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.