Franco-Nevada Corporation

Good morning, ladies and gentlemen, and welcome to the Franco Nevada Corporation Q2 2020 results conference call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on August 6, 2020. I would now like to turn the conference over to Candida Hayden. Please go ahead.

Thank you, Colin. 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. Sandy Perena, 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 from our 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 two of this presentation. I will now turn over the call to Sandy Perenna, CFO of Franco Nevada.

Thanks, Candida. Good morning, everyone. As we all know, 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 first quarter 2020. However, with COVID-19, we had a number of interests impacted 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 three, we have highlighted the gold and gold equivalent ounces for the three months and six months ended June 30th, 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 second quarter 2020, GEO sold were 104,330 compared to 107,774 a year ago. The company has benefited from GOs delivered and sold from Cobre, Panama, as the company began receiving gold and silver ounces in third quarter last year. However, deliveries in Q2 2020 were hindered by the mine being placed on current 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 less GOs in second quarter compared to a year ago was Antipakai, 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 which showcased its leverage to the rising gold prices was Hemlo. Franklin, Nevada has a 50% net profit interest on the interlink deposit within Hemlo. The company saw a substantial increase in GOs 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 less GOs 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 second quarter being $17.11 per ounce compared to $13.10 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, being 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 six, we illustrate the diversification of our portfolio revenue generation. As shown, 92% of our quarterly revenue was generated by gold and gold equivalents in second quarter, with gold being 70%, silver 10%, PGM is 11%, and other mining 1%. From a geographic revenue profile, revenue was sourced 82% from the Americas, with Latin America being the largest. And the third chart highlights the asset diversification of the company. Candelaria was our largest revenue generator at 14% for the quarter. Our top four core assets, Cobre Panama, Candelaria, Antipakai, and Antamina, generated 36% of the revenue for the company. One area that our board and management is very proud of is our focus on cost management and being a high-margin business. We like to stress the strength of our business model and the scalability. The chart on slide seven illustrates how 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 cost 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 did retract its geo-sold guidance due to the uncertainty around the impact of COVID-19. In addition, the energy revenue guidance was pulled due to the sharp decrease in energy prices and the related volatility. Management is reinstating guidance for 2020 as its royalty and stream assets impacted by the pandemic begin to return to normal operations. Based upon performance for the first six 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 platinum, and $2,200 palladium. With respect to the energy division, revenue is projected to be between $60 to $75 million for the year. This is assuming a $40 WTIO price and $2 MCF natural gas price. Before I turn it over to Paul, I wanted to provide an update on the CRA audits. 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 did receive a proposal letter related to tax years 2012 and 2013 for foreign accrual property income. 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 before interest and penalties. Franco Nevada does not agree with the proposal, nor the calculation prepared by CRA, and has made this clear to CRA. And now I will pass it over to Paul, who will provide an update on available capital and business development.

Please wait while the recorder is connected.

Thank you, Sandra.

The conference is now being recorded.

Thank you. I'll be talking about recent business development activity and our future growth drivers. During Q2, we reached agreement on 100 million financing for Solgold, where we'll receive a 1% NSR on oil production from their Cascabel property in Ecuador. Cascabel is a large copper-gold porphyry system amenable to block caving, and we believe one of the best copper-gold development projects globally. M&I resources are 2.7 billion tons at 0.53% copper equivalent. Very interesting to us, that includes more than 21 million ounces of gold. The resource includes a high-grade core of more than 440 million tons at 1.4% copper equivalent. SolGold has the option until January of next year to increase the deal by 50%. That would be a 1.5% royalty and $150 million financing. They also have the option to buy back half of the royalty for a period of time. We've retained an option to convert the NSR on all metals to a gold-only royalty on an NPV-neutral basis. As COVID travel restrictions were in place when we agreed the transaction, on-site due diligence was deferred. We've provided interim funding to allow SoGold to continue its activities until we can complete our due diligence. Credit for the transaction goes to Ian Gray and our business development team, and they're available to take any questions later in the call. I'll turn now to our growth outlook. We feel particularly well positioned as the gold price runs with a close to 20-year reserve life and built-in growth for the next number of years. Business development remains active. Short-term, we expect to be successful with some smaller transactions. Medium-term, we're active bidding on larger transactions, although, as always, these are competitive processes. We also expect some attractive energy assets will become available as the sector shakes out. Organic growth is again becoming a big contributor as we move further into the gold bull market. Slide 10 shows the expected drivers. Expansions on Stillwater, Tassius, and Macassar, and the construction of Solaris Norte and Coro Coico are included in our five-year guidance. But we also have a very broad portfolio with 35 other mining development projects and greater than 200 exploration projects. The pace of development at many of these assets has picked up. Assets like Valentine Lake, Hard Rock, Stibnite Gold, and Monument Bay are not in our 2024 guidance, and their development is more and more likely. Slide 11 highlights positive portfolio updates from the quarter. I'll point to one in particular, Dukedin in Australia, that's undergoing a change. Historically mined as a number of open deposits, they've discovered major underground extensions and are currently developing the first of a number of underground mines. One development not on the slide, it now appears there's good potential for life extensions at our Sudbury PGM streams. We've also seen great exploration success at a number of our assets, particularly in Canada. The saddle zone at Detour, East Goldie at Mallardic, and extensions at Macass and Hemlo. Eskay Creek is also increasingly looking like it'll have a second life as an open pit operation. All this organic growth would come at no cost. The final topic to cover is our available capital, showed on slide 12. Our cash balance is building rapidly. We have working capital of $478 million, and we have no debt. including our available credit facilities of $1.1 billion. We have a total of $1.7 billion of available capital to deploy on new opportunities to grow the company. With that, I'll hand it to the operator, and we welcome any questions.

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press star followed by the one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be polled in the order they are received. Should you wish to decline from the polling process, please press star, followed by two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment for your first question. Okay, so your first question comes from Puneet Singh of Industrial Alliance. Please go ahead.

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

Yes, so the first quantum states that they'll be fully ramped up by mid-August. And then from there, it could take anywhere from four to six weeks for us to be paid. So we should see some deliveries in August, but I would say towards the second half of September is when we'll get back on track.

Okay, thank you. And then on the energy side, I see Weyburn was one of the hardest hit, and WTI has recovered since. I just want to get a sense of In your guidance for energy revenue, how much of that is allocated to Weyburn and how do you think that asset performs in relation to the others in the second half of the year?

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 with around $20 a barrel or so, which was less than the cost for capital and operating and so there was actually a small negative balance there on the NRI. That will turn around to the back half of the year as prices improve, so there should be significant increase in revenue from particularly the Weyburn NRI in the second part of the year, and that is factored into our guidance for energy. Okay, thanks.

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

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 use of that cash. So it's, I guess, added 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?

Sure. So it's a tool for us and we've been opportunistic. Initially, the goal was to pay off our debt, which we've done. And then part of that is what's in front of us in terms of deal flow. But if the cash does sit on the balance sheet, I think we've shown over time that we can deploy it. And it's a very cyclical business and 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 to look at using, but as we've always said, we'll be opportunistic.

Okay, thanks. And then with regards to the change in guidance for 2020, There's a bunch of moving parts, I guess, factoring in COVID-related items, some changes at the underlying operations, and then the change in the commodity price assumptions. Is there any read-through on the guidance change with respect to if you could provide in terms of the underlying operating asset changes specifically, I guess, the result of that? I guess Candelaria is one larger change, but is there anything else we should be aware of maybe for a forecast going forward?

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, Candelaria, where Lundeen came out last week with updated guidance. So it's reflecting the update there. But otherwise, you know, we assume the operations will return to normal in the second half of the year.

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

Your next question comes from Jackie Prissy-Bialowski of BMO Capital Markets. Jackie, please go ahead.

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 if you see room for maybe further dividend increases or how you guys are thinking about that in the context of the rest of your capital allocation decisions?

Sure. One of the core objectives of the company is to have a sustainable and progressive dividend and have that track record where we've increased it every year. Unfortunately, we've been able to do so 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 in the cycle, it could lead to higher than traditional increases. But again, it will just depend what's in front of us at the time. But we are committed to raising our dividend each year.

Great, thanks. Sorry, just, yeah, that's a community. The other question just popped out of my head. I'll get back in the queue if I think about it. Thanks. Thanks.

Your next question comes from Carrie Macquarie of Canaccord Genuity. Carrie, please go ahead.

Good morning. Maybe just another question on the updated geo guidance, just given the timing of concentrate sales. Is there any sort of split we should think about in terms of Q3 versus Q4 if we just sort of take the rest of your guidance?

Yes, so you will see higher geos sold in Q4 versus Q3. As for the split, it's probably going to be 60-40 in terms of the incremental geos sold for the second half of the year.

Okay. And then maybe just on the sole goal transaction, just wondering, you know, what the schedule looks like just on the due diligence completion.

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

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

As discussed before, there are some attractive transactions out there. The business development team is very active on them. They are competitive, though, and we expect to be competitive in them. But as always, the objective is to generate returns for shareholders rather than just to grow the size of the company.

Maybe one last one. With copper prices sort of back creeping towards $3, some of the potential transactions were more base metal transactions. Does that change the outlook for some of these to get done in your view?

Sure, it's Ian again here. That takes the pressure off some balance sheets. So on balance, yes, I would say it takes some things off of oil. However, I would also point to the copper-gold ratio still being quite favorable for base metals producers to do precious metal streams.

Great. That's it for me. Thanks.

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

Thanks. Hi, Paul. Hi, Sandeep. First off, congratulations on a very solid Q2, all things considered. Maybe my first question, again, is on the corporate development side. Paul, as you mentioned, the opportunities out there. Could you maybe, in the past you talked about one opportunity, as you talked about, is precious metal streams of base metal mines. The other one is, of course, you know, potentially helping some of these producers transact in M&A transactions. Are those, you know, still two of the key sort of sources of opportunities coming up?

Cosmos, thanks for the question. I'm going to hand it over to Ian.

Hi, Cosmos. Hi, Ian. I would say M&A Cosmos has probably slowed down a little bit in terms of funding acquisitions. Probably more what you're seeing is base metals producers. And another theme I would point to is that existing precious metals royalties are increasingly on the market. So we're seeing a bit more of that as well.

Mm-hmm. And then as a follow-up, and Ian, 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 highs, silver prices have increased. Has it made it more difficult for you to price some of these deals in that, 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?

So Cosmos, we're looking to do good deals for our shareholders, so certainly we have to take a measured approach to evaluating the valuation, and that's something that we look to do. I can't share, obviously, too much there. These are competitive processes, but we're looking to do good deals, not just deals for deals' sake.

For sure. Maybe a question on... You know, the MPIs, Sandeep, as you mentioned, Hemlo was one where it had a good leverage in the quarter, you know, certainly benefiting from higher gold prices. How about your other MPIs? You know, the one at Kirkland Lake and the one at Goldstrike. Should we expect, you know, again, the same type of leverage on a go-forward basis as some of those MPIs as well? And are there any other MPIs I might have missed?

I'm sure. So at Macatha with Kirkman Lake, it's a question of when they mine on that land. So the NPI doesn't apply to the whole property. So I think for the foreseeable future, that will be minimal. Gold strike, just again, it only applies to certain claims. It'll depend upon what flows through. I think at $2,000 gold, you will start to see the leverage come through at the gold strike NPI. But the one we are looking forward to is Muscle White, where we do have a 5% MPI. Obviously, Muscle White was impacted by the fire last year, but it is up and running, and that MPI, hopefully starting next year, will start to kick in revenue again. So that will probably have the most meaningful impact versus Hemla.

For sure. And talking about different zones at the royalties here, One I want to move to is, you know, Canadian Malartic Underground. As we've, you know, kind of started hearing, Agnico, Igo, and Yamana has really started talking up, you know, the underground potential here at Canadian Malartic. As you mentioned earlier today, you know, you talked about East Gwoldy Zone and, you know, potentially some of the other underground zones as well. Could you maybe remind us, this is likely on your website, but could you remind us in terms of, for example, East Gwoldy Zone to 2.7 million ounces in underground resources. How much do you have? How much of that is on your royalty ground? In terms of the other deposits, Odyssey, Yeast, Marlardic, what do you have in terms of total resources that could be attributable back to Franklin, Nevada?

The Cosmos is poor. Probably the best place to look is in our asset handbook, where we do have a schematic that shows the position, as we understand it, of East Goldie relative to our royalty claims. But recall at Merlartic, we have a couple of individual claims. We don't cover all the property, but you will see there our best estimate of the portion of East Goldie that we cover. We do potentially touch on some of the other areas, but East Goldie is probably the likely area where we get more answers. We don't have a detailed breakout of the actual resource to give an accurate percentage.

For sure. And then maybe one last question, if I may, likely to Jason here. You know, good to see that you've reestablished 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 in terms of, I believe that's Henry Hub. You know, clearly those numbers, those assumptions look pretty good at this point in time. But Jason, could you remind us in terms of the sensitivity to, you know, commodity prices? And who knows, it might actually go up from where it is today if we have more of a V-shaped recovery. So I just want to get an understanding in terms of your sensitivity there. you know, to the oil and also natural gas prices.

Thanks, Cosmos. It's Jason here. And you're right, there is some leverage to revenue from a rise in commodity prices. We have leverage in our Canadian operations, mostly through our Weyburn NRI, and also some through Orion Realty. And then in our U.S. assets, we have leverage that comes from really from increase in drilling and activity as operators on our lands in the US ramp up their development pace. It's very hard to give you an exact number or ratio for leverage right now. We're sort of waiting to see, as the prices come back, what response the operators have in terms of increasing their capital budgets and increasing their development pace. So I think as the prices sort of settle out here and become more consistent, we'll probably get a better idea over the next couple of quarters as to what a rise in commodity price would do for activity rates in the U.S., and then we'll be able to give you a better sort of leverage number to work off of. But certainly you should see, as the commodity price goes up, at a minimum you'll see leverage at our Canadian operations just because of the financial leverage associated with those royalties.

Sounds good. So, Jason, I guess, you know, it sounds like it's not just so much you know, commodity sort of leverage. It might even be on top of that some kind of operational leverage when, you know, some of the operators might start putting more drills back into the ground.

Yeah, that's exactly right. I think what you saw when the oil price sort of crashed in April was a real pullback from E&P companies in terms of the amount of dollars they were putting into the ground in drilling and development. As the price rebounds here, there will be a point where operators start to recommit that capital. But we just have to follow it. We obviously don't have the visibility into operators' plans, and we'll have to wait for them to start recommitting that capital before we have a better idea of how that impacts production going forward.

Yeah. And, Jason, I guess the follow-up here is that, you know, right now it's back up to about $40 per barrel WTI. You know, 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 do we just need more stability?

You know, it's a bit of both. I think what you're seeing right now is sort of a rebalancing in the whole energy market. You obviously had a huge disruptive event that happened where operators cut capital significantly. They curtailed production. They really trimmed their development plans. We've just recently come back up to $40, and I think E&P companies are still a little bit reluctant to really increase their capital budgets. Most of them, if you look at what they've been saying publicly, is that they plan over the next year or so at these types of prices, $40 or so, to try to keep their production reasonably flat or maybe introduce a very low rate of growth on the order of up to 5%. Nobody out there right now is talking about growth of 20 or 25% like they were at higher prices. I think that's going to take time. You're going to have to see more sustained higher prices before you would expect those kind of growth rates to come back. So at $40, I think right now in the market, that's a recipe for operators to kind of maintain production profiles at a reasonably flat level.

Great. Thanks a lot. Those are all the questions I have. Thanks again.

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

Yes, good morning, everybody. And I'm sorry, I jumped on the call just a little bit late. And I think, Sandy, maybe you had given some guidance on the Cobre Panama. You know, what I understood is that by September, we are going to be back on track on those shipments. And Is that fair to assume that that's when we get back to that 25,000 ounces per quarter rate sort of in September?

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

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

No, not at this time.

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

Yeah, that's factored into the guidance that we provided, Tanya. So we do think there will be a lag as we see lower commodity prices impact production levels. but that is factored into the guidance that we provided.

Okay. Okay, so that's just on the guidance. And maybe just coming back on the M&A, and I did hear Paul and Ian talk a little bit about that. And when you mentioned the small to moderate size, on Q1 you had mentioned that was under $500 million. Is that still that sort of size that you're seeing in the short term, short to medium term?

Yeah, we're seeing some smaller transactions that are most actionable under the $100 million mark, I would say. But it really runs the whole gambit, Tanya, in terms of size at the moment within the pipeline from quite large to relatively small.

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

No, I think right across the spectrum there as well, both precious, other mining, so base and bulks, and energy. So we're looking at all of those things, looking for the best deposits.

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

There is, to a certain respect, we're also getting better at more creative ways to get comfort on assets and leveraging contacts and so forth where we have them, folks that we know and trust.

Okay. But things are still pretty much on getting access to places that still have those travel restrictions?

Yeah, there are certainly some places, but other places it's just more challenging in terms of logistics. Okay.

Okay, thanks a lot.

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

Yes, thank you. Sandy, on the CRA situation, is there an avenue to open up settlement discussions with CRA and come to some kind of conclusion along the same lines that we did?

That is one of the options. We will evaluate as time goes on and the discussions. 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'll explore all our avenues. At the end of the day, we think we've done everything in compliance with the laws. And so we think we shouldn't have to pay anything else, but we will continue to explore our options.

You have not opened discussions with them on that front yet? Not yet. Okay. And Ian, on the M&A front, you've mentioned the word competitive a number of times. The biggest deal done recently, if I price it out rightly, it was done at about a 3% IRR. Is that the kind of metrics we should be looking at for deals going forward now?

Greg, you know, it's hard to comment on specific transactions that have occurred within the marketplace. And, you know, there's obviously a lot of assumptions that go into your calculation there. But... I would say that we're looking to do deals with reasonable levels of return vis-a-vis deals that we've done in the past and using similar methodologies to look at metals prices. So we're not breaking the mold.

Okay. Sandy, final question, just returning to you. With your balance sheet, where it's at and the free cash flow you're going to be generating, Does it make sense to have a more efficient capital structure and carry some debt going forward, and that would enable you to do a big deal but also continue to pay a large dividend or a larger dividend?

It's a fair comment, Greg, but I think what we've seen in the history of the company is that when this is a cyclical business and the best time to put on debt is when there's a downturn and You know, we did that in 2014, 2015, when we added Candelaria, Antipakai, and Antamina. We went into that downturn with no leverage, and it was the perfect time to add leverage, so that's the way we view the capital structure. There is a time to put debt on the balance sheet, but now is not the time. Gotcha. Okay, thank you.

Your next question comes from Fahad Tariq of Credit Suisse. Please go ahead.

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

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

Yeah, 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. It depends a little bit on how aggressive Continental is in their development efforts and their drilling efforts. If drilling and development continue at a slower pace, there is less acreage available to buy on the ground in favorable places. If that's the case, we may slow our commitment there. A question we haven't really addressed with Continental yet. We'll have to wait until later in the year before we determine what the appropriate level of spending next year should be.

Thank you.

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

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 versus Q4 just because of the timing of the oil price and the lag effect of when the drilling goes on? Will Q3, again, be quite a bit lower than Q4 if I look at a weighting by quarter? Sure.

Yeah, it's Jason here, Brian. I think that's correct. I think you will see some carryover of the low price impacting in Q3 more so than Q4. So if you're looking at dividing out that revenue over the balance of the year, you'd want to wait a little bit more towards the fourth quarter than the third quarter.

And my second question is kind of philosophical. You've been pretty good historically about doing counter-cyclical investing. If I ask you now, I mean, oil and gas you sort of got into, but I could argue gold high, even base metals are high, oil low, relatively speaking right now. And yes, you've got your deal with Continental, which regulates how you do things. But philosophically, should we, would we be surprised if we saw you enter an oil deal with someone else going forward? I'm just trying to philosophically see back to 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 countercyclical basis, maybe oil is the right thing to do right now. Brian, it's Paul.

You're absolutely right. As you well know, the focus is on gold, but in the other commodities, we try and be opportunistic. The general criteria there for the other commodities are, is it a good deposit? That's the number one driver. But if we're doing deals outside of gold, we also say, how do we justify that that is a better deal than we could do in the gold space? And some of the ingredients go into that is, are they good jurisdictions? Is it current cash flow? And also, for those other commodities, are we being opportunistic? We're never going to get the timing absolutely right, but for those other commodities, we want to believe that we're in the lower half of the commodity price cycle when we do that. So as any deal comes forward, those are the criteria that we look at, and you're absolutely right. There are assets in the energy sector that will fall into that, and that's why we say as the sector settles down and sellers find a price level that they're willing to sell assets at, there may be some good opportunities.

Great. Thanks very much, Paul.

Ladies and gentlemen, as a reminder, should you have a question, please press star followed by the one. Okay, so it appears there are no further questions at this time. Please proceed.

Thank you, Colin. 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.

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