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

Good afternoon, ladies and gentlemen. I'd like to welcome you to the 2022 Annual and Special Meeting of the Shareholders of Franco-Nevada Corporation. My name is David Harquail. And as Chair of the Board of Directors of the company, I will chair the formal portion of this meeting. And following that, Paul Brink, on my right here, our President and CEO, will provide some remarks and take your questions. Thank you for joining us today. Actually, after 3 years of not having in-person meeting, I was actually wondering if we would have anybody here. And I was questioning the expense of hiring a large hall like this, but it's been well worth it. It's good to have some friends here, see so much of the management team participating as well. So thank you for coming. And for those of you that sent in your proxies, thank you for that as well. This meeting is a hybrid one. So this is why we have all this extra technology today, allowing for both in-person and virtual participation. It's our first one, so bear with us if there's some technical glitches. Here are a few logistics for the meeting. If you're on the webcast, detailed instructions are displayed on how to vote your shares and ask questions and get technical assistance, if necessary. If you're on the phone line, please note you cannot vote or ask questions. I would now like to introduce some of the people in the room here today. At the head table, Paul Brink, our CEO and President; Sandip Rana, our Chief Financial Officer; and Lloyd Hong, our Chief Legal Officer and Corporate Secretary. I'd also like to introduce some members of the leadership team that we have here in attendance. We have Eaun Gray, our Senior Vice President -- if you could just stand, raise your hand, of Business Development. [Audio Gap] Vice President of Diversified. All of our directors are present this afternoon in person or by webcast. I'd like to introduce our directors and would ask each of them to stand as I say their names. So Tom Albanese; Derek Evans; Dr. Catharine Farrow; Louis Gignac; Maureen Jensen -- sorry, Louis, I should have given you more time. Jennifer Maki; and Randall Oliphant. Not here in person, but joining us virtually is -- from Texas is Elliott Pew. And so we have a slide picture of him here, but not a live one. He's been with us all day as we've been doing Board meetings and committee meetings. So I know he's participating. The new Franco-Nevada will be celebrating its 15th anniversary as a public company at the end of this year. Over time, change is inevitable. We've been carefully reviewing both the Board and the executive team [Audio Gap] DNA of what has made us so successful. At our in-person meeting at -- AGM in 2018, we marked the retirement of our Director and friend, Graham Farquharson. He was the original sole director of the newly incorporated Franco-Nevada, and we started it in October of 2007. He was a core part of making Franco-Nevada a success, and he love this company. Even though he was past retirement age, he stayed involved as an honorary director and attended many of our meetings and dinners. He provided our team with his technical views on many of our potential investments and saved us from potential disasters at the same time. This week, Graham passed away at the age of 81. Graham was a statesman of the Canadian mining industry. He was an inductee of the Canadian Mining Hall of Fame, and just last year, was awarded an Order of Canada. And I have to see whether he was able to participate in that ceremony. I don't know if he was able to. But most important of all to us, he was a member of the Franco-Nevada family, and he will be missed. At our last in-person AGM in 2019, we welcomed Jennifer Maki to the Board and later that year, Elliott Pew. At our virtual meeting in 2020, we welcomed Maureen Jensen. At the same time, Pierre Lassonde stepped down as Chair and Director of our company, and I stepped into his role. Pierre was a Co-Founder of the new Franco-Nevada and a big part of our success. We had planned a super large party that year. We had all the bookings done, lots of people coming from out of town. As you know, things couldn't happen in May of 2020. As I stepped into the role of Chair, in Pierre's place, Paul Brink stepped into my role as President and CEO and became a Director of the company. He has done all those roles ably since then, and you'll hear from Paul shortly. And then finally, at our AGM in 2021, we thanked the Honorable David Peterson for his service as a director since the founding of this company. He's a friend to us all, and his advice and mentorship were hugely appreciated. As you can see, there's been substantial renewal that has been undertaken already, and we'll be carefully taking further steps while respecting what makes Franco-Nevada successful. We'll now move on to the formal part of our meeting. Instructions on how to participate on the webcast will appear on the screen. I will now ask Lloyd Hong to act as Secretary of the meeting and Paul Allen and [ Jamie Brasik, ] as representatives of Computershare, to act as scrutineers. The scrutineers will report on the number of shares represented at this meeting by proxy. Proof of service of notice calling the meeting has been filed. I direct that a copy of the notice and affidavit providing service thereof be annexed to the minutes of this meeting. I've been advised there is a quorum, and request that the scrutineers' report be annexed to the minutes of the meeting. I therefore declare that this meeting is regularly called and properly constituted for the transaction of business. We will conduct the votes on the matters before us by poll. On a poll, each shareholder is entitled to vote on the matter and has one vote in respect of each share entitled to be voted on the matter and held by that shareholder. I would now ask Lumi to open the polls to webcast voting on all of the matters of business for this meeting and to keep the polls open until after all the items of business have been presented and I've asked for the polls to be closed. For those shareholders present in person, you should have been provided with a ballot form if you are registered with the scrutineers on your arrival. If you are a registered holder or a duly appointed proxy holder and have not received a ballot form, please raise your hand and one will be provided to you. [Operator Instructions] Lloyd Hong will read the question aloud. [Operator Instructions] We're going to see if all this works. I hope we could test it. If your questions are more general in nature, I would ask that you please wait until the formal part of the business have been concluded as Paul will be conducting a Q&A session at the end, and we'll be happy to take it then. After all the matters of business have been presented and the voting has been closed, I'll ask Computershare to tabulate the results and report them to the meeting. First matter of business is to confirm receipt of the financial statements and the auditor's report, consolidated financial statements of the company and its subsidiaries for the year ended December 31, 2021. And the reports of the directors and auditors thereon have been mailed to all shareholders who requested them together with a notice of meeting. The financial statements are also available on our website, and you can request paper copies by phone or by e-mail. The next matter of business is the election of directors. I would now like to turn to the election of directors. The nominees of management of the company were identified in the information circular mailed to each shareholder of the company. I introduced the directors earlier and had them stand. Will someone please nominate the directors? Given that they've already stood, we're going to forego standing again. And the 10 directors required to be nominated, so could I have that?

Mr. Chairman, my name is Eaun Gray, and 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; and 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.

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

Thank you very much. Are there any questions?

There are no questions on the webcast.

No questions from the webcast as well. I declare the nominations closed. The next matter of business is the appointment of the company's auditors. Will someone please move a motion for the appointment of auditors and to authorize the directors to fix the remuneration of the auditors?

Mr. Chairman, my name is Jason O’Connell, 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.

Mr. Chairman, my name is [indiscernible]. I'm a shareholder of the company. I second this motion.

Thank you very much. Are there any questions?

There are no questions on the webcast.

No questions from the webcast either. If there are no questions, we'll move on to the next item, which is a 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 a motion for the say-on-pay advisory resolution?

Mr. Chairman. My name is Adrian Wong, and I'm a shareholder of the company. 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 21, 2022.

Good. Good. Seconder?

Mr. Chairman, I second the motion.

Are there any questions?

There are no questions on the webcast.

Okay. That was the final item of the formal business for this meeting. If you have not yet voted on the motions that have been tabled, I would ask you that you now complete your voting. We will pause briefly for the final votes to come in. I'm told here to count to 10. So we have so many multiple platforms here. So we'll just -- we'll make sure we receive these. [Voting]

Okay. My legal counsel says I'm okay to proceed. I declare the voting closed and would ask the polls to be closed and for Computershare to collect the physical ballots from those shareholders here in person and to tabulate the preliminary results of the voting. And I'm told to count to 10 again. So I'm waiting for his thumb up, that will tell me when to proceed. Okay. That was only about 6 seconds. That's good. Are there any other items of business that any shareholder in attendance would like to raise? Is there anything from the webcast?

Nothing from the webcast.

Seeing none, the formal business of this meeting has now been completed, and my job is done. So we have received the preliminary results, and I declare that each of the motions in this meeting has been carried by no less than 90% of the votes, including the election of directors. I declare the persons nominated have been duly elected as directors of Franco-Nevada Corporation. The final results of the meeting will be reported on SEDAR by tomorrow. So congratulations, directors. With that, having done my job, I'll now pass it over to Paul Brink to entertain you, and he'll provide both his remarks and will take your questions. Thank you very much.

Thank you, David. Welcome, everybody. Please heed the cautionary statement. I will be making some forward-looking statements. As David had mentioned, this is our 15th AGM. Later in the year will be the 15th anniversary of our business. The reason I put the big 15 is -- was -- as I was reflecting on that, we have been in the royalty business in the new Franco as long as the old Franco was in the business. It was 1986 that Pierre and Seymour bought the first royalty on Goldstrike. It was 2001 that they negotiated the deal with Newmont. It's amazing how fast time has gone that we now have been in the business same amount of time. We set out 15 years ago with the objective of creating a lower-risk gold investment to hedge against market volatility. We're very proud of what we've been able to achieve over that period. Our CAGR is approaching 20%, outperforming all the market benchmarks, the high-flying NASDAQ stocks, the overall market, the S&P, gold bullion. And remarkable that during that period, the GDX or the index mostly of the gold operating stocks has been relatively flat. This is a snapshot of the performance of the company over that time. And you can see whether it's by GEOs, by revenue, by market cap, all of those have increased in the order of 6 to 8x. I'll point you to the bottom right-hand corner of the chart there, where you'll see that our EBITDA in 2021 is now exceeding more than $1 billion a year. With the growth in the business, we've been able to increase the dividend that we pay 15 times consecutively. Last year, we increased the dividend 15%. This year, we increased the dividend in the order of 7%, but we moved it a quarter earlier. So in effect, about a 10% increase in the dividend year-over-year. The objective on the dividend is to keep it sustainable, first of all; and second, progressive. When we look at the yields that our investors are achieving now, those that invested at the IPO, for Canadian investors, it's more than a 10% yield and getting close to -- or get an 8.5% yield for our U.S. investors. I'll turn a bit to our business model. And 2 main elements, both with royalties and streams, they're just 2 key things. One, the top line interest. And the top line interest, it means it's more stable, it's high margin. But in particular, you don't have a cost element, so you're not subject to cost inflation. And the second thing about them is they're nonoperating interest. So you're not subject to the risk of capital calls. Management are not operating assets day-to-day, so we can focus on growing the business. And also because you're not operating assets, you can build a much more [ diversified ] [Audio Gap] build. Despite not being an operating company, ESG is still a focus. And 2 elements. First, as we think about our investments, we are allocating capital on behalf of our shareholders. That means we need to take particular care when we're doing our due diligence to ensure that we're investing in operations that won't have an adverse impact on the environment and treat their communities as well. And in particular, on the communities, we are active. We do engage with our operators around their communities and make sure that we're doing our best contributing to those communities to make sure that they're benefiting from the projects. The second side of ESG is how we think about it in terms of our business. And the first is our alignment with our shareholders. The key thing at Franco has always been ownership, both the Board and the management being owners of the stock, making sure that we are incentive-ed to drive the share price up and keep alignment with our shareholders. The second part of that is being a good employer to all of our employees, and part of that is making sure that we have an inclusive workforce that we attract and retain diverse talent. We're proud that we've been recognized for our efforts on the ESG side. We are the #1 ranked precious metal stock by Sustainalytics. And we also received top rankings from the other major ESG rating organizations. One of the elements that I mentioned earlier is -- a great attractiveness of our business, particularly as a gold business, is that we're largely not impacted by cost inflation, one, because of our top line interest. The only material costs that we got that are impacted by inflation is our G&A. Our G&A is less than 3% of revenue. And with our energy investments, we actually have leverage to energy cost inflation that is driving much of the cost inflation in the industry. All of that means is when we have commodity price increases, our revenue increases move directly to our bottom line. Through 2021, our EBITDA margins were 84%, our net profit margin, more than 50%. Turning to the asset portfolio. We believe our business is unique because we have both the largest royalty portfolio in the business, but also because of our streams. Speaking of the 2 elements, and first, on the royalty side, we've been building that business for upwards of 38 years between the old Franco, the period at Newmont and the new Franco. In total, there are more than 400 interests in that business. And it's in that portfolio that we have experienced so much optionality. Many assets that have outperformed our expectations, but to name a few, Goldstrike, Tasiast, Detour, all of the -- all of those investments will be more than 100 baggers in terms of the optionality that they provided to the company. The other side of the business is streaming. Our 4 largest streams are all on some of the world's largest copper assets. The beauty of the assets is, one, they provide a very stable stream of cash flow to the company. It's very long-life cash flow, copper assets typically being so much larger than gold assets and more long-lived. But also these assets really illustrate the saying that great ore bodies get better. And all of these investments have done better than we expected at the time of our investments. Cobre Panama, the largest of them, has been built as a far larger mine than we originally imagined. Candelaria, when we did that transaction, had a 14-year mine life. In total now, that mine life is approaching 30 years. Both Antamina and Antapaccay have outperformed in terms of the production that we had expected in the year since we've done those deals. We have the most diversified portfolio in the industry, whether you look at assets or operators. We have the least single exposure to -- the least exposure to a single asset in the industry. We also have most of our assets in very good mining countries, 91% coming from the Americas. And we're also diversified in terms of our investments in precious metals, but also on the diversified side. And what we have found is that openness to diversification has allowed us to pick good entry points into some other resources and as a result, create greater exposure to resource optionality across the world's great resource deposits than we might have been able to do just from precious metals. Lastly, speaking on our growth outlook. We put out our guidance along with our annual results, typically 5-year guidance. You'll see that we have good built-in growth in the business over the next 5 years. The principal driver of that is the expansion of Cobre Panama. First Quantum is taking up from 85 million tonnes per annum up to 100 million tonnes per annum, which they hope to achieve by the end of 2023. That growth is also supported by broad growth across the portfolio, coming both from mine expansions and also from new mines, along with those mine expansions. One of the exciting ones is Detour. They have just put out new results, with further deep exploration results on the deposit and are now considering an underground mine at Detour but has -- also have indicated that they are looking at expanding it to greater throughput than they had previously contemplated. Stillwater has been expanded with the Blitz project. That will see it go from in the order of 600,000 ounces a year up to 850,000 ounces a year. Kinross is well advanced with a 24,000 expansion at Tasiast. They're currently at or around the 21,000 tonne per day run rate, looking to go to 24,000 over the next couple of years. We'll also get good growth out of Subika, which is the southern portion of Newmont's Ahafo mine, where mining is moving out of our ground, and so we'll get growth. New mines coming on, the first of the list is Salares Norte, where Gold Fields is well advanced with the construction. Next up will be Greenstone or Hardrock, where they have started construction. And we expect following on behind that will likely be Marathon Gold, Eskay Creek and potentially the Stibnite mine down in Idaho. We have a total of $1.6 billion of available capital, and that amount continues to grow. We're generating in the order of $1 billion of cash, and that cash balance is building. Business development team is busy. A good strong pipeline, particularly looking at financing new gold projects. So conclude -- to conclude, what makes Franco-Nevada different? And it takes me back to the time, 15 years ago, I was working with Sharon Dowdall when we were drafting the prospectus for the IPO of Franco-Nevada. And I was rolling out the typical corporate boilerplate, and Sharon stopped me. And she said, "You have to understand, Franco-Nevada is a special company." And that was the start of my education. And what is it that makes Franco-Nevada special? It is, first of all, management that considers themselves of -- owners of the company, that our incentive when we're looking at doing deals is not just [Audio Gap] do we get the share price up. The second is the Board, a Board that is the strongest technical Board in the industry, but also a Board with experience of so many industry cycles that we've got the patience to wait until we've got good points to spend our capital in the cycle. And the third piece is how we think about capital availability, and it's putting a premium on financial flexibility over financial leverage. So with that, I'll conclude, and I would love to take any questions. [Operator Instructions] Lloyd Hong will read the question aloud. [Operator Instructions] But first up, are there any questions from the floor?

Thank you. A question for you, Mr. Brink. With your increased revenue that you've been seeing and your significant cash position, will we be seeing a special dividend or perhaps a performance dividend coming in the future?

Thank you, and a good question. The -- what we found with our business, and we are, in a lot of respects, in the investment business. And over time, have always found that there are good opportunities to put our capital to work. As I mentioned, so much of that is the patience, waiting for the right deals to come along, waiting for the right point in the cycle to make those investments. We think those are key to being a successful resource investor. So we are happy to build up cash on the balance sheet. When we think back to the returns that we've been able to generate in our business, roughly close to a 20% CAGR, we still think the best use of that capital is investing in new assets. So that will be our principal use of cash. Aside from that, we do plan to continue to increase the dividend so long as we can, but stick with sustainable and progressive.

Yes. Paul, would splitting the mining and energy assets make sense? I'm thinking of the previous Franco-Euro-Nevada combination. Any sense of that?

It is an interesting question and something that we have thought about over time. If we were to do that, it would again be to drive the share price higher. So the sort of circumstance that you would need would be a strong oil and gas market. I have to say we're approaching that. But you'd also want to see an environment where you can get a high multiple on the cash flow for the oil and gas business. So it is a possibility. I would say the most likely outcome here is that we retain those assets in our business. We like those assets. We think there's tremendous resource optionality. We're happy to have a bit of diversity in the business, and we're able to achieve a premium valuation on that. But we always keep an eye open to generating returns for shareholders. And if we can actually drive the share price forward by realizing that value, we would be open to.

Mr. Brink, what is your long-term outlook for gold?

Well, I love that question. We have invited along to join us today, and he will be presenting to our Board this evening on the gold market, John Reade, the senior economist at the World Gold Council. So I'm going to invite John to come up and to give his views on the gold market.

[ I don't have a mic ] [indiscernible]. I don't need it for the group itself, but obviously there are people [indiscernible].

Yes.

Well, first of all, thank you very much, Paul, for the opportunity to talk about the outlook for gold in the long term and for the invitation that has been extended to me by Franco-Nevada to talk at that Board later. I guess one thing, how long have you got? Because I describe myself as the most boring dinner party guest on the planet because I've been in the gold business for 35 years, and I know an awful lot about a very narrow topic. But I'm not going to bore you to death.

5 minutes.

5 minutes. 5 minutes. I should start a stopwatch. I normally have to when David says that to me. All right. I think the first thing I'd say is that the outlook for gold, I personally think, has never been more attractive in terms of how investors are accessing the market. The World Gold Council has been going about 30 years. I must say I've been in the business for 35. When we both started out, this was a market that was driven by jewelry demand. Central banks were selling. Investors sometimes bought, sometimes sold, but it was a small component of the market. We've seen step changes in the gold market over the past 30 years. Investment is now a more important component of gold demand than jewelry, makes up about 42% of demand over the last 10 years. Jewelry is about 34%, and technology demand is sort of 7%. And of course, central banks are buying as well. So the gold market has changed a lot. Investment is a much bigger component of it. But I think there's still an enormous potential for investment to increase and to become a higher proportion of the gold market because one of the things that we've been doing is going out and speaking to investors and demonstrating the role that gold has in a portfolio as a source of returns, as a diversifier and as an asset that really helps when bad things happen. So I think we're going to see more investment demand coming forward. In terms of price, the work that we've done developing a valuation model for gold, which is published on our website, free to use, and I encourage you to go along and have a look, would suggest that the long-term outlook for gold is around 5% per annum increases, on average. Now what we've seen in the last couple of years, look at 2020, I don't think many people had a coronavirus pandemic in their playbook at the start of the year. The world went into a recession, gold delivered a 25% return. 2021, a recovery. In the global economy, gold underperformed about 2% decline. And then coming into this year, obviously, we've been overtaken by the events with the Russian invasion of Ukraine. So it's not going to be an easy ride as it [Audio Gap] 5-odd percent return. I think the second thing I'd say as well is we based this valuation model, this price estimation tool off the events of the last 30 years. And I think what we've seen demonstrated over the last couple of years is the inflation genie is now out of the bottle. And I think what we've seen from the invasion of Ukraine has been a demonstration of what happens when globalization reverses, when you can no longer access markets like you used to able to and you start to get supply interruptions, which we first saw during the coronavirus pandemic, but now those interruptions and the threats of more interruptions to come really moving commodity prices, contributing materially to inflation. Now I don't have a crystal ball when it comes to the war. I don't know how things are going to play out, but I think we can certainly see a couple of trends, one of which is the commodity prices are going to be higher and more volatile. I think the second thing is that economic growth globally will probably be lower than it was before. That combination of 2 factors, higher inflation and slowing growth, pushes the world more towards stagflation. Stagflationary conditions have increased. And one of the pieces we wrote last year on stagflation and different types of inflation showed how gold and other asset classes perform in the different periods, whether it's [ gold deal locks, ] whether it's deflation, and then you look at stagflation. Gold and other commodities perform very well in absolute terms during stagflationary conditions and particularly well in relative terms as well. So whatever the outcome, I think, that we see out of Ukraine, the world has moved towards a more stagflationary environment, and that probably means that it's going to be a positive environment for gold and other commodities. I would refer to our website to read more, contact us directly. As you might have gathered, I love talking about gold. Thank you.

John, thank you. Very much appreciated. The -- so we'll see now if there are any questions via the webcast. Lloyd?

I have one question from a Mr. [ George Fetterolf. ] Is there any interest in exploring mineral production in North America currently dominated by China, example, rare earth and/or those required for new energy?

So John, in answer to that, the -- in terms of the commodities that we're interested in, precious metals is obviously the focus. But as we've mentioned, we're open to other commodities. We're not an explorationist ourselves. But if there was a great deposit that was a rare earth deposit, we would certainly consider it. I wouldn't put rare earth at the top of the list in terms of things that we're likely to do, and that's not driven by the nature of the geology. More that just the products that are produced out of rare earth are -- there's a myriad of products -- the markets to analyze those products are very difficult. So more likely the things that you'd see us invest in is what you've seen in the past, precious metals, oil and gas, copper, iron ore. These are all things with highly liquid markets where it's very easy for us to understand those markets. So I wouldn't rule rare earth out, but I'd say it's on the less likely category.

There are no further questions from the webcast.

Before we close the meeting, a reminder that we'll be releasing our Q1 results later today, and a press release should cross the wire early this evening. We hope you'll be able to join us for our Q1 conference call, which is scheduled for 10 a.m. tomorrow morning. Thank you for your support for Franco-Nevada, and have a good evening.