Franco-Nevada Corporation (NYSE:FNV) Q4 2023 Earnings Call Transcript
Franco-Nevada Corporation (NYSE:FNV) Q4 2023 Earnings Call Transcript March 6, 2024
Franco-Nevada Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to Franco-Nevada Corporation's 2023 Year-end Results Conference Call and Webcast. This call is being recorded on March 6, 2024. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct the Q&A session, where you may ask a question through the phone lines or webcast. [Operator Instructions]. I would now like to turn the conference over to your host, Candida Hayden, Senior Analyst, Investor Relations. Please go ahead.
Candida Hayden : Thank you, Alura. Good morning, everyone. Thank you for joining us today to discuss Franco-Nevada's year-end 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: Thank you, Candida, and good morning. Our diversified top line business has a history of generating leading returns. But in late 2023, we were challenged by the unprecedented production hole for Cobre Panama. We're hopeful that the issues can be resolved, although we've taken a prudent approach to the carrying value of the asset. Despite the issues at Cobre Panama, our business remains robust. We finished the year with no debt at $1.4 billion of cash. Balance of our long-duration business still generates industry-leading cash flow. Top-line business model is fortunately not impacted by industry cost inflation. And in 2023, we generated an 83% adjusted EBITDA margin During the year, we added a number of attractive royalty interests, principally on gold mines and projects in Canada, Chile, Australia and the U.S. Drop in U.S. natural gas prices also allow us to add to our natural gas royalty interests.
Our shareholders depend on us to allocate capital to operations that treat the environment and the host communities responsibly. The work has resulted in top-level ratings from the ESG agencies. Notably, we're top-ranked in the gold sector and in the broader precious metal by Sustainalytics for 2024. Our objective is to have a sustainable and progressive dividend that's dependable, even involved of times and in 2024, our board, we're proud to increase our dividend for the 17th consecutive year. Investors from our IPO are now achieving a 9.4% yield in U.S. dollars or 12.9% yield in Canadian dollars. Growth outlook for the balance of our business is strong over the next five years. Grade assets keep getting better. Antamina has just sanctioned the capital program that will increase production in an areas considering in ground expansion.
And Agnico Eagle is planning to add underground for our tour to expand output up to 1 million ounces per year. An exciting head of new mine builds. I'm looking forward to new contributions from Tocantinzinho, Greenstone and Salares Norte amongst others that will drive our organic growth through 2028. This outlook is good certainty, two thirds of the production is already under construction. $3.4 billion of capital we have available positions us well to add further assets. Cobre Panama represented roughly 20% of our revenue, and the production halt has seen more than a proportional reduction in our market cap. Prospect of Cobre restarting or an arbitration settlement are all upside optionality from these trading levels. In summary, the outlook for our business is bright.
Our strategy of maintaining a strong balance sheet has never been more relevant, giving us a large treasury to grow the business at a time when capital for the industry is at scarce. Now, I hand the call over to Sandip.
Sandip Rana: Thank you, Paul, and good morning, everyone. I will begin with Slide 4, which shows how the company performed against the guidance that was issued for 2023. The updated guidance provided by the company for last year was 620,000 to 640,000 total GEOs sold. Of this total, we guided to 480,000 to 500,000 precious metal GEOs, with the balance being from diversified assets. The company ended the year with 607,045 GEOs sold well within the guidance range. We're also within the guidance range for precious metals with 488,109 GEOs sold. The diversified assets, which include our non-precious mining assets and entered assets, resulted in just under 140,000 GEOs sold for the year. Before I get further into the financial results, I wanted to speak about Cobre Panama.
Turning to Slide 5. Cobre Panama is Franco-Nevada's largest investment and has generated approximately 20% of revenue. Before the halt in production, the mine was operating very well, having successfully completed its expansion to 100 million tonnes per year. We will deliver 28,318 GEOs during fourth quarter and just shy of 129,000 GEOs for the full year. However, as previously disclosed, Cobre Panama has been in preservation and safe management with production halted since November 2023. November 28, 2023, following protest and President Cortizo’s call for a mining moratorium, the Supreme Court of Justice of Panama released its ruling declaring Law 406 unconstitutional. In light of these events, we carried out an impairment assessment of our Cobre Panama streams at December 31, 2023.
The recording of impairments is a judgment made by management based on available information at a point in time, which are used to determine the accounting treatment. We took a prudent approach in our judgment of the facts and circumstances and based on the halting of production of political environment surrounding the ruling by the Supreme Court, as well as the significant share price impact, we determine the recoverable amount under applicable accounting standards to be nailed as at December 31, 2023. As a result, we recognized a full noncash impairment loss of approximately $1.2 billion. As previously disclosed, we have provided a notice of intent to commence arbitration against the State of Panama. While we believe in the strength of our claims, the potential proceeds from the arbitration or reflected in our impairment valuation.
Our streams on Cobre Panama remain valid, and we are hopeful of a resolution between first quantum and the state of Panama and a restart of the mine at which time our deliveries would restart. In this situation, we would assess the recoverable amount of Cobre Panama streams at that point in time, which may lead to a reversal of part or all of the impairment loss we recognized. Moving on to the financial performance for the quarter. On Slide 6, we highlight the gold equivalent ounces sold for the last five quarters as well as the last five years. Total GEOs sold were lower when compared to prior year, with Q4 2023 GEO sold being 152,351 compared to 180,886 in the fourth quarter 2022. Of this, precious metal, GEOs were 119,581, down approximately 8% from prior year.
For the quarter, the largest contributors to the lower precious metals were Cobre Panama due to the halt in production, as mentioned, Stillwater, which was due to the impact of converting weaker platinum palladium revenue to GEOs; and Candelaria, which had lower production during the quarter. The lower GEOs from these assets was partially offset by stronger production from both Antapaccay and MWS, both of which had a very strong fourth quarter. Precious metal GEOs represented 79% of total GEOs for the quarter and 78% for the full year. For diversified GEOs, our Vale royalty resulted in an increase in GEOs for the quarter compared to prior due to higher iron ore prices. As you know, each quarter, we make an estimate of what the royalty will be with the actual amount being announced by Vale in late March and September each year.
As a result, you will see adjustments to our accruals twice a year in the first and third quarter each year. Energy GEOs were significantly lower at 25,640 GEOs for Q4 compared to 47,713 a year ago. This was the result of lower energy prices, natural gas in particular. 2023 saw continued volatility in commodity prices. As you can see on Slide 7, gold and silver prices were higher for the quarter and year, with gold higher by over 14% for the quarter and almost 8% for the year. Palladium prices were significantly lower year-over-year which did negatively impact the conversion of PGM revenues to GEOs. Energy prices were weaker in '23 coming off multiyear highs from 2022. Slide 8 our total revenue and adjusted EBITDA amounts for the last five quarters.
As you can see from the bar charts, the revenue and adjusted EBITDA has decreased slightly Q4 2023 compared to prior year. The company recorded $303.3 million in revenue during the quarter and $254.6 million in adjusted EBITDA. The margin of 83.9% was achieved for the quarter. As you turn to Slide 9, you will see the key financial results for the company. As mentioned, total GEOs were 627,045, generating $1.2 billion in revenue. On the cost side, we did have a slight decrease in cost of sales compared to Q4 2022 due to lower energy costs. Also, cost of sales is dependent on which assets deliver stream ounces as not all fixed payments for stream ounces are equal. Depletion decreased to $68.9 million versus $73.5 million a year ago. Depletion is based on actual mining GEO sold and barrels of oil equivalent received on the energy side of the business.
As we received less GEOs from Cobre Panama and Antamina and Candelaria, this impacted depletion as those assets are higher per ounce depletion assets. We did record a net loss for the quarter of $982.5 million or $5.11 per share due to the impairment recorded on Cobre Panama. This compares to net into $165 million or $0.86 per share in the prior year. However, adjusted net income was $172.9 million or $0.90 per share for the quarter, up 5% and 5.8%, respectively, versus prior year. Slide 10 highlights the continued diversification of the portfolio. From the chart, you can see that 78% of our full year 2023 revenue was generated by precious metals, with revenue being sourced 88% from the Americas, with Canada and the United States, the largest.
Slide 11 illustrates the strength of our business model to generate high margins. For 2023, the cash cost per GEO, which is essentially cost of sales divided by gold equivalent ounces sold, is $286 per GEO. This compares to $242 per GEO in 2022. This amount will fluctuate depending on 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 over $1,600 per ounce in 2023. In a rising commodity environment, we expect to benefit fully as the cost per GEO sold should not increase significantly. We consider our cost structure to essentially be fixed. The other cost component for the company besides the cost of sales is our core administration costs.
The royalty streaming business model is a scalable model. Our corporate administration costs have increased at a much lower rate than our revenue. Revenue has increased eightfold from 2008, while corporate admin costs has less than doubled over the same period. Management believes we can continue to add to our portfolio and grow our business without adding significant overhead to the company. With respect to guidance going forward, please refer to Slide 13. For 2024, we are guiding to total GEOs sold of between 480,000 to 540,000 GEOs sold. Of this total GEOs, we are guiding to 360,000 to 400,000 precious metals GEOs for the year. The balance would be GEOs from our diversified assets, of which we expect energy to account for about 75% for 2024.
Please note that for all guidance ranges, we have excluded Cobre Panama in our GEO sold numbers. At Cobre Panama range in production, we would have expected deliveries and sales of between 130,000 to 150,000 GEOs annually. The overall main drivers for GEOs year-over-year are: for precious metals, we will benefit from initial ounces from new mines being completed in 2024, to Tocantinzinho, Greenstone Mera Rosa and Salares Norte. We will have full year deliveries for Magino and Séquéla, and we expect an increase in GEOs from Candelaria based on the guidance from the operator. However, we are anticipating lower production at Antapaccay based on the mine plan for lower grades. Our guidance has been calculated using $1,950 per ounce gold, $22.50 for silver, $850 for platinum, $900 palladium and $115 per ton 62% iron ore.
Obviously, prices are volatile, and as they change, it will impact the conversion of non-gold commodities to GEOs. Also, please note, we expect to reach our GEO cap by MWS by the end of 2024. On the energy side, we are using a price of $75 per barrel WTI and $2.50 and CF natural gas. This range of 85,000 to 105,000 GEOs from our energy assets. As we look forward over the next few years, we do forecast 2026 as the current high for GEO sold based upon what we know today. Thereafter, we will have the staff ancillary in 2027 and then Antapaccay in 2028. Our outlook for 2028 is 540,000 to 600,000 GEOs sold. Of this range, metals will be 385,000 to 425,000 GEOs. Main contributors will be higher production from Antamina and Guadalupe based on latest mine plans.
New mine starts from Valentine Gold, Stibnite Gold, Eskay Creek and Castle Mountain Phase 2. For diversified GEOs, we do expect increasing GEOs from our Vale royalty as attributable production should increase with the royalty on the Southeast system becoming payable. For the energy assets, we do assume an increase in production over the next five years, resulting in increasing. Also, we have held energy prices flat at $75 a barrel WTI and $2.50 Mcf of natural gas for the period. Overall, when you look at the outlook for GEO sold, the company has approximately 15% built-in organic growth from 2023 to 2028 at budgeted commodity prices, excluding Cobre Panama. This also assumes that no additional assets are added to the portfolio. Two additional items to note.
With the legal proceedings that we will move forward related to Cobre Panama, we are expecting to incur annual costs of between $10 million to $15 million per year. These costs will be disclosed separately in our financials going forward. And with the proposed implementation of the global minimum tax, sometime in 2024, we are projecting that our effective tax rate will increase to approximately 18% to 19% going forward. The global minimum tax will be retroactive to January 1, 2024. The effective tax rate will actuate based on the jurisdictions that generate tax for income. And lastly, Slide 14 summarizes the financial resources available to the company, including our credit facility of $1 billion, total available capital at December 31, 2023, is $2.4 billion.
And now I'll pass it over to Alura, and we are happy to answer any questions.
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