Franco-Nevada Corporation (FNV) Earnings Call Transcript & Summary

Welcome, ladies and gentlemen, and I would like to introduce Mr. Pierre Lassonde, Chair of the Board of Directors, who will chair this meeting. Please go ahead.

Thank you, and good afternoon, ladies and gentlemen. I would like to welcome you to the 2020 Annual and Special Meeting of the Shareholders of Franco-Nevada Corporation. Thank you for joining us today by teleconference and webcast. Of course, we wish we could have done the meeting in person, but as we all know, this is not feasible under the circumstances. I would like to thank our shareholders for voting in advance and hope that everyone is keeping well and staying safe. First, I'd like to introduce our leadership team who are with me today and they are -- and of course, we are at social distancing, just so you know, and very safe. First, I'd like to introduce David Harquail. David has been the Chief Executive Officer since our IPO in 2007, and he will be my successor as Chair of the Board following this meeting. We have also Paul Brink, the incoming President and Chief Executive Officer of the company; Sandip Rana, our Chief Financial Officer of the company; and Lloyd Hong, our Chief Legal Officer and Corporate Secretary of the company. We will now move on to the formal part of the meeting. All of the lines are currently muted. As we go through the items of business requiring approval, I will provide instructions on how to vote. I would ask that Lloyd Hong as -- act as secretary of the meeting; and Paul Allen as the representative of Computershare, act as scrutineer. The scrutineer will report on the number of shares represented at this meeting in person or by proxy. The proof of service of the notice calling the meeting has been filed. I direct that a copy of the notice and affidavit proving service thereof be annexed to the minutes of this meeting. I have been advised that there is a quorum present and request that the scrutineer's report be annexed to the minutes of this meeting. And I therefore declare that this meeting is regularly called and properly constituted for the transaction of business. The first matter of business is to confirm the receipt of the financial statements and the auditor's report. The consolidated financial statements of the company and its subsidiaries for the year ended December 31, 2019, and the reports of the directors and auditors thereon have been mailed to all shareholders who requested them, together with the notice of meeting. The financial statements are also available on our website or you can request paper copies by phone or by e-mail. The next matter of business is the election of directors. The nominees of management of the company were identified in the information circular mailed to each shareholder of the company. Will someone please nominate the directors? 11 directors are required to be nominated.

Mr. Chairman, my name is Lloyd Hong. I'm a shareholder of the company. I nominate David Harquail, Paul Brink, Tom Albanese, Derek Evans, Dr. Catharine Farrow, Louis Gignac, Maureen Jensen, Jennifer Maki, Randall Oliphant, the Honorable David Peterson, Elliott Pew as directors of the company to hold office until the next Annual Meeting of Shareholders or until their successors are elected or appointed.

Thank you. Can I have a seconder, please?

Mr. Chairman, my name is Sandip Rana, and I'm a shareholder of the company. I second the nominations.

I will now call for a vote. For those on the telephone, please press Star 1 to vote if you're in favor and please press Star 2 to vote against. Again, Star 1 in favor, Star 2 against. For those on the webcast, please vote, 'yes', if you're in favor or, 'no', if you're against, and press Submit. And for those in person, please say, 'aye', if you are in favor and, 'nay', if you're against. [Voting]

Thank you. I declare the nominations closed. Since only the required number of persons have been nominated, I declare the persons nominated have been duly elected as directors of Franco-Nevada Corporation. I guess, congratulations to all of the directors. The next matter of business is the appointment of the company's auditors. Will someone please move the resolution for the appointment of auditors and to authorize the directors to fix the remuneration of such auditors?

Mr. Chairman, my name is Paul Brink, and I'm a shareholder of the company. I move that PricewaterhouseCoopers LLP Chartered Accountants be appointed auditors of the company until the next annual meeting at such remuneration as may be fixed by the directors of the company. The directors being hereby authorized to fix such remuneration.

Thank you, Mr. Brink. Can I have a seconder?

Mr. Chairman, I second the motion.

Thank you. I will now call for a vote. Again, for those on the telephone, please press Star 1 to vote in favor or Star 2 against. For those on the webcast, vote, 'yes', if you're in favor or, 'no', if you're against and press Submit. For those in person, we have the 'aye' or the 'nay', please? [Voting]

Thank you. I declare the motion carried. The next matter of business is the say-on-pay advisory resolution. Since the vote is advisory, it will not be binding on the Board. However, the Board will consider the outcome of the vote as part of its ongoing review of executive compensation matters. Will someone please move the resolution for the say-on-pay advisory resolution?

Mr. Chairman, I move that on an advisory basis and not to diminish the role and responsibilities of the Board of Directors of the company, the shareholders accept the approach to executive compensation as disclosed in the company's management information circular dated March 20, 2020.

Thank you, Mr. Rana. Can I have a seconder?

Mr. Chairman, I second the motion.

Thank you, Mr. Brink. I will now call for a vote. Again, for those on the phone, please press Star 1 to vote in favor or Star 2, if you're against. For those on the webcast, please vote, 'yes', if you're in favor, and 'no', and again, press Submit. And for those in person, well, please say 'aye' or 'nay', if you're against. [Voting]

Thank you, Messieurs. I declare the motion carried. The formal business of the meeting has now been completed. If there are no other items of business that a shareholder wishes to raise, may I have a resolution for the conclusion of the formal part of the meeting.

Mr. Chairman, I move that the meeting now be concluded.

Thank you, Mr. Hong. Can I have a seconder?

Mr. Chairman, I second the motion.

Thank you, Mr. Brink. All in favor, please say, 'aye'. [Voting]

And I declare the motion carried. The meeting will then conclude. Not too bad, under 10 minutes. We've done quite well. Now before I turn the meeting over to David Harquail, I would like just to say a few words and very short on my, I would say, proper good-byes. Franco-Nevada started 35 years ago as one of those thousands of junior exploration companies in a $2 million equity raise at $0.35 a share, September 1985. Seymour Schulich, my partner, and I had high hopes, but truly little experience in this field. Out of desperation, we ended up creating a business model that was not only unique at the time, but truly one of the most robust business model I have ever seen. By 2001, Franco was absorbed by New Malt mining in a $3.2 billion deal that saw David Harquail and myself moving to Denver to be part of the continuing adventure. In late 2007, we had the incredible chance, the unique opportunity to get another kick at the can by taking Franco-Nevada public again, at the time at $15.20 a share for a market cap of USD 1.2 billion. These are opportunities that rarely happen twice in your lifetime. 12 years later, the stock just crested the $200 a share mark. I think it's a celebration of my departure, but I'll leave that to the market to decide. What I can say is that the second ride has been just as wild and spectacular as the first one. And I'd like to, first and foremost, thank David Harquail for it. David has been the heart and soul of Franco, 2. He's been the leader, the inspiration and the doer, and I owe him a great deal of gratitude. But then I look at the team that he surrounded himself with and the incredible talent of Paul Brink, of Sandip Rana and of Lloyd Hong. And it's because of them that we are where we are today. So I'd like to thank you to the whole team and the organization up and down who have made it all happen. And finally, I'd like to thank the analysts, the brokers, the portfolio managers and the thousands of shareholders and stakeholders who have believed in us and helped us build this great company. At a time when financial markets are racked by uncertainties, volatility, losses in the face of COVID-19, there is nothing that gives me greater pleasure than to see our share price reach new highs and give our shareholders that extra support and comfort they deserve by having invested in Franco-Nevada. That more than anything else is reward enough for me. Thank you. And with that, I'd like to thank, David. It's all yours, man.

Pierre, thank you for those very kind remarks. I've been working with you for over 33 years now. So it's been longer than my marriage. So it's been -- as you said, it's been a couple of wonderful rides. The original Franco, the Newmount ride, and now the new Franco ride and all of them incredible successes and a lot of fun. At our Board meeting today, we were taking stock. And because it's a Board for the new Franco, we were just looking at how has Franco done in the last 12.5 years since it's gone public. And as Pierre mentioned, we hit all-time highs yesterday, which is pretty incredible, timing your transition, and you actually do it at an all-time high. I think most chairs and CEOs leave their companies usually in more suspect circumstances. But our market cap in Canadian dollars reached almost $39 billion yesterday, in U.S., almost $28 billion. Our total shareholder return for Canadian investors is 1,485%, something you can say is almost a 15-bagger. People brag about 10 baggers. This almost hit the 15 baggers. It's definitely been more than a 10-bagger in the U.S. dollar terms. And in terms of CAGRs, I have all these numbers for you, Pierre. Compounded annual growth rate, Canadian dollars, was over 25% and in U.S. dollars, 21.6%. So I think, we spend a lot of time talking to portfolio managers. They often lecture us on how to run our company, but I think we've been able to run our portfolio better than just about any of our portfolio managers that have taken positions. I couldn't be more pleased. And so one of the things that the Board did is we passed a special board resolution today, and I'd like to just take the liberty of reading it to our shareholders. Whereas Pierre Lassonde has demonstrated community service, philanthropy and industry leadership for many decades and has served as Chair of the Board of Franco-Nevada since 2007; whereas under Pierre's leadership, substantial value has been created for Franco-Nevada shareholders; whereas Pierre has significantly contributed to the success of Franco-Nevada; whereas the Board of Directors of Franco-Nevada wishes to express its gratitude to Pierre for his service to the company, be it resolved, that the Board of Directors of Franco-Nevada hereby expresses its deep appreciation and a heartfelt thanks to Pierre for his leadership and convey its sincere gratitude for his many years of service, that the Board of Directors of Franco-Nevada wishes to formally recognize Pierre's invaluable contributions by bestowing him with the honorific title of Chair Emeritus. And that the very best wishes are extended to Pierre for many years of good health, happiness and continued community service. That will be in our Board resolution which I expect will be approved at our next Board meeting.

Thank you. Thank you very much. This will all go on my Instagram.

In terms of my role, I've been trying to focus people that I don't really see it as a retirement, but more of a change of role. I'm looking very forward to being -- continuing to be involved with Franco-Nevada as Chair of the Board, and I'm honored to be given that opportunity, and I hope to be associated with Franco-Nevada for some years to come. And I feel very confident that we're putting it in very good hands. I've worked now with Paul Brink for over 15 years. He's been indoctrinated in the philosophy and the modes of creating value for shareholders. He's demonstrated all the attributes that we think are important in terms of putting the interest of shareholders of Franco-Nevada first before personal interest. So I believe we've got a very good future CEO, and he's going to be supported by a terrific team, especially Lloyd Hong and Sandip Rana that are his key lieutenants in this company going forward. So I'm going to ask Paul to make a few remarks as he's about to become CEO of the company. And I'm going to ask him to handle any questions from shareholders that we might have in the Q&A that follows. So Paul, it's all yours.

Thank you. Pierre and David, first of all, thank you for your confidence in me in this new role. Franco-Nevada is held in very high regard. It's an honor, a big responsibility and a terrific opportunity to carry the Franco torch. Franco's always had incredibly good luck, but what has made its success repeatable is staying true to its business principles and its culture. A big part of my role will be to sustain those. These are what I think are the 3 key principles: create exposure to exploration success, invest in good resources rather than betting on commodity prices and debt aversion, the value of financial flexibility ahead of the cost of capital. The second element is our culture. The core of the culture is to think like owners, not like managers. The objective is to create shareholder value, not just a bigger company. Lastly, our outlook. We're a far larger company than 12 years ago, and there's more competition in our business, but mining remains a cyclical, capital-intensive and risky business. There's a large amount of capital looking for a low-risk way to invest in mining assets. With our ability to identify good ore bodies, I believe we can be the capital allocator of choice. And there is a long runway of growth ahead for Franco-Nevada. With that, we will hand it to the operator and take any questions.

[Operator Instructions] And we will hear first from [ Howard Roberts ].

What about these -- can you make comments on the mine closures that are taking place, owing to the coronavirus problem?

Sure. I'd be happy to. Many mines across the industry that have been impacted; 2 of our larger mines have been, Cobre Panama and Antamina. Both of them are taking steps to identify how they can operate safely in a COVID environment. And once they've established that working in concert with the various authorities, we expect that they'll be reopening, although we don't have timing yet on either of those 2 operations. Amongst our other assets, and there are -- we have 2 larger assets, Candelaria and Antapaccay, they continue to operate normally. We have more than 50 other assets. Of those other assets, 11 of them have had temporary closures, although we're now at the stage where a number of them are opening up. I believe we have now 5 of those operations that have announced that they are reopening. So hopefully, we have seen the worst of that. The one element that is always worth remembering for Franco is we don't have any fixed costs related to the investments. So to the extent we do have mine closures, there is no loss associated if the mine doesn't get -- if the ore doesn't get mined today. It does get mined in the future. So effectively, it's just a deferral of revenues for the company.

[Operator Instructions] And at this time, it appears we have no other questions on the phone. Please proceed.

Sylvie, we have a few questions on the webcast here. So I will just go ahead and read those, and Paul can provide responses. So the first one is from Sandy Rhind from Alexander Capital. Question is, where do your financial contracts rank on a borrower's balance sheet in the event of an unexpected bankruptcy of one of your borrowers? Have you ever had to collect under such a circumstance and did you achieve full recovery?

Thanks for the question, Sandy. We have 2 types of instrument, royalties and streams. Royalties in places like Canada and the U.S. and Australia are fantastic in that you can register them against title, which means that they're permanently attached to the title. If an operator does go through insolvency, the royalty survives. That -- there have been a few insolvencies in our portfolio, and those royalties have survived and so have probably the best tenure that you can get for any instrument. But the other types of investments we have are streams. With a stream, it's a contract. So where you rank in the capital structure is a matter of negotiation. We like to structure our streams so that we are first in line in our claim against the assets. We're fortunate that all our assets have performed well. And so have never had any issues from insolvencies.

The next question comes from [ Dave Sirocca ]. Is there any plans to split the common stock?

The -- we have considered it in the past. It's not something we have considered recently. And the -- but must say with the stock cresting above CAD 200, perhaps it's something that we should consider again.

The next question comes from [ Deacon Turner ]. How does the Board feel about the current PE multiple looking forward?

This is David Harquail here. It's coming down because our earnings are growing. So I think it's just a question of can we grow our earnings faster than our share price. It's been quite gratifying to see the share price move so high, but I think it's a reflection of the assets that are in place. But you just have to look at the track record over 33 years. I think we're trying to keep the ingredients to keep managing that track record going forward. I think we always have appeared expensive, but that's because I think we've always managed this company so it doesn't get into trouble and that it can be positioned to take advantage of good opportunities. I think we're positioned for exactly that in this current liquidity down growth. So I feel very good about where we are.

The next question comes from [ Bill Ring ]. How will the current closures affect this quarter's revenue?

So Bill, a couple of things. Just in terms of timing of the closures. We are fortunate that the timing of most of these closures was post the first quarter. So it shouldn't be expected to -- because of that impact that quarter. As we go forward, we don't know how long those closures will last. So it is potential -- there is good potential that the second quarter revenues will be affected by a number of those closures.

Looks like the last question here comes from [ Rishi Gosalia ]. What do you think about gold ownership within Central Banks over the next 5 to 10 years? Does the global macro situation give you any thoughts about a change in their thinking for the longer term?

David Harquail here. Both Pierre Lassonde and myself have had the pleasure of being in -- former Chairs of the World Gold Council. And the World Gold Council is the industry association that works very actively with about 148 of the world's Central Banks. There's only 193 of them. So we're working with the vast majority. We actually do regular surveys of the banks. And what -- and the survey is really to see what is the tone and thinking of Central Bank managers. And if anything, we're seeing increasing interest by Central Banks in terms of appetite for gold. Most of them don't want to be too specific in terms of how much they're going to buy going forward, but most of them are saying that gold is an asset that they want to hold within their Central Bank holdings. And I can tell you that there's an increasing number that have been -- communicated to the World Gold Council that they're willing to increase their holdings in gold over the time, that they're looking for some diversity from their U.S. holdings. So I think in terms of, if you want a Central Bank perspective, we've seen tremendous growth in Central Bank holdings since 2008. And this year -- last year was a record year for Central Bank purchases. This year will -- it looks a little more steady, perhaps might not be a record year, but we've had record ETF buying. So that's the supplement for the marketplace. But we're very positive about the attitudes of central bankers for gold going forward.

Okay. We have another question from [ Deacon Turner ]. Have you revised the long-term outlook for unconventional shale, especially in the SCOOP and STACK due to the changing dynamics of the space?

The -- in terms of our outlook overall and spoke about it in terms of one of our core principles is, our objective is investing in good resources and investing in the space. We focused in the U.S. in the shale basins on the very best basins, the Permian and the SCOOP/STACK and also from a gas perspective in the Marcellus. So we're very confident in the geology of those places. There's no doubt this downturn has impacted prices. And because of that, it has impacted capital. And so yes, in terms of the level of activity over the next period on those plays, obviously, that will change. And we'll take that into account. But we remain absolutely confident in the geology of those plays and long-term ability to pay us a good term.

The next question is from [ James DiCenzo ]. Hats off and thank you, Mr. Lassonde, to you and David, Sandip, Paul and the Board, for all your great work. Question for Paul, David or Pierre. Where do you see Franco-Nevada in the future, in the coming decade with gold mining?

Where's the new guy?

Paul, you're the new guy. You deliver.

I think there is a tremendous role to play, as I said earlier on. Mining is a tremendously risky business. And it takes some very deep skill sets in determining what are the good ore bodies and what aren't. We've been so fortunate at Franco to have a tremendously strong technical team, both in management but also on our Board. I think that is a core competence. And I've got to think that investors in the mining space will be looking for those skills. And I think we can put them to good use, helping people for many years going forward to allocate their capital in the mining space.

Okay. I think we'll take 1 last question here and it's from [ Sandy Catallia ]. Can you please express what's the growth prospects for the company over the next 3 to 5 years? What kind of earnings growth can we expect?

The growth prospects of the company are very good over the next number of years. We have built in growth, and that is -- the biggest driver of that growth is Cobre Panama. First Quantum plans to expand the output of that, and that will drive our geos over the next 4 to 5 years. That growth will be complemented with growth from a number of assets across the portfolio. So there's a baseline of growth that we've got good visibility on. But the history of the company has also shown that we've been able to supplement that with acquisitions. And I expect in this environment, in particular, we should be able to add assets in addition to that. Our business, as you well know, is a very high-margin business. We typically run at about an 80% EBITDA margin. Don't have a lot of costs. And so you get a fairly direct drive as we grow our revenues. You've got to expect that our earnings will move up in lockstep with those.

And it's David Harquail here. As you'll see on the wires right now, we've just put out our first quarter numbers. They're our second best quarter in our history, only second to the fourth quarter that we had at the end of last year. Also, we just announced that we're going to increase our dividend for the 13th consecutive year by another -- to USD 1.04 on a per annum basis. And so that will be with the upcoming quarterly payment in June. So it's kind of a continuing progression in terms of the numbers we've been able to deliver. We believe we're slightly ahead of Street consensus on adjusted earnings and revenues. So it's -- the track record is continuing going forward. There's a conference call tomorrow to discuss these results at 10 o'clock tomorrow morning. So we'll have a lot more details. So there'll be also a new presentation up tomorrow morning on the website, and you're welcome to join our conference call at 10 o'clock tomorrow morning. But I think in the spirit of an annual meeting and the Board of Directors here, as we very much appreciate the support we've had from investors, from the the brokerage houses, the banks here in Canada and the U.S., it's just -- your trust in us has been -- we take very seriously. It's a big responsibility. One of the things we want to do is properly celebrate in person Pierre's track record with us. So we're going to invite him for our annual meeting next year. We even will give him an opportunity to speak again. And I think we can probably then get a proper round of applause. It's hard to do on these teleconferences, but we hope you can join us next year. Pierre is Chair Emeritus. He has to do some work. And so we'll very much hope you can be part of that. And we're going to try to keep much of the continuity and the culture in this company together for as long as possible. So Lloyd, I hand it back to you.

Thank you, everyone, for participating. We'll have our call tomorrow. Thank you. Thanks, operator.

Thank you, sir. Ladies and gentlemen, this does indeed conclude your meeting for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines. Enjoy the rest of your day.