Franco-Nevada Corporation

Good morning and welcome to Franco Nevada Corporation's second quarter 2023 results conference call and webcast. This call is being recorded on August 9, 2023. 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 webcast. If you are joining by webcast, you may submit a written question for the Q&A session at any time during this 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 for an operator. And I would like to turn the conference over to your host, Candida Hayden, Senior Analyst, Investor Relations. Please go ahead.

Thank you, Sylvie. Good morning, everyone. Thank you for joining us today to discuss Franco Nevada's second quarter 2023 results. Accompanying this call is the presentation, which is available on our website at franco-nevada.com, where you will also find our full financial results. The presentation is also available to view on the webcast. During our call this morning, Paul Brink, President and CEO of Franco Nevada, will provide introductory remarks, followed by Sandeep Rana, Chief Financial Officer, who will provide a brief review of our results. This will be followed by a Q&A period. Our full executive team is available to answer any questions. Participants may submit questions by telephone or via the webcast. We would like to remind participants that some of today's commentary may contain forward-looking information and we refer you to our detailed cautionary note on slide two of this presentation. I will now turn the call over to Paul Brink, President and CEO.

Thanks, Candida, and good morning. For Q2, our core assets returned to normal production and deliveries at Cobra Panama and Antipokai caught up from the disruptions in Q1. Revenue from our diversified assets was impacted by lower oil, gas, and iron ore prices compared to the relative highs of the prior year period. As a result, we expect total geos for the year to be at the low end of our guidance range. With the Cobre Panama CP100 expansion physically complete, we started to see the benefit of high throughput for the quarter, and First Quantum expects to exit the year at the 100 million ton per annum throughput rate. Following public consultation, the refreshed concession contract was signed by the government and First Quantum and is expected to be presented before the National Assembly during the current sitting. G-Mining continues to do a tremendous job with the construction of the Toca do Zinho gold mine in Brazil. We've now funded $183 million of our total $250 million stream deposit, and the project is on track for commercial production in the second half of 2024. The quarter saw first production from a couple of new mines, Argonaut's Maginot Mine in Ontario and Fortuna's Mine in Cote d'Ivoire. Goldfields expects first production from Solaris Norte in Chile before year-end. We added a number of royalty interests during the period. In Chile, we acquired 2.64% gold royalty on Barrick's Pasqual property. We also acquired a 1.5% NSR on Hochschild Mining's Vulcan gold project. And we increased our holding on Lundin Mining's Cacerones copper mine. So we now own a total 0.57% NSR on the mine. In Canada, we acquired an additional 1.5% NSR on Marathon's Valentine gold project. and we now hold a total 3% NSR on the project. During the quarter, we entered an agreement to provide royalty financing to exploration stage companies in partnership with the EMX Royalty Corp. We have great respect for EMX's team of on-the-ground geologists, and they'll be responsible for sourcing the transactions. We were active with community contributions over the three months. We contributed to Sylvania Stillwater's community initiative in Montana, and to the I-80 Fund, which supports small businesses in rural Northern Nevada. We also partnered with Perpetual Resources to build social capacity at the Stibnite Gold Project. Franka Nevada is debt-free. He is growing his cash balances, and at the end of June, we had $2.3 billion in available capital. Our business development team is active. For many operators and developers, royalty and stream financing is currently the lowest cost of available capital. With high rates, debt financing is expensive, and there's little depth in the market for new issue gold equity. With that, I'll hand the call over to Sandy.

Thank you, Paul. Good morning, everyone. Our diverse portfolio continued to generate strong cash flows and high margins during second quarter 2023. Antipakai and Cobre Panama returned to normal operations and were key contributors to the strong financial performance in the quarter. As well, the remainder of our mining portfolio performed in line with our expectations. For the diversified assets, the retreat in iron ore and energy prices from 2022 did result in a reduction in diversified revenues and associated GEOs in second quarter 2023 compared to prior year. On slide four, we highlight the gold equivalent ounces sold for the last five quarters. Overall, GEOs sold for second quarter were 168,515. down from second quarter 2022. For the quarter, precious metal geos were 132,033, up slightly from same quarter last year and up 19% from first quarter 2023. For the quarter, the largest contributors for precious metal geos were Antipokai and Kobe Panama. At Antipokai, geos delivered and sold were higher in the quarter compared to prior year. Following the temporary suspension of operations and constrained logistics experienced in Q1 2023, operations returned to normalized levels in March, resulting in significantly higher deliveries to Franklin, Nevada, with 19,683 geos sold in the quarter compared to just over 10,000 geos in Q2 2022. For Cobre, Panama, operations ramped back up to full production following an interruption due to export restrictions in first quarter. Together with the benefit of additional processing facilities related to the CP100 expansion project, we received strong deliveries from Cobre, Panama, with 36,650 geos sold in the quarter. Marigold and Tassius were also strong contributors during the quarter due to mine sequencing and higher grades and recoveries, respectively. A few assets which performed below expectation were Antamina, Guadalupe, and Stillwater. For Antamina, we had lower geos sold than prior year as the operator was affected by a tropical cyclone that affected Peru's northern region in March 2023. This also affected production in April, which will impact our third quarter deliveries. At Guadalupe, the operator mined less ounces from lands covered by our stream, resulting in lower geos delivered and sold. And at Stillwater, production was impacted by an incident that damaged shaft infrastructure in March 2023. This was remediated in April. However, the decrease in geos compared to prior years also reflects a less favorable PGM to gold conversion ratio. Q2 2023 saw continued volatility in commodity prices. Slide 5 shows the average commodity prices for Q2 2023 and prior year. Precious metals did see an improvement year over year, with gold, silver, and platinum averaging higher. However, palladium, iron ore, and energy prices were down significantly. A large component of diversified DOs and revenue is energy. Production has remained strong and was 25% higher on a BOE basis during the quarter. However, as seen on slide 6, the bar charts highlight the retreat in oil and gas prices year over year. WTI averaged $73.78 a barrel in second quarter, down 32% versus prior year. Natural gas averaged $2.32 per MCF, down 69% versus prior year. As a result, the sharp fall in energy prices impacted our geo-sold generated bioenergy assets, which were $28,683 for the quarter, compared to $50,387 in Q2 2022. As you will recall, energy prices saw a sharp increase in 2021 and 2022 due to many factors, with the largest being geopolitical tension. Slide 7 highlights our total revenue and adjusted EBITDA amounts for the three months ended June 30, 2023 and 2022. Revenue and adjusted EBITDA have decreased year over year. The decrease is the result of lower contribution from diversified assets, partially offset by better performance from precious metals. The company recorded $329.9 million in revenue in second quarter and $275.6 million in adjusted EBITDA. a margin of 83.5% was achieved. As you turn to slide 8, you'll see the key financial results for the company. As mentioned, geos and revenue were lower in the quarter compared to prior year. On the cost side, we had an increase in cost of sales, which was $47.1 million, compared to $45.5 million in Q2 2022. The largest component of this is the per ounce fixed cost we pay for stream ounces, we sold 102,785 stream ounces in second quarter compared to 98,163 a year ago. Depletion increased to 75.1 million versus 69.6 million a year ago. Depletion is based on actual mining geos sold and barrels of oil equivalent received from energy assets. As we received higher geos from Antipakai and Cobre Panama, which are higher per ounce depletion assets, this resulted in higher overall depletion expense. For second quarter 2023, adjusted net income was $182.9 million, or $0.95 per share, compared to $195.8 million, or $1.02 per share, in prior year. Slide 9 highlights the continued diversification of the portfolio. As shown, 79% of our Q2 2023 revenue was generated by precious metals. This compares to 69% in Q2 2022. The geographic revenue profile has revenue being sourced 89% from the Americas. With respect to asset diversification, Cobre Panama was again our largest revenue generator at 22% of total revenue for the quarter, followed by Antipakai and Candelaria. And the last chart highlights our operator diversity. Our largest exposure to revenue being generated by any one operator is 22%, which is First Quantum, who operates Cobre Panama. Slide 10 illustrates the strength of our business model to generate high margins. On the slide, you can see that cost of sales has remained fairly consistent over the period shown. The amount of cost of sales will depend on the mix of royalty versus stream geos, including mining and energy. During second quarter 2023, the cash cost per geo, which essentially cost of sales divided by gold equivalent ounces sold, was $280 per geo. This compares to $238 per geo in second quarter 2022. Corporate administration costs, including stock-based compensation, was less than 3% of revenue for the quarter. The total can fluctuate quarter over quarter, but it's tended to average approximately $8 million each quarter historically. In a rising commodity price environment, we expect to benefit fully, as we do not expect our cost structure to change significantly. Slide 11 summarizes the financial resources available to the company. When including our credit facility of $1 billion, total available capital at June 30, 2023 is $2.3 billion. The company is debt-free. And on slide 12, 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 the second half of the year, we are maintaining our guidance range for total geo-sold of $640,000 to $700,000. However, we expect to be at the lower end of that range due to the conversion of non-gold revenue to geos based on our revised commodity prices. And now I'll pass it over to the operator as we are happy to answer any questions.

Thank you, sir. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touchtone phone. You will then hear a three-tone prompt acknowledging your request. And if you would like to withdraw from the question queue, please press star followed by two. And if you are using your speakerphone, you will need to lift the handset before pressing any keys. Please go ahead and press star one now if you have any questions. And your first question will be from Sahat Tariq at Credit Suisse. Please go ahead.

Hi, thanks for taking my question. As you think about the diversified commodity prices, so iron ore energy prices being lower, Does that in any way change what you're focusing on in your deal pipeline? I know in the past you've talked about counter-cyclical investing, so I just wanted to tie that in with how the commodity prices are moving.

Thanks. Thanks. More the point is, as you say, we try to be opportunistic investors. Our focus is always on precious metals, but when we're investing in other commodities, we're looking to get better entry points. that either needs to be based on lower commodity prices or at least that we can use lower longer-term prices in valuing the deal. So when you do have price weakness, that is an opportunity.

Okay, and then just on the balance sheet, just given the strength of the balance sheet, $1.2 billion of cash, undrawn revolver, Can you just walk us through maybe how you're thinking about just use of capital in the context of there aren't that many large deals out there? Just try to think of how the balance sheet will be utilized. Thanks.

I'm sure Sandeep here. Really, there's no change in strategy. Franco has always had a strong balance sheet, and we're happy having cash on the balance sheet. Obviously, dividend is important, but the number one priority is to deploy that capital to add assets. And we know it's a cyclical business. There's times when our capital will be needed, and there's other times where we might not be as active. So we're happy accumulating cash on the balance sheet. But the second most important thing is the dividend, which we intend to raise as we have done in the past.

Okay, great. Thank you.

Thank you. Next question will be from Josh Wilson at RBC Capital Markets. Please go ahead.

Thanks. On the global minimum tax, with the draft legislation out in Canada, I'm wondering if there's been any further clarity on what the potential impact is and whether this is something that is expected to be affecting 2024 taxes paid.

Yes, Josh, no change. As we said last quarter, The estimate is 3% to 4% of our NAV based on GMT being implemented January 1st. No changes.

Okay, and just to confirm, that is consistent with, I guess, the initial interpretations of the legislation? Yes, correct. Okay, thanks. And then speaking of counter-cyclical investing, Sahab is asking, with the Pasqual-Lama royalty purchase, you know, it's obviously a reasonably well-known asset, but a sort of a larger dollar value, I guess, for an option style of royalty. I'm wondering if there's any additional views the company has on the potential there, or if this is, you know, just sort of a tuck-in long-term option with no further interpretations, at least based on what we've heard from Barrick over the last couple of years.

Josh, it's the We think one of our competitive advantages, given the long-dated nature of our portfolio, is that we can buy some of these long-dated interests. We would like to do it, and what we found is great endowments are the ones that ultimately get developed, also the ones that get better over time. PASQA is certainly one of those, one of the best undeveloped gold deposits. So I think you're right in thinking of it in a counter-cyclical sense. We've done this before. A great example was Detour. When Placid built that mine as an underground mine, had abandoned it, and we were able to buy royalty on it, in a sense, in the darkest days, and ultimately it became a very successful mine. It's the way we like to think about these things. Pass Square is a class of deposit that you'll always have operators looking to spend capital on it. It's in a good, secure jurisdiction. Our view is it gets developed over time, and I think it will be a tremendous investment. Great. Those are all my questions.

Thank you.

Thank you. Next question will be from Aiko Ile at HC Wainwright. Please go ahead. Aiko, please unmute your line.

Oh, sorry. Can you hear me now?

Yes, we can hear you.

Hello, Paul. I will stand up. Sorry about that. Yeah, I was on mute as we correctly identified. I personally thought interest rates would be topping out or potentially even leveling off by now. Clearly, that hasn't really happened. But I was curious what longer-term interest rate assumptions that you use in your models, given your future funding commitments and things like the expansion of underlying streams and also even for future acquisitions placement.

I think in short, we're in the very fortunate position we don't have any debt. So as rates go up, while many people are constrained, we're not. It really puts us in a position that I think we've got more latitude in our investments than many other people who are constrained by debt.

But I assume that with commitments that you have in the future, you have some sort of internal models that you use to place yourself against your competition, no?

We have our models, but as we don't have debt and typically we don't carry debt as a long-term source of financing. When we've had it, we've repaid it quickly. It doesn't factor heavily into our cost of capital.

Fair enough. I think we'll take this one offline. And then also, can you provide some color on your plant depletion year by year through 2027? I saw you had the longer term outlook in your presentation. Just like a rough estimate by year?

I don't have those numbers in front of me, Heiko. We can take that offline.

Perfect. And then the last one I had, just looking at the remainder of the year, what assets do you think might make the biggest difference between plans for your outlook and what would actually come in? In other words, is there anything that analysts should be looking at particularly closely?

I think we've re-aided our guidance, so the ranges that we had provided as part of our March guidance, I think we're comfortable that our core assets will achieve those targets, in which case it results in us meeting our guidance levels in the second half of the year.

Fair enough. I appreciate it. I'll give you guys a call back later.

Okay. Thanks, Heiko.

Thank you. Next question will be from Cosmos Chu at CIBC. Please go ahead.

Great. Thanks, Paul, Sandy, Vinti. Maybe my first question is on your guidance as well. You know, Paul, as you mentioned, you're now targeting the lower end of your guidance range. You've kind of answered my question, but I just want to confirm. If I just look at your precious metals guidance, you're actually tracking pretty well. So, you know, the fact that you're targeting for total geo to lower end, is that really just due to, you know, lower sort of diversified prices, energy prices, iron ore prices, or is that too simplistic of a way to look at it?

No, Cosmos, you're essentially correct. You know, when we did our original guidance, the iron ore price we used was higher than what it's averaged thus far in 2023. and what we're using going forward. Same with the energy prices. And so the other side, the gold price is higher than what we had in our original guidance. So, you know, you get a double impact on converting the non-gold revenue to geos, and that's essentially the reason for guiding to the lower end.

Perfect. And then in terms of some of the corporate development here, you know, you talked about in your MD&A the partnership with EMX Royalties. It's not new, but, you know, at least right now, I guess, you're putting a number to it, joint acquisitions, not huge, $5.5 million on your end. But I guess my question is, what does, you know, each of the parties bring to the table? I kind of know the answer, but I just want to confirm. And, you know, could this lead to something that's bigger down the road? Or is this really the niche in terms of you know, smaller, earlier stage royalties, you know, utilizing, say, the technical expertise of the EMX team?

That's a couple of things there. We know the team well. We like the team. Part of the DNA of our business is, you know, to keep on bidding on the smaller royalties where we see value. Our issue is how we prioritize our time. The team most of the time is engaged on bigger transactions. So one of the great benefits for us in this transaction is the EMX team is targeting these transactions. We pay a bit of a carry on the deal. Our capital being available means that they can approach parties with more capital to put to work. So those are the main elements of it. And the overall strategy here is, and a bit to what I alluded to in the overall comment, capital really is constrained for the gold development sector and particularly for the earlier stage exploration sector. So we think we can profitably put dollars to work in an area that really needs the capital.

That's good to hear. Maybe one last question, more asset-specific here. Enter Pakai in the MD&A. You highlighted the exploration potential here. I'm going to butcher this. Coro Coheco, so about 10 kilometers away from Antipatay. Could you maybe talk a bit more about that in terms of timing, in terms of upside potential, and what we could expect?

So, Cosmos, a bit of background on that property. And as you'll recall, the first mine on that property was Tintaya, mined by BHP. It was a SCAR deposit. The second, Antipokai, is a porphyry deposit. It's on a parallel trend. On that same trend as Tentaya is Korokoaiko, another scone deposit. Total metal value is about three-quarters of what's in Antipokai, but the grades are slightly higher. So it's a project that the Glen Forest know about for quite some time. They've been looking at developing it. They've scoped it out as different iterations of underground and open pit and various proportions of that. They are currently working on building social license with the communities with their view that once they know that they've secured that, that they would look to push the project forward in terms of development. So don't have an exact timeline on when it might start contributing. But I think the way to think about it is, you know, that at least by the time Andapakai comes to an end, there's a replacement deposit, and so you'd see production continuing for a long period.

Great. Thanks, Paul, Sandeep, and team. And clearly your pronunciation is much better than mine, so I've got to take some lessons here. But thanks again.

Thank you. Next question will be from Martin Prettier at Veritas Investment Research. Please go ahead.

Thank you. In terms of the volumes, I look at the value volumes that were down 11%, and I was expecting more. So the question is why and what is the expectation going forward?

Sorry, volumes related to which?

Value in iron ore volumes.

Okay, yes. Yes, so there was two components. One is valley, the production is usually lower in the first half of the year versus the second half of the year. So we've always guided 45% of our geos will be in the first six months and 55 in the second six months. But there was lower production at the mines themselves. And then with the lower iron ore price, resulted in lower revenue from valet. And then when you convert to geos at a higher gold price, it results in lower geos.

No, I'm not talking geos. I'm talking simply if you take the iron ore number, that's lower. It's 11% lower. And my expectation is that they would produce more.

Yeah, so the revenue number, it's our best estimate at this time, right? So we don't We don't receive a number from valet. We're making our best estimate. So it could be a case of we'll be making an adjustment in Q3 based upon what the actual numbers come out from valet.

And what is the expectation going forward? Because that asset was supposed to grow and it doesn't seem to be growing much.

Yeah, obviously they've had production challenges, which hopefully get rectified. But they have a threshold in... late 2024, early 2025, where our royalty there will kick in. So for Franco, Nevada, we do expect higher production from that royalty going forward, but that won't kick in until end of 2024. Okay.

And the tax was rather low. The tax rate was 13%, which is lower than what I expected. What should I expect in terms of tax for the year?

So the rate was lower because it's a mix of where the income is earned. Because we had higher stream ounces from Cobre, Panama, and Antipakai, our Barbados subsidiary was a larger contribution of our net income, which has resulted in a lower tax rate, and we had lower energy revenue, which comes out of the U.S. and Canada. Going forward, you know, we typically guide to about 15% effective tax rate.

Okay, perfect. Thank you very much.

Thank you. Next question will be from Tanya Jakoskonek at Scotiabank. Please go ahead.

Yes, good morning, everyone. Thank you so much for taking my questions. I just wanted to follow up on Pascualama, if I could. I just wanted to know, does the royalty on the gold and copper cover all of Barrick's reserves and resources on the Chilean side?

Yes, Tanya, that's right. The royalty applies only to the Chilean side of the border, but it does cover all of the current resources on that side of the border. And in fact, there's an area of interest that is broader than Barrick's property position itself.

So if I was to take about, like, you know, go into Barrick's reserves and resources and take 60%, because I kindly, I remember it was about 60% of of the assets that's on the Chilean side versus 40 on Argentina. Would that be how you kind of viewed it when you paid your 75 million on it?

Yeah, you'd have to look at Barrick's disclosure to try to form a view of resources on the Chilean side. Our view was a bit higher than that. Our view was more like 80%. So when we were looking at our economics, we were using closer to 80% of the resource on the Chilean side.

Okay. All right, that helps. Thank you for that. And maybe just again on the M&A front or transaction front, Paul, should we be surprised to see you do an energy and or iron ore deal ahead of a gold deal right now because of where the prices are?

Tanya, you know our preference is always to add more precious metal. But we always say we're open to all commodities. It's driven by good deposits. So you shouldn't be surprised if you see an iron ore or an oil and gas deal. You should expect that it would be on a great deposit.

Okay. And on all of these opportunities that you're looking at, are we still in that sub-$500 million range? I'm just trying to still see whether we're in that range. I think it's like 100 to 350. I forget, but on all of these that you're looking right now, is that the range I should be thinking about?

Yes. Most of what we're looking at is a modest size, so you're accurate.

100 to 300 area?

Yes.

Perfect. And then, Sandy, maybe if I could come to you to just ask about... The year, so you've given us guidance that 55% of the production, obviously pricing has an impact on the GEOs in the second half of the year. Oil and gas or the energy division to be lower in the second half. Is there anything on the gold side? Is it evenly distributed? I know Cobre Panama is ramping up. I just don't know what the timing of your sales, should I be thinking even distribution on the gold side?

At this stage, yes, Kenya. I'd expect Q3 and Q4 to be pretty similar. Even if Cobre Panama ramps up with a stronger Q4, there's other assets that will do better in Q3 than Q4. It's just we don't have the exact detail by quarter. So I say essentially they'll be similar.

Okay. And, yep, that's it from me. Thank you so much.

Thank you. As a reminder, ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touch-tone phone. And your next question will be from Brian MacArthur at Raymond James. Please go ahead.

Good morning, and thank you for taking my question. Just following up on PASCLA, can I ask whether the copper royalty came with the gold royalty? And I guess where I'm going with this is whether you paid very much for the copper royalty royalties that said it was bought from different individuals, and really the question then is, do you see something different at Pasco where we'd be getting copper going forward, or was most of the bid price based, assuming on the 2.7% NSR gold?

Yeah, hi, Brian. The royalty that we bought was primarily based on the value in the gold, so the 2.7% NSR at today's gold prices. The small copper royalty came attached to that. We did buy it through different sellers, but each royalty had gold and copper in it. So the copper was more a tag along. We don't see as much value in the copper royalty at this stage. Great. That's what I thought.

And the second part, you talk about it being a sliding scale and you give us above $800, but there were some ones around on the property, if I remember correctly. that were scaled pretty aggressively. Is it still like, can I assume it's just 2.7% above 800 even if the bull price goes to like many times that and the sliding scale part is on the lower end or is there a function as we ramp up through certain higher prices that you get an extra kicker?

The sliding scale tops out at $800 an ounce, so at today's prices and anything above $800 an ounce, it's 2.7%. We would obviously just get the benefit of the higher gold price in that scenario.

Great. Thanks very much.

Thank you. And at this time, we have no other questions registered. Please proceed with any closing remarks or Q&A on the web.

Thank you, Sylvie. There are no questions on the webcast. This concludes our second quarter 2023 results conference call and webcast. We expect to release our third quarter 2023 results after market close on November 8th with a conference call held the following morning. Thank you for your interest in Franklin, Nevada.

Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines.