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Franco-Nevada Corporation (FNV) Q2 2019 Earnings Call Transcript

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Franco-Nevada Corporation (NYSE: FNV)
Q2 2019 Earnings Call
August 8, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen and welcome to the Franco-Nevada Corporation Q2 2019 results conversation call. At this time, all lines are in listen-only mode. Following the presentation, we'll conduct a question and answer session. If at any time during this call you require immediate assistance, please press *0 for the operator. This call is being recorded on Thursday, August 8th, 2019.

I would now like to turn the conference over to Candida Hayden. Please go ahead.

Candida Hayden -- Corporate Affairs

Thank you, Britney. Good morning, everyone. Thank you for joining us today to discuss Franco-Nevada's second quarter 2019 financial 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 followed by Paul Brink, President and COO of Franco-Nevada, who will provide a closing summary. This will be followed by a Q&A period. Representatives of our Toronto office are present to answer any questions. Before we begin formal remarks, we would like to remind participants that some of today's commentary may contain forward-looking information and we refer you to our detailed cautionary note from slide two of this presentation.


I will now turn over the call to Sandip Rana, CFO of Franco-Nevada.

Q:

Good morning, everyone. As you will have seen from the press release issued yesterday, the company delivered another quarter of strong financial results. As you turn to slide three, you can see the key financial results for the three and six months ended June 30th, 2019 compared to the same period in 2018. The company had a strong quarter, with increases across all financial metrics when comparing the two quarters.

For the six months ended June 30th, 2019, the company has achieved a number of financial records compared to the six months ended June 30th, 2019. These are all highlighted. 2019 is off to a very strong start. With the increase in revenue and due to the lower cost nature of our business model, adjusted EBITDA and adjusted net income were also significantly higher in Q2 2019 versus Q2 2018. Adjusted EBITDA was $137.9 million or $0.74 per share and adjusted net income for Q2 2019 was $64 million or $0.34 per share.

These strong financial results continued to showcase the strength of the Franco-Nevada business model, in particular the quality and diversity of the assets. From an operational standpoint, our royalty and stream assets continued to perform well.

As we turn to slide four, the chart illustrates the gold and golf equivalent ounces for each of the last five years. The geos earned for Q2 2019 were 107,774 compared to 107,333 in Q2 in 2018. It was a flat quarter year over year. Although geos were stable year-over-year, the company did have strong performance from its gold NTI such as Hemlo and Goldstrike as well as strong contributions from its PGM assets. However, the strong performance was somewhat negated by lower geo deliveries by Guadalupe, Bald Mountain, and Antapaccay.

Turning to slide five, we have two charts on the page. The first highlights the total revenue earned by the company for the previous five quarters. For second quarter 2019, revenue earned was $170.5 million. This is an increase from Q2 2018 as the company benefited from higher mining asset revenue with both PGM and other mining contributing to the increase. In addition, the energy assets had a strong second quarter.

The bottom chart highlights the energy revenue and the average WTI oil price for the last five quarters. Q2 2019 was a better quarter for energy compared to both Q2 2018 and Q1 2019. The increase in energy revenue was a result of strong production performance from our Orion asset and the growth in revenue from the Continental Royalty acquisition venture.

The company did fund $37.5 million during the quarter for the Continental Royalty venture with an additional $10.8 million accrued in accounts payable on the balance sheet at the end of the quarter. With respect to this venture, the acquisition pace has been favorable so far this year. As a result, the company has agreed to increase the capital commitment in 2019 to $120 million, up from $100 million previously.

On slide six, we illustrate the commodity mix of our revenue as well as highlight the jurisdiction in which the revenue is generated. As shown, 84% of revenue for the quarter was generated by gold and gold equivalent assets, with 62% being from gold, 10% silver, 9% PGMs, and 3% other. The geographic revenue profile has revenue being sourced 80% from the Americas.

One of the strengths of our business model is the diversification of our portfolio. Slide seven aims to highlight this. The first chart illustrates that only two assets contributed more than 10% of our revenue individually with another being at 6% for the quarter. Those three assets in total generated 28% of our revenue. The company is not economically dependent on any one single asset.

The second chart highlights how revenue is distributed from a legal ownership perspective, with no legal entity accounting for greater than 41% of revenue in Q2 2019. The last chart highlights our operator diversity. Our largest exposure to revenue being generated by any one operator is 12%, which is Lundin Mining, who operates Candelaria. We are fortunate to have royalties and streams on many properties mined by some of the most reputable mining companies in the world.

One area that our board and management is very proud of is our focus on cost management. We like to stress the strength of our business model and the scalability. I think this cannot be illustrated any more clearly than slide eight. Here, we've highlighted our quarterly revenues and our quarterly general and administrative expenses since our IPO.

Since 2008, our revenues have grown from approximately $25 million to $170 million this quarter, this while our G&A has remained fairly stable over this time period. General and administrative costs have approximated $5 million to $8 million per quarter for these last 11 years. For Q2 2019, G&A was less than 4% revenue. Management believes we can continue to add to our portfolio and grow our business without adding significant overhead to the company.

To add another financing option for the company, Franco-Nevada recently announced an aftermarket equity program. If you turn to slide nine, I will highlight some of the key elements of this program. It is usually referred to as an ATM program. The program will allow the company to issue from treasury up to $200 million worth of common shares. All sales would be at the discretion of management.

There is no requirement that mandates actual sales having to take place under the ATM program. The program provides the company with another tool in managing the balance sheet and liquidity available to the company. We look at the ATM program, the $1.1 billion in credit facilities, and the significant cash that the company will continue to generate as sources of capital to help finance future transactions.

There are a number of benefits of implementing an ATM program. Some of these include a lower commission structure than traditional methods of raising equity, increased flexibility and timing of sales, and the elimination in the discount when selling shares.

Two points to highlight when executing an ATM program are that the ATM program is under similar blackout restrictions as company management. As a result, if Franco-Nevada did choose to execute under the ATM, there would be no ATM sales from the first day after quarter end until after the company releases its quarterly earnings. Secondly, there are volume limitations of how much can be sold into the market on any given day.

The current capital available to the company is highlighted on slide ten. The company has approximately $1.1 billion available when including working capital, marketable facilities, and undrawn credit facilities. As of today, the company is $385 million in debt outstanding, which is a combination of $225 million drawn on its corporate credit facility, an $160 million one-year term loan which matures in April 2020. Overall, the company is in a very strong financial position.

Before I turn it over to Paul, I would like to mention there is no update to the international CRA audit currently under way. We continue to provide information and answer questions from CRA. However, the company did receive a proposal letter for two of its Canadian subsidiaries during the quarter.

The CRA letters propose to reassess 2014 and 2015 taxation years to increase income by adjusting the timing of the deduction of upfront payments with respect to precious metal streams. The additional federal provincial taxes would be approximately $1.6 million. This is effectively a timing issue of when taxes are paid. If a reassessment is received, we will file the necessary objections to oppose it.

I will now turn it over to Paul.

Paul Brink -- President and Chief Operating Officer

Thanks, Sandip. I'll start with our mining assets and in particular, Cobre Panama. Our team just returned from their latest visit to site and report that the ramp up is progressing well. The first two trains, each for SAG mill and two ball mills are fully operational. All four pit crushers are also operational. The first concentrates were shipped in June and along with their second quarter reporting, First Quantum reiterated their 2019 production guidance for Cobre Panama.

Payment timing as a result timing of our gear deliveries has been quicker on the initial concentrate sales contracts and what we expect with longer-term sales contracts. As a result, we're anticipating the geos delivered to Franco-Nevada will be toward the upper end of our prior guidance of 20,000 to 40,000 geos in 2019. On other items, the business development team are actively pursuing new transactions and we have good prospects for acquiring additional precious metal assets this year.

Turning to energy on slide 12, Franco-Nevada has acquired a 1% overriding royalty interest on a portion of range resources acreage in the Marcellus Basin for $300 million. Our strategy has been to focus on the core of the best oil and gas basins that are proven to attract capital throughout the commodity cycle. The Marcellus is one of the most prolific and active gas and liquids place in North America. The range's acreage has good exposure to the liquids rich portion of the Marcellus, giving it a very competitive cost position.

The assets of strong current cashflow assuming gas prices of $2.40 per NCF, 2020 revenue is expected to be $25 million. The range has a strong track record of growing reserves and production from these assets and our revenue is expected to grow to approximately $30 million per anum in five years.

These are long life assets with large undrilled inventory. The royalty area contains approximately 2,400 undrilled well locations, which at the 2018 rate of 78 new wells per year would approximately 30 years of drilling runway.

The principal focus is the Marcellus formation, but there's also potential upside in the development of the Utica and Upper Devonian formations. The acquisition adds to our commodity diversification to increased exposure to natural gas and natural gas liquids. The economics of the play are underpinned by liquids which contribute roughly half of the revenue. Including the new Marcellus assets, our revenue is still projected to exceed 80% from gold equivalent ounces through 2023. Geo growth during the period is largely driven by the ramp up of Cobre Panama.

We've provided updated guidance for 2019 on slide 13. Based on the strong results year to date and an increase in expected deliveries from Cobre Panama, we now expect 2019 geo-deliveries to be at the higher end of our previously announced guidance range of 465,000 to 500,000 geos.

The Marcellus transaction contributes immediately to cash flow, including this new royalty and anticipating continued strong performance of the energy assets, we now expect to generate $100 million to $115 million in energy revenue this year. This compares to $70 million to $85 million previously. The guidance assumes WTI prices of $55 per barrel and Henry Hub natural gas prices of $2.40 per mcf for the balance of the year.

Higher gold prices could not have come at a better time for Franco-Nevada. We have invested through the downturn and are delighted that the run-up in gold price is happening in tandem with the ramp-up of Cobre. We're looking forward to a strong second half to 2019 and a growing revenue outlook over the next five years.

That concludes our comments. I'll hand it back to the operator and welcome any questions.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, we'll now begin the question and answer session. Should you have a question, please press the * followed by the 1 on your touch tone phone. You will hear a three-tone prompt acknowledging your request and your questions will be pulled in the order they are received. Should you wish to decline from the pulling process, please press the * followed by the 2. If you're using a speakerphone, please lift the handset before pressing any keys.

Your first question comes from Chris Perry from Scotiabank. Please go ahead.

Chris Terry -- Scotiabank -- Analyst

Hi, guys. I had a couple of questions today. The first one is just in terms of the precious potential opportunities. What's your best estimates or what are you seeing in terms of divestments that you expect from the majors? How do you think the M&A stock may play out on that front from how you're viewing it? Thanks.

Paul Brink -- President and Chief Operating Officer

Chris, it's Paul. We expect the run-up in the gold prices here will be a very good thing for those divestments. I think for the seniors looking to monetize some of those assets, they need a stronger environment where buyers of those assets can access more capital. I think if we move into September, you'll see the pace of those divestments pick up.

Chris Terry -- Scotiabank -- Analyst

Thanks. Do you think it could be before the end of the year rather than 2020?

Paul Brink -- President and Chief Operating Officer

Yes. I think they're prospects this year.

Chris Terry -- Scotiabank -- Analyst

Thanks. Then on slide six, where you've got the revenue mix in energy at 16%, just thinking about the mix going forward, you obviously add Cobre Panama, which increases the percentage of the precious space. From here, if you were to do more oil and gas deals and get closer to that overall level, does that mean you have to do, I guess, precious deals at the same time that you would do oil and gas deals or naturally, that Cobre Panama would take up the slack and you still have room for one or two more oil and gas deals? Thanks.

Paul Brink -- President and Chief Operating Officer

With the growth in Cobre and also the run up in gold prices, there is a little more room for non-gold transactions. The focus on the company is on precious metal at the moment. In terms of active deals, it's most likely the next transactions will be precious metal-related.

Chris Terry -- Scotiabank -- Analyst

Okay. Thanks. The last one from me -- just on Cobre into 2020 and the timing, should we expect any delays at the start of 2020 or do we just take the first quantum guidance and run it straight through for what you should expect? Is there any difference in timing for the Franco share? Thanks.

Paul Brink -- President and Chief Operating Officer

As we've pointed out, there's a difference in timing when they produce concentrate to when we get our delivery. It depends on when we get paid for those concentrate sales. Obviously, when they're ramping up production, we get some of that lag. I expect a bit of a lag in 2020, but it shouldn't be a substantial item.

Chris Terry -- Scotiabank -- Analyst

That's it for me. Thank you.

Operator

Your next question comes from Cosmos Chiu from CIBC. Go ahead.

Cosmos Chiu -- CIBC -- Analyst

Thanks, Sandip and Paul. Congrats on a very good quarter. Maybe next time I'll take what I think earnings is going to be, take on 10% and call that my new estimate. Maybe my first question is on Cobre Panama. Your 20,000-40,000-ounce guidance for 2019, that hasn't changed, but now, you're saying you're going to be trending closer to 40,000 ounces up at the top. Is that once again due to timing? Then on that, say it's going to be 40,000 ounces, how much higher is Q4 going to be compared to Q3?

Paul Brink -- President and Chief Operating Officer

Cosmos, yes, it really just is timing. The part of it that we didn't know was what the timing of those payments would be. We had factored in roughly two months, which I think is a good estimate for over the longer term what that timing will be with longer term sales contracts. For the initial contracts, it's been less than a month. So, that's what's made up the difference. I think obviously Q4 is going to be greater than Q3 as we ramp up. I don't have the particular numbers on the two quarters.

Cosmos Chiu -- CIBC -- Analyst

Maybe sticking with the guidance here -- on the energy guidance, you've increased it, in part due to the recent acquisition, but I also see that the assumption right now is $55 per barrel WTI. We're not there right now. It's hard some decrease in the past few days. Could you give us some sensitivities in terms of $1 per barrel change? What does that mean to your potential revenue?

Jason O'Connell -- Vice President of Oil and Gas

Hey, Cosmos, it's Jason O'Connell here. In terms of sensitivity, the biggest area of sensitivity is in regard to the Weyburn NRI, which is about 20% of our overall revenue. Last time we ran the sensitivities, I believe it was a 10% change in the price of WTI resulted in about a 10% change in WTI, sort of a 12% change in revenue.

Cosmos Chiu -- CIBC -- Analyst

Okay. Maybe sticking with energy here and the recent lower oil price, do you see that as an opportunity to acquire more energy assets or is the volatility right now a bit too much and you would rather wait for that to die down a little bit?

Jason O'Connell -- Vice President of Oil and Gas

No, Cosmos, I think the volatility is less important on the energy side. I think there's lots of opportunity for us, regardless of where the oil and gas prices are. There are a number of assets we've discussed before that are available to us in the US in particular. I don't think the commodity price is really what's driving the availability of those assets right now. I think the issue for us is more strategically -- where does our energy ratio sit relative to precious metals? As Paul mentioned, the focus of the company right now is really more on the precious metal side than the energy side. While there are plenty of opportunities to focus on, we really are focused on the precious metals side of the business.

Cosmos Chiu -- CIBC -- Analyst

Then on the partnership with Continental here, it sounds like there's a favorable pace in terms of acquisitions and you've increased the commitment from $100 million to $120 million. Sandip, can you remind us in terms of how much more needs to be spent to get to that $120 million in 2019 and how much is committed in 2020 and how much in 2021?

Sandip Rana -- Chief Financial Officer

Off the top of my head, Cosmos, I can't remember how much is left for this year. We did fund $37.5 million in the second quarter. It would be $100 million again in 2020 and approximately $40 million in 2021.

Cosmos Chiu -- CIBC -- Analyst

Got it. Okay. I can back that up. In terms of the quarter here, I guess we've seen some pretty good results coming out of Goldstrike, some pretty good results coming out of MWS quarter-over-quarter. Could you maybe comment on those two, more specifically on Goldstrike? Is that sustainable?

Sandip Rana -- Chief Financial Officer

Sure. So, first with MWS, it's all about timing of when we get deliveries, but on annual basis, they typically do about 25,000 geos in terms of deliveries to Franco. With respect to Goldstrike, part of the amount was some adjustments to the NPI calculation as we reviewed it and we found some errors that needed to be corrected. That was part of the increase relative to Goldstrike. It's not sustainable going forward, although we expect a better NPI based on where the gold price is today.

Cosmos Chiu -- CIBC -- Analyst

Great. Thank you.

Operator

Your next question comes from Greg Barnes from TD Securities. Please go ahead.

Greg Barnes -- TD Securities -- Analyst

I think this is a question for Jason. As Cosmos pointed out, you have accelerated the payments on Continental. Is there a scope to extend that agreement or add to it and put more money into it?

Jason O'Connell -- Vice President of Oil and Gas

Thanks, Greg. There isn't a specific plan to extend that agreement. It would be up to the two parties to jointly agree to do so. I think realistically what will happen is we'll evaluate -- once our full commitment is achieved, we'll look at what the opportunities look like and how the assets are performing and decide at that point whether both parties have an appetite to extend the agreement further.

Greg Barnes -- TD Securities -- Analyst

Given the pace of drilling you're seeing so far, clearly, there are opportunities beyond this.

Jason O'Connell -- Vice President of Oil and Gas

Certainly, on the acquisition side, there have been. We are somewhat limited in terms of how much acreage Continental can actually buy on the ground that is in front of their drill schedule. As they progress drilling up their acreage position, it should become more and more difficult to acquire royalties.

We'll just have to evaluate once we get through in the next couple of years how much of that royalty inventory is left to be acquired and what the prices look like at the time and lastly, how are the assets performing relative to our expectations. I think we'll evaluate all those criteria once we get through the initial commitment period and then likely make a decision alongside Continental at that point.

Greg Barnes -- TD Securities -- Analyst

That's great. Thank you.

Operator

Your next question comes from Carey MacRury with Canaccord Genuity. Please go ahead.

Carey MacRury -- Canaccord Genuity -- Analyst

Hi, good morning, guys. Just a question on the Goldstrike NPI -- I think you mentioned in your press release that could potential improve just given the synergies around the new Newmont-Barrick JV. I'm just wondering whether all the potential changes or flows, do you have a sense of how that's going to work on Goldstrike and how that will be tracked going forward?

Sandip Rana -- Chief Financial Officer

Hi, Carey, Sandip here. No visibility right now. I think they're working it out themselves, obviously. We will get information as it becomes available. We have no visibility right now. Then we do annual site visits and audits. I would say within the next six months, we should get some visibility on what the impact will be.

Carey MacRury -- Canaccord Genuity -- Analyst

And your NPI at the end of the day is based on the ore coming out of Goldstrike, not the facility itself?

Sandip Rana -- Chief Financial Officer

There's obviously the NSR, which is a royalty based upon the various claim loss within Goldstrike, of which we get various royalty rates, and then you have the NPI, where they get to deduct capital. What will happen is if they're allocating ore from other properties besides Goldstrike and getting protest at Goldstrike, we will get credit for operating costs related to those. It is a complicated calculation, but as I said, once we get more visibility, we can share.

Carey MacRury -- Canaccord Genuity -- Analyst

Thank you.

Operator

Your next question comes from Brian MacArthur from Raymond James. Please go ahead.

Brian MacArthur -- Raymond James -- Analyst

Good morning. My question is also on oil and gas -- so, the first half, you did very well. You made about close to $50 million at give or take $55 oil, which is what you're forecasting. But in the back half, you should be similar, I would think. Then on top of that, you'd get some from the new Marcellus.

Plus, you got a ramp of more money at Continental and then I think you get the $9 million catch-up for the transaction. So, if you put that all together, I'm surprised guidance isn't a little higher. Is there something else happening the ramp-up of the Marcellus deal? You indicate $25 million next year. So, half of that is $12 million plus my $9 million catch-up is $21 million right there -- is there something else going on somewhere else I'm missing?

Sandip Rana -- Chief Financial Officer

Not entirely, Brian. I think the big drivers for the difference there are Weyburn. Generally, Weyburn fluctuates quite a bit depending on the level of capital coming into the operation. Oftentimes, their capital allocation schedules have been back-end loaded in terms of back end of the year.

So, you may see the Weyburn contribution come down a little bit. The biggest difference, I think, is just in the way we look at most of the US assets we have that are outside of range and outside of Continental.

In terms of forecasting revenue there, it's very challenging to accurately budget for those assets. We just don't know when that acreage will be drilled and what the royalty rate on individual wells will be. So, our approach to budgeting there is arguably a little bit conservative in that we sort of assume our production will remain relatively flat or decline a little bit from natural well decline.

Broadly speaking, you're right. If everything were to stay the same, you would be adding those elements on top. But I think the other elements you need to think about are just, again, the capital at Weyburn oftentimes is back-end loaded toward the end of the year. We have been conservative on the US assets just because of that lack of visibility.

Brian MacArthur -- Raymond James -- Analyst

Thanks very much.

Sandip Rana -- Chief Financial Officer

One other element, Brian, as I'm thinking about it, there was also a catch-up payment early in 2019 from revenue we under-accrued for 2018. In other words, it was revenue in 2018 that fell through 2019. That's another element that impacts that.

Brian MacArthur -- Raymond James -- Analyst

Thanks very much. That's very helpful.

Operator

There are no further questions at this time, please proceed.

Candida Hayden -- Corporate Affairs

Thank you, Britney. We expect to release our third quarter 2019 results after market close on November 11th, with a conference call held the following morning. Thank you for your interest in Franco-Nevada. Goodbye.

Operator

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

Duration: 30 minutes

Call participants:

Candida Hayden -- Corporate Affairs

Sandip Rana -- Chief Financial Officer

Paul Brink -- President and Chief Operating Officer

Jason O'Connell -- Vice President of Oil and Gas

Chris Terry -- Scotiabank -- Analyst

Cosmos Chiu -- CIBC -- Analyst

Greg Barnes -- TD Securities -- Analyst

Carey MacRury -- Canaccord Genuity -- Analyst

Brian MacArthur -- Raymond James -- Analyst

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