Franco-Nevada Corporation

Good morning ladies and gentlemen and welcome to the Franco Nevada Corporation's third quarter 2022 results conference call and webcast. At this time the call is being recorded November 7, 2022. At this time all lines are in a listen only mode. Following the presentation we will conduct a question and answer session where you may ask a question through the phone line or the webcast. If you are joining by webcast you may submit your question for this question and answer session at any time during the call by typing your question in the Q&A section of the webcast platform. If you require immediate assistance during the call, please press star zero at any time for the operator. I would now like to turn the conference over to your host, Bonavitek, Vice President, Finance. Please go ahead.

Thank you, Michelle. Good morning, everyone. Thank you for joining us today to discuss Franco Nevada's third quarter 2022 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. Sandy Brana, Chief Financial Officer, will provide a brief review of our results. And Ian Gray, Senior Vice President, Business Development, will provide an overview of a recent Maginot transaction. 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 three of this presentation. I will now turn the call over to Paul Brink, President and CEO of Franco Nevada.

Thanks, Bonnevie, and good morning. I'd like to start by announcing that Jacques Perron will be joining our board of directors. We pride ourselves on the technical capabilities of our board, and Jacques will certainly add in that area, amongst others. Jacques had a very successful career in the industry, has led a number of companies, and I'm sure is well known to most of you. We got to know Jacques through his running companies where we have royalty interests, in particular while he is CEO of Predium, operating Bruce Jack, and is the CEO of St. Andrews Goldfields, running Horton Holloway. Jacques, welcome to the board of Franklin, Nevada. Turning to our Q3 results, we saw good underlying production from our diversified portfolio of assets in the quarter. While precious metal prices declined, the impact on our revenue in the quarter was partially offset by higher energy prices. Our Q3 Geos are lower than Q2 with two main items. While Colbury Panama had record production for the quarter, the strong performance isn't fully reflected in our Q3 Geo sales due to the timing of shipments. We also had a lower contribution from our Vale Ainur royalty. Despite these items, Frank Nevada has earned record Geos, revenue, adjusted net income, and adjusted EBITDA for the three quarters through September. We're on track to meet our 2022 guidance. We expect to be at the higher end of our overall geo guidance range and at the lower end of our precious metal range. The weaker gold price environment has led to an increase in demand for royalty and stream financing and in our business development activity. We're pleased to have acquired a royalty on Argonauts Maginot project in Ontario, currently advancing through construction. The project's had its issues with cost overruns, made only tougher in this inflationary environment, although we believe Argonaut now has a good line of sight on completing construction as planned. The asset has great upside. The current mine plan is a small portion of the total resource, and we believe far more ore will be recovered over the life of the mine. Last quarter, we announced the financing package we had provided to G-Mining for the construction of the Tocantinsinho project in Brazil. Since then, the company has received its license extensions and has commenced construction. Maginot and Tocantinsinho add to a growing list of minefields in our portfolio. Most advanced are Solaris Norte and Seguela, which are scheduled to start production next year, along with Maginot. We expect to see the first gold ounces from Greenstone, Mara Rosa and Tocantinsinho in 2024, and Valentine Lake is scheduled to start in 2025. Our other growth driver is mine expansions. The Cobra Panama expansion is on track to reach 100 million ton per annum of throughput by late 2023. First, Quantum commented this quarter that the mill is performed at the 95 million ton per annum rate and expect by year end it will operate sustainably at the 90 million ton per annum rate. At Detour Lake, Agnico discussed their plans to produce greater than a million ounces per year. The expansion work was ongoing through the quarter, and they hope to meet their near-term throughput target of 28 million ton per annum ahead of schedule. On the other hand, Stillwater have reduced their growth plans to 700,000 PGM ounces by 2027, down from 850,000 PGM ounces previously expected. The other mine expansions at Tagist, Macassar, Odyssey, and Island Gold are all progressing well. We continue to advance our ESG effort on a number of fronts. During the quarter, we have awarded four scholarships to diverse mining students at McGill, U of T, and Queens. We committed $225,000 of funding for community programs as part of the Maginot transaction. A number of programs we're funding are also currently being implemented, including community water infrastructure down to Pekai, an education initiative in partnership with Andamita, and community waste management at Cascavel. In summary, we're blessed with a business model that's high margin, largely immune to cost inflation, and exposes our shareholders to tremendous long-term optionality. With the prospect of global recession, it's a great comfort to have no debt, two billion in available capital, and to be generating operating cash flow at a rate that's close to a billion dollars per year. You'll recall that last year the board moved the annual dividend review earlier in the year, and we expect the same timing in 2023 with a dividend declaration in January for the first quarter dividend that's paid in March. With that, I'll hand the call over to Sandy.

Thank you, Paul. Good morning, everyone. As Paul mentioned, the company saw strong underlying production from our diverse portfolio of assets during the quarter. The majority of the mining assets performed in line with expectations. Revenue and earnings were impacted by weaker precious metal commodity prices and timing of deliveries for certain assets. The one area of the business that continued to deliver strong financial results was the energy division. On slide four, we've highlighted the gold and gold equivalent houses sold for the three and nine months ended September 30th, 2022 and 2021. Overall, GEO sold were relatively flat when compared to prior year with third quarter GEO sold being 176,408 compared to 177,578 third quarter 2021. Of this, precious metal GOs were 120,542, down 7,150 GOs from prior year. The largest contributors to the lower precious metal GOs were Stillwater and Tamina and Cobre, Panama. The lower contribution of GOs from Stillwater was the result of a mine production being temporarily suspended as a result of flooding in the area in late June. The mine resumed operations in late July. Also, the amount of geos sold from Stillwater was lower due to the impact of lower platinum and palladium prices on the conversion to geos. For Antamina, we expected 2022 to be a more normalized year with silver ounce deliveries to be in the range of 2.8 million to 3.2 million ounces. This is what is transpiring for the first nine months of the year. However, we've recorded less geos sold than expected as the gold to silver ratio has weakened this year. resulting in less G.O. sold on conversion of silver ounces. At Cobre Panama, first quantum achieved record production during third quarter. However, due to timing of shipments, gold and silver deliveries and ounces sold were lower than expected for Franco Nevada during the quarter. We expect higher deliveries from Cobre Panama in fourth quarter. Offsetting the lower G.O. sold from the assets mentioned, we had strong third quarter performance from Candelaria and Tazius compared to the prior year. For diversified geos, our valet royalty resulted in just over 3,600 geos for the quarter. This was lower than prior year due to lower production and lower iron ore prices. Also this quarter, the true-up recorded related to the period January 1st to June 30th, 2022 resulted in a revenue reversal of approximately $1.6 million. As you know, each quarter we make an estimate of what the royalty will be, with the actual amount being announced by Vale in late March and September each year. As a result, you will see these types of adjustments to our accruals twice a year, Q1 and Q3. Energy GEOs increased by 54% year-over-year as we benefited from continued higher energy prices. Slide five highlights our total revenue in adjusted EBITDA amounts for the three and nine months ended September 30th, 2022 and 2021. As you can see from the bar charts, revenue adjusted EBITDA have decreased year over year for the three months. The company recorded 304.2 million in revenue in third quarter and 256.7 million in adjusted EBITDA. A margin of 84.4% was achieved. Partially offsetting the lower contribution from precious metals in the quarter, was a continued strong contribution from the energy assets as revenue increased from 55.1 million a year ago to 83.8 million this quarter. The West Texas intermediate oil price averaged just over $91 per barrel during the quarter, a 30% increase from prior year. Natural gas prices were also higher with Henry Hub averaging $7.91 per FCF during the quarter compared to $4.32 per FCF a year ago. For the nine months year to date, both revenue and adjusted EBITDA are higher than prior year and new records for the company. As you turn to slide six, you'll see the key financial results for the company. Although GEOs were relatively flat, revenue, as mentioned, declined because of lower commodity prices. On the cost side, our cost of sales was flat, which is consistent with the flat year-over-year GEOs sold. Cost of sales is dependent on which assets deliver stream ounces. as not all fixed payments per stream ounce are equal. As well, the cash cost per geo, which was $238 this quarter, will fluctuate depending on the mix of royalty versus stream geos, including mining and energy. But at current average gold prices, the company continues to generate significant margins. Depletion decreased to $68.5 million versus $73 million a year ago. Depletion is based on actual mining geos sold and barrels of oil equivalent received on the energy side of the business. As we received less geos from Antamina, Valet, and Cobre, Panama, this impacted depletion as those assets are higher per ounce depletion assets. With respect to taxes, the effective tax rate for the quarter was 16.2%, which is higher than the 15% we have trended to previously. This was due to higher income being generated in Canada and the United States from our energy assets. Adjusted net income was 159.7 million, or 83 cents per share for the quarter. Slide seven highlights the continued diversification of the portfolio, which we consider one of the strengths and differentiators of Franco Nevada. As shown, just over 70% of our Q3 2022 revenue was generated by precious metals. The geographic revenue profile has revenue being sourced 90% from the Americas, with Canada and the US being 42%. With respect to asset diversification, Cobre Panama was our largest revenue generator at 15% of total revenue for the quarter, followed by Candelaria and Antipakai. Cobre Panama continues to be the only asset greater than 10% of revenue. And the last chart highlights our operator diversity Our largest exposure to revenue being generated by any one operator is 15%, which is first quantum who operates Corporate Panama. The other cost component for the company besides the cost of sales is our corporate administration costs. The chart on slide eight highlights our quarterly revenues and our quarterly corporate admin and share-based compensation expense since our IPO. As you can see, revenues have grown significantly over the period shown, while corporate costs have remained fairly stable. For Q3 2022, corporate admin, including Sharebase comp, was $5.1 million, or less than 2% of revenue. Management believes we can continue to add to the portfolio and grow our business without adding significant cash overhead to the company. On slide 9, we reiterate our guidance for the year. Based upon updated commodity prices, as highlighted on the slide, and our expectations of production from our royalty and stream interest for fourth quarter, we are forecasting that we'll be at the high end of the total GEO sold guidance of 680,000 to 740,000. Also, we expect to have a higher contribution of GEO sold from our diversified assets than our original plan. I will now turn it over to Ian, who will speak to our recent Mugino transaction.

Thank you, Sandeep. In October, we were very pleased to complete the Maginot Royalty and Equity Finance. We were delighted to work with the Argonaut team and its bank syndicate to provide a financing solution for the project, which is expected to go into production next year. The project design is conventional from a technical standpoint and is located in an excellent mining jurisdiction, Ontario. We believe that there is good potential in the broader land package over time in this exciting district next to Island Gold. where we also have a royalty. We've included key project parameters on this slide and highlight the recent quarterly update where Argonaut noted the Maginot project, excuse me, is now 70% complete. Moving to the next slide, slide 11, we highlight our available capital of $2 billion. Equity valuations of mine developers remain particularly depressed. In this high inflation environment, and we believe we can put capital to work partnering with some of the best development projects and help them to differentiate themselves. With that, I'll hand it back to the operator for any questions. Thank you.

Thank you. During this Q&A session, if you would like to ask a question, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press the star followed by the two. If you are joining us on the webcast, please submit your question through the Q&A section of the webcast platform. The first question on the phone line comes from Hector Ile of HC Wainwright. Please go ahead.

Hi, everyone. It's Heiko, not Hector. And just want to extend my congratulations to Jacques. I had the pleasure of working with him when he was at Predium, and it was a pleasure. So congratulations to all of you. I hear more and more about forced sellers in the market. I mean, that's just one example, and I understand this is not a perfect comp. A $50 million deal happened today where the seller specifically stated that the deal removed a financing overhang. Obviously, this is sort of a special situation thing, but can you provide some insights on what you're seeing with pricing of distressed sales in the market and also the sizing and the development stage that these potential streams might be in? I mean, you've hinted at some of this in your release when you go weaker gold price environment has led to an increase in demand for royalty and stream financing. But maybe if you could just provide some more data points, if you could.

Sure. Heiko, it's Ian speaking here, and thank you for the question. It's an excellent observation. I think what we see at the moment is a number of companies, specifically in the precious metals space, where there is an acute need for capital. I think our transaction that we announced with Argonaut and Magino is a good example. case in point of the type of financings that we're looking at at the moment. And, you know, we see good potential within the precious metal space to continue to do more of these kind of medium-sized transactions. So hopefully going forward there will be more like that. Size, you know, the guidance I think is, you know, more towards the intermediate overall size.

And pricing-wise?

Pricing, I think the market remains relatively competitive, but where we try to differentiate ourselves is to work with partners that value what we do and the solution that we provide, and we try to be nimble in that respect and provide value to our counterparties, and hopefully, as a result, also offer our shareholders attractive returns on the deals that we do.

Fair enough. This was a wonderful lead-in to my follow-up question, and With the caveat that I've never really had it pointed out to me quite like this on a call, or rather in an earnings release, with all the push towards ESG, and I mean, you actually breaking down and quantifying some of your longer-term ESG goals in this release today, are you actively avoiding investments with operators that you believe do not fulfill your longer-term ESG requirements? I guess what I'm asking is, in addition to having their social license to operate, which I assume... is always a prerequisite. Would you actively not invest into something because of board composition or other ESG and air quotes failures?

Hi Coates, Paul. Yes, ESG is very important and the way we think of ourselves is we are allocating capital on behalf of our shareholders. We want to make sure that we do and we want to make sure that they're comfortable that when we're allocating capital it is into good projects. A lot of our due diligence is focused on environmental and community impacts and absolutely there are projects that we look at where there's either an existing environmental condition, maybe something in their planning that we're not comfortable with, perhaps it's the community relationship. There are deals that we've turned down for all those reasons in the past to make sure that we are supporting good projects.

Interesting. Appreciate the insight. I'll get back in queue. Thank you so much.

Thank you. The next question comes from John Tomasos of John Tomasos Very Independent Research. Please go ahead.

Thank you. Is it fair to say that your investment criteria automatically get a little more rigorous with lower metals prices because you use the spot gold price rather than an estimated future gold price in making investments, and you seek the bottom quarter of the cost curve. And in addition, in the current period of rapidly rising interest rates, where we're at 4% and getting higher, would you raise your hurdle rate of return to reflect current market conditions?

John, Paul again. I'd say the best way to characterize it is we want to be a consistent source of capital throughout the cycle, and we try to be as consistent through the cycle in terms of what that cost of capital is. What tends to happen is when things get overheated in the sector, nobody gets our term sheets because they can get cheaper capital, particularly from the equity markets. When the markets are weak, when other costs of capital become higher, that's when we see that people tend to hit our term sheets. So it's less so that we try and change the way we price deals. It's just that we try and be consistent through the cycle.

So you're using the same numbers today as you would have used on March 1st when gold was in $2,000.

No, when we present, when we look at things, we always have a view as to what are current prices. We also have a view as to what are long-term prices. We try and look at every deal through those two lenses. The art of it is picking the point somewhere in between the two. But we try and make sure that the deal makes sense to us, both on current and on long-term prices.

Do you worry that it's too hard New deals and do large deals because of the capital and competition in the sector? Or is it better to just sit on the sidelines and let other people pay too much?

There is more competition in the sector, no doubt about it. But our view is this is a very capital-intensive sector. It's a very volatile sector. And that if you're patient, the good assets will come available and there will be good opportunities to grow a company.

Thank you. Thank you. Once again, ladies and gentlemen, if you do have a question on the phone lines, please press star 1 at this time. Next question comes from Tanya Askinolik of Scotiabank. Please go ahead.

Good morning, everyone. I think that's me. I just wanted to circle back to Ian so I understand correctly. So Ian, Are we, you know, when you said you're seeing deals more back in sort of the mid-range for pricing, is that that 100 to 300 million range that we talked about in Q2?

Hi, Tanya. Yeah, I think that's a reasonably fair way to characterize it. I wouldn't put hard bounds on that. You know, there's potential both bigger and smaller. as we negotiate and look at transactions. But that is generally where we're seeing the majority of the opportunities at the moment, and it is pretty active.

And the ones under $100 million are more these royalty sort of deals that you're seeing, and sort of streams would be greater than $100? Would that be fair, or?

Uh, not necessarily. Uh, I, I think we, we see, you know, both types of opportunities, bigger royalties as well are, are also out there. You know, the royalties like Magino in Ontario, 2% NSR, it's pretty much bread and butter type of business. We like to do those even if they are, uh, a little bit under, uh, you know, a hundred million as you point out.

Okay. And still, as you mentioned in the precious metal space is your focus and, uh, just project financing continues to be the main opportunities.

Yeah, I think project financing, that's a fair assumption that that is the majority of the opportunities, but we see others as well, and there are also kind of byproduct-based metals deals out there that we look at.

Okay, so those are back on the radar again.

Don't know if they ever went off, but yeah, there are some of those out there.

That's fair. Thank you, Ian, for that. If I could ask a bit of guidance from Sandy for just looking out for the remainder of the year. Appreciate you telling us some insights on Cobra Panama, so expecting a stronger Q4. Hemlo looked like it came in at, per guidance, and I think was at 5 to 6 million Canadian per quarter or thereabout. And I think you had mentioned distributed Q3, Q4. Just wondered about valet, because we were quite off on that contribution. Any guidance for Q4 on that one? I know we don't have the accrual happening, but anything you can give there would be appreciative. Or any other asset for stronger Q4 performance?

Sure. So, Tanya, I guess Hamlow I would expect similar to Q3 in fourth quarter. And then specifically on valet, obviously iron ore prices have come down. So I would expect something similar to third quarter, obviously backing out the revenue reversal of $1.6 million. That was part of the number.

Any other assets in Q4 that you think you should flag for us?

No, as I said, I think, you know, underlying production at most assets was good. In the quarter, it was just timing of deliveries and Cobre Panama specifically. So I think, you know, it's just business as usual. I think most assets will come in similar.

Okay. Well, that's appreciated. Thank you so much, and I will look forward to the dividend in January.

Thank you. There are no further questions on the phone line. I will now turn the Q&A session over to Bona Vitek, who will take questions from the webcast.

Thank you, Michelle. We have two questions from Bernie Pichi of Pelisad Capital. The first one is, can you quantify the miss that occurred because of shipment delays at Cobre Panama? And will that miss be picked up in Q4?

Sure. So the delivery that was delayed into Q4 for Cobre was about 7,000 to 8,000 geos. So we have received that, and that will be sold off in this quarter. Obviously, you can't predict on timing of shipments, so there's nothing to say that there's a delivery that could potentially be received at the end of December. It doesn't get pushed into January, but that is the quantum of the shipping delay for Q3.

Thank you. And the second question from Bernie is, it would appear that acquisitions of non-precious metals are not front and center at this time. Any comments?

We continue to look outside the precious metal space as well. I think what we would note, however, is there's a preponderance of deals to do in the precious metal space. And in the current pricing environment, that's where we're focusing a great deal of our attention.

And our last question is from Vincent Lantini of Lantini Capital. Does Franco Nevada hold any physical gold on its balance sheet?

We do. So we have three royalties that pay us in coins, Tassiest, Detour, and Kirkland Lake. It's roughly 6,000 ounces per quarter, and we do hold that on the balance sheet, and we sell that on a regular basis.

And that was our last question. There are no further questions from the webcast. So this concludes our third quarter 2022 results conference call and webcast. We expect to release our year-end 2022 results after market pulls on March 15, with a conference call held the following morning. Thank you for your interest in Franco, Nevada.

Ladies and gentlemen, this does conclude our conference call for today. We thank you for your participation and ask that you please disconnect your lines.