to start off on just some of the guidance. And thanks, Sandip, Hemlo is always difficult to forecast. But just as we look at the second half of the year, and we do have the Candelaria, I think it was one that you had mentioned and Tocantinzinho, Salares Norte, those ones ramping up. I might think like it's second half -- is second half weighted, but is it more weighted to Q4? Or is it more of an even distribution? Plus I have the Vale top-up in Q3. So I'm just trying to understand Q3 versus Q4.

Sure, Tanya. Yes. As of right now from the visibility that we have, I would say it's probably going to be pretty even between the two. Maybe Q4 might be a little bit higher as Greenstone and Salares Norte ramp up, but I don't expect too much of a difference. Obviously, part of it is all dependent on commodity prices with respect to the NPIs. But for simplicity, I would say they should be pretty close.

Okay. That's helpful. Thank you for that. And then if I can move on to just the transactions and just the environment itself. And Eaun, for you, thank you for your forecast of 2029 for start-up of the sulfides, we modeled it into the next decade ourselves. But when you look at the internal rate of return, and again, making that decision, whatever gold price you want to use, for both of your transactions that you recently did, what are you getting? Are you getting the middle single-digit internal rate of returns? Just a benchmark for us to see on that. And the same with Cascabel, like when did you figure start-up on that asset as well?

Thanks Tanya, for the question. There's a lot there to unpack. I would say, first of all, it's risk-adjusted returns is what we think about and optionality is important in the investments. We want to see that there's a lot there that can go right over time, and we can earn an outsized return. Even if it does take time, it might not show up in an IRR, but certainly enhances the profile of the company providing gold for years to come. So with Yanacocha, yes, I would say it's a pretty reasonable return we see with the oxides and the sulfides. And beyond that, you have fantastic projects, which stands to provide you many multiples on your investment as those move forward. Now Conga, Killish could take a lot of time, if they get developed. But certainly, that skewed towards outsized cash flows from the investment was attractive to us. So maybe that provides a bit of good context.

Is reasonable for you single-digit, middle single-digit, like 5%? I don't know what reasonable is for you?

Yes, for an asset that has a great degree of optionality. That would be a reasonable return. Again, all just all things equal, it's risk-adjusted. In other cases, like SolGold, the return was meaningfully higher. And it just represents, as again, I mentioned a risk-adjusted rate of return.

Okay. And then for SolGold, when did you assume start-up of that one? And when you say significantly higher, are you implying double-digit?

Yes. In terms of - I don't want to get too much of steel specifics. I don't think it's appropriate. But roughly, if we look at scenarios. We started there in the early 2030s, and rate of return certainly above the mid-single digits. But beyond that, I don't think it's appropriate to comment.

Okay. Thank you for that color, Eaun. And maybe just turning to the M&A environment. Just I wanted to - on the last conference call, we talked about you're seeing bigger-sized deals, plus $500 million. I guess the Cascabel one was over $500 million. What sort of opportunity size are we still looking at now? Is it still over that $500 million? Are we back to about $100 million, to $300 million on the gold side? That's my first question on the transaction side?

Thanks, Tanya, for the question. Good question. I would say expect more of the same in terms of what you've seen recently for deal size. $100 million to $300 million is a pretty good kind of average size within the pipeline. The overall comments, I think that it remains extremely busy. So there's lots to look at, which is great and plenty on the Precious Metal side. So the team remains very focused.

Okay. Great. And then in terms of royalties, I mean, Buenaventura has been talking about the selling of this royalty in Yanacocha since last year. So congrats on finally getting this done. Are you seeing other opportunities on the royalty side in the environment separate from stream?

Certainly. We like royalties. They're great within the portfolio. So we see a bit of both, both in terms of streams and royalties [ph].

Okay. And then maybe just for Paul. I think the last conference call, we talked about transactions in non-gold space. We had specifically talked about lithium in the $50 million to $400 million range. And just looking at opportunities in the part of the market where commodities are not as strong as we see in the gold market. So I'm just wondering, what your thoughts -- have they changed? Is the opportunities for lithium still there? And is that something you still want to pursue?

We're still busy on that front, as Eaun mentioned. Most of our assets on the Precious Metals side, but we are looking at some diversified, some of that is lithium, some in other commodities. So I think there's still good potential to get, some deals done in those areas.

And that $50 million to $400 million range is, so the range that would fit into?

Yes, that's a good range.

Okay. Looks like you're very busy. Congratulations on both of those deals.

Thank you, Tanya.

Thank you. Our next question comes from the line of Martin Pradier from Veritas Investment Research. Go ahead please.

Thank you. It looks like you need the sulfide project to go ahead to make your money back in Yanacocha. Is that the correct assumption?

That is correct. Eaun speaking here.

Okay. And did I hear that there was a $49 million tax adjustment from previous year. Is that correct, or is it just previous quarter?

Yes. So because Barbados increased its tax rate to 9%, it's corporate tax rate, our deferred tax liability on our balance sheet, was set up at the old rate. So we had to adjust that, and that was $49.1 million one-time adjustment.

Okay. Perfect. Thank you. That's all. Thank you very much.

Thank you. There are no further questions on the phone line. I will now turn the Q&A session over to Candida Hayden, who will take questions from the webcast.

Thank you, Laura. Our first question comes from Bernie Peachey [ph] at Palisade Capital. Given the recent social and political turmoil in Ecuador, I'm a bit surprised by your commitment to the Cascabel project especially after Panama experience. What extent have you balanced your attention to the project geology versus your view of the political environment there?

Thank you for the question. Cascabel transaction was very carefully structured to take advantage of the geology, but also mitigate the risks. First point, in terms of the funding structure, it's broken down in tranches based on stage gains. And this allows certain items to be dealt with, before additional capital is funded. And then when it comes to the final construction funding, that is contingent upon the rest of the funding being secured, and a robust investment agreement being signed, with government of Ecuador with criteria, included as a condition to funding. So we take a lot of comfort from that. But I'd probably say, bigger picture, Ecuador has a very fair split fiscal flows versus other countries. And so, we draw a lot of comfort from that as well. Mines like [Salares Norte], the government drives 50% of the economic benefit of the projects. So that provides what I believe is a good backdrop towards stability going forward, social acceptability of mining projects. The government is also quite supportive of the project, which gave us a lot of comfort as part of our diligence. We met with a number of government officials Kito along with our partners at Osisko and also Canadian and U.S. Embassy staff.

Next question is also from [Bernie Peachey] at Palisade Capital, an update on Panama, especially given the new government?

So Bernie, it's Paul. The since the Mulino administration has come in, I think all the indications will be positive. They've indicated a willingness to look at a reopening of mine, enter into negotiations that is with some conditions. I'd say most positive are the steps that, they're taking of the first item is that they wanted to do a comprehensive environmental review. And so, they're putting together a panel of experts that they can do that. I'm very hopeful that, that will help demonstrate that the asset has been very well operated, and that some of the misgivings that have been promoted in the population, that there was environmental damage, will be dispelled. So, I think taking very positive steps to set the table so that they can, one, have a discussion with the company; and two, position this project better with the public in Panama.

The last question comes from Bjorn Wiklander. Current cash portfolio is US$1.4 billion. Is there deals out there such as royalty or stream that are coming that can match this cash position? Or are there other opportunities that this cash position can be used for? And if so, what could that be?

Thanks for the question, Eaun speaking. As I mentioned, we see a very robust pipeline at the moment. There's good potential to deploy that capital with what we have in the pipeline. Going forward, I think you will see us continue to transact on a number of opportunities. So I don't see it as surplus, it's quite beneficial for us in terms of bidding competitively.

Thank you, Eaun. There are no further questions from the webcast. This concludes our second quarter results conference call and webcast. We expect to release our third quarter 2024 results after market close on November 8, with the conference call held the following morning. Thank you for your interest in Franco-Nevada. Goodbye.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.