Franco-Nevada Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 14, 2024

There are 9 speakers on the call.

Operator

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

Operator

Please go ahead.

Speaker 1

Thank you, Lara. Good morning, everyone. Thank you for joining us today to discuss Franco Nevada's Q2 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.

Speaker 1

During our call this morning, Paul Brink, President and CEO of Franco Nevada, will provide introductory remarks followed by Sandeep Rana, Chief Financial Officer, who will provide a brief review of our results and Ian Gray, Senior Vice President, Business Development, who will discuss our recent transactions. 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 Slide 2 of this presentation.

Speaker 1

I will now turn the call over to Paul Brink, President and CEO of Franco Nevada.

Speaker 2

Thanks, 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 Cobre Panama and due to lower production at Candelaria and Andapacay. Lower quarterly production of the 2 operating assets is short term bump and we expect to return to normal operations at both for the balance of the year.

Speaker 2

These are 2 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 Korokawaiko project at Andalpukai. Our business development team have had great success in recent months, and we're very pleased to have added 2 long life assets to the portfolio: the gold stream on SolGold's Casquebel Copper Gold development project in Ecuador and royalty on New Marciana Cocha operations in Peru. Ian 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 Tocquitozenho gold mines that all started production in recent months will boost our results in the second half of the year.

Speaker 2

With that, I'll hand it over to Sander.

Speaker 3

Thanks, Paul. Good morning, everyone. I'll turn to Slide 4 to give an overview of the financial results for the quarter. Overall, GEO sold were 110,264 for 2nd quarter 2024. This compares to 168,515 for the prior year quarter and 131 $1,865 for the prior year quarter when Cobre Panama GEOs are excluded.

Speaker 3

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 Antipakay compared to prior year. Geos delivered were both less than our from both were 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.

Speaker 3

With access to higher grade ore anticipated in the second half of twenty twenty four, Lundin Mining anticipates stronger production. We have maintained the production guidance for Candelaria. At Antipakay, geos delivered and sold were also lower in Q2 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 twenty twenty four, and Franco Nevada expects its stream deliveries for the full year to be within its initial expectations of 50,000 to 60,000 GEOs.

Speaker 3

AMO NPI was also weaker than expected in Q2 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 hemp mole 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.

Speaker 3

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 2020 3, revenue included a catch up royalty payment related to new wells in the Permian Basin, which was not present in Q2 20.

Speaker 3

As we look at total revenue, revenue was $260,100,000 for the quarter compared to $329,900,000 a year ago. When you exclude Cobre Panama from prior year revenue, revenue was actually up from 258,200,000 dollars 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.

Speaker 3

Slide 6 highlights the financial results for the quarter year to date 2024. As mentioned, GEO sold and revenue were lower year over year. Adjusted EBITDA was $221,900,000 while adjusted net income was $144,900,000 dollars 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 for Cobre Panama and had lower GEOs delivered and sold from Ante Buckeye and Candelaria. With respect to the arbitration costs for Cobre Panama, the company incurred costs of $800,000 in Q2 2024 and have incurred $2,300,000 year to date.

Speaker 3

We expect approximately $3,000,000 to be incurred for the rest of the year. Depreciation decreased to 52 $900,000 versus $75,100,000 a year ago. Again, the decrease was due to no depletion recorded for Cobre Panama as well as lower depletion recorded for Antebakay 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 2 Global Income Tax Initiative.

Speaker 3

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 2, is at least 15% going forward. What's important to note is that of the $122,800,000 total tax expense recorded for the 6 months ended June 30, 2024, 49,100,000 relates to an adjustment for prior years and the actual incremental tax expense related to 2024 is about $21,000,000 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 2nd quarter 2024 revenue was generated by precious metals with revenue being sourced 82% from the Americas.

Speaker 3

Slide 8 illustrates the strength of our business model to generate high margins. For Q2 twenty twenty four, the cash cost per GEO, which is essentially cost of sales 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.

Speaker 3

Margin was approximately $2,100 per ounce in Q2 2020. In a rising commodity price environment, we expect to benefit fully as the cost per geosol should not increase in its income. As we turn to available capital, the company has 2 $400,000,000 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 Arroyalty and New Montana Cocoa property for $210,000,000 which Ian will speak to shortly, $23,300,000 advanced assault gold as part of the $525,000,000 stream commitment agreed to in July purchase of shares in G Mining Ventures as part of the Reunion Gold Business Combination for $25,000,000 and the funding of a 5 year $35,000,000 loan to EMX Royalty.

Speaker 3

Even after funding a dip up, the company still has a strong balance sheet to complete additional transaction. Also during the quarter, the company amended its 1,000,000,000 dollars unsecured revolving term credit facility to extend its term to June 3, 2029. Finally, with respect to the GEO sold guidance for 2024, 400 and 80,000 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 deliveries from Candelaria in the second half of the year and continued contributions from Tocan Zinno, Greenstone and Solaris Norte.

Speaker 3

And with that, I will now pass it over to Ian, who will speak to the recent business development transactions completed.

Speaker 4

Thank you, Sandy, and good morning. As Paul mentioned, we were happy to announce Goldstream financing on Salt Gold's Alpala project in July. We view this as a world class copper gold porphyry. Dream is tailored to Salt Gold's needs, allowing for derisking with initial pre construction tranches and funding construction once key stage gates are met and funding is secured. Transaction was syndicated seventy-thirty with the Cisco Gold Royalties and we believe represents prudent capital allocation and risk adjusted return.

Speaker 4

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 derisk the project. Our team sees great upside on Elpala and on the broader Casavel concession, which the stream covers. Projects like Tenayama 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 bit over time on the property.

Speaker 4

The transaction includes a number of risk mitigates to determine when funding takes place and various protections for streamers should there be delays or rescoping 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 both Franco Nevada and Assisco. We along with Assisco look forward to the steps management is taking to advance the project. I'm pleased that Casquebel will be a meaningful contributor to Franco Nevada for years to come. We'd also point investors to SolGold's recent update released this morning providing information on their steps to add value to the project.

Speaker 4

Moving to the Anacocha 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 are very positive on the sulfides and see great potential from the existing footprints to extend the life for many years beyond what is currently envisaged. The royalty also covers the Conga and Killas 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 Beneventura providing comfort in the long term potential.

Speaker 4

We view this as another world class geological setting 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.

Operator

Our first question comes from the line of Josh Wolfson from RBC Capital Markets. Go ahead please.

Speaker 5

Yes, thanks very much. First question on the Atacocha 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 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 were large producing known assets.

Speaker 5

Just a bit more insight on what the company sees versus what we know in the market today?

Speaker 4

Thanks, Josh. It's Ian speaking. We see great potential in the asset. It's been a huge producer over the years. A brownfield site with a very large resource endowment.

Speaker 4

We do get the benefit of existing oxide production and expect that 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 that Newmont, 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 incentivize maintaining production in our view.

Speaker 4

You have the Tonga project, which not that long ago was advancing and in the fullness of time, there is potential there and the Kilach project, both very, very large. And so you get the benefit both of immediate cash flow and fantastic optionality longer term. So that is why we find it attractive, and it's a great partner. Newmont, 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.

Speaker 5

Great. And then just in terms of the opportunity for maybe more of this style transaction that skews towards

Speaker 3

the optionalities. Are these the type

Speaker 5

of opportunities you're seeing out there? Or there's been a focus at least from commentary for other companies about project financing type of deals?

Speaker 4

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 all fronts.

Speaker 6

Got it.

Speaker 5

Thank you. And one last question, just on one of the deals that was done early 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 revenues hasn't really improved that much and there was a large investment made in the Q1. When should we start to see the increased royalty revenues from this asset?

Speaker 4

Hi, 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.

Speaker 4

A lot of that is timing and commodity price. So gas prices that 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 their production. So low gas prices in Haynesville have resulted in softer drilling rates and at times operators dialing back their 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 2 ways.

Speaker 4

We're also on boarding continuing to on board 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.

Speaker 1

Those are my questions.

Speaker 4

Thank you.

Operator

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

Speaker 7

Yes. Thanks operator and good morning, Frank team. Thanks for taking the question here. I wanted to ask first of all about the deal on Yanacocha. Congratulations on getting another big deal done.

Speaker 7

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?

Speaker 4

Thanks, Lawson. Ian 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 delay. But I think we are expecting something around the 2029 timeline for production.

Speaker 7

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?

Speaker 7

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?

Speaker 2

Lawson, it's Paul. Thanks for the question. Focus as 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 it generates the best returns over time.

Speaker 2

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 the commodity mix. So as always, the gold and precious metal is number 1 on our list in terms of what we'd like to do, But always open minded if they're great assets and other commodities, we think we'll get long term returns, happy to add those 2.

Speaker 7

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

Operator

Thank you. Our next question comes from the line of Tania Gugiscione from Scotiabank. Go ahead please.

Speaker 8

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 Sandeep for that 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 was one that you had mentioned and Tucanvino, Salares Norte, those ones ramping up.

Speaker 8

Am I to think that like it's a 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.

Speaker 3

Sure, Tanya. As of right now, from the visibility that we have, I would say it's probably going to be pretty even between the 2. Maybe Q4 might be a little bit higher as Greenstone and Solaris North Bay 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.

Speaker 3

But for simplicity, I would say they should be pretty close.

Speaker 8

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 Ian for you, thank you for your forecast of 2029 for the start up of the sulfides, we modeled it into the next decade ourselves.

Speaker 8

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 return? Just a benchmark for us to see on that. And same with Casavel, like when did you figure start up on that asset as well?

Speaker 4

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.

Speaker 4

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 stand to provide you many multiples on your investment as those move forward. Now Conga, Kilach could take a lot of time if they get developed, but certainly that's skewed towards outsized cash flows from the investment was tracked to us. So maybe that provides a bit of context on

Speaker 8

And is reasonable for you single mid single digit, middle single digit like 5%. I don't know what reasonable is for you.

Speaker 4

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 Solvold, the return was meaningfully higher. And it just represents, again, I mentioned a risk adjusted rate of return.

Speaker 8

Okay. And then the full goal, when did you assume start up of that one? And when you say significantly higher, are you implying double digit?

Speaker 4

Yes. In terms of I don't want to get too much into deal specifics. I don't think it's appropriate. But roughly, we look at scenarios for start up 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.

Speaker 8

Okay. Thank you for that color, Ian. And maybe just turning to the M and A environment. Just I wanted to on the last conference call, we talked about you're seeing bigger size deals, plus $500,000,000 I guess the Casavel one was over $500,000,000 What sort of opportunity size are we still looking at now? Is it still over that $500,000,000 Are we back to that $100,000,000 to $300,000,000 on the gold side?

Speaker 8

That's my first question on the transaction side.

Speaker 4

Thanks, Tanya, for the question. It's a good question. I would say expect more of the same in terms of what you've seen recently for deal size. 100 to 300 is a pretty good kind of average size within the pipeline. The overall comments, I think, is that it remains extremely busy.

Speaker 4

So there's lots to look at, which is great, and plenty on the precious metal side. So the team remains very focused. Thank you.

Speaker 8

Okay. And then in terms of royalties, I mean, Buenaventura has been talking about the selling of this royalty on 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?

Speaker 4

Certainly. We like royalties. I think they're great within the portfolio. So we see

Speaker 2

that both

Speaker 4

in terms of streams and royalties.

Speaker 8

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 $50,000,000 to $400,000,000 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's your thoughts?

Speaker 8

Have they changed? Are the opportunities for lithium still there? And is that something you still want to pursue?

Speaker 2

We're still busy on that front. As Ian mentioned, most of our assets on the precious metal 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.

Speaker 8

And that $50,000,000 to $400,000,000 range is still the range that those would fit into?

Speaker 2

Yes, that's a good range.

Speaker 8

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

Speaker 4

Thank you, Tanya.

Operator

Thank you. Our next question comes from the line of Martin

Speaker 6

to go ahead to make your money back on Yanacocha. Is that the correct assumption?

Speaker 4

That is correct, Ian speaking here.

Speaker 6

Okay. And did I hear that there was a $49,000,000 tax adjustment from previous year? Is that correct? Or it's just previous quarter?

Speaker 3

Yes. So because Barbados increased its tax rate to 9%, its 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 49,100,000 dollars a onetime adjustment.

Speaker 6

Okay, perfect. Thank you. That's all for me. Thank you very much.

Operator

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

Speaker 1

Thank you, Lara. Our first question comes from Bernie Picci from 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?

Speaker 4

Thank you for the question. Asquebel 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 gates. 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 governments of Ecuador with criteria included as conditions of funding.

Speaker 4

So we take a lot of comfort from that. But I would probably say, bigger picture, Ecuador has a very fair split of fiscal flows versus other countries. And so we draw a lot of comfort from that as well. With mines like Fertil 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.

Speaker 4

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 in Quito, along with our partners at Sysco and also Canadian and U. S. Embassy staff.

Speaker 1

Next question is also from Bernie Pucci at Halsted Capital. An update on Panama, especially given the new government.

Speaker 2

So Bernie, it's Paul. Since the Molino administration has come in, I think all the indications have been positive. They've indicated a willingness to look at a reopening of mine enter into negotiations that is with some conditions. And I'd say most positive is the steps they're taking. The first item is that they want to do a comprehensive environmental review and so they're putting together a panel of experts so that they can do that.

Speaker 2

I'm very hopeful that that will help demonstrate that the company 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, 1, have a discussion with the company and 2, position this project better with the public in Panama.

Speaker 1

The last question comes from Bjorn Wiklender. Current cash portfolio is USD 1,400,000,000. Is there deals out there such as royalty or streams 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?

Speaker 4

Thanks for the question. It's Ian speaking. As I mentioned, we see a very robust pipeline. At alumina. There's good potential to deploy that capital with what we have in the pipeline.

Speaker 4

Going forward, I think you will see us continue to transact on a number of opportunities. So I don't see it as a surplus. It's quite beneficial for us in terms of bidding competitively.

Speaker 1

Thank you, Ian. There are no further questions from the webcast. This concludes our Q2 results conference call and webcast. We expect to release our Q3 2024 results after market close on November 8 with the conference call held the following morning. Thank you for your interest in Franco Nevada.

Speaker 1

Goodbye.

Operator

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

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Franco-Nevada Q2 2024
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