Earnings Call Transcript - FNV Q1 2021

Operator, Operator

Good morning, everyone, and welcome to the Franco-Nevada Corporation Q1 2021 Results Conference Call. I would now like to hand the call over to your host, Jason. Please continue.

Jason [indiscernible], Company Representative

Thank you, Chris. Good morning, everyone. Thank you for joining us today to discuss Franco-Nevada's First Quarter 2021 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. Paul Brink, President and CEO of Franco-Nevada, will provide some introductory remarks, followed by Sandip Rana, CFO 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 are available to answer any questions. We would like to remind participants that some of today's commentaries 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.

Paul Brink, President and CEO

Thanks, Jason. Good morning. Our diversified portfolio outperformed in the first quarter, generating record revenues and near-record margins, an 85% adjusted EBITDA margin and a 52% adjusted net income margin. Gold equivalent ounces for the quarter were ahead of our expectations. Strong deliveries from Antamina, ongoing ramp-up at Cobre Panama, and leverage to gold prices at Hemlo made for the largest increases over Q1 2020. As we progress through the year, we expect higher contributions from each of Cobre Panama and Candelaria due to increased throughput and high grades, respectively. Energy revenues for the quarter were well ahead of our guided annual run rate. A strong initial contribution from Haynesville, some high-interest wells in the Permian and higher energy prices were the drivers. We're committed to ensuring that Franco-Nevada is the gold investment that works for all our stakeholders, including our shareholders, our operating partners and our communities. Along with our asset handbook, we recently published our annual ESG report. Highlights of the ESG report are our sector-leading rankings, promoting responsible mining through our capital allocation, ongoing contribution to communities and our increased commitment to diversity in our Board and top leadership. During the quarter, we added two attractive precious metal assets, a royalty on Roxgold's Séguéla gold development project in Côte d'Ivoire and a precious metal stream on the Condestable copper mine in Peru. Both assets have excellent upside potential. We were delighted post-quarter end to acquire a tranche of Vale Iron Ore Royalty Debentures. With the Vale interest, along with our Labrador Iron Ore Royalty Company investment, we add to our base of low-risk, long-life cash flows and further enhance the diversity of our portfolio. With the additions, the portfolio remains more than 8% precious metal-focused. Our recently published asset handbook highlights the year-on-year growth in our reserves and long-reserve lives. The iron ore assets will further extend both measures. Turning now to our outlook. 2021 is expected to be a strong growth year for Franco-Nevada, with new acquisitions, mine expansions and new mines all contributing. We continue to see numerous exploration successes in the portfolio. Most recently, success at the Copper World satellite to the Rosemont deposit, ongoing expansion of Skeena's Eskay Creek deposit, expansions of East Gouldie at Canadian Malartic and high-grade step-out holes at Wallbridge's Fenelon deposit. This week, Kirkland Lake provided the latest drilling update on a 270,000-meter drill program at Detour Lake. The likely expansion of the resource at Detour should be a catalyst for our stock this year. Strong gold prices and near-record copper prices are boosting the development outlook for our pipeline of gold and copper interests. The Hardrock, Valentine Lake and Stibnite Gold projects and the Alpala and Taca Taca copper projects, among others. Following the Vale Royalty Debenture acquisition, we revised our guidance and outlook and now expect 25% growth in revenue over the next 5 years. We announced with our year-end results an increased quarterly dividend to $0.30 a share. This was our 14th successive annual dividend increase. The Board has now declared the first of those dividends payable on June 24. The 15% increase is larger than typical and reflects the growth in our business due to Cobre Panama. A note on Board succession and renewal. At yesterday's annual meeting, the Honourable David Peterson stepped down as the Chair of the Compensation and ESG Committee after more than 13 years as a Director of Franco-Nevada. The Board and I would like to thank David for his outstanding leadership and many years of service. We will no doubt miss his unique abilities to foster unity within the Board. In terms of renewal, you'll recall that Maureen Jensen joined the Board at this time last year. Maureen has a strong governance background, having previously led the Ontario Securities Commission. To sum up, our portfolio continues to outperform. It has built-in growth and tremendous long-term optionality. We're in a net cash position of $1.2 billion in available capital and are now generating EBITDA at a rate of $1 billion per year. We're focused on precious metal acquisitions and see good prospects for adding to the portfolio. I'll now hand it over to our CFO, Sandip Rana.

Sandip Rana, CFO

Thank you, Paul. Good morning, everyone. The first quarter of 2021 maintained the positive momentum that Franco-Nevada established at the end of 2020. Our royalty and stream portfolio continues to perform well and exceed expectations. Despite a slight decline in gold prices compared to the fourth quarter of 2020, Franco-Nevada achieved a remarkably strong financial quarter, setting records for revenue and adjusted EBITDA. In the quarter ending March 31, 2021, gold and gold equivalent ounces sold rose over 10% compared to the previous year, totaling 149,575 GEOs. Key contributors to this success included Antamina, Hemlo, Cobre Panama, and Condestable. Antamina's strong performance was driven by increased silver deliveries and higher silver prices. It is important to note that the silver ounces received in Q1 2021 were based on production from the previous quarter. We expect silver production from Antamina to reach the upper end of the previously estimated range of 2.8 million to 3.2 million ounces for 2021. At Hemlo, we benefitted from mining on our 50% NPI ground, recording 11,675 GEOs sold in the quarter, with just over 4,400 GEOs linked to prior periods. However, we anticipate a reduction in mining on NPI ground in the latter half of the year. Cobre Panama had a strong first quarter, selling 29,622 GEOs, consistent with our full-year guidance of 105,000 to 125,000 GEOs sold. Additionally, we received our first gold and silver ounces from the Condestable stream transaction, reporting just over 3,000 GEOs sold as revenue for the quarter. Sudbury and Guadalupe were two assets that saw a decrease in GEOs sold compared to the prior year. Although KGHM will continue mining at McCreedy West for several more years, it will operate at a lower production rate, which was reflected in the first-quarter sales. Moreover, Guadalupe experienced fewer GEOs sold due to lower grades than in the previous year. Our total revenue and adjusted EBITDA for Q1 2021 and Q1 2020 show substantial year-over-year increases. The average gold price for the quarter was $1,794 per ounce, reflecting a 13% rise from $1,583 per ounce a year ago. Revenue hit a record high of $308.9 million, with adjusted EBITDA also reaching a record at $262.7 million. This translates to a margin of 85%. Gold and silver revenue climbed from $189.1 million last year to $237.7 million in Q1 2021, a 26% increase. Energy assets contributed significantly as well, with revenues jumping from $26.5 million a year ago to $45.1 million this quarter, thanks to recovering oil and gas prices and improved production. We also reported $7.2 million in revenue from the recent Haynesville natural gas transaction. The increase in revenue and adjusted EBITDA was mainly driven by the higher number of GEOs sold and rising commodity prices, particularly in precious metals and energy. Our cost of sales was lower at $40.6 million compared to $43.6 million last year, attributed to fewer ounces delivered and sold from Sudbury and Guadalupe. The depreciation expense rose to $71.2 million for the quarter, up from $64.4 million in Q1 2020, due to mining activities and energy revenue. In terms of adjusted net income, we recorded $160.9 million or $0.85 per share, marking increases of 47.3% and 44.8%, respectively, year-over-year. Franco-Nevada has evolved from being exclusively a royalty company to including streaming as part of our business model, with streams contributing significantly to revenue growth. These streams represent 50% of our revenue in Q1, although royalties continue to offer higher margins and operational cash flow. The costs associated with royalties remain minimal, demonstrating our expectation that our hybrid model of stream and royalty assets will lead to continued peer-leading EBITDA margins. Our cash cost per ounce typically ranges from $250 to $300 per GEO sold, with the average gold price increasing alongside an 18% decrease in cash costs per ounce, indicating benefits from low fixed costs linked to the stream mix. Our corporate administration costs reflect our commitment to cost efficiency, remaining stable since our IPO while revenue has soared from approximately $25 million in 2008 to $310 million this quarter. Corporate administration for Q1 2021 was $6.2 million or 2% of revenue. We believe we can further expand our portfolio without substantially increasing our overhead. Portfolio diversification remains a key strength for Franco-Nevada, as 85% of our Q1 2021 revenue came from gold and gold equivalents, with 90% sourced from the Americas. Cobre Panama was our largest revenue source at 17% for the quarter, followed by Antapaccay at 11%. On April 16, 2021, we completed the purchase of 57 million Vale Royalty Debentures for $538 million, allowing us to receive premium payments based on net sales from several of Vale's Brazilian mines. This acquisition is expected to generate 25,000 to 35,000 GEOs sold in 2021, and with this addition, we've raised our guidance to 580,000 to 615,000 GEOs for the year, a 15% increase over 2020. Our guidance for energy revenue remains unchanged, projected at $115 million to $135 million. In the second quarter, we will accrue six months’ worth of Vale Royalty revenue, with actual cash payment expected at the end of September. There is a possibility that precious metals revenue could fall below 80% for the quarter, but we anticipate a rebound above that level in Q3 2021. As of now, we have available capital of $1.2 billion, supported by a cash on hand and a draw on our credit facility used for the Vale Royalty acquisition, while remaining in a net cash position.

Operator, Operator

Your first question comes from Tyler Langton at JPMorgan.

Tyler Langton, Analyst

Just starting with the energy revenues of the $45 million in the quarter. I know you mentioned it kind of benefited from production and prices. Could you give us, I guess, a sense maybe if current prices hold where they are, just kind of what sort of the revenues could look like this year, just given, obviously, you're kind of well on track to hit the guidance?

Jason O’Connell, Company Representative

Yes, Tyler, it's Jason O’Connell here. I appreciate the question. For Q1, we had a higher than usual revenue figure for energy. Part of that was revenue from previous periods. If we adjust for that prior revenue, the quarterly figure would have been around $40 million. We had about $5 million coming from wells that produced last year, but we only received payment this year. With the increased prices, we anticipate better revenue. The prices were slightly above the $55 per barrel WTI and $2.50 per mcf prices we used in our guidance, which benefited us. If prices remain high for the rest of the year, I would expect our results to exceed the guidance provided. During our Analyst Day, we shared some insights on the sensitivity to commodity prices. There is some leverage associated with our energy portfolio. If prices are on average 10% higher than our guidance, revenue should increase by about 13%. So again, if prices stay elevated, we expect revenues to also be higher, and there will be some leverage in that revenue figure.

Tyler Langton, Analyst

With this production, is there any consideration regarding the long-term guidance that this might be a temporary benefit for this year? Or should we not anticipate that?

Jason O’Connell, Company Representative

I believe that when reviewing the quarter, it's important to note the benefit we had from prior period revenue, which I don't expect to continue. Additionally, we had a solid quarter in terms of production volume. However, we still think our initial guidance for the year remains valid. Some of the assets that performed well might see a decline in production over the year. Therefore, I advise against annualizing the revenue from this quarter.

Tyler Langton, Analyst

Okay. Perfect. And then just a final question on Hemlo. I know there were close to 12,000 GEOs in the quarter, and there was about a 4,000-ounce benefit. I remember you mentioned last quarter a contribution of 20,000 to 30,000 ounces. I understand you said the NPI should decrease in the second half. Given the Q1 results, could you potentially exceed that guidance or at least reach the upper end of it for the year?

Sandip Rana, CFO

I think it's still too early to narrow it at this stage of that 12,000. Obviously, as you said, there's 4,000 related to the prior period. Right now, I would say we're probably going to end up in the middle of that range. But because it is an NPI, costs do impact the payment, and as expected, there should be lower production on the land towards the end of this year or in the second half of this year. Still comfortable with that range, not in a position to narrow it at this stage.

Operator, Operator

Your next question comes from Josh Wolfson, RBC Capital Markets.

Joshua Wolfson, Analyst

Just looking at the Vale transaction and guidance, just so I understand clearly. So in the second quarter, you're planning to accrue production that would have started from January, is that correct?

Sandip Rana, CFO

Yes, that's correct. Because we didn't own them until April 16, 2021, but we're entitled to payments for production from January 1. So for the June quarter end, we will be accruing 6 months' worth of production or sales.

Joshua Wolfson, Analyst

Okay. And then the guidance for the 25,000 to 35,000 ounces. Did that assume production from January or from April?

Sandip Rana, CFO

That's a full year's production, January 1 to December 31.

Joshua Wolfson, Analyst

Okay. Understood. Thank you for the information about the lift shares. We have always had this significant short-term investment amount that we struggled to understand, but reflecting on that deal, it seems these shares began to be acquired over five years ago. We didn’t cover this at the Analyst Day. However, what is Franco’s strategic thinking regarding this large share position? Clearly, the current share price is much higher than the acquisition price. What is the ultimate goal for the company in this context?

Paul Brink, President and CEO

Josh, we think of the investment really just as a royalty holding. Labrador Iron Ore income fund is run with very little G&A, so it's effectively just a straight pass-through of that interest. So we're very happy just with the current position we hold. But the stock has traded very well. And so we're not looking to acquire anymore at these prices, as you know, for our focus on adding new assets really is on the precious metal side. But it is an attractive asset. If it was ever trading at much lower prices, we would consider adding more.

Operator, Operator

Your next question comes from Cosmos Chiu, CIBC.

Cosmos Chiu, Analyst

Maybe my first question is on LatAm, Latin America, here. Certainly, the COVID-19 situation isn't great in LatAm, and a number of your assets or royalty and streams are in Latin America. For example, I think there was a bit of an outbreak at Antamina. Could you maybe comment on your understanding of the situation right now? And has it impacted you in any way so far in Q1, or I guess we're into Q2 now? And how have you factored that in?

Paul Brink, President and CEO

Cosmos, you're absolutely right. Latin America has been heavily impacted by COVID. Of the assets, the only outbreak we're aware of is at Antamina, but we haven't heard anything yet in terms of that impacting production either through the first quarter this year or through the rest of the year. So to date, as far as work, they're able to manage that without impacting production.

Cosmos Chiu, Analyst

Okay. Transitioning from Antamina to West Africa, I noticed you made several acquisitions in the last quarter. One acquisition that hasn't received much attention is Séguéla, which I believe has good upside potential despite being small. My question is twofold. First, regarding the recent merger proposal between Fortuna Silver and Roxgold, they have mentioned potential in some of the pits and others. Can you confirm that the Royalty applies to the entire land package?

Eaun Gray, Company Representative

Cosmos, this is Eaun. Yes, you're right. It does cover the mining license, which covers all of those targets and prospects.

Cosmos Chiu, Analyst

Great. And then, Eaun, are you getting more excited now with the proposed acquisition or merger of Fortuna Silver and Roxgold, potentially now with Séguéla being part of a larger company? Do you see more upside potential from here onwards?

Eaun Gray, Company Representative

We love the deposit. It starts and ends in terms of geology for us. And the technical team really liked it. And so we were very happy to partner with the team at Roxgold there. And we're also very happy to see Fortuna now come into the picture. Bigger company, lots of potential. And we hope to maintain good contact and relations and would also be keen to do something bigger there if ever needed.

Cosmos Chiu, Analyst

Of course. Now that we are part of a larger company, could you confirm if there is a buy down related to the Royalty? How does that work within this bigger organization? Do you think that buy down will be utilized more than it was before?

Eaun Gray, Company Representative

Sure. And so a little bit of background. There was another pre-existing royalty that existed on the properties prior to our transaction, and it had a 100% buy down. Our deal would allow the company to buy back half at a predefined price effectively equivalent to the price at which we bought in. And that was an arrangement that worked for both parties, and we were able to do due diligence. And obviously, you see some of the great things there, like Sunbird ahead of time, which made it a very compelling acquisition for us. So it's a bit of back and forth in terms of negotiation, but we cut it at 50%, and it's very possible they'll do that, but we're still happy with the royalty and being part of the project.

Cosmos Chiu, Analyst

Of course. Maybe one last question here. And coming back to Canada here. As you mentioned, Paul, in your opening remarks, there's been a new discovery made by Agnico Eagle and Yamana at East Gouldie at Canadian Malartic. I haven't gone through your entire sort of asset handbook yet. But I'm not sure how much you can comment at this point in time. But with that new discovery potentially fall within your royalty grounds, and can you talk about the extent of your Royalty on that land package here in terms of the area?

Paul Brink, President and CEO

Thank you, Cosmos. The royalty claims that we hold at Canadian Malartic do not encompass the entire property position. We have about five separate claim blocks that form a bit of a checkerboard. One of the claims includes what we believe is the center of the East Gouldie deposit. The extensions that have been made are to the east of that area. Additionally, we have another claim block located to the east. While it's still early in the process, it seems that a portion of the extension may be located on one of our other claims, and we are very excited about this development.

Operator, Operator

Your next question comes from Brian MacArthur, Raymond James.

Brian MacArthur, Analyst

I have two questions related to the 5-year guidance. There was a comment earlier in the call about Sudbury potentially being lower than expected. When you initially provided the 2025 guidance, it was assumed that Sudbury would continue as is. Is that still true? My second question is about the MWS Royalty. Is it included in the 5-year guidance, or does the 325,000-ounce cap come into effect before then?

Sandip Rana, CFO

Brian, it's Sandip here. Sudbury, yes, it's going to continue mining on the McCreedy West till 2026, is the current life of mine plan. As we highlighted at the end as part of our year-end, it will be at half the rate it was for 2020. So if you look at Q1, it's on pace for that profile. So it will be about 10,000 to 12,000 GEOs per year for the next 5 years.

Brian MacArthur, Analyst

Great. So that hasn't changed at all...

Sandip Rana, CFO

That hasn't changed, that hasn't changed. It's just year-over-year. It's a lot less than it was last year, but that's the reason because they're mining at a reduced rate. With respect to mine waste solutions, we expect the cap to be reached in 2024. So it is not included in our 2025 5-year outlook.

Operator, Operator

There are no further questions at this time. Please proceed.

Paul Brink, President and CEO

Thank you, Chris. We expect to release our Q2 2021 results after market close on August 10, with the conference call held the following morning. Thank you for your interest in Franco-Nevada.

Operator, Operator

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