Franco-Nevada Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2023

There are 7 speakers on the call.

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 and A session where you may ask a question through the phone line or webcast. If you are joining by webcast, you may submit a written question for the Q and A session at any time during this call by typing your question in the Q and A section of the webcast platform.

Operator

I would now like to turn the conference over to your host, Candida Hayden, Senior Analyst, Our Investor Relations, please go ahead.

Speaker 1

Thank you, Jerry. Good morning, everyone. Thank you for joining us today to discuss Franco Nevada's 3rd quarter 2023 results. Accompanying this call is a presentation, which is available on our website atfrancodavada.com, where you will also find our full financial results. Presentation is also available to view on the web During our call this morning, Paul Brink, President and CEO of Franco Nevada, will provide introductory remarks followed by Sandeep Renna, Chief Financial Officer, who will provide a brief review of our results.

Speaker 1

This will be followed by a Q and 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 I will now turn over the call to Paul Brink, President and CEO of Franco Nevada.

Speaker 2

Thanks, Candida, and good morning. We were saddened holding our Board yesterday with an empty seat After the passing of Randall Oliphant early in September, Randall was a leader in the gold mining industry, had been a strong presence in our boardroom for 16 years And played a big role in our company's success is missed by all of us at Franco Nevada. Our core precious metal Our core precious metal assets anchored the 3rd 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 oil prices.

Speaker 2

4th quarter GEOs are expected to be slightly higher than the Q3. The 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.

Speaker 2

There have been substantial social and anti mining process Following approval by the National Assembly of the revised concession agreement in October. Last week, the government enacted a on granting new mining concession contracts. We 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 in Cobre Panama has continued despite the protest activity including roadblockades. We've been in close contact with our partner First Quantum as the situation unfolds and together we are continuing to monitor it closely.

Speaker 2

Looking forward to 2024, we're expecting added precious metal contributions from a number of new mines. Most impactful will be the Tocco de Zinnos stream, which e 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, Our first gold is expected before mid year. We recently agreed to acquire an incremental 1% NSR and Argonauts from Geno Gold Mine taking our total NSR there also to 3%. Geno achieved commercial production November 1 and continues to ramp up production.

Speaker 2

Lastly, Goldfields' Solaris Norte project in Chile was 96% complete at the last report And we expect our 1st 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 underground operations that they've been contemplating. On a similar note, Kinross are now considering an underground expansion of Tasiast. Both Hudbay and Canadian nickel have released new studies, a PFS on Copper World with a timeline to production in 2028 And a feasibility study at Corford Nickel.

Speaker 2

Lundin Mining again is having great success with their recently acquired Casa Ronin's mine With throughput well ahead of the acquisition assumptions and aggressive exploration program planned. Marathon Gold had a simplified permitting process confirmed That would allow that the Berry deposit expansion be included earlier in their mine plan. Finally, on our balance sheet and outlook. While developments at Cobre Panama have added uncertainty at one of our Our business is designed to weather such events. And regardless of the outcome, our business will remain robust, generating strong cash flows with high margins.

Speaker 2

We have no debt and a cash balance of $1,300,000,000 Including our undrawn facilities, our available capital for deployment is And debt capital is increasingly expensive. With that, I'll turn it over to Sandy.

Speaker 3

Thanks, Paul. Good morning, everyone. Our diverse royalty and stream portfolio continued to generate strong cash flows and high margins during Q3 of 2023. If you turn to Slide 4, the chart shows gold equivalent ounces sold for Q3 2023 along with the previous 4 quarters. Geos sold in the quarter were 160,848, a 5% decrease relative to 2nd quarter 23 and a 9% decrease relative to the comparable period for the prior year.

Speaker 3

Of total GEO 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 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 CP 100 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.

Speaker 3

At Antamina, we had approximately 30% lower GEO 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 1 quarter lag for delivery of silver ounces from Antamina. The deliveries in 3rd quarter related to production from to June 2023. For our diversified portfolio, we did record lower GEOs in revenue in the quarter as energy prices were lower compared to prior year. Q3 2023 saw continued volatility in commodity prices as highlighted on Slide 5.

Speaker 3

Precious metals did see an improvement year over year with average gold prices higher by 11.6%, silver by 22.6% and 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 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 an Mcf, lower by 66%. As a result, the lower energy prices impacted our GEO sold and revenue, with GEO sold from our energy assets being 40 September 30, 2023, 2022, the portfolio continues to deliver consistent performance.

Speaker 3

Revenue was $309,500,000 for the quarter, slightly higher than prior year of $304,200,000 While adjusted EBITDA was relatively flat at $255,100,000 compared to $256,700,000 in Q3 2022. The company continued to generate a strong margin at 82.4% for the quarter. As you turn to Slide 8, you will see the key financial results For the company, as mentioned, GEO 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 $48,900,000 compared to $42,000,000 in Q3 2022. The largest component of this is the per ounce fixed cost we pay for stream ounces.

Speaker 3

We sold 97,275 stream ounces in 3rd quarter compared to $90,237 a year ago. Depletion remained relatively flat at $68,100,000 versus 68 point $5,000,000 a year ago. And for Q3 2023, adjusted net income was $175,100,000 or $0.91 per share compared to $159,700,000 or 83 percent 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.

Speaker 3

This compares to 68% a year ago. 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 will depend on the mix of royalty versus stream GEOs, including both mining and energy.

Speaker 3

Corporate administration costs, including stock based compensation, was less than 2% of revenue for the quarter. This can fluctuate quarter to quarter, but is tended to average approximately $8,000,000 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 $1,000,000,000 total available capital is $2,300,000,000 at the end of September.

Speaker 3

The company continues to be debt free And generated $236,000,000 in operating cash flow during the quarter. Outflows for the quarter included $66,200,000 to Demining Ventures For the remainder of the $250,000,000 Stream deposit for TZ, the full deposit has now been funded. We closed the Pascua royalty transaction for $75,000,000 and the company did declare dividends of $65,300,000 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 So $700,000 With the we expect to be near the lower end of that range due to the conversion of non to GEOs based on our revised commodity prices.

Speaker 3

For precious metals, the GEO sold range is 490,000 to 500 and $30,000 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 We'll be proceeding with the implementation of the 15% global minimum tax. We expect this to be effective January 2024. For For 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%.

Speaker 3

However, earlier this week, the Barbados government announced that they are proposing to raise their 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. The specific Barbados legislation has not been released at this time. We will review and determine the impact once available. And now I'll pass it over to Gerry as we're happy to answer any questions.

Operator

Of course. If you would like to withdraw your questions, please press the hash key. If you are joining us on the webcast, Please submit your question through the Q and A section of the webcast platform. Our first question comes from the line of Heiko Ihle of H. C.

Operator

Wainwright. Please go ahead.

Speaker 4

Good morning, Paul, Sandeep and team.

Speaker 2

Hi, Kip.

Speaker 4

Hey, with Antamina in your release you state that production at the mine was also impacted by cycloneyahoo which constrained logistics in March April of this year. This was reflected in the deliveries we received in Q3 'twenty three. You sort of hinted at this in your prepared remarks, but just to clarify this again, this issue is completely in the rearview mirror now And given the delivery schedule that was agreed upon and we can go back to our prior models on the site, correct? In other words, there should not be any follow through to this into Q4?

Speaker 3

Yes, yes. That related to earlier in the year and that's been So the delivery we would get in November will be from production from July to September.

Speaker 4

That's how I figured it. And this was a little bit more open ended. I mean, I understand that the chart is looking quite pretty, goes up $240 over the It's within $120,000 $130 of its annual high and it's looking quite nice on the 5 year chart as well. In the meantime, the GDX is close to its annual low. Franco Nevada shares really aren't a big exception to all of this, though obviously pre market today is looking quite decent.

Speaker 4

In your view, is the markets, the broader market missing something? What are they looking for to properly reward your company And it's Nestor, is it more ESG for broader base, is it higher dividends, is it just People have been beaten down for too long and they don't care anymore. Anything you want to share with us that you're seeing from folks you talk with on the phone?

Speaker 2

Heiko, I think a couple of things there. And the obvious one is The impacts of Cobre Panama at the moment and that has had a clear impact on the stock. The other one and in terms of the performance of the stock and where we found that The value creation over time is we truly have a business that's not impacted by cost inflation. And cost inflation has been such a big element that's Into the return of mining companies over time. So one, it's been protected on that aspect of the business.

Speaker 2

The other is we have a very deep portfolio and the core thing about the mining industry is so much The value is created at the drill bit. And when the industry is able to drill, have the capital and can make new discoveries, inevitably they do. And the beauty of our business is we are exposed to that both with our streams plus an extremely deep royalty portfolio and It's that optionality and it's why I spoke to it a bit in my comments. We continually get good news as to what's Happening in the exploration portfolio and I think that's the element that ultimately drives the future value of the company.

Speaker 4

Fair enough. I mean, and the Cobre Panama obviously doesn't really have a whole lot of impact on the GDX. It's really just you. But I agree with the rest of your answer and I'll get back in queue. Thank you so much.

Operator

And there are no further questions. I stand corrected. We have a question from the line of Brian MacArthur of Raymond James. Please go ahead. Hey, Brian MacArthur of Raymond James, you may go ahead and ask your question.

Operator

If you have your phone on mute, could you please unmute?

Speaker 5

Good morning. Sorry about that. And Deepa, I was wondering if you just go through the Barbados again. Sorry, I may have missed it because my line cut out. But sorry, Is it not just going to be 15% going forward like everything else in global of minimum tax?

Speaker 5

Or is there something else you were Kind of going through because I sort of heard 96 when you went through it.

Speaker 3

If you could just

Speaker 5

go through that again, that'd be helpful. Thank you.

Speaker 3

Sure. So the way the global minimum tax works, Brian, is that whatever the difference is between the 15% and the local corporate tax rate, You'll pay a top up you were supposed to pay a top up tax in Canada based on accounting income. So for example, we were low single digits in Barbados and now The 15%. So assume the delta is 13%. You would pay that 13% based on accounting income.

Speaker 3

So there would be a cash tax payable. Barbados is now increasing their corporate tax rate from low single digits to 9%, at least they Proposed to do so. As a result, that will be based on regular tax, where you get the deposit treatment. And then what they're doing is they're proposing to implement a top up tax from 9% to 15%, which would be based on accounting. And so for there, there would be a cash tax payable.

Speaker 3

So essentially, we're still determining the impact, but we think it will be positive.

Speaker 5

So just if I look at your global portfolio though, will you not then just pay like And all the screens that are run through their 15% and then the other stuff that's outside for the other structured ones, you'll pay the rate in that Jurisdiction on a consolidated basis, you'll probably get something just weighted slightly higher than 15%. Is that fair? Or how should I think about that?

Speaker 3

It's Just the split between what's going to be calculated based on tax versus accounting. There is an Back to that, we can go offline, Brian. I can walk you through. Okay.

Speaker 5

Great. Thanks very much.

Operator

Your next question comes from the line of Adrian Dey of Adrian Dey Asset Management. Please go ahead.

Speaker 3

Yes, good morning. I was just wondering if you could update us how you're viewing the market for new Streams and possibly royalties, but new streams.

Speaker 4

Yes. Yes.

Speaker 6

Hi, Adrian. It's Ian Gray speaking. As Paul commented, the gold It is quite constrained for capital. So we are seeing good opportunities there for additional royalties and streams As you saw with our recent Magino transaction, so we're looking forward to doing more there. And I do see it as being Relatively buoyant, especially on the gold side.

Speaker 3

Mostly development, helping development?

Speaker 6

Yes. I think that's a fair characterization.

Speaker 3

Okay. Thank you.

Operator

And there are no further questions on the phone line at this time. I will now turn the Q and A session over to Candida Hayden, who will take questions from the webcast.

Speaker 1

Thank you, Jerry. Our first question comes from Alex Richardson from Ananda Asset Management. Why do you decide to become so reliant on Cobre Panama for Future geo growth given it is not a gold property?

Speaker 3

Alex,

Speaker 2

Our businesses has expanded over time and you know the history of the company is we bought many royalties on gold properties and those have had tremendous Sean, tremendous optionality and growth over time. But a lot of the growth in our business, as you correctly point out, has been buying precious metal streams on big copper assets. And that has been a very good element that allowed us to grow the business Principally copper assets tend to be much larger than gold assets. They also tend to have much longer lifespans. So if you look at Antamina, Antapakai, Candelaria, all of those we get the precious metal from those copper assets.

Speaker 2

Not only have those assets done very well, all of them have outperformed our assumptions at acquisition. They have very long lives and we've also seen tremendous life expansion from those assets. Probably a good example is Candelaria. Candelaria, when we helped finance Lundin to acquire that asset 6 or so years ago, it had a 14 year mine life. Lunde Mining's a tremendous success with the exploration program.

Speaker 2

And when we look forward today, the go forward mine life is in the order of 25 years. So They are long lived assets, but also have potential to get better over time. So it's been a good business for us.

Speaker 1

Our next question comes from a private investor. Any provisions taken on the Cobre Panama situation?

Speaker 3

Hi. No provision as is out there from First Quantum and ourselves. The mine is still operating, operating very well. So there's no provision, no review or impairment at this time.

Speaker 4

Thank you,

Speaker 1

Sanjeep. Our next The next question comes from Vincenzo at 7 Pillars Capital Management. Could you please give me some color on the contingency plan if 1st quantum, Cobre Panama were to go into arbitration. How should we think about potential claims that Franco Nevada might have On an arbitration results or if any potential exportation of Cobre Panama should occur, is there any

Speaker 2

Yes. So we hope it doesn't go in that direction. But if the concession were taken away from the operators, the one route for them is arbitration. What we've seen in the past is in some of the water circumstances, international arbitrators have ruled in favor of the mining companies. So you Typically have seen settlements for the companies that have been meaningful.

Speaker 2

They do have real teeth. So they ultimately do get paid. Our agreement and our contracts is if there is a settlement that we would get a proportionate share of that settlement.

Speaker 1

Thank you, Paul. Next question is from Diego In a scenario where Cobre Panama is expropriated, what kind of actions would you legally expect to take?

Speaker 2

I would in terms of the comments that we've already made, the action to be taken is by the operators. The and arbitration is the most likely course for them there. Again, hope they don't go down that course and then our protections are as

Speaker 1

Thank you, Paul. There are no further questions from the webcast. This concludes our Q3 2023 results Conference Call and Webcast. We expect to release our year end 2023 results after market close

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Franco-Nevada Q3 2023
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