Earnings Call Transcript - FNV Q3 2023

Operator, Operator

Good morning, and welcome to Franco-Nevada Corporation's Third Quarter 2023 Results Conference Call and Webcast. This call is being recorded on November 9, 2023. At this time, all lines are in listen-only mode. Following the presentation, we will hold a Q&A session where you can ask questions through the phone line or webcast. I would now like to turn the conference over to your host, Candida Hayden, Senior Analyst of Investor Relations. Please go ahead.

Candida Hayden, Senior Analyst, Investor Relations

Thank you, Jerry. Good morning, everyone. Thank you for joining us today to discuss Franco-Nevada's third quarter 2023 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. During our call this morning, Paul Brink, President and CEO of Franco-Nevada, will provide introductory remarks; followed by Sandip Rana, Chief Financial Officer, 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 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 Paul Brink, President and CEO of Franco-Nevada.

Paul Brink, President and CEO

Our core precious metal assets anchored the third quarter results. Both precious metal GEOs and revenues were up over the same period last year. Total revenues increased, although total GEOs were slightly down, in part due to gold prices being relatively stronger than oil, gas, and iron ore prices. Both quarter GEOs are expected to be slightly higher than the third quarter. The corporate Cobre Panama CP100 expansion is on track for year end and we expect the core streams to perform well. As we indicated following Q2, we expect to be near the low end of our GEO guidance range for the year. If gold prices maintain current levels, it will further boost revenues and financial results. Cobre Panama has dominated the news over the last 10 days. There have been substantial social protests against mining, following the National Assembly's approval of the revised concession agreement in October. Last week, the government enacted a moratorium on granting new mining concession contracts. They also proposed, but didn't proceed with, a popular consultation on the new mining contract. The Panamanian Supreme Court is now considering a number of lawsuits challenging the constitutionality of Law 406. Production at Cobre Panama has continued despite the protest activity, including road blockades. We've been in close contact with our partner, First Quantum, as the situation unfolds, and together we are continuing to monitor it closely. Looking forward to 2024, we're expecting added precious metal contributions from a number of new mines. Most impactful will be the Tocantinzinho stream, where G Mining Ventures is progressing construction on time and on budget. We have a meaningful 3% NSR on Equinox and Orion's Greenstone project in Ontario where first gold is expected before midyear. We recently agreed to acquire an incremental 1% NSR on Argonaut’s Magino gold mine, increasing our total NSR there to 3%. Magino achieved commercial production on November 1 and continues to ramp up production. Lastly, Gold Fields at Salares Norte project in Chile was 96% complete at the last report, and we expect our first royalty payments in early 2024. We continue to receive good news on the long-term organic growth in the portfolio. Candelaria received its environmental impact approval from the regional Chilean authorities, and I hope that paves the way for an expansion of the underground operations they have been contemplating.

Sandip Rana, Chief Financial Officer

Thanks, Paul. Good morning, everyone. Our diverse GEO stream portfolio continued to generate strong cash flows and high margins during the third quarter of 2023. If you turn to Slide 4, the chart shows gold equivalent ounces sold for the third quarter of 2023 along with the previous four quarters. GEOs sold in the quarter were 160,848, a 5% decrease relative to the second quarter of 2023 and a 9% decrease relative to the comparable period for the prior year. Of total GEOs sold for the quarter, precious metals were 125,337, an increase of 4% from the same quarter last year. For the quarter, the largest contributors for precious metal GEOs were Cobre Panama, Candelaria, and Antapaccay, with the increase year-over-year being from Cobre Panama and Guadalupe. Cobre Panama delivered 33% more GEOs than the same quarter in the prior year, driven by higher copper grades and the continued ramp-up of the CP100 expansion project. Guadalupe GEOs sold were higher by 14% relative to the comparable period from the prior year, with the increase being due to higher average grades being mined. One asset that had a weaker quarter for us compared to the prior year was Antamina. At Antamina, we had approximately 30% lower GEOs sold than the prior year as the operator was impacted by a tropical cyclone that affected Peru's northern region in April 2023. As you recall, there is a one-quarter lag for delivery of silver ounces from Antamina. The deliveries in the third quarter related to production from April to June 2023. For our diversified portfolio, we did record lower GEOs and revenue in the quarter as energy prices were lower compared to the prior year. The third quarter of 2023 saw continued volatility in commodity prices as highlighted on Slide 5. Precious metals did see improvements year-over-year, with average gold prices higher by 11.6%, silver by 22.6%, and platinum by 5.1%. However, palladium and energy prices were down significantly. A large component of our diversified GEOs and revenue comes from our energy assets. On a barrel of oil equivalent basis, production was slightly lower than the prior year. However, as seen on the bar chart on Slide 6, there was a larger retreat in oil and gas prices. WTI averaged $82.26 a barrel in the quarter, lower by 10% versus the comparable quarter in the prior year, and natural gas averaged $2.66 in MCF, lower by 66%. As a result, the lower energy prices impacted our GEOs sold and revenue with GEOs sold from our energy assets being 43% lower in the third quarter of 2023 compared to the prior year. Slide 7 highlights our total revenue and adjusted EBITDA amounts for the three months ended September 30, 2023, and 2022. The portfolio continues to deliver consistent performance. Revenue was $309.5 million for the quarter, slightly higher than the prior year's $304.2 million, while adjusted EBITDA was relatively flat at $255.1 million compared to $256.7 million in the third quarter of 2022. The company continued to generate a strong margin at 82.4% for the quarter. As you turn to Slide 8, you'll see the key financial results for the company. As mentioned, GEOs sold were lower for the quarter, but revenue was higher due to higher average precious metal prices. On the cost side, we did have an increase in cost of sales, which was $48.9 million compared to $42 million in the third quarter of 2022. The largest component of this is the per-ounce fixed cost we paid for stream ounces. We sold 97,275 stream ounces in the third quarter compared to 90,237 a year ago. Depletion remained relatively flat at $68.1 million versus $68.5 million a year ago. For the third quarter of 2023, adjusted net income was $175.1 million, or $0.91 per share, compared to $159.7 million or $0.83 per share in the prior year. Slide 9 highlights the continued diversification of the portfolio. As shown, 78% of our Q3 2023 revenue was generated by precious metals. This compares to 68% a year ago. The geographic revenue profile shows revenue being sourced 88% from the Americas. With respect to asset diversification, Cobre Panama was our largest revenue generator at 22% of total revenue for the quarter, followed by Candelaria and Antapaccay. The last chart highlights our operator diversity, with First Quantum being the largest at 22% of revenue. Slide 10 illustrates the strength of our business model to generate consistent high margins. On the slide, you can see that the cost of sales has remained fairly consistent over the period shown. The amount of cost of sales would depend on the mix of royalty versus stream GEOs, including both mining and energy. Corporate administration costs, including stock-based compensation, were less than 2% of revenue for the quarter. This can fluctuate quarter-to-quarter, but has tended to average approximately $8 million each quarter historically. In a rising commodity price environment, we expect to benefit fully as we do not expect our cost structure to change significantly. Slide 11 summarizes the financial resources available to the company, including our credit facility of $1 billion. Total available capital is $2.3 billion at the end of September. The company continues to be debt-free and generated $236 million in operating cash flow during the quarter. Outflows for the quarter included $66.2 million to G Mining Ventures for the remainder of the $250 million stream deposit for Tasiast. The full deposit has now been funded. We closed the Pascua-Lama royalty transaction for $75 million and the company did declare dividends of $65.3 million during the quarter. On Slide 12, we reiterate our guidance for the year based on updated commodity prices as highlighted on the slide and our expectations of production from our royalty and stream interests for the remainder of the year. We are maintaining our guidance range for total GEOs sold of 640,000 to 700,000. We expect to be near the lower end of that range due to the conversion of non-gold revenue to GEOs based on our revised commodity prices. For precious metals, the GEOs sold range is 490,000 to 530,000. Again, we expect to be near the lower end of that range. Turning to tax matters, as you are aware, the Canadian Government has announced that it will be proceeding with the implementation of the 15% global minimum tax. We expect this to be effective January 2024. For Franco-Nevada, this will impact the taxes associated with the income from our Barbados subsidiary, where the current corporate tax rate is less than 15%. However, earlier this week, the Barbados Government announced that they are proposing to raise their local corporate tax rate to 9%. In addition, they are proposing to implement an additional 6% top-up tax for companies whose parent entity is subject to the global minimum tax. Specific Barbados legislation has not been released at this time. We will review and determine the impact once available. I will pass it over to Jerry as we're happy to answer any questions.

Operator, Operator

Of course. Now the first question comes from Heiko Ihle of H.C. Wainwright. Please go ahead.

Heiko Ihle, Analyst

Good morning, Paul, Sandip, and team.

Paul Brink, President and CEO

Hi Heiko.

Heiko Ihle, Analyst

Hey, with Antamina in your release, you state the core production at the mine was also impacted by Cyclone Yaku, which constrained logistics in March and April of this year. This was reflected in the deliveries we received in Q3 2023. You sort of hinted at this in your prepared remarks, but just to clarify this again, this issue is completely in the rearview mirror now, and given the delivery schedule that was agreed upon, we can go back to our prior models on the site. Correct? In other words, there should not be any follow-through to this into Q4?

Paul Brink, President and CEO

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

Heiko Ihle, Analyst

That's how I figured it. And this one's a little bit more open-ended. I mean, I understand that the chart is looking quite pretty. Gold is up $240 over the past year. It's within $120 and $130 of its annual high, and it's looking quite nice on a five-year chart as well. In the meantime, the GDX is close to its annual low. Franco-Nevada shares really aren't a big exception to all of this though. Obviously pre-market today is looking quite decent. In your view, is the market, the broader market, missing something? And what are they looking for to properly reward your company and its investors? Is it more ESG for a broader base? Is it higher dividends? Is it just people have been beaten down for too long, they don't care anymore? Anything you want to share with us that you're seeing from folks you talk with on the phone?

Paul Brink, President and CEO

Heiko, I think a couple of things there and the obvious one is the impacts at Cobre Panama at the moment, and that has had a clear impact on the stock. The other one in terms of the performance of the stock and where we found the value creation over time is we truly have a business that's not impacted by cost inflation. Cost inflation has been such a big element that's eaten into the return of mining companies over time. So, one, it's been protected on that aspect of the business. The other is we have a very deep portfolio. And the core thing about the mining industry is so much of the value is created at the drill bit. When the industry is able to drill, has the capital and can make new discoveries, inevitably they do. The beauty of our business is we are exposed to that both with our streams plus an extremely deep royalty portfolio. That's the optionality, and it's why I spoke to it a bit in my comments. We continually get good news as to what's happening in the exploration portfolio, and I think that's the element that ultimately drives the future value of the company.

Heiko Ihle, Analyst

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

Operator, Operator

And there are no further questions. I stand corrected. We have a question from Brian MacArthur of Raymond James. Please go ahead. Brian MacArthur of Raymond James, you may ask your question. If your phone is on mute, could you please unmute?

Brian MacArthur, Analyst

Good morning. Sorry about that. Sandip, I was wondering if you could just go through the Barbados again. Sorry, I may have missed it because my line cut out. But is it not just going to be 15% going forward like everything else in global minimum tax, or is there something else you were kind of going through because I sort of heard 9 and 6 when you went through it? If you could just go through that again, that'd be helpful. Thank you.

Sandip Rana, Chief Financial Officer

Sure. So the way the global minimum tax works, Brian, is that whatever the difference is between the 15% and the local corporate tax rate, you pay a top-up. You are supposed to pay a top-up tax in Canada based on accounting income. For example, we were in the low single digits in Barbados and now the 15%. So assume the delta is 13%, you would pay that 13% based on accounting income, so there would be a cash tax payable. Barbados is now increasing their corporate tax rate from low single digits to 9%. At least they proposed to do so. As a result, that will be based on regular tax, where you get the deposit treatment. Then they are proposing to implement a top-up tax from 9% to 15%, which would be based on accounting. There, again, there would be a cash tax payable. Essentially, we're still determining the impact, but we think it will be positive.

Brian MacArthur, Analyst

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

Sandip Rana, Chief Financial Officer

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

Brian MacArthur, Analyst

Great, thanks very much.

Operator, Operator

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

Adrian Day, Analyst

Yes, good morning. I was just wondering if you could update us on your view in the market for new streams and possibly royalties, but new streams.

Eaun Gray, Executive

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

Adrian Day, Analyst

Mostly development, helping development.

Eaun Gray, Executive

Yes, I think that's a fair characterization.

Operator, Operator

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

Candida Hayden, Senior Analyst, Investor Relations

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

Paul Brink, President and CEO

Alex, our business has expanded over time, and the history of the company is we purchased many royalties on gold properties, and those have shown tremendous optionality and growth over time. A lot of the growth in our business, as you correctly point out, has been buying precious metal streams on large copper assets. That has been a very good element, allowing us to grow the business faster. Copper assets tend to be much larger than gold assets, and they also tend to have much longer lifespans. If you look at Antamina, Antapaccay, and Candelaria, we receive precious metal from those copper assets. Not only have those assets done very well, all of them have outperformed our assumptions at acquisition. They have very long lives, and we've seen tremendous life expansion from those assets. A good example is Candelaria; when we helped finance Lundin to acquire that asset six or so years ago, it had a 14-year mine life. Lundin Mining achieved tremendous success with the exploration program, and today the expected mine life is around 25 years. They are long-lived assets but also have the potential to improve over time. So it's been a good business for us.

Candida Hayden, Senior Analyst, Investor Relations

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

Sandip Rana, Chief Financial Officer

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

Candida Hayden, Senior Analyst, Investor Relations

Thank you, Sandip. Our next question comes from Vincenzo at Seven Pillars Capital Management. Could you please give me some color on the contingency plan? If First Quantum's Cobre Panama were to go into arbitration, how should we think about potential claims that Franco-Nevada might have on arbitration results, or if any potential expropriation of Cobre Panama should occur, is there any insurance Franco-Nevada can claim?

Paul Brink, President and CEO

Yes. We hope it doesn't go in that direction. But if the concession were taken away from the operators, arbitration would be one route for them. In past similar circumstances, international arbiters have ruled in favor of mining companies. Typically, we have seen settlements for the companies which have been meaningful and real. If there is a settlement, our agreement states that we would get a proportionate share of that settlement.

Candida Hayden, Senior Analyst, Investor Relations

Thank you, Paul. The next question is from Diego at Norster Capital Management. In a scenario where Cobre Panama is expropriated, what kind of actions would you legally expect to take?

Paul Brink, President and CEO

The actions to be taken are by the operators, and arbitration is the most likely course for them. Again, we hope they don't go down that route, and our protections are as we've outlined.

Candida Hayden, Senior Analyst, Investor Relations

Thank you, Paul. There are no further questions from the webcast. This concludes our third quarter 2023 results conference call and webcast. We expect to release our year-end 2023 results after market close on March 5, with a conference call held the following morning. Thank you for your interest in Franco-Nevada.