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

We're very happy to host Eaun Gray, the Senior Vice President of Business Development or the new royalty finder for Franco-Nevada. The company earned $0.95 in the March quarter. So they have almost $3 million a day to reinvest, including depreciation and depletion. I'm sure Eaun is going to apologize for all the money they make at $110 oil and $6, $8 natural gas, you should have a better sequential earnings report than the average royalty company with gold and silver trailing a little bit. Please tell us all the good news Eaun.

Thank you, John, and good afternoon to everybody. John, really appreciate you including us again in this conference. It's always a pleasure to do this with you. I'd like to start off by first just highlighting our cautionary statements, which I've opened on Slide 2. This is available on our website, and I also point you to our annual risk disclosures as I will be making some forward-looking statements in this presentation. So Franco-Nevada, as you look to, John, has got a very robust business model. Overall, we have one of the most diversified portfolios within the royalties and streaming space. We've got a strong track record of execution. And additionally, we've got a number of growth prospects within the portfolio that bode well for the future. So I think while a lot of other royalty companies can say that they have some of these things, there is quite a bit of differentiation here, especially in just how large and diversified our portfolio is. And this has really borne fruit over time. You can see our performance has really led a number of key indices, and we're quite proud of that. And we've got some very supportive shareholders as well. We think of ourselves as capital allocators within the mining space. And so we invest across the cycle when times are good and also when times are bad. Sometimes when capital is scarce, it's the best time to make investments, when equity markets are difficult, and we look to support companies that we partner with through that period. We do have very strong cash flow from our existing assets. So at this stage in our growth cycle, we don't really need to be tapping the equity markets to fund our growth to a large extent. It's built in with our cash flows, and we're also quite proud of our dividend increases over time. We think that portfolio also has great organic potential within it, providing optionality, a lot of properties that we find quite exciting. In my team within business development, we're tasked with growing the business. And we like to do this in a number of ways. And depending on where we are in the cycle, it does differ. But right now, we are seeing the equity market from old stocks being particularly tough. And in that type of market, we can provide capital to help projects move forward. We like to call that kind of the emerging market or emerging project basket. You've seen probably in the past, the financing we did with SolGold to support the development of Cascabel and the exploration prefeasibility study there, Marathon Gold with Valentine Lake, Skeena Resources quite recently. And one that we continue to be quite proud of is the investments to acquire the claims from Cliffs in the Ring of Fire. And you will have seen that [ why we ] just picked up Noront there and now with our loan that was provided at the time that we paid and the royalty now on the balance sheet with that capital recouped. Probably also like to provide project financing. Secularly, that's been a tough space for banks, [ including ] us. So Cobre Panama, our largest asset, by margin, that was a project financing to help get that built through what were at times quite difficult conditions in the copper market, and Candelaria with Lundin in acquisition financing. And of course, during the dislocation in the credit market, how many deals with Glencore and with Teck as well. So a pretty rounded overall business model and ways to grow. Asset selection is key here. Trying to get it right as much as possible to get the exploration optionality. And we've had some great wins within the portfolio over time, which I'll touch on a little bit later. Now the portfolio is quite diversified globally. You will note that there are some areas where we don't have assets. In this environment, quite lucky in that regard, I think, to be out of some of the riskier jurisdictions, focused more in the Americas and really quite diversified even within this area. Four cornerstone assets really led by Cobre Panama, the Candelaria, Antamina, Antapaccay, all leading copper mines globally in what we think is a good environment for copper going forward. Performance continues to be quite strong, which I mentioned, everyone spent much time on that, but I will again highlight the diversity of the portfolio. In terms of revenue, if you look at operators, individual assets, geography and also individual qualities as John alluded to earlier. Diversification is our strength. Now track record has also been very important. We have managed to keep our G&A down. Our business model is not one where we have a lot of cost of goods sold that are exposed to -- for an inflationary environment. In fact, we're quite lean in that regard, very robust margins. And we stand to benefit disproportionately and I believe, in the inflationary environment relative to operators. So I think it's quite a good case for Franco-Nevada at the moment. And just moving through these slides. One worth highlighting, I think, Slide 21 within our investor deck that shows performance in different market environments. And again, my view in this environment where you're seeing a lot of inflation and operators really take that on the chin to a large extent, and the royalty model does benefit overall and provides a very interesting investment opportunity should there be a sustained period of inflation for our operators. Now in terms of growth, we do have some very interesting kind of built-in growth. And the most material really is Cobre Panama. At Cobre Panama, a large copper mine Panama operated by First Quantum, we're across the whole property, including the Korean partners. It is ramping up. We're intended to ramp up to 100 million tons per annum of throughput. And so over the next few years, we get a bit of a tailwind from that. So that is quite beneficial from a high-quality asset. We've provided a bit of detail within the investor deck and lots of information there and also on First Quantum's website, if anyone is interested in looking at it in more detail. But also more broadly, portfolio has a number of other growth options within it that we see being quite beneficial going forward. Some of the lesser-known ones, I think worth highlighting here Salares Norte, Gold Fields, very advanced gold development project in Chile. It will be a large producer when it comes online, high-grade open pits primarily oxides, very interesting. Séguéla in Ivory Coast, that is now owned by Fortuna. We did the deal there with Roxgold. That project is also well advanced in terms of development. It should be coming on in the near term here. And Valentine Lake also one that we've seen great progress on the permitting, hopefully, we'll continue to see progress on that front. And they have been leading with the drill bit there at their very deposit where they've added a lot of interesting intersections and are planning to put out an updated resource report in the near term. So certainly encourage investors to keep an eye out for some of those. And also, as I alluded to, [ there's a chart within ] the portfolio, Detour Lake, this is a royalty that David Harquail, our Chairman, bought years ago for a relatively modest sum, but that asset continues to grow. And we look forward to seeing what Agnico puts out with their update, which I think is expected imminently.

So it's notable that half of these projects in this slide are in Canada and the U.S. And only one of the expansions, Tasiast, in one of the new mines in Ivory Coast or countries that couldn't vote to condemn the Ukraine war. I view those 52 countries as pariahs of sorts.

Right. Yes.

The number sounds a pretty good batting average with 7 out of 8.

Yes. And what we say is we try to keep the majority of our investments in pretty straightforward mining jurisdictions. There always is noise around taxes and things of that ilk. But we will make investments in other jurisdictions where we see good potential going forward and moderate risk. So producing asset news, I think I alluded to a lot of that already. But there are a number of projects, Castle Mountain being one that might not get as much attention from our investors, but we did just add another royalty on Castle Mountain. So it's quite an attractive royalty, hopefully, with the Phase 2 expansion permitting advancing that it will be an even bigger contributor going forward.

So every one of these operators in that slide are very fine companies.

Yes. We do value our relationships with our operators. It is quite important. We try to work with the best team. Team is always important in making investment decisions. And within the portfolio, John, you and I touched on this a little bit earlier, but there are a number of interesting opportunities where things really do stand a chance of being quite meaningful contributors going forward with Cascabel, for instance, in Ecuador; Copper World in Arizona; Fenelon and Martinière in Quebec, Valentine Lake; Eskay Creek. It's quite a deep portfolio, which is what I would highlight for investors there. So quite keen to watch these projects develop. And as gold prices were quite strong over the last couple of years, these projects have received a lot of attention and investment. So it should be a fruitful future for them. And then finally, this is a slide I mentioned last year, I'd really just point to the bottom right-hand corner. There are a number of things here that are further out in the future. Taca Taca First Quantum in Argentina, a very attractive copper project; Cascabel, I mentioned; NuevaUnion copper, nickel in Ontario; Ring of Fire, there's a lot of potential there in the long term, which excites us. And then overall, we are in a good position to grow the business. As you mentioned, we are generating significant cash flow, and we actively look to deploy that. I do think it's a good environment for Franco-Nevada, both in terms of organic growth and also future acquisitive growth. We've got a good balance sheet. Markets are -- both the bond market and the equity market were challenging than they've been for some time. So as a provider of capital that does stand to benefit us going forward. So John, with that, I'd be happy to answer any questions that you got.

I got lots. So we earned $0.95 in the March quarter. With oil and gas rising more than gold and silver have fallen, is it safe to expect at least $1 in the June quarter?

I'm not going to speculate on that at this stage, John. I think probably get myself in trouble doing that. But it is very nice to see energy prices where they are for our portfolio as opposed to, I think, most where people are quite concerned about the inflationary impacts of energy, we actually stand to benefit. And our last 2 investments in natural gas in Haynesville and Marcellus, they are very well positioned in the environment and should be good performers going forward given what prices are.

So Wheaton Precious Metals and Sandstorm have been getting a lot more deals done in the last year. Are any of those assets, assets that were big enough to move the needle for Franco-Nevada? Any of those deals you wish you had done?

I won't comment on individual deals that others have done. What I would say, though, is that in the current environment, where I think capital is more scarce, there are some excellent opportunities still. And so we're keen to add assets in this environment. Also quite interesting, as you noted, gold has been more of a lagger than other commodities. And I think that's quite positive. Relative to investing in other metals or commodities at this stage, I think it is a good time to continue to invest in gold as we see inflation and potential for the gold price than to reflect that inflationary environment going forward.

The royalty and streaming companies are better than the mines in an inflationary period because you're not exposed to operating and capital cost. So it's -- Franco's model is just like your slide shows, good in every phase of the cycle.

I believe that is correct. Yes, particularly...

Oil -- oil, gold, et cetera. The structures are good.

Right. Yes. And again, one of the differentiators it's quite observable for us. We have a number of development assets already within the portfolio. And a lot of these came into the portfolio at a very low cost base. We think of these 2, for instance. So that's fantastic for our shareholders when that type of thing happens. When assets continue to move into stronger and stronger hands to get more and more attention. And so there are a number of circumstances at detour that will continue to benefit our shareholders in this environment.

So let's try to understand better the distant assets that might come into production? What is your state in First Quantum's Taca Taca?

So we have a royalty on Taca Taca. It's a royalty we've had for quite some time. It's a straightforward NSR royalty. It's detailed in our asset handbook. So I would encourage people to have a look there as it provides more fulsome information if you want to hear. But that asset is one that First Quantum has continued to advance. They are public in terms of permitting, continuing to focus on that asset. It's located in Salta, Argentina, which is quite a welcoming jurisdiction for mining within Argentina. So good potential for that one going forward. I think there hasn't really been a detailed time line provided for that at this stage by First Quantum, but with copper prices being strong and First Quantum deleveraging rapidly, given the ramp-up of Cobre Panama, it's a logical next step in terms of development for a team with excellent building...

So let's try to work out the numbers. So First Quantum made 0.25 million tons of copper or 550 million pounds. That would be $2.2 billion of gross revenue. So if you had 1% of that, it would be $22 million. I'm doing the math right?

I'm just double-checking the exact royalty percentage that we've got there for you, John, but I think that's -- I think you're right. And there are taxes associated with that, so we can ignore that and you've got to pay the transportation because it isn't that small to return royalty.

So just as an example, your -- our shares outstanding, how much is the royalty?

That's 1.08%.

So $22 million is a good starting point? And before taxes and expenses, it would be $0.11 or $0.12 incrementally. So it's not quite 3% growth. In terms of Cascabel, what is the stake?

So Cascabel is one that actually bears probably a bit more explanation. So the royalty we have on Cascabel is a 1% NSR on the space, but it has a number of bells and whistles associated with it. So there are minimum payments of $10 million a year that start subject to certain conditions, I believe in 2028. And additionally, there is a gross-up on the royalty. If certain copper equivalent is not produced, royalty gets adjusted upwards in its percentage. And that is quite beneficial. I think we referenced that off of 80% of what was in the PEA at the time we did the deal. So at a minimum, it's 1%. It could be significantly more kind of as a make-whole type of provision comes in. And also, we have...

You don't expect Cascabel to be an underground block cave such as the earlier technical studies?

Yes. So they have now released through PFS. And I think that is a pretty robust document in terms of how it scopes out production. It remains a blockade, just a smaller blockade. And they're also using a shaft to get access to it quicker. So I think that is a very prudent way to develop that.

Do you think it will be 200,000 tons of copper or 300,000 tons of copper?

I'm not going to speculate.

These blockades are tough to execute?

They are. They are. And that's why we included so many of these deal protections. What we do see is, despite the fact that it's likely the majority of the economics come from block cave. There is open pit potential, which they flagged and they've had drilling success, one of the neighboring deposits also covered by the royalty, Tandayama-America. So they're looking to identify some open pit potential to supplement the underground block cave, which can take longer to propagate. So again, I think it's prudent the way that the current team is advancing that strong shareholders with BHP and Newcrest. Good experience, developing large projects in Newcrest particularly block caves. So we're quite hopeful that, that will be a significant contributor over time.

What is -- what is the stake in Courageous Lake of Seabridge?

Courageous Lake is a straight NSR. I don't remember exactly what the percentage is, it might be 1 or 2, but it's a significant gold asset in Northern Canada. Again, one of these that -- should it come to the floor would be a meaningful contributor to us.

So we just had the call with them. And they said that they might phase it down from a 400,000 to a 200,000 ounce startup to reduce initial capital. They haven't updated that feasibility study for a decade. They're just about to update the KSM, so that they've got these things like Snowstorm and 3 Aces in Iskut River and Courageous Lake that they could sell for large amounts of money. And they're $1.1 billion cap, and they don't seem to get credit for anything. It's like the more they do, the more they get discounted. They might do something to advance that.

Yes. Courageous Lake is 1.02% NSR.

So in terms of the Stibnite project, what would that safe be?

I believe Stibnite has -- is roughly 2%. Again, a significant potential contributor going forward, permitting of course there is the primary lagger in terms of time line, fantastic deposit, good grades in the United States. So no surprise that permitting is a challenge. But it's one that we added at least what, maybe about 10 years ago now.

Their argument is that they're going to clean up the mess, a little bit like the argument for like KSM or Seabridge. The property bleeds sulfides and makes acid water runoff. And if they mine it, we'll clean it up.

I think there's an excellent case for that. The historical mine was there from decades ago. I've seen it in the past. I think of Pueblo Viejo, for instance, where modern money operation really can stand to improve the environment. But it is always tough to convince people. There's a lot of sensitivity towards the mining development. But that one, I think, is a great case to be permitted.

So where does their scale about, 200,000 ounces?

I believe it's a little above that, and the royalty is 1.7%.

So these are all nice little projects. The trouble with earning $2 million a day is that the growth comes in 2% or 3% increments. We just have to suffer through that?

Yes. What we're hopeful is that going forward, we do start to see some pretty meaningful projects advance. As capital markets do loosen up those larger copper projects, especially held by intermediates are fantastic opportunities, especially as the banks have been moving away from that type of market and they need a lot of capital to build that type of project. So going forward, hopefully, we can add some Cobre Panama-type assets, but it's just on the media horizon. We have to keep an eye out to position ourselves when bigger assets to kind of available.

Once again, questions are welcome through the question box. We have some. Is the approximate annual 18% return measured per share or on the company as a whole.

Where is the 18% coming from the...

That was the rate of return since the IPO in 2007.

Yes. So I don't -- I believe that's on the IPO price that I can confirm.

How much is the current Holt-Holloway royalty?

So that is a more complicated royalty. It's not currently paying. The mine is shut down. But with Agnico and new ownership there, we hope that it will be brought into kind of an integrated plan, and we can see a future where it starts to pay, but it certainly is more a patchwork in complicated situation.

It's over 8%?

It's on a sliding scale. So I think it could get potentially even a little bit higher.

Sometimes, we can't apologize for having cut a good deal to begin with?

Well, I can't take any credit for that, but, yes, hopefully, we see that line return to production soon.

What is the sensitivity of earnings to the prices of commodities, gold, silver, PGMs, oil, gas?

We've looked at this. And of course, the assumptions are important and they change over time. But it has been relatively linear, what you would expect. There are always deviations in mine plans quarter-to-quarter we're not necessarily aware of. But I think on the oil side, there might be a little bit of torque, especially from the operating interest we have. Overall, it's fairy linear.

So if gold goes up 10%, 75% or 80% of your earnings goes up 10%. Approximately. Tell us about the NuevaUnion royalty?

Sure. So our royalty is on Relincho, which is the lower piece of the complex as opposed to El Morro, which is...

That copper moly rather than copper-gold?

That is correct. Yes. And that came, I believe, in the same acquisition that we got Taca Taca.

Is there a 1% NSR or 2%?

It didn't have that ballpark. I think it's 1%, but I refer you to the asset...

It's unclear whether the optimization plan would start at the bottom of the hill of Relincho or the top of the hill of El Morro for the copper-gold?

That's right. It's something that we'll have to see going forward. My understanding is there are high rates lower down at Relincho as well, but we're not privy to the current mine...

And I think they're still studying it?

Yes. And permitting still as a ways to go.

Your company was sort of countercyclical and thought into the oil and gas assets when the Haynesville Shale is particularly in disfavor around the time BHP was divesting. And after Freeport had divested, now things are good. What are the pros and cons of taking a profit when the assets doubled or tripled in value?

It's something I would say we spend a lot of time thinking about monetizing individual assets within our portfolio. I think as that case illustrates well, the optionality is something that's not necessarily the most tangible at all times. And while yes, prices are high now, that's probably also a good backdrop to continue to harvest significant cash flow going forward. So it's certainly not something that we're flipping to go. We will look at it. We're not in any major hurry to monetizing assets. Over time, we've been much more an aggregator of assets. It doesn't take a lot...

You've been like a Warren Buffet buy and hold in Berkshire Hathaway. You buy good things and keep them.

Yes. I think we would have probably eroded shareholder value over time if we try to take that approach in terms of buying and flipping, it's probably...

When was the last time Franco-Nevada sold or producing royalty stream?

I don't think we have. I don't think we have. I don't know perfect history on the company, so don't quote me on it. But certainly, there's not -- sales have been Franco now for 7 years.

In terms of transactions, is your biggest priority low-cost size and long life with exploration potential optionality?

You just painted a perfect picture, I think, there, John. That's the idea. That's the idea. Can you sometimes get a good deal on other assets? Yes. And I think where we can, and it's good tenure, we would look to do that. But can we want to offer duration to investors? And I think it's hard to get in other places like you can with the royalty model. The ability to profit through multiple cycles with long-life assets. Generally, those should be both cost, survive the cycles and focusing on the geology and saying, do we think this is something that over time will continue to bear fruit? A lot of times, what you see is you drill out to a certain level and then you -- it's not economic to continue to drill out past 10, 15, 20 years, but a good chance that things will be found with time and we expose our shareholders to that work that we can.

So are there any pretty girls you wish you had kissed that you didn't kiss in terms of the deals that have gone by over the years?

We certainly have seen good assets trade. It's not always on the terms that we'd like. So I think I'd be remiss to say that there weren't some that got away. But I think we've had very good luck overall, adding assets that have really provided great exposure for shareholders.

As Franco-Nevada bought ever a royalty company that was publicly traded with producing properties?

We did buy Gold Wheaton, a number of years back. Yes.

So today, not Wheaton Precious Metal was not so much Royal Gold, but the smaller royalty companies have not been treated well in the stock market. And your company has held its value. Given the difficulty in getting deals done, I guess that's an opportunity, but none of them have -- few of them have cornerstone assets like your top 4 mines?

Yes. And...

Or it might be the biggest cornerstone assets that's in a smaller publicly traded royalty company?

Right. Yes. I think what I would say is we still see good opportunity to buy assets directly as opposed to buying a whole company. It is complicated. You would want to see there in good value there. Often, people will seek a premium, which for a royalty company, I think, is as passively managed.

Well, Nomad just sold at almost no premium. And I guess they were afraid that one of their founding shareholders wanted to sell them was going to knock the stock down. But it's good to be diversified and large like Franco not had any of those...

Yes. It's certainly not the top priority for us at the moment in terms of acquisitive growth of that nature on market. We do evaluate it, we miss not to. Bankers are always coming in pitching ideas, but we're quite cautious in that regard.

So in order to have a 10% increase in earnings or about $0.40 a share, you need to have over $100 million annual revenue. So your company doesn't explicitly have a minimum size criteria, it's more quality criteria. And the growth increments that we're using as examples are more like 2%, 3% growth from the particular mine coming on. And there's nothing wrong with that. It's a reflection of your success and the fact that the company is big and you're making $2 million a day. So that -- if an investor were building a 20-year dividend discount model, do you think that 5% is a secular growth rate of your volume aside from the price benefit? Do you think that's a reasonable target for 10 or 20 years?

A 5% CAGR in revenue?

5% CAGR in volume without adjusting for price.

Without adjusting for price. It's certainly something we're shooting for. As time goes on, could that get harder, yes. But at the moment, we do see good opportunities. I wouldn't want to pencil myself in for a particular growth rate, but something in the single-digit growth rate percentages that I think we probably see that historically. And we do see good opportunities at the moment.

In terms of markets and given your size is your cash flow in almost $1 billion a year now. Should someone interpret that the silver market or the PGM markets are too small and you need a bigger market like gold or the base metals by products oil and gas because it's just so big and you need a bigger pond to play in?

I think there's still good opportunity in silver, and we'd love to continue to add precious metal assets, both gold and silver to the portfolio. And that's really, to be honest, within the business development team are focused right now, as these precious metals. PGMs probably a little bit more cautious about. We've seen the volatility in palladium. And so we just want to make sure if we did something there, then it would be beneficial over time. They're using realistic prices over the longer term. We have great PGM exposure now. It's been a fantastic contributor. I think Stillwater has certainly been within the top 10 for us in terms of revenue for a little while now. And so shareholders have benefited significantly from that. I wouldn't want to say we wouldn't do more, but I think we'd just be quite careful about how we do that.

Once again, questions from the webcast are welcome. In terms of building up cash, we almost accumulated $200 million in the March quarter. Is there a threshold or there's such a thing as too much cash? If you got the $2 billion in cash, would you pay a special dividend?

So we've been progressive with our dividends over time. We always want to make sure that we're in a good position to pay them long term and grow them. So we are cautious about how we increase dividends. Personally, as a business development person, I see good opportunity to grow and deploy a lot of that cash flow over the medium term here. So I don't think we're going to be in that kind of position where we seriously considering that because I'm hopeful that we'll be able to deploy into new investments.

Does the company ever bought back common shares in down markets?

No. That is...

That would be unnecessary because the junior gold hurt much worse than Franco, and that's when you have your best opportunities?

That's probably fair. It's not something -- we do like paying the dividend and progressively increasing it. Share buybacks don't get a lot of attention.

In terms of your revenues by mineral or the share, what's interesting, I calculated like 4 years running history. The #1 and 2 are obviously, gold and silver. But the #3 bounces around where PGMs have been as high as 9%. And oil has been as high as 10.4% and hydrocarbons have been as high as 15%. So that -- it's not really clear what's #3, is that fair?

Over time, that's been the case. I would say it doesn't probably fully reflect the investment that was done into the energy space, which was significant of all the other commodities we've invested in new energy is clearly next to precious metals, number two. And I think in this environment, you probably see that demonstrated more clearly than in the past.

So in the last 4 years, gold and silver averaged 76.5%. If we threw in PGMs, it would be 84%, 85% precious metals. Do you think that's a reasonable prologue to the future? Or do you think iron ore and energy are going to take a few points more?

Yes, I won't speculate on the percentages there, but maybe I can comment more on the trends. First off, I would say, the focus for new business development right now is precious metals. We have a good cash flow, and we are very much focused on deploying back into precious metals. And as almost a rebalancing of the cash flows that we're earning right now. We will look at other commodities. If there's something that's very attractive evaluated, but that's a clear focus for us. We provided details on the energy business. We've seen a pretty significant move there in the spot markets over the last 6 months. So I would expect that, that will be reflected in our revenues while that is sustained, which I think there's good life for that going forward.

I've done my best to try to draw you out a little bit, but I know that you have attorneys and constraints. Is anyone will ask questions from the webcast. Paul has been a trooper. He's been down with COVID, but he didn't postpone the meeting, and we appreciate that and wish you all the good health. And I know you need 30 hours a day to look at all the precious metals deals.

Well, thank you, John. I appreciate you hosting us and look forward to doing this again some time.

Super. Thank you very much.

Bye-bye.

Bye-bye.