Earnings Call Transcript - FNV Q2 2020

Operator, Operator

Good morning, everyone, and welcome to the Franco-Nevada Corporation's Q2 2020 Results Conference Call. I will now hand the call over to Candida Hayden. Please proceed.

Candida Hayden, Senior Vice President

Thank you, Colon. Good morning everyone. Thank you for joining us today to discuss Franco-Nevada's Second Quarter 2020 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. Sandip Rana, CFO of Franco-Nevada will provide a brief review of our results and Paul Brink, President and CEO of Franco-Nevada, will provide a business development update. This will be followed by a Q&A period. Representatives of my executive team are present in our boardroom to answer any questions. 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 Sandip Rana, CFO of Franco-Nevada.

Sandip Rana, CFO

Thanks, Candida. Good morning everyone. As we all know, the Second Quarter 2020 was not your typical quarter. Franco-Nevada, like many companies, was impacted by the COVID-19 pandemic. The company had ended 2019 with very strong performance from its royalty and stream assets, which continued into the first quarter of 2020. However, with COVID-19, we had a number of impacts in the second quarter. Of our 56 producing assets at the end of March, 15 were impacted in some way. These assets were either mandated to shut down or to partially curtail production. As of today, we are pleased that almost all of the assets that were impacted have resumed normal operations. Only the Golden Highway assets remain closed. We look forward to our royalties and streams resuming normal operations and continuing to deliver the growth built into our portfolio. On Slide 3, we have highlighted the gold and gold equivalent ounces for the 3 and 6 months ended June 30, 2020 and 2019. Overall, despite the portfolio not performing as planned due to the pandemic, GEO sold were fairly stable for both periods shown. For the second quarter of 2020, GEO sold over 104,330 compared to 107,774 a year ago. The company has benefited from GEO delivered and sold from Cobre Panama as the company began receiving gold equivalent ounces in the third quarter last year. However, deliveries in Q2 2020 were hindered by the mine being placed on care and maintenance because of the COVID-19 pandemic. We expect deliveries to ramp up over the next few months as the mine has resumed operations. One other material asset that did deliver last GEOs in the second quarter compared to a year ago was Antapaccay. The mine did experience concentrate shipment delays in April and May as a result of the pandemic, but we are beginning to see catch-up deliveries of those delayed shipments. With respect to the rest of the portfolio, one asset that showcased its leverage to the rising gold prices was Hemlo. Franco-Nevada has a 50% net profit interest on the interleague deposit within Hemlo. The company saw substantial increases in GEOs delivered and revenue recognized for the second quarter compared to a year ago. We expect this asset to continue to do well as gold prices increase. With respect to PGM silver and other mining assets, the company did recognize last GEO sold, which was in line with expectations. Slide 4 highlights our gold and gold equivalent revenue for Q2 2020, Q1 2020, and Q2 2019. The company's gold and gold equivalent revenue increased 26% compared to a year ago despite relatively flat GEO sold. The increase in revenue was due to the increase in gold prices, with the average gold price for the second quarter being $1,711 per ounce compared to $1,310 per ounce a year ago. Energy revenue had a significant decrease year-over-year, decreasing from $27.6 million in Q2 2019 to $14.6 million in Q2 2020. Overall production at the assets did increase for the energy side, but this was negated by the lower oil and gas prices realized in the quarter. As you are aware, oil prices reached historic lows in April 2020. As you turn to Slide 5, you will see the key financial results for the company. I won't get into the detailed numbers, but the company continues to deliver strong financial metrics including revenue, adjusted EBITDA, and adjusted net income. For Q2 2020, adjusted EBITDA was $158.1 million, a 14.6% increase over a year ago. When adjusting for unusual items, adjusted net income was 43.4% higher in Q2 2020 compared to Q2 2019 at $91.8 million versus $64 million a year ago. On Slide 6, we illustrate the diversification of our portfolio revenue generation. As shown, 92% of our quarterly revenue was generated by gold and gold equivalents in the second quarter, with gold being 70%, silver 10%, PGMs 11%, and other mining 1%. From a geographic revenue profile, revenue was sourced 82% from the Americas, with Latin America being the largest. The third chart highlights the asset diversification of the company. Candelaria was our largest revenue generator at 14% for the quarter, and our top four core assets: Cobre Panama, Candelaria, Antapaccay, and Antamina generated 36% of the revenue for the company. One area that our Board and management are very proud of is our focus on cost management and being a high-margin business. We'd like to stress the strength of our business model and the scalability. The chart on Slide 7 illustrates that the margin for the company increases as gold prices increase. Our cost structure, which we reflect in our cash cost per ounce, includes our cost of sales less costs associated with the energy business. As you can see, it does fluctuate quarterly but approximates $250 to $300 per ounce. If gold prices continue to rise, we expect to benefit fully as the cost per ounce should not increase significantly. This is truly a high-margin business. As you are aware, on April 7, 2020, the company retracted its GEO sold guidance due to the uncertainty around the impact of COVID-19. In addition, the energy revenue guidance was suspended due to the sharp decrease in energy prices and the related volatility. Management is reinstating guidance for 2020, but its royalty and stream assets impacted by the pandemic begin to return to normal operations. Based upon performance for the first 6 months of the year and our expectations for the second half, the GEO sold guidance is 475,000 to 505,000. This guidance is based on commodity prices of $1,800 gold, $20 silver, $900, and $2,200 palladium. With respect to the energy division, revenue is projected to be between $60 to $75 million for the year. This assumes a $40 WTI oil price and $2 Mcf natural gas price. Before I turn it over to Paul, I wanted to provide an update on the CRA audit with respect to the transfer pricing reassessments received for Mexico and Barbados. There are no material changes to what has been disclosed previously. However, in July, the company received a proposal letter related to tax years 2012 and 2013 for foreign accrual property income. The CRA claims that the income for those tax years earned in Barbados should be taxed in Canada under FAPI. The tax owed would be approximately $7 million plus interest and penalties. Franco-Nevada does not agree with the proposal or the calculation prepared by the CRA and has made this clear to them. Now, I will pass it over to Paul, who will provide an update on available capital and discuss our future growth drivers.

Paul Brink, President & CEO

Thank you. I'll discuss our recent business development activities and future growth drivers. In the second quarter, we secured a $100 million financing agreement with SolGold, which includes a 1% NSR on oil production from the Cascavel property in Ecuador. Cascavel is a significant copper-gold porphyry system suitable for block caving, and we consider it one of the top copper-gold development projects worldwide. The measured and indicated resources stand at 2.7 billion tonnes at 0.53% copper equivalent, which is particularly appealing to us as it contains over 21 million ounces of gold. The resource also has a high-grade core of more than 440 million tonnes at 1.4% copper equivalent. SolGold has until January of next year to increase the agreement by 50%, which would raise the royalty to 1.5% and the financing to $150 million. They also have a chance to buy back half of the royalty for a specified period. We've kept the option to convert the NSR in all metals to a gold-only royalty on an NPV neutral basis. Due to COVID travel restrictions during the agreement, we delayed onsite due diligence. We have provided interim funding to SolGold to maintain operations until we can complete our due diligence. Credit for this transaction belongs to Eaun Gray and our business development team, who will be available for questions later. Now, moving on to our growth outlook, we feel well-positioned with rising gold prices, a reserve life nearing 20 years, and built-in growth for the coming years. Business development is active. In the short term, we anticipate success with several smaller transactions; in the medium term, we are bidding on larger deals, which, as always, are competitive processes. We also expect attractive energy assets to emerge as the sector evolves. Organic growth is increasingly contributing as we advance in the global market. Our guidance for the next five years includes expansions at Stillwater, Tasiast, and Macassa, along with the construction of Salares Norte and Coroccohuayco. Furthermore, we possess a wide-ranging portfolio with 35 additional mining development projects and over 200 exploration projects. The development pace of many assets is accelerating; while projects like Ballantyne Lake and Hardrock are not part of our 2024 guidance, their development is becoming more probable. Positive portfolio updates from the quarter are showcased on Slide 11. Specifically, in Australia, a mine that has historically produced open pit deposits is now finding significant underground extensions and developing its first underground mines. Also, one development that is not included on the slide suggests promising potential for life extensions at our Sudbury PGM streams. We've achieved significant exploration success at several assets, especially in Canada, with notable results at East Gouldie at Malartic and extensions at Macassa and Hemlo. SK Creek is also increasingly appearing to have potential for a second life as an open pit operation. This organic growth will incur no additional costs. Lastly, regarding our available capital on Slide 12, our cash reserves are increasing quickly, with working capital exceeding $1 billion and zero debt. With our available credit facilities totaling $1.1 billion, we have a total of $1.7 billion in capital available to invest in new opportunities that will help grow the company. I’ll now return the floor to the operator and welcome any questions.

Operator, Operator

Thank you, everyone. Your first question comes from Puneet Singh of Industrial Alliance, please go ahead.

Puneet Singh, Analyst

Hi, good morning. I guess my first question is as Cobre Panama ramps up, do you expect any kind of lag in deliveries, however that works in terms of recognizing the GEOs for your reporting in Q3?

Unidentified Company Representative, Company Representative

Yes. So, First Quantum states that they'll be fully ramped up by mid-August, and then from there, it can take anywhere from 4 to 6 weeks for us to be paid. We should see some deliveries in August. However, I would say towards the second half of September is when we will get back on track.

Puneet Singh, Analyst

Thank you. Regarding the energy sector, I noticed that Weyburn was significantly impacted, and WTI has seen some recovery since then. I would like to know how much of your energy revenue guidance is attributed to Weyburn and how you expect this asset to perform compared to others in the latter half of the year.

Unidentified Company Representative, Company Representative

Weyburn should improve dramatically in the second half of the year. As you know, when the prices collapsed in April and May, the realized price for Weyburn dropped significantly, around $20 a barrel or so, which was less than the cost of capital and operations. There was actually a small negative balance there on the NRI that will turn around in the second half of the year as prices improve. So there should be a significant increase in revenue from particularly Weyburn in the second part of the year, and that is factored into our guidance for energy.

Puneet Singh, Analyst

Okay, thanks.

Operator, Operator

Your next question comes from Josh Wolfson of RBC Capital Markets. Josh, please go ahead.

Joshua Wolfson, Analyst

Thank you. Looking at the ATM, which has been running at around $50 to $70 million per quarter, we haven't seen much in terms of the use of that cash. So, it seems like adding to the balance sheet beyond free cash flow. How should we look at the ATM going forward? Is this kind of a constant revenue stream for the company, or is this expected to be used for a deal? Or is there some implication on valuation we should be looking into for the use of that ATM program?

Unidentified Company Representative, Company Representative

Sure. So it's a tool for us, and we've been opportunistic in its use. Initially, the goal was to pay off our debt, which we've done. Part of that also depends on what's in front of us in terms of deal flow. But if the cash does sit on the balance sheet, we've shown over time that we can deploy it, and it's a very cyclical business. Whoever has cash usually benefits at the end of the day. Will it be ongoing? I think it's a tool for us to continue looking at using, but as we've always said, we will be opportunistic.

Joshua Wolfson, Analyst

Thank you. Regarding the guidance adjustment for 2020, there are several factors to consider, including COVID-related impacts, some operational changes, and updates to commodity price assumptions. Can you provide insights on how these changes, particularly those related to Candelaria, might influence our forecasts moving forward?

Unidentified Company Representative, Company Representative

No, I think the main source of the change is just the COVID impact for the various assets and then in addition to what you mentioned, with Candelaria, Lundin came out last week with updated guidance, so it's reflecting the update there. But otherwise, we assumed the operations will return to normal in the second half of the year.

Joshua Wolfson, Analyst

Okay. That's all my questions. Thank you very much.

Operator, Operator

Your next question comes from Jackie Przybylowski of BMO Capital Markets. Jackie, please go ahead.

Jackie Przybylowski, Analyst

Thanks very much. I'm just going to follow up with Josh's capital allocation questions. I noticed the dividend went up by a penny in the quarter in Q2. Can you talk a little bit about what your thoughts are around the dividend? Do you see room for maybe further dividend increases, or how are you guys thinking about that in the context of the rest of your capital allocation decisions?

Unidentified Company Representative, Company Representative

Sure. One of the core objectives of the company is to have a sustainable and progressive dividend. We have a track record where we've increased it every year, which we've been able to do for the last 13 years. Yes, we increased it by $0.01 per quarter recently, and we'll look to increase it going forward, but there is no metric that we tie it to, and depending on where we are, it could lead to higher than traditional increases. Again, it will just depend on what's in front of us at the time. But we are committed to raising our dividend each year.

Jackie Przybylowski, Analyst

Great, thanks. I'll get back in the queue.

Unidentified Company Representative, Company Representative

Okay. Thanks.

Operator, Operator

Your next question comes from Carey MacRury of Canaccord Genuity. Carey, please go ahead.

Carey MacRury, Analyst

Good morning. Maybe just another question on the updated GEO guidance. Given the timing of concentrate sales, is there any sort of split we should consider in terms of Q3 versus Q4, if we take the rest of your guidance?

Unidentified Company Representative, Company Representative

Yes. So you will see higher GEO sold in Q4 versus Q3. In terms of the split, it's probably going to be 60:40 in terms of the incremental GEO sold for the second half of the year.

Carey MacRury, Analyst

Okay. And then maybe just on the SolGold transaction. Just wondering what the schedule looks like on due diligence completion.

Eaun Gray, Business Development Manager

Hi Carey, Eaun Gray here. Due diligence is ongoing. We hope to complete something in the near term, as we've previously messaged. Obviously, with COVID, these things are a bit challenging but it is ongoing.

Carey MacRury, Analyst

Maybe one more question on, Paul, you mentioned some of the bigger opportunities considered medium term. I'm just wondering if you could provide some color on the medium term.

Unidentified Company Representative, Company Representative

As discussed before, there are some attractive transactions out there that the business development team is actively pursuing. They are competitive though, and we expect to be competitive enough. But as always, the objective is to generate returns for shareholders, rather than just to grow the size of the company.

Carey MacRury, Analyst

Maybe one last one, with copper prices back towards $3, could some extension transactions be more base metal transactions. Does that change the outlook for some of these to get done?

Eaun Gray, Business Development Manager

Sure, it's Eaun again here. That takes the pressure off some balance sheets. On balance, yes, I would say it helps facilitate some deals. However, I would also point out that the copper-gold ratio is still quite favorable for base metals producers to do precious metal streams.

Carey MacRury, Analyst

Great, that's it for me. Thanks.

Operator, Operator

Your next question comes from Cosmos Chiu of CIBC. Cosmos, please go ahead.

Cosmos Chiu, Analyst

Thanks. Hi, Paul. Hi Sandip, first off, congratulations on a very solid Q2. Considering everything, my first question is again about the corporate development side. Paul, as you mentioned, there are opportunities out there. In the past, you've discussed precious metal streams from base metal mines, and potentially assisting these producers with M&A transactions. Are those still two of the key sources of opportunities ahead?

Paul Brink, President & CEO

Cosmos, thanks for the question. I'm going to hand it over to you. So, I would say M&A activity has probably slowed down a little bit in terms of funding acquisitions. What you're seeing now more is that existing precious metals royalties are increasingly on the market. So we're seeing a bit more of that as well.

Cosmos Chiu, Analyst

And then as a follow-up on Eaun, I'm not sure how much you can share with us here. But as we've all seen, precious metal gold prices have increased, record high silver prices have also increased. Has it made it more difficult for you to price some of these deals? As Paul mentioned, these are competitive situations. Are producers asking for some of these deals to be priced at spot, and would you pay spot?

Unidentified Company Representative, Company Representative

Cosmos, we're looking to do good deals for our shareholders. So certainly we have to take a measured approach to evaluating the valuation. That's something we look to do. I can't share obviously too much there as these are competitive processes. We're looking to do good deals, not just deals for the sake of it.

Cosmos Chiu, Analyst

Maybe a question on the NPIs. Sandip, as you mentioned, Hemlo was one where it had a good leverage in the quarter, certainly benefiting from higher gold prices. How about your other NPIs? You've mentioned Kirkland Lake and the one at Goldstrike. Do we expect again the same type of leverage going forward with some of those NPIs as well? And are there any other NPIs I might have missed?

Sandip Rana, CFO

At Macassa, with Kirkland Lake, it’s a matter of when they will begin mining that land. The NPI does not cover the entire property, so for the foreseeable future, it will likely be minimal. Regarding Goldstrike, it is limited to specific claims, and its performance will depend on what comes through. I believe that at $2,000 gold, we will start to see some leverage at the Goldstrike NPI. However, we are particularly looking forward to the other NPI where we hold a 5% stake. This was affected by the fire last year, but it is now operational again, and we hope it will begin to generate revenue next year. This NPI is expected to have the most significant impact compared to Hemlo.

Cosmos Chiu, Analyst

Certainly, I want to discuss the different areas of the royalties, specifically focusing on the Canadian Malartic underground. Agnico Eagle and Yamana have begun emphasizing the underground potential at Canadian Malartic. Earlier today, you mentioned the East Gouldie zone, along with other underground zones. Could you clarify how much of the 2.7 million ounces in underground resources at East Gouldie is located on your royalty ground? Additionally, for the other deposits such as Odyssey and East Malartic, what is the total amount of resources that can be attributed to Franco-Nevada?

Paul Brink, President & CEO

Cosmos, it's Paul. The best place to look is in our asset handbook, where we do have a schematic that shows the position of East Gouldie relative to our royalty claims. The recall at Malartic, we have a couple of individual claims that don’t cover all of the property, but you will see our best estimate of the portion of East Gouldie that we cover and we do potentially touch on some of the other areas, but East Gouldie is the likely area where we'll see more answers. We don't have a detailed breakout of the actual resource to provide an accurate percentage.

Cosmos Chiu, Analyst

For sure. And then maybe, one last question if I may, likely to Jason here. Good to see that you've re-established your revenue guidance for the year in terms of the energy portfolio. Right now, you're looking at, I believe, $40 per barrel and $2 per Mcf. I believe that's Henry Hub. Clearly, those assumptions are pretty good at this point in time, but Jason, could you remind us in terms of the sensitivity to commodity prices? Who knows, it might actually go up from where it is today. If we have more of a V-shaped recovery, I just want to get a better understanding in terms of your sensitivity.

Jason O’Connell, COO

Thanks, Cosmos. It's Jason here, and you're right, there is some leverage to revenue from rising commodity prices. We have leverage in our Canadian operations, mostly through our Weyburn NRI and also through the Orion royalty. In our US assets, we have leverage that comes from increases in drilling and activity as operators on our lands in the US ramp up their development pace. It's tough to provide an exact ratio for leverage right now; we need to wait and see how the prices come back and what response the operators have in terms of increasing their capital budgets. But certainly, you should see leverage at our Canadian operations just because of the financial leverage associated with those royalties.

Cosmos Chiu, Analyst

It sounds good. So, Jason, I guess it sounds like there is so much commodity leverage, and that could be on top of that some kind of operational leverage when some of the operators might start pulling more drills back into the ground.

Jason O’Connell, COO

Yeah, that's exactly right. What you saw when the oil price crashed in April was a significant pullback from E&P companies in the amount of dollars they were spending on drilling and development. As the price rebounds here, there will be a point where operators start to recommence that capital spending. But we don’t have visibility into operators’ plans, and we'll have to wait for them to commit capital before having a better idea of how that impacts production going forward.

Cosmos Chiu, Analyst

Yeah. And Jason, I guess the follow-up here is that right now it's back up to about $40 per barrel WTI. Based on your experience, do you think that's enough for operators to put drills back into the ground, or do we need a higher price or just more stability?

Jason O’Connell, COO

It's a bit of both. What you're seeing right now is a rebalancing of the entire energy market. You obviously had a huge disruptive event. Operators cut capital significantly, curtailed production, and reduced their development plans. We've just recently come back up to $40, and I think E&P companies are still somewhat reluctant to increase their capital budgets. Many are planning to maintain their production fairly flat or introduce a very low growth rate of not more than 5%. Nobody is talking about growth of 20% or 25% like they were at higher prices. This will take time, and you'll need more sustained high prices before you would expect those growth rates to return.

Cosmos Chiu, Analyst

Great. Thanks a lot. Those are all my questions, thanks again.

Operator, Operator

Your next question comes from Tanya Jakusconek of Scotiabank. Tanya, please go ahead.

Tanya Jakusconek, Analyst

Yes, hi, good morning everybody. I’m sorry, I jumped on the call just a little bit late. I think Sandip maybe you had given some guidance on Cobre Panama. What I understood is that by September, we're going to be back on track on those shipments. Is that fair to assume that that's when we can get back to that 25,000 ounces per quarter rate?

Sandip Rana, CFO

Yes, towards the end of September. That should be the going rate moving forward.

Tanya Jakusconek, Analyst

And sorry, did I miss on Antamina? I know it was about 8,000 to 10,000 ounces of gold equivalent per quarter. Did you provide when we got back on track there?

Unidentified Company Representative, Company Representative

No, not at this time.

Tanya Jakusconek, Analyst

Okay. And just in Q1, you gave us guidance that you still expect the oil and gas front will have a lag in revenue impact and we were going to feel it in the second half of 2020. Is that still the case?

Sandip Rana, CFO

Yes, that's factored into the guidance that we provided. We do think there will be a lag as we see lower commodity prices impacting production levels, and that is factored into our guidance.

Tanya Jakusconek, Analyst

Okay. So that's just on the guidance, and maybe just coming back on the M&A that you and Paul and Eaun talked a little bit about. When you mentioned the small to moderate size, in Q1 you mentioned that was under $500 million, is that still the size you're seeing in the short to medium term?

Unidentified Company Representative, Company Representative

Yes, we're seeing some smaller transactions that are more actionable under the $100 million mark; however, it really runs the whole gamut in terms of size at the moment within the pipeline, from quite large to relatively small.

Tanya Jakusconek, Analyst

Okay. And you also mentioned that with the higher base metal prices, the balance sheet is a bit better on the base metal side. But you had mentioned in Q1 that you were also looking at transactions and the other mining. Is that still something you're seeing now, or has your focus shifted to the energy sector?

Unidentified Company Representative, Company Representative

No, I think right across the spectrum, we are looking at precious metals, other mining, and energy, so we're looking at all those areas for the best opportunities.

Tanya Jakusconek, Analyst

Okay, and then just on the technical due diligence you mentioned, you're still doing the technical due diligence. How are you finding it now? Are things opening up?

Unidentified Company Representative, Company Representative

There is some improvement, but it is still quite challenging. We are getting better at being creative in ways to gain comfort on assets through leveraging contacts and so forth where we have them that we know and trust.

Tanya Jakusconek, Analyst

Okay, but things still remain challenging in getting access to some places due to travel restrictions?

Unidentified Company Representative, Company Representative

Yes, there are certainly some places, but other places are just more challenging in terms of logistics.

Operator, Operator

Your next question comes from Greg Barnes of TD Securities. Greg, please go ahead.

Greg Barnes, Analyst

Yes, thank you. Sandip, on the CRA situation, is there an avenue to open up settlement discussions with CRA to come to some kind of conclusion along the same lines that we didn’t do?

Sandip Rana, CFO

That is one of the options we will evaluate as time goes on. I think we waited for the Cameco decision, and that was favorable; they won the appeal. So it is one of the options, but we will explore all our alternatives. At the end of the day, we think we've done everything in compliance with the laws. Therefore, we shouldn't have to pay anything else, but we will continue to explore our options.

Greg Barnes, Analyst

But you have not opened discussions with them on that front yet?

Sandip Rana, CFO

Not yet.

Greg Barnes, Analyst

Okay. And then on the M&A front, you've mentioned the word competitive a number of times. The biggest deal done recently priced out at around a 3% IRR. Is that the kind of metric we should be considering for deals going forward now?

Sandip Rana, CFO

Greg, it's hard to comment on specific transactions within the marketplace. Many assumptions go into the IRR calculations. However, I would say that we are looking to do deals that offer reasonable levels of return compared to the deals we've done in the past and using similar methodologies to assess metals prices.

Greg Barnes, Analyst

Okay. And, Sandip, final question. With your balance sheet where it is and the free cash flow you're going to generate, does it make sense to have a more efficient capital structure and carry some debt going forward? That would enable you to do a big deal and also continue to pay a large dividend or a larger dividend?

Sandip Rana, CFO

It's a fair comment, Greg, but I think what we've seen in the history of the company is that this is a cyclical business, and the best time to put on debt is during a downturn. We did that in 2014 and 2015 when we added Candelaria, Antapaccay, and Antamina. We went into that downturn with no leverage, and it was the perfect time to add leverage. So that's how we view the capital structure. If there is a time to put debt on the balance sheet, then maybe later, but now is not that time.

Operator, Operator

Your next question comes from an unidentified analyst at Credit Suisse, please go ahead.

Unidentified Analyst, Analyst

Hi, good morning. Just one from me, on the energy side of the business, can you talk about this year? Obviously, energy revenue is going to be less than 10% of the overall mix. What does that look like in a more normalized year next year? Is this still back to that 15% to 20% maybe even higher? And are there opportunities to lower the capital commitment with Continental next year as well? Thanks.

Sandip Rana, CFO

I'll take the first part of that question. With respect to next year going forward, with the significant increase in precious metals prices, energy revenue will likely be below 10%. If commodity prices remain where they are currently, it will definitely be less than 10% of revenue. Regarding Continental, I'll pass it off to Jason.

Jason O’Connell, COO

Yes, there is potential to decrease that commitment or spread it out over a longer time period. The objective of that partnership is to try to buy acreage on the ground in front of Continental’s drilling program. This depends somewhat on how aggressive Continental is in their development efforts and their drilling efforts. If drilling and development slow down, fewer desirableacreage will be available to purchase, and if that's the case, we may slow our commitment there. But we haven't really addressed that question with Continental yet. We will have to wait until later in the year before we can determine the appropriate spending level for next year.

Operator, Operator

Your next question comes from Brian MacArthur of Raymond James. Brian, please go ahead.

Brian MacArthur, Analyst

Good morning. Just following up. First of all, on Tanya's question about the delays for oil and gas royalties coming in. Should we expect Q3 to be hit relatively hard compared to Q4, just because of the timing of the oil price and the lag effect of when the drilling occurs? Will Q3 again be quite a bit lower than Q4 if I look at a weighting by quarter?

Jason O’Connell, COO

Yes, it's Jason. Brian, I think that's correct. I believe you'll see a carryover of the low price impacting Q3 more than Q4. So if you're looking at dividing out that revenue over the balance of the year, you'd want to weight it a little more towards the fourth quarter than the third quarter.

Brian MacArthur, Analyst

And my second question is kind of philosophical. You've been pretty good historically about doing counter-cyclical investing. If I ask you know, I mean oil and gas, we've sort of gotten into, but I could argue gold is high, base metals are high, oil is low relatively speaking right now. I realize you've got your deal with Continental, which regulates how you do things, but philosophically, should we be surprised if we saw you enter an oil deal with someone else going forward? I'm just trying to philosophically see where you'd be allocating capital, and I realize it depends on what deals come available. But you've talked about doing energy, base metals, precious metals on a counter-cyclical basis. Maybe oil is the right thing to do right now.

Paul Brink, President & CEO

Hi Brian, it's Paul. You're absolutely on point. The focus is indeed on gold, but in the other commodities, we try to be opportunistic. The number one driver is, is it a good deposit? That's the primary factor. When we're considering deals outside of gold, we also evaluate if the deal provides a better return compared to gold space. Some other factors that go into our evaluation include jurisdiction, current cash flow, and being opportunistic. We may not get the timing right, but for those other commodities, we prefer to believe we're in the lower half of the commodity price cycle when we enter those transactions. Therefore, as any deal comes forward, those are the criteria we consider, and there are assets in the energy sector that will be of interest, especially as the sector stabilizes and sellers find a price level they're comfortable with.

Brian MacArthur, Analyst

Great, thanks very much, Paul.

Operator, Operator

Okay, it seems there are no further questions at this time, so please proceed.

Unidentified Company Representative, Company Representative

Thank you, Colon. We expect to release our third quarter 2020 results after market close on November 4th with a conference call held the following morning. Thank you for your interest in Franco-Nevada. Goodbye.

Operator, Operator

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