Franco-Nevada Corporation (NYSE:FNV) Q3 2023 Earnings Call Transcript
Franco-Nevada Corporation (NYSE:FNV) Q3 2023 Earnings Call Transcript November 9, 2023
Operator: Good morning, and welcome to Franco-Nevada Corporation's Third Quarter 2023 Results Conference Call and Webcast. This call is being recorded on November 9, 2023. At this time all lines are in 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. [Operator Instructions] I would now like to turn the conference over to your host, Candida Hayden, Senior Analyst, of Investor Relations. Please go ahead.
Candida Hayden: Thank you, Jerry. Good morning, everyone. Thank you for joining us today to discuss Franco-Nevada's third quarter 2023 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. This will be followed by a Q&A period. Our full executive team is available to answer any questions. Participants may submit questions by 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.
Paul Brink:
on early in: Our core precious metal assets anchored the third quarter results. Both precious metal GEOs and revenues were up over the same period last year. Total revenues increased, although total GEOs were slightly down, in part due to gold prices being relatively stronger than oil and gas and iron ore prices. Both quarter GEOs are expected to be slightly higher than the third quarter. The corporate Cobre Panama CP100 expansion is on track for year end and we expect the core streams to perform well. As we had indicated following Q2, we expect to be near the low end of our GEO guidance range for the year. Gold prices maintain at current levels it will further boost revenues and financial results. Cobre Panama has dominated the news over the last 10 days.
There have been substantial social and anti-mining process, falling approval by the National Assembly of the revised concession agreement in October. Last week, the government enacted a moratorium on granting new mining concession contracts. They also proposed, but didn't proceed with a popular consultation on the new mining contract. Panamanian Supreme Court is now considering a number of lawsuits challenging the constitutionality of Law 406. Production at Cobre Panama has continued despite the protest activity, including road blockades. We've been in close contact with our partner, First Quantum as the situation unfolds, and together we are continuing to monitor it closely. Looking forward to 2024, we're expecting added precious metal contributions from a number of new mines.
Most impactful will be the Tocantinzinho stream, where G Mining Ventures is progressing construction and as you'd expect from that team on time and on budget. We have a meaningful 3% NSR on Equinox and Orion's Greenstone project in Ontario where first gold is expected before midyear. We recently agreed to acquire an incremental 1% NSR on Argonaut’s Magino gold mine, taking out total NSR there also to 3%. Magino achieved commercial production November 1, and continues to ramp up production. Lastly, Gold Fields at Salares Norte project in Chile was 96% complete at the last report and we expect our first royalty payments in early 2024. We continue to get good news on the longer term organic growth in the portfolio. Candelaria received its environmental impact approval from the regional Chilean authorities and I hope that paves the way for an expansion of the underground operations that they've been contemplating.
Hudbay: Finally, on our balance sheet and outlook, while developments at Kobe Panama have added uncertainty at one of our assets, our business is designed whether such events and regardless of the outcome, our business will remain robust generating strong cash flows with high margins. We have no debt and a cash balance of $1.3 billion. Including our grown facilities, our available capital for deployment is $2.3 billion. We continue to be the capital provider of choice for many players where equity capital is difficult to raise and debt capital is increasingly expensive. With that I'll turn it over to Sandip.
Lundin: Finally, on our balance sheet and outlook, while developments at Kobe Panama have added uncertainty at one of our assets, our business is designed whether such events and regardless of the outcome, our business will remain robust generating strong cash flows with high margins. We have no debt and a cash balance of $1.3 billion. Including our grown facilities, our available capital for deployment is $2.3 billion. We continue to be the capital provider of choice for many players where equity capital is difficult to raise and debt capital is increasingly expensive. With that I'll turn it over to Sandip.
Sandip Rana: Thanks Paul. Good morning everyone. Our diverse GEO [ph] stream portfolio continued to generate strong cash flows and high margins during third quarter 2023. If you turn to Slide 4, the chart shows gold equivalent ounces sold for third quarter 2023 along with the previous four quarters. GEOs sold in the quarter were 160,848, a 5% decrease relative to second quarter 2023 and a 9% decrease relative to the comparable period for the prior year. Of total GEOs sold for the quarter, precious metals were 125,337, an increase of 4% from same quarter last year. For the quarter, the largest contributors for precious metal GEOs were Cobre Panama, Candelaria and Antapaccay, with the increase year-over-year being from Cobre Panama and Guadalupe.
Cobre Panama delivered 33% more GEOs than the same quarter in prior year. This was driven by higher copper grades and the continued ramp up of the CP100 expansion project. Guadalupe GEOs sold were higher by 14% relative to the comparable period from the prior year with the increase being due to higher average grades being mined. One asset which did have a weaker quarter for us compared to prior year was Antamina. At Antamina, we had approximately 30% lower GEOs sold than prior year as the operator was impacted by a tropical cyclone that affected Peru's northern region in April 2023. As you will recall, there is a one quarter lag for delivery of silver ounces from Antamina. The deliveries in third quarter related to production from April to June 2023.
For our diversified portfolio, we did record lower GEOs and revenue in the quarter as energy prices were lower compared to prior year. Third quarter 2023 saw continued volatility in commodity prices as highlighted on Slide 5. Precious metals did see an improvement year-over-year, with average gold prices higher by 11.6%, silver by 22.6% and platinum by 5.1%. However, Palladium and energy prices were down significantly. A large component of our diversified GEOs and revenue comes from our energy assets. On a barrel of oil equivalent basis, production was slightly lower than prior year. However, as seen on the bar chart on Slide 6, there was a larger retreat [ph] in oil and gas prices. WTI averaged $82.26 a barrel in the quarter, lower by 10% versus the comparable quarter in prior year and natural gas averaged $2.66 in MCF lower by 66%.
As a result, the lower energy prices impacted our GEOs sold and revenue with GEOs sold from our energy assets being 43% lower in third quarter 2023 compared to prior year. Slide 7 highlights our total revenue and adjusted EBITDA amounts for the three months ended September 30, 2023 and 2022. The portfolio continues to deliver consistent performance. Revenue was $309.5 million for the quarter, slightly higher than prior year's $304.2 million, while adjusted EBITDA was relatively flat at $255.1 million compared to $256.7 million in third quarter of 2022. The company continued to generate a strong margin at 82.4% for the quarter. As you turn to Slide 8, you'll see the key financial results for the company. As mentioned, GEOs sold were lower for the quarter, but revenue was higher due to higher average precious metal prices.
On the cost side, we did have an increase in cost of sales which was $48.9 million compared to $42 million in third quarter 2022. The largest component of this is the per ounce fixed cost we paid for stream ounces. We sold 97,275 stream ounces in third quarter compared to 90,237 a year ago. Depletion remained relatively flat at $68.1 million versus $68.5 million a year ago. And for third quarter 2023, adjusted net income was $175.1 million or $0.91 per share compared to $159.7 million or 83% per share in prior year. Slide 9 highlights the continued diversification of the portfolio. As shown, 78% of our Q3 2023 revenue was generated by precious metals. This compares to 68% a year ago. The geographic revenue profile has revenue being sourced 88% from the Americas.
With respect to asset diversification, Cobre Panama was our largest revenue generator at 22% of total revenue for the quarter, followed by Candelaria and Antapaccay. The last chart highlights our operator diversity, with First Quantum being the largest at 22% of revenue. Slide 10 illustrates the strength of our business model to generate consistent high margins. On the slide, you can see that cost of sales has remained fairly consistent over the period shown. The amount of cost of sales would depend on the mix of royalty versus stream GEOs, including both mining and energy. Corporate administration costs, including stock based compensation, was less than 2% of revenue for the quarter. This can fluctuate quarter-to-quarter, but has tended to average approximately 8 million each quarter historically.
In a rising commodity price environment, we expect to benefit fully as we do not expect our cost structure to change significantly. Slide 11 summarizes the financial resources available to the company, when including our credit facility of $1 billion. Total available capital is $2.3 billion at the end of September. The company continues to be debt free and generated $236 million in operating cash flow during the quarter. Outflows for the quarter included $66.2 million G Mining Ventures for the remainder of the $250 million stream deposit for Tasiast [ph]. The full deposit has now been funded. We closed the Pascua-Lama royalty transaction for $75 million and the company did declare dividends of $65.3 million during the quarter. On Slide 12, we reiterate our guidance for the year based upon updated commodity prices as highlighted on the slide and our expectations of production from our royalty and stream interest for the remainder of the year.
We are maintaining our guidance range for total GEOs sold of 640,000 to 700,000. We expect to be near the lower end of that range due to the conversion of non-gold revenue to GEOs based on our revised commodity prices. For precious metals, the GEOs sold range is 490,000 to 530,000. Again we expect to be near the lower end of that range. Turning to tax matters, as you are aware, the Canadian Government has announced that it will be proceeding with the implementation of the 15% global minimum tax. We expect this to be effective January 2024. Franco-Nevada, this will impact the tax associated with the income from our Barbados subsidiary where the current corporate tax rate is less than 15%. However, earlier this week, the Barbados Government announced that they are proposing to raise their local corporate tax rate to 9%.
In addition they are proposing to implement an additional 6% top up tax for companies whose parent entity is subject to the global minimum tax. Specific Barbados legislation has not been released at this time. We will review and determine the impact once available. And I will pass it over to Jerry as we're happy to answer any questions.
Operator: Of course. [Operator Instructions] Now first question comes from the line of Heiko Ihle of H.C. Wainwright. Please go ahead.
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