Franco-Nevada Corporation
Q1 2013 Earnings Call Transcript

Published: 8 May 2013

[Operator:]

Good afternoon. My name is Rob, and I will be conference operator today. At this time, I would like to welcome everyone to the Franco-Nevada Corporation First Quarter Results Conference Call. [Operator Instructions] Thank you, and we'll now turn the call over to Mr. Stefan Axell, Manager of Investor Relations. Sir, please go ahead.

[Stefan Axell:]

Thank you, Rob. Good afternoon, everyone. We are pleased that you have joined us today for the Franco-Nevada Q1 2013 financial results conference call. Accompanying our call today is a presentation, which is available on our website at franco-nevada.com, where you'll also find our full MD&A and financial results. On the line, we have David Harquail, President and CEO; Sandip Rana, CFO, who will review the Q1 2003 (sic) [2013] results; and Paul Brink, SVP Business Development, who will discuss our 2 recent transactions. In addition, we have our entire management team present to answer any questions during the Q&A period. Before we begin formal remarks regarding our results, we would like to remind participants that some of today's commentary may contain forward-looking information. As such, we refer you to our detailed cautionary note regarding forward-looking statements on Slide 2 of our presentation. I'll now turn the call over to Sandip Rana, CFO of Franco-Nevada.

[Sandip Rana:]

Thank you, Stefan. Good afternoon, everyone. As you will have seen from our press release issued this morning, the company had another solid quarter. Our overall royalty and stream operations continue to perform well. As you turn to Slide 4, you will see the key financial results for the company. Overall revenue was higher at $108.8 million for the first quarter of 2013 compared to $105 million a year ago. Our net income for the quarter was $35.4 million, which compares to $46.8 million in first quarter of 2012. The reduction was due to mark-to-market adjustments on warrants held, foreign exchange and an increase in taxes. Looking at the non-IFRS measures, the company earned adjusted EBITDA of $89.1 million or $0.61 per share compared to $85.4 million and $0.61 per share in first quarter of 2012. On an adjusted net income basis, the company earned $40.6 million or $0.28 per share compared to $43.6 million or $0.31 per share a year ago. The strength of our business model is its ability to generate cash flow, which is evident through our continued strong margin of 81.9% for first quarter of 2013. With respect to production, you will recall as part of our 2013 guidance, we provided guidance based upon gold equivalent ounces for our mineral assets. For first quarter 2013, the company earned 58,289 gold equivalent ounces from our mineral assets, an increase of 5.1% from first quarter 2012. Turning to Slide 5, you will see the key factors contributing to the change in revenue for the company for Q1 2013 versus Q1 2012. The company's assets continued to perform well as evidenced by the increase in gold revenue for the quarter. The company earned $77.4 million in gold revenue, an increase from $74.9 million a year ago. This increase was due to an increase in the gold equivalent ounces earned from our gold assets during the quarter, while the average price of gold actually decreased by $61 per ounce compared to last year. Despite this gold price reduction, the increase in gold equivalent ounces made up for the difference and resulted in the company earning higher gold revenue. Some of the properties contributing increased ounces during the quarter include

[Paul Brink:]

Thanks, Sandip. We've added 2 NSRs in the last quarter. The first is a 1.2% NSR on Pretium's Brucejack property that we've acquired for $45 million from B2Gold, the royalties payable after about 500,000 ounces are produced. The district hosts some of Canada's largest gold resources, including Pretium's Snowfield and Seabridge's KSM project. Brucejack has been one of the most exciting high-grade discoveries in Canada, with many of the intercepts having grades measured in kilograms per tonne. In a very short amount of time, the Pretium team has established a large resource, 8.5 million ounces in the indicated category, 2.9 million ounces in the inferred category, and they'll be taking a box sample later this year to better establish the likely mine head grades. We believe this property has got excellent prospectivity and we are very glad to acquire an interest in it. Turning to Page 11. We've acquired for $15 million a 1.7% NSR on Midas Gold's Golden Meadows property in Idaho, as well as 2 million Midas share purchase warrants. Midas has done a great job consolidating this district, which has seen mining since the early 1900. The property includes 3 open-pit resources within a few kilometers of each other, together totaling 4.2 million ounces of indicated and 2.9 million ounces of inferred gold resources, with grades between 1.6 and 1.7 grams per tonne. We were attracted to this property by the exploration potential, both surrounding the deposits, a long strike between the Yellow Pine and the Hangar Flats deposits, and also regionally. The company has got an excellent permitting team, and we look forward to them advancing the project through feasibility and into operation. Turning to Page 12. Our total available capital is $1.4 billion. The breakdown is $867 million of working capital, $60 million of marketable securities, and then we've got an additional $500 million in undrawn credit facilities. In terms of the deal environment, our business development team is very active. But there's a strong demand for royalty and streaming capital in this market, and we expect there will be good opportunities to build our portfolio and our resource optionality. David, I'll hand it to you.

[David Harquail:]

Well, thank you, Paul. Last year, as you know, we did some very big deals, and now Paul has just spoken to a few smaller deals. And there had been some suggestions that we were no longer interested in smaller deals, and I think this is setting the record straight. We're still keen on all sizes of deals. And one of the big advantages of our business model is that both big and small assets can fit very well into our portfolio, and I expect we'll see more of these types of these deals in the future. Slide 13 is actually a repeat of the slide that we gave at our Analyst Day and Investor Day in March. And really, it sums up all the ounces of gold associated with our properties. Now one of the things that we see as the key value metric of this company is whether we're adding ounces of gold reserves and resources to our properties, and are we doing it on a per-share basis. And you can see there's been strong growth in both of those metrics. The only trouble is this is just directional, as it gives you an indication of the total number of ounces, but doesn't really account that some of our ounces are streams, where we do have to pay the $400 an ounce, as Sandip mentioned, and then a small fraction are profit royalties, where there's some additional deductions. So what we did is last year, we came out with the Asset Handbook, where we introduced a new concept called Royalty Equivalent Units. And on Slide #14, we are now putting out our newest Asset Handbook. It's on our website today, 96 pages long. And what we've done is we've gone through our most material assets that have measurable reserves and resources on them. And what we've done is where they're not simple gross royalty assets where there's deductions involved in some of the assets, we've done the math in terms of helping adjust them, so as if they were ounces net of all the associated costs. So if there's a stream, we would effectively deduct the costs associated with buying those ounces. If it's a profit royalty, we've given you the indication of what we think are the net margins in that property and what would be the net ounces that we receive on each of those assets. What you can see is compared to the Asset Handbook numbers we gave you last year, there's been a substantial jump in the number of REUs that we're showing on all categories, both proven and probable, measured, indicated and inferred. And now we're looking at about 7 million ounces of proven and probable -- or I should say proven and probable REUs, and about another 3 million ounces of measured and indicated. We feel over time, there's the high likelihood that the majority of proven and probable and measured and indicated REUs will get produced. That's roughly 10 million REU units. And so on Slide #15, what we've done is just really summing up a conclusion that you can see in our Asset Handbook. With roughly 10 million M&I REUs, including the proven and probable, at approximately today's gold price, that represents about $15 billion of pretax, undiscounted cash flow that we expect to see from our assets. This compares to our market cap today of just north of $6 billion. And of course, this doesn't include any additional potential on what are over 40,000 kilometers of Franco-Nevada royalty properties. So in terms of how do we handle taxes and overhead costs, well, we have other assets. And we feel that our oil and gas and other assets are profitable enough that they can cover effectively the taxes going forward and our overheads, leaving effectively our 10 million ounces of REUs free to our shareholders. So one of the, I guess, themes you want to take away is that one of the big comparisons that we believe investors should take away from our stock is that we are somewhat comparable to a gold ETF. But unlike a gold ETF, investors are buying gold at a significant discount in our company and are receiving a yield. And that's something that will be emphasized a little later today at our annual general meeting. And what I'd like to do is with that conclusion, just open it up to any questions from anybody on the line.

[Operator:]

[Operator Instructions] Your first question comes from the line of David Haughton from BMO.

[David Haughton:]

I've got 2 questions for you. Firstly, if -- on Cobre Panama, if you had any discussions with First Quantum and if there's any adjustments that we should be thinking about as far as your payment for the Cobre Panama royalty.

[David Harquail:]

David, I appreciate it. It's David Harquail here. We have met with a couple of the principals from First Quantum. It's more of a getting-to-know-each-other. As they said at their annual meeting yesterday, they're still in a review basis on the project. They are obviously making lots of changes to the project. It's just too early to say. And I think the -- probably the most immediate impact to us is that the potential drawdown in our commitment might come in a little later than we originally had scheduled or put in our original MD&A for the company. But they don't have any more specifics for us yet, so we can't give anymore, I guess, detail in terms of when those draws might occur for us.

[David Haughton:]

All right. Of course, on the Analyst Day, we kind of had a suggestion it could be round about 270 million in 2013. Would it be prudent to drop that by, I don't know, 10%, 20% and move that into the next year or so?

[David Harquail:]

It would be just a guess at this stage, so it's just too early. They said 2 to 4 months. I think at that point, we can give you more specifics on the schedule. We're fairly relaxed about this. We really want them to get their own best estimates out there before we make any changes in our own guidance.

[David Haughton:]

Okay. The second one was Goldstrike. We understood that this year would be a weaker year than the previous because of the footprint in which Barrick would be mining. The numbers came in pretty good for the first quarter. Should we use that as a guide for the rest of the year, do you think?

[Sandip Rana:]

I think it was a very good quarter for Goldstrike for us. But I think going forward, they still anticipate spending that capital. So I would not use Q1 as guidance for the rest of the year. I think what was projected for the year with the capital and the NPI being lower, I think that's the route to go.

[Operator:]

Your next question comes from the line of Cosmos Chiu from CIBC.

[Cosmos Chiu:]

Got a few questions here. In terms of the 2 acquisitions that were made, I get the sense that they're very North American-focused. Maybe, Paul, if you can let me know, is North America where the best opportunities are? Or is it more a geographical preference? Or is it just by chance both acquisitions were in North America this time around?

[Paul Brink:]

Cosmos, I don't think our geographical targets have changed at all. It's more coincidence that both of these assets are in North America. But I think, as you know from our portfolio, we are very comfortable and do like to have a lot of our assets in the North American jurisdictions.

[Cosmos Chiu:]

Great. And in terms of guidance, the underlying commodity prices certainly have changed in terms of how we're looking at guidance right now. But if I were to use the old commodity prices that were given last time, I don't think there would be that much of a change anyways, right, in terms of the GEO guidance that was given out?

[Sandip Rana:]

Correct. So we had used $1,600 gold, $1,600 platinum. And if you knock off $200 off each of those, the GEO guidance still is the same.

[Cosmos Chiu:]

Yes. And I guess given that, you've kind of lowered your assumption here. I'm sure you've also done some kind of sensitivity analysis on your own portfolio. I guess given the new paradigm or new gold price that we're seeing today and the additional volatility, have you stress-test your portfolio to kind of figure out what portion of your portfolio could be "at risk" in terms of being higher cost and lower production if today's gold price kind of persists?

[David Harquail:]

Cosmos, maybe I could address it. I'd say we were actually just discussing this at our board meeting this morning. And the -- I guess the conclusion I have is really none of our larger assets do we see stressed at anything. Even at $1,200 or lower, we don't see any stress on those. The real stress has occurred on some of these really smaller undercapitalized companies. And we've had already 2 small assets that have gone under receivership, Great Basin's Hollister mine and also the Bronzewing mine in Australia. We've actually been very, I guess, involved in terms of the receivership process just make sure our royalties are being respected. Actually, we're very comfortable and we expect these operations will resume again in the future. We'll be seeing royalty payments, but they're just not large enough to make a difference in our overall guidance or projections. So I think the real stress will come if we end up in a protracted period of gold prices at these levels are below for 2 to 3 years. Because I think what we'll see is a deferral of capital spending on the projects, and eventually, that will catch up on the projects. But I don't see that impacting our material assets for a number of years yet.

[Cosmos Chiu:]

Great. And maybe switching gears a little bit and going to a happier note here, one asset that doesn't get a lot of attention in your portfolio but certainly has seen quite a lot of growth would be Duketon. That's been operated by Regis, and I guess quietly, Regis has become a pretty big company on the ASX itself. I'm just wondering, what's the actual book value right now for the asset so that I can maybe work through and figure out what the return on capital has been for that royalty?

[Sandip Rana:]

I believe it's about $2 million.

[Cosmos Chiu:]

Oh, okay. That's it?

[Sandip Rana:]

That's it.

[David Harquail:]

Cosmos, it fits in our theme. All of our best assets have a $2 million -- if you look back, Goldstrike, Detour...

[Sandip Rana:]

Detour.

[David Harquail:]

And Tasiast were all $2 million deals.

[Cosmos Chiu:]

Okay. I'll be on the lookout for other $2 million deals that you guys do.

[David Harquail:]

Actually, we do do some. It's just they're too small to even talk about in our press release. We love those.

[Operator:]

Your next question comes from the line of Paolo Lostritto from National Bank Financial.

[Paolo Lostritto:]

I know this might be a bit of a sensitive subject, but maybe, Paul, you can give us a sense of what are some of the metrics you're using in terms of the valuation both for Golden Meadows and for the Brucejack project.

[Paul Brink:]

Paolo, the -- rather than getting into the details, I think the important thing is when we're investing, we look to make our money over 5, 10, 15, 20 years. And so as the market moves up and down, our metrics don't really change very much. So what we find is in periods of high-equity markets, it's tough for us to get deals to clear. But when you get a market like this, when the equity investors seem to be undervaluing things, then we can get more deals done. So I think the most important thing is the way we value things is fairly consistent over time.

[Operator:]

Your next question comes from John Tumazos. Please state your company.

[John Tumazos:]

We've been very excited about Brucejack. We think that 80 assays better than the kilogram is a nice thing. There's been, I guess, some doubters in the market because the variability is very high since the high-grade assays are very high. And sometimes, their other assays that aren't as high. Could you talk about your interpretation of the property? We're very encouraged that Franco bought into it both from your standpoint and Pretium standpoint, too.

[Paul Brink:]

The -- in terms of looking at it, we absolutely agree with the distribution. And any time you got a distribution that's got so -- such high grade in some of the intercepts, it becomes difficult put a number on what your mineable grade is going to be. So going into this, we appreciate that that's still a piece that will need to get put in place. And we'll have a lot more clarity once the box sample is out. But really what got our attention on this property is the prospectivity of the property, the fact the company's been able to pull together such a large resource in a fairly short amount of time. So when we look at that resource, we really think there's great potential for them to find additional ounces on the property. And so as we done -- as we did our valuation, what we really look forward to is participating in the upside when they do find those additional ounces.

[John Tumazos:]

Now is it correct that you're -- when you make a royalty investment, you're looking for something like a 5% revenue return on current gold prices plus that optionality on gold ounces?

[David Harquail:]

Yes, the way we think about it is when we say we'll pay a fair price for what we see today and what we're comfortable will ultimately be mineable. How we try and generate an above-average return for our business is position ourselves that we can participate in that resource expansion. So we think this is -- the Brucejack is a classic case of that. As they find more, we hope to share in that upside along with the shareholders.

[John Tumazos:]

And forgive me if I ask one question too many. Just tell me to stop. But Pretium did an equity financing just a few weeks ago on really low terms, and it would be great, maybe a win-win situation, to do a small streaming with them for their capital, so they don't sell stock at such terrible prices. Go for it.

[David Harquail:]

We're always looking for new opportunities so we appreciate the heads up.

[Operator:]

[Operator Instructions] There are no further questions at this time. I will turn the call back over to your presenters.

[David Harquail:]

Thank you, operator. This call is a bit like our board meeting. This was a relatively smooth quarter. All our meetings have been short, and our question period has been short as well. So I take it as a sign it's a good quarter, no surprises. Our annual meeting is being held today at 4

[Operator:]

Ladies and gentlemen, thank you for your participation. This concludes today's conference call and you may now disconnect.