Franco-Nevada Corporation

Good morning, ladies and gentlemen, and welcome to the Franco Nevada Corporation Q1 2021 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 May 6, 2021. I would now like to turn the conference over to your host, Jason Picciotti. Please go ahead.

Thank you, Chris. Good morning, everyone. Thank you for joining us today to discuss Franco Nevada's first quarter 2021 results. Accompanying this call is a presentation which is available on our website at FrancoNevada.com where you will also find our full financial results. Paul Brink, President and CEO of Franco Nevada, will provide some introductory remarks, followed by Sandeep Rana, CFO of Franco Nevada, who will provide a brief review of our results. This will be followed by a Q&A period. Our full executive team are available to answer any questions. We would like to remind participants that some of today's 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 the call over to Paul Brink, President and CEO of Franco Nevada.

Thanks, Jason. Good morning. A diversified portfolio outperformed in the first quarter, generating record revenues and near-record margins. An 85% adjusted EBITDA margin and a 52% adjusted net income margin. Gold equivalent ounces for the quarter were ahead of our expectations. Strong deliveries from Andamena, ongoing ramp up at Cobre Panama, and leverage to gold prices at Hemlo made for the largest increases over Q1 2020. As we progress through the year, we expect high contributions from each of Cobre Panama and Candelaria due to increased throughput and high grades respectively. Energy revenues for the quarter were well ahead of our guided annual run rate, a strong initial contribution from Haynesville, some high-interest wells in the Permian, and high energy prices were the drivers. We're committed to ensuring that Frankenvato is the gold investment that works for all our stakeholders, including our shareholders, our operating partners, and our communities. Along with our asset handbook, we recently published our annual ESG report. Highlights of the ESG report are our sector-leading rankings, promoting responsible mining through our capital allocation, ongoing contribution to communities, and our increased commitment to diversity in our board and top leadership. During the quarter, we added two attractive precious metal assets, a royalty on rocks called Seguela Gold Development Project in Cote d'Ivoire, and a precious metal stream on the Condensable Copper Mine in Peru. Both assets with excellent upside potential. We were delighted, post-quarter end, to acquire a tranche of Vale iron ore royalty debentures. The Vale interests, along with our Labrador iron ore royalty company investment, add to our base of low-risk, long-life cash flows and further enhance the diversity of our portfolio. With the additions, the portfolio remains more than 80% precious metal focused. Our recently published asset handbook highlights the year-on-year growth in our reserves and long-reserve lives. The iron ore assets will further extend both measures. Turning now to our outlook, 2021 is expected to be a strong growth year for Franco Nevada, with new acquisitions, mine expansions, and new mines all contributing. We continue to see numerous exploration successes in the portfolio. Most recently, success at the Copper World satellites to the Rosemont deposit, ongoing expansion of Skeena's Eskay Creek deposit, extensions of East Goldie at Canadian Mallardic, and high-grade step-up holes at Walbridge's Fenelon deposit. This week, Kirkland Lake provided the latest drilling update on their 270,000-meter drill program at Detour Lake. The likely expansion of the resource at Detour should be a catalyst for our stock this year. Strong gold prices and near-record copper prices are boosting the development outlook for our pipeline of gold and copper interests. the Hard Rock, Valentine Lake, and Stibnite Gold projects, and the Alpala and Takataka Cockle projects, amongst others. Following the Vale Royalty debenture acquisition, we revised our guidance and outlook, and now expect 25% growth in revenue over the next five years. We announced with our year-end results an increased quarterly dividend to 30 cents a share. This was our 14th successive annual dividend increase. The Board has now declared the first of those dividends payable June 24th. The 15% increase is larger than typical and reflects the growth in our business due to Cobra Panama. A note on Board succession and renewal. At yesterday's Annual Meeting, the Honorable David Peterson stepped down as Chair of the Compensation and ESG Committee and after more than 13 years as the Director of Franca Nevada. The Board and I would like to thank David for his outstanding leadership and many years of service. We will no doubt miss his unique abilities for building unity within the Board. In terms of renewal, you'll recall that Maureen Jensen joined the Board at this time last year. Maureen has a strong governance background, having previously led the Ontario Securities Commission. To sum up, our portfolio continues to outperform. It has built in growth and tremendous long-term optionality. We're in a net cash position of $1.2 billion in available capital and are now generating EBITDA at a rate of $1 billion per year. We're focused on precious metal acquisitions and see good prospects for adding to the portfolio. I'll now hand it over to our CFO, Sandra Brenner.

Thanks, Paul. Good morning, everyone. First quarter 2021 continued to build on the positive momentum that Franklin, Nevada ended 2020 with. Our royalty and stream portfolio continues to perform well and ahead of expectations. Although the gold price in first quarter 2021 was a little weaker than fourth quarter, Franco Nevada still delivered a very strong financial quarter with record revenue and record adjusted EBITDA. On slide three, we have highlighted the gold and gold equivalent ounces sold for the three months ended March 31st, 2021 and 2020. Overall GEO sold increased over 10% compared to prior year, with Q1 2021 GEO sold being 149,575. We had a number of strong contributors during the quarter, Antemina, Hamlo, Cobre Panama, and Condestable. The strong performance for Antemina was a combination of higher silver deliveries along with higher silver prices during the quarter. I'd like to highlight that for Antamina, Franklin, Nevada is delivered silver ounces based on a one quarter lag for production. For example, the silver ounces we received in Q1 2021 were related to production from Antamina for fourth quarter 2020. We anticipate silver ounce production from Antamina to be at the high end of the 2.8 to 3.2 million range previously provided for 2021. At Hemlo, we continue to benefit from mining on our 50% NPI ground. The company recorded 11,675 geos sold for the quarter, of which just over 4,400 geos related to prior periods. We do expect mining on NPI ground to decrease in the second half of the year. Cobre, Panama had a strong first quarter for Franco, Nevada, with geos sold of 29,622 as the project continues to ramp up. The deliveries were in line with the full year 105 to 125,000 geos sold guidance we have previously provided. Finally, we were delivered our first gold and silver ounces for the recent Condestable stream transaction. Just over 3,000 geos sold were recorded as revenue for the quarter. Two assets which did deliver less geos in the quarter versus prior year were Sudbury and Guadalupe. Although KGHM has decided to continue mining at MacReady West for an additional number of years, it will be at a lower production rate, which was reflected in the geos sold in the first quarter of 2021. As for Guadalupe, the company received and sold fewer geos in the quarter because of lower grades than a year ago. Slide 4 highlights our total revenue and adjusted EBITDA for Q1 2021 and Q1 2020. As you can see from the bar charts, revenue in adjusted EBITDA has increased significantly year-over-year. The average gold price for the quarter was 1794 per ounce compared to 1583 per ounce a year ago, a 13% increase. The 308.9 million in revenue in the quarter is a record for the company as is the adjusted EBITDA of 262.7 million. As Paul mentioned, margin of 85% was achieved. Gold and silver revenue increased from $189.1 million in the quarter last year to $237.7 million in Q1 2021, a 26% increase. First quarter also saw strong contribution from the energy assets as revenue increased from $26.5 million a year ago to $45.1 million this quarter. The increase was due to a rebound in oil and gas prices as well as an increase in production. The company also recorded $7.2 million in revenue from the recently announced Hainesville natural gas transaction. As you turn to slide 5, you will see the key financial results for the company. As mentioned, the increase in revenue in adjusted EBITDA was due predominantly to the increase in GEO sold and an increase in commodity prices, both precious metals and energy. On the cost side, cost of sales was lower at 40.6 million versus 43.6 million a year ago. The decrease was due to less ounces delivered and sold from Sudbury and Guadalupe. We pay a higher cost per ounce for these two streams. Depreciation was higher at 71.2 million for the quarter compared to 64.4 million in Q1 2020. The increase is due to the source of where mining and energy revenue is derived. The company recorded higher depletion from Antofagai, Condestable and Cobre Panama during the quarter. Adjusted net income and adjusted net income per share increased significantly in first quarter. Adjusted net income was 160.9 million or 85 cents per share, increases of 47.3% and 44.8% respectively over prior year. Franco Nevada has always been a royalty company. but has evolved to include streaming as part of the business model. Slide six breaks down the mix between streams and royalty revenue for first quarter 2021. The streams that we've added have been very successful for the company, adding significant top line growth. They have become the largest component of our revenue, generating 176.9 million, or 50% of revenue during the quarter. However, it is royalties, whether mining or energy, which generate higher margin and thus cash flow from operations. As you can see, the costs related to royalties are minimal, with a combined cost of $3.5 million related to the $132 million in revenue generated by the royalties. We believe our business model of both stream and royalty assets will allow us to continue to achieve peer-leading EBITDA margins. With respect to margin, the chart on slide 7 illustrates how the margin for the company increases as the gold price increases. Our mining cost structure, which we reflect in our cash cost per ounce, includes our cost of sales, less cost associated with the energy business, which are minimal. Cash cost per ounce usually ranges between $250 to $300 per geo sold. The average gold price increased approximately 13% year-over-year, but the cash cost per ounce actually decreased 18%. This decrease was a result of geos with lower fixed costs being sold and more royalty ounces recognized as revenue in Q1 2021. In a rising gold price environment, we expect to benefit fully as the cost per ounce should not increase significantly and as can be seen in the first quarter could decrease depending on the mix of royalties versus streams. One of the strengths of having a diverse portfolio. The other cash component for the company besides the cost of sales is our corporate administration cost. Our board and management are very proud of our focus on cost management. We like to stress the strength of our business model and the scalability. The chart on slide eight clearly illustrates our focus on being as cost efficient as possible in managing this business. Here we have highlighted our quarterly revenues and our quarterly general administrative expenses since our IPO. Since 2008, our revenues have grown from approximately $25 million to $310 million this quarter. That is more than a 12-fold increase. This while our G&A has remained fairly stable over this time period. Q1 2021 corporate administration was $6.2 million, or 2% of revenue. Management believes we can continue to add to our portfolio and grow our business without adding significant overhead to the company. Slide 9 highlights the diversification of the portfolio, which we consider one of the strengths and differentiators of Franco Nevada. As shown, 85% of our Q1 2021 revenue was generated by gold and gold equivalents. The geographic revenue profile has revenue being sourced 90% from the Americas, with South America being the largest at 29%. With respect to asset diversification, Cobre Panama was our largest revenue generator at 17% of total revenue for the quarter, followed by Antipokai at 11%. Those are the only two assets that generated more than 10% of our revenue. The last chart highlights our operator diversity. Our largest exposure to revenue being generated by any one operator is 17%, which is First Quantum, who operates Cobre Panama. As was disclosed on April 16, 2021, the company purchased 57 million Valet Royalty debentures subsequent to order end for $538 million. The debentures allowed holders to receive a premium payment based on net sales from a number of Valet's Brazilian mines. With this acquisition, Franklin, Nevada expects to recognize 25,000 to 35,000 geos sold for full year 2021. With the additional GEOs to be received in 2021, we have increased our guidance to 580 to 615,000 for the year from the previous 555 to 585,000. The midpoint of this revised guidance range is a 15% increase over 2020 actuals. Our energy revenue guidance remains the same as disclosed at year end of 115 to 135 million. For the valet royalty revenue, the second quarter ending June 30th, 2021, we will be accruing revenue for the royalties for the period January 1st to June 30th. So essentially, we will be accruing six months worth of revenue in second quarter. Thereafter, we will accrue quarterly. The actual cash payment will not be received until the end of September and then every six months thereafter. With the recognition of six months of revenue in Q2, there is the possibility that precious metals revenue could be below 80% for the quarter, depending upon how our precious metal assets perform. If that does occur, we do expect to again be above 80% precious metals revenue in third quarter 2021. Also on the valet royalty, there is a seasonality for production and thus sales. with production being lower in the first half of the year versus the second half. The split is typically 45-55. As of today, as seen on slide 11, with respect to available capital on hand, the company has liquidity of $1.2 billion. We did fund the valet royalty acquisition of $538 million with a combination of cash on hand and $150 million draw on our credit facility, but we continue to be in a net cash position. I will now turn it back to Chris. We are happy to take 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 one on your touchtone phone. You will hear a three-tone prompt acknowledging your request, and your questions will be pulled in the order they are received. If you are using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Tyler Langton, JP Morgan. Tyler, please go ahead.

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

Yeah, hi, Tyler. It's Jason O'Connell here. Appreciate the question. For Q1, we did have a higher than normal revenue number for energy. Part of that number came from revenue from prior periods. If you adjust for that prior period revenue, the number for the quarter would have been closer to about $40 million or so. We had about $5 million coming from wells that were producing last year, but we only received payment this year. With the higher prices, we do expect to have better revenue. The prices were a bit above the $55 per barrel WTI and $2.50 per MCF prices that we used in our guidance, so we benefited from that. If prices stay elevated for the rest of the year, I would expect that we would come in a bit higher than our guidance that we provided. During our analyst day, provided a bit of information around the sensitivity to commodity prices, so there is a bit of leverage associated with our energy portfolio. If prices on average are 10% higher than the guidance that we gave, the revenue should increase by about 13%. So again, if prices remain higher, we expect revenues will be higher and there will be a bit of leverage within that revenue number.

I guess with this production, is there anything when I think of the longer-term guidance where this is sort of a more temporary benefit for this year, or should we not expect that?

I would say when you look at the quarter, again, there is the benefit of that prior period revenue that I would not expect to continue going forward. In addition to that, we did have a good quarter production or volume-wise. But we continue to think that our guidance is still relevant that we provided at the beginning of the year. So some of those assets that had a good quarter, the wells on some of those assets will continue to decline throughout the year. So I would just caution you not to take the revenue from the quarter and annualize that.

Okay, perfect. And then just a final question on HEMLO. I know I guess there's around close to 12,000 of GEOs in the quarter, and there was around a 4,000. ounce benefit. I think you talked about last quarter like a 20 to 30,000 ounce contribution. And I know you mentioned that I guess the NPI should decrease in the second half, but just given sort of the Q1 results, I mean, I guess could you exceed that guidance or at least hit the high end of it for the year?

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

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

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

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

Okay, and then the guidance for the, I forget what the exact number was, 25,000 to 35,000 ounces, did that assume production from June or from April?

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

Okay, understood. And then on the sort of lift shares, you know, thank you for that disclosure. We've always had this large short-term investment dollar amount that we could never understand what it was, which, you know, looking back at that deal, it looks like those shares were acquired, just started to be acquired at least maybe five-plus years ago. Yeah. We didn't get this at the analyst day, but strategically, what's Franco thinking about this large share position? Obviously, the current share price is a lot higher than where it was acquired, but what's the ultimate goal here for the company?

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

Okay, great. Those are all my questions. Thank you.

Thank you. Ladies and gentlemen, as a reminder, should you have a question, please press star 1 on your touchtone phone. Your next question comes from Cosmo Chu, CIBC. Cosmo, please go ahead.

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

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

Okay, for sure. Maybe now moving from, you know, Antamina to West Africa here, you know, you made a number of acquisitions in the past quarter. One that didn't really get a lot of attention was Seguela. But I think it's actually one that could have, you know, good upside potential here, although it's fairly small. But I guess, you know, my question is in two parts. The first part is, you know, with a recent combination or proposed combination of Fortuna Silver and ROX Gold, they've really talked up, you know, potential here of some of the pits, Kula, Asian, and some of the other ones. I just want to confirm that. The royalty is on all the different or the entire land package.

Hi, Cosmos. It's Ian.

Hi, Ian.

You're right. It does cover the mining license, which covers all of those targets and prospects.

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

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

Of course. And then on the flip side here, now that it is within a bigger company, could you, Ian, confirm with us, I believe there's a buy-down rate at the Royalty. How that works, and within a larger company now, do you think that buy-down is going to get exercised more so than previously?

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

There's been a new discovery made by Agnico Ugo and Yamana at Yeast Goldie at Canadian Mallardic. I haven't gone through your entire sort of asset handbook yet, but I'm not sure how much you can comment at this point in time. But, you know, would that new discovery potentially fall within your royalty grounds? And can you talk about the extent of your royalty on that land package here in terms of the area?

Thanks, Cosmos. The royalty claims that we have at Canadian Mallardic don't cover the full property position. I think it's five separate claim blocks that we cover. It's a bit of a checkerboard. One of the claims covers what is, our understanding, the center of the East Goldie deposit. The extensions that they have now made are to the east of that. We do have another claim block that falls to the east. And so it's early days, but it looks like part of that extension may be on one of our other claims, and so we're very excited about it.

Great. Thanks again. Those are all the questions I have. Thanks again, Paul.

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

Good morning. I just have two questions, both related to the five-year guidance. There was a comment made earlier in the call today about Sudbury potentially being lower than expected. And I know originally when you gave that 2025 guidance, Sudbury, the assumption was it was going to continue out then. Is that still the case? And my second question is, can you just remind me when the MWS royalty, is it in the 2020? Is it in the five-year guidance, too, or does the 325,000-ounce cap kick in before then? Thank you.

Hi, Brian. Sandy here. Sudbury, yes, it's going to continue mining. I'm recruiting west until 2026 is the current life of mine plan. As we highlighted at the end as part of our year end, it'll be at half the rate it was for 2020. And so if you look at Q1, it's on pace for that profile. So it's within our expectations for 2021. So it'll be about 10 to 12,000 geos per year for the next five years.

Great, so that hasn't changed at all.

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

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

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

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