FRANCO NEVADA Corp Q4 FY2021 Earnings Call

Good morning, everyone, and welcome to the Franco-Nevada Corporation 2021 Year-End Results Conference Call and Webcast. This call is being recorded on March 10, 2022. Currently, all lines are set to listen-only mode. After the presentation, we will have a question and answer session where you can ask questions through the phone line or webcast. If you are on the webcast, you can submit written questions for the Q&A at any time during this call. I will now turn the call over to your host, Ms. Bonavie Tek, Vice President of Finance. Please proceed.

Thank you, Pam. Good morning everyone. Thank you for joining us today to discuss Franco-Nevada's 2021 year-end 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. Paul Brink, President and CEO of Franco-Nevada, will provide some introductory remarks; followed by Sandip Rana, Chief Financial Officer of Franco-Nevada, 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 comments may contain forward-looking information and we refer you to our detailed cautionary note on Slide 2 of this presentation. I will now turn the call over to Paul Brink, President and CEO of Franco-Nevada.

Thanks, Bonavie, and good morning. I'm delighted to be reporting Franco-Nevada's best-ever annual results, both top line and bottom line. Our diversified portfolio served us well with good contributions across precious metals, energy and iron ore, driving a 27% increase in revenue to $1.3 billion. Precious metal growth was driven by an increased contribution from Cobre Panama performance by Antamina and the first year contribution from the Condestable acquisition. And oil prices spiked during the year, and we generated strong revenues from our iron ore holdings. Energy prices recovered from their pandemic lows in 2020 that along with the newly acquired Haynesville natural gas royalties saw our energy revenue more than double. The benefit of our top line business is most apparent during periods of cost inflation. Our revenue growth translated directly into expanded margins and record earnings. Our efforts on ESG continue to be well received. We recently had our top rating reaffirmed by Sustainalytics, and we're once again highly ranked in the Global Mail Annual Governance ratings. We also made progress on our diversity goals in 2021 and through promotion increased the diversity of our senior management. The growth in our business prompted our 15th consecutive annual dividend increase announced this January. The 6.7% increase takes our quarterly dividend to $0.32 per share in U.S. dollar terms. Our Board also moved their annual dividend review earlier in the year. So, the increase will for the first time apply for each of our full quarterly dividends this year, an effective 10% annual dividend increase. Turning to outlook. It goes without saying, with the terrible war in Ukraine, markets and commodity prices are very volatile, and there's a wide range of revenue outcomes. After the 27% growth in 2021, we expect a slightly lower production profile in 2022. The outlook reflects an expected lower contribution from Guadalupe or normalized grades at Antamina and a dip in the grade at Antapacay for the year before recovering again in 2023. At the same time, prices for gold, PGMs, nickel, energy, and iron ore, are currently all high and if sustained, will boost revenues for the year. We expect our growth to continue in 2023, with the largest driver being Cobre Panama, First Quantum plans to expand the mine from the current 85 million tons per annum and achieve 100 million tons per annum by the end of 2023. We're guiding to roughly 10% organic growth in our business by 2026 over 2021 levels, with a similar commodity mix between precious metals and diversified over the period. Growth will come from mine expansions and new mines. Expansions are expected at Detour, Tasiast, Stillwater and Vale’s iron ore operations, along with Cobre Panama. Of the new mines expected to contribute, Salares Norte, Seguela and Greenstone are already under construction. Strong commodity markets inevitably drive organic growth in our portfolio; along with a deep portfolio of royalties on gold exploration properties, we have royalties on what are likely some of the next generation of copper and nickel mines. Our business development team is very active, principally with the financing of new gold mines but also on diversified assets. To wrap up, I'm proud of what our team has achieved resulting in yet another record year that builds on the track record of Franco-Nevada. Over to you, Sandip.

Thanks, Paul. Good morning, everyone. As mentioned by Paul, Franco-Nevada ended 2021 with a strong fourth quarter, resulting in record financial results for the full year. Our royalty and streaming portfolio continued to perform well with the company benefiting from its asset and commodity diversification during the year. As you turn to Slide 3, you can see how the company performed against the guidance that was issued for 2021. The initial guidance provided by the company for the year was 555,000 to 585,000 GEOs for the mining assets. The range was increased and then narrowed as the year progressed with our guidance in November being 590,000 to 615,000 GEOs sold. I'm proud to say that the company achieved near the top end of this range with 610,981 GEOs sold for 2021. With respect to our energy assets, the company had guided to revenue of $115 million to $135 million for the year using a $55 per barrel WTI oil price. As you know, energy prices rebounded strongly in 2021 from the lows of 2020. We increased our guidance a number of times during the year with the most recent paying $195 million to $205 million. We are pleased to report that our actual energy revenue for the year was $210 million, exceeding the top end of the revenue range. As you will have seen with our press release issued yesterday beginning in Q4 2021 and going forward, we will be including energy revenues and our gold equivalent ounce total. We believe this provides a more comprehensive measure of our business and would be useful to investors to evaluate the full scale of our portfolio. On Slide 4, we highlight the gold equivalent ounces sold, which do include energy GEOs for the last five quarters as well as the previous five years. The portfolio has performed well with overall growth for each of the time frames presented. The company sold 182,543 GEOs in fourth quarter 2021, compared to just over 162,000 GEOs in Q4 2020. The 12% increase was a result of strong performance from our diversified assets. We benefited from the addition of the Vale royalty as well as the rebound in energy revenue. For the quarter, we had strong performance from Cobre Panama and Candelaria as they delivered higher GEOs than expected, while Antapacay and Guadalupe performed weaker, delivering less GEOs than prior year. The revenue for the Hemlo NPI was negligible for the quarter as the operation continued to produce less ounces from our royalty lands and incurred higher costs. Net profit interest royalties do have leverage to rising commodity prices, and we do think there is the possibility for the Hemlo NPI to rebound in 2022, given where current gold prices are. With respect to the iron ore assets, we recorded 8,600 GEOs in the quarter, compared to 4,778 in Q4 2020, the increase being the addition of the Vale royalty. We will find out later this month what the actual royalty payment will be for the Vale assets for the last six months of 2021, and will record any adjustment required in the first quarter of 2022. The strong fourth quarter closed out the year with 728,237 GEOs sold for 2021, a new record for Franco-Nevada and a 27% increase over the prior year. Precious metal GEOs represented 76% of total GEOs for the quarter and 77% for the full year. The GEOs for the full year do include 117,256 GEOs related to the energy assets. 2021 saw continued positive momentum in commodity prices. As you see on Slide 5, all commodities were higher for the year, with iron ore and energy increasing significantly. However, for the quarter, other than energy prices in platinum, precious metal prices averaged lower than Q4 2020. Slide 6 highlights our total revenue and adjusted EBITDA amounts for the 3 and 12 months ended December 31, 2021, and 2020. As you can see from the bar charts, revenue and adjusted EBITDA has increased year-over-year. The company recorded $327.7 million in revenue in the fourth quarter and $269.8 million in adjusted EBITDA, a margin of 80.3% was achieved. Fourth quarter continued the strong contribution from the energy assets as revenue increased from $27.8 million a year ago to $62 million this quarter. The increase was due to the rebound in energy prices from a year ago as well as the contribution from the Haynesville gas acquisition. For the full year, the company recorded $1.3 billion in revenue and $1.09 billion in adjusted EBITDA, both records for the company. As you turn to Slide 7, you will see the key financial results for the company. There are a lot of financial records for the full year, which are highlighted in gold. As mentioned, with the increase in commodity prices, the company had strong revenue growth for the quarter and year. And with the margin generation of our business model, there was a significant increase in adjusted EBITDA and adjusted net income. On the cost side, we did have an increase in cost of sales as more stream ounces were delivered and sold compared to 2020. In fact, stream GEOs increased 19% year-over-year. Depletion was also higher at $299.6 million versus $241 million a year ago due to the increase in GEO sold, a large portion being from higher depletion stream assets. In addition, we had additional depletion related to the Condestable, Vale and Haynesville acquisitions. For the full year, adjusted EBITDA was $1.09 billion, a 30% increase over 2020 and the first time adjusted EBITDA had surpassed $1 billion. Adjusted net income was $673.6 million, a 30% increase over 2020, while adjusted net income per share was $3.52, also a 30% increase over the full year 2020. Slide 8 highlights the continued diversification of the portfolio, which we consider one of the strengths and differentiators of Franco-Nevada. As shown, 77% of our 2021 revenue was generated by precious metals. The geographic revenue profile has revenue being sourced 91% from the Americas, with Canada and the U.S. being the largest. With respect to asset diversification, Cobre Panama was our largest revenue generator at 18% of total revenue for the year, followed by Antapaccay in Candelaria at 9%. Cobre Panama is the only asset greater than 10% of revenue. And the last chart highlights our operator diversity. Our largest exposure to revenue being generated by any one operator is 18%, which is First Quantum who operates Cobre Panama. We are fortunate to have royalties and streams on many properties mined by some of the most reputable mining companies in the world.

It's Jason O'Connell here. We're keeping an eye on what's happening with the operators, particularly in the U.S. that are running our shale assets. To date, they have been fairly disciplined in how they're allocating capital into their assets. We've seen, I guess, from the low point in 2020 after commodity prices crashed, we've seen a pretty good rebound in drilling rig rates across our acreage. Despite that fact, operators are under pressure from their shareholders to maintain a fair amount of discipline in how they allocate capital. They're returning capital to the shareholders rather than putting it back in the ground. And so what's set to possibly change is given the large jump in energy prices here. There is some talk and some pressure from the government in the U.S. to increase production. So, we could see a situation here where production volumes increase under the strong price environment that we're seeing right now.

Thanks, Adam. As always, with our business, our number one priority is adding precious metals to the portfolio. But the industry is more competitive. And so, you're right in saying we were indicating keeping all avenues open to us in terms of adding good diversified assets if they do become available as well, so that we've got the maximum opportunities to grow the company. On the energy side, we have indicated, we're not looking to add more assets at this stage. We think the level of contribution is good in the portfolio. In due course, if the portfolio is much bigger, we may get back to adding energy assets. In the short term, obviously, with the constraints on the amount of capital available in that industry, I think energy prices will do particularly well. If we do get a larger contribution from them, I'd say that would be all upside.

Just wanted to start with sensitivities, if I could, to commodity prices. And thank you very much for giving us your commodity price assumptions for your GEOs. Just wanted to start with just Jason, on the last guidance on the energy prices was a 10% move would impact revenues by 13%. Is that still a viable number for us to use?

Yes. So we did look at it, Tanya. It's basically a 1:1 on the iron ore. And on the gold, it's for a 10% increase. It's about a 12% increase in cash flow, just because of the streams and the leverage there.

It is. And same criteria, if it's a great ore body and we can get it at what we think is an attractive long-term price, we're always interested.

Thank you. There are no questions from the webcast. So, operator, I think we can wrap it up then.

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