Franco-Nevada Corporation (NYSE:FNV) Q1 2024 Earnings Call Transcript

Franco-Nevada Corporation (NYSE:FNV) Q1 2024 Earnings Call Transcript May 2, 2024

Franco-Nevada Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning and welcome to Franco-Nevada Corporation’s First Quarter 2024 Results Conference Call and Webcast. This call is being recorded on May 2, 2024. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a Q&A session, where you may ask a question through the phone line or webcast. If you’re joining by webcast, you may submit a written question for the Q&A session at any time during this call by typing your question in the Q&A section of the webcast platform. [Operator Instructions] I would now like to turn the conference over to your host, Candida Hayden, Senior Analyst, Investor Relations.

Candida Hayden: Thank you, Julie. Good morning, everyone. Thank you for joining us today to discuss Franco-Nevada’s first quarter 2024 results. Accompanying this call is a presentation, which is available on our website at franco-nevada.com, where you will also find our full financial results. The presentation is also available to view on the webcast. During our call this morning, Paul Brink, President and CEO of Franco-Nevada, will provide introductory remarks followed by Sandip Rana, Chief Financial Officer, who will provide a brief review of our results. This will be followed by a Q&A period. Our full executive team is available to answer any questions. Participants may submit questions via the telephone or via the webcast.

We would like to remind participants that some of today’s commentary may contain forward-looking information, and we refer you to our detailed cautionary note on Slide 2 of this presentation. I will now turn over the call to Paul Brink, President and CEO of Franco-Nevada.

Paul Brink: Thank you, Candida and good morning. Yesterday, we held our AGM here in Toronto and we’re pleased to have Hugo Dryland join our Board. Hugo has for many years led Rothschild’s Metal & Mining Advisory business and amongst other areas, has extensive experience in project finance and international arbitration. Hugo fills the seat left empty after Randall Oliphant sadly passed away last year. Our diversified portfolio performed well and production for the quarter met our expectations. Antapaccay GEO sales were above and Candelaria GEO sales slightly below our expectations. Elevated gold prices boosted our revenue and translated directly into some of our highest-ever margins. Adjusted EBITDA margin was 84.2% and adjusted net income margin was 56.9%.

Royalties on new mines continue to contribute to our growth. During the quarter, goldfields support the first gold at Salares Norte and Hochschild at Mara Rosa. Equinox and G Mining are on track for first production at Greenstone and Tocantinzinho respectively in the coming months. Alamos’ planned acquisition of Argonaut will help realize the full potential of the Magino and the Island deposits including a potential expansion of the Magino Mill facility. Alba reported good progress on the construction of Ballantyne Gold and production there is expected to start in the first half of 2025. While Cobre Panama remains in preservation and safe management. we’re hopeful that the issues can be resolved. Panamanian election takes place this Sunday, May 5th.

On the business development front, we closed the previously-announced acquisition of natural gas royalties in the Haynesville and added a number of smaller interests. An incremental royalty on Pascua-Lama, a royalty on Scottee Resources property in the Golden Triangle, BC, an increase to the Condestable gold stream in Peru and a Silver Royalty on Perpetua’s Stibnite gold property in Idaho. Our organic growth typically accelerates on the back of higher gold prices. A highlight for the quarter is the success that Agnico Eagle continues to have expanding the detour Lake orebody and also the East Gouldie orebody at Canadian Malartic. To wrap up, we have no debt, $2.3 billion in available capital and an active deal pipeline. I’ll hand the call over to Sandip.

Sandip Rana: Thank you, Paul. Good morning, everyone. As mentioned by Paul, our portfolio of assets continued to perform well and were in line with expectations for first quarter 2024. With respect to performance in the quarter, on slide 4, we highlight the gold equivalent ounces sold for the last five quarters. As you are aware, Cobre Panama has not contributed any GEOs or revenue for 2024 as it is under preservation and safe management. On the slide, we highlighted Cobre Panama separately for prior periods. Total GEOs sold were 122,897 for Q1 2024. This compares to 145,331 for the same period in 2023. Of this, precious metal GEOs were $93,018, compared to $111,238 in the prior year. However, if Cobre Panama is excluded from prior-year comparatives, precious metals GEOs were actually higher year-over-year at 93,018 versus 82,575 GEOs. This increase was due to strong contributions from Antapaccay, Guadalupe and Subika, all of which had strong production in first quarter of 2024.

This increase was partially offset by lower GEOs sold for Sudbury due to lower production and Stillwater, which was due to the impact of converting weaker platinum palladium revenue to GEOs. In addition, we were delivered approximately 3,000 GEOs per Condestable, which remain in inventory at the end of the quarter. These ounces were not sold during first quarter and have subsequently been sold post quarter end. Precious metal GEOs represented approximately 76% of total GEOs for the quarter. For diversified GEOs, our Vale Royalty contributed an increase in GEOs for the quarter, compared to prior year due to a higher-than-anticipated royalty payment reflecting higher iron ore sales during the second half of 2023. As you know, each quarter we make an estimate of what the royalty will be with the actual amount being announced by Vale in late March and September each year.

As a result, you will see adjustments to revenue twice a year in first and third quarters each year. Energy GEOs were lower at $2,182 for Q1, compared to $25,952 a year ago. The decrease in GEOs is a combination of lower revenue due to weaker natural gas prices, but also the impact of converting energy revenue to GEOs using higher gold prices. Q1 2024 saw continued movement in average commodity prices. As you see on slide 5, gold and silver prices were higher for the quarter when compared to prior year. However, platinum and in particular, palladium prices were significantly lower year-over-year, which did negatively impact conversion of PGM revenues to GEOs. Oil prices were relatively flat with natural gas being sharply lower. Slide 6 highlights our total revenue and adjusted EBITDA amounts of last five quarters.

As you can see from the bar charts, revenue and adjusted EBITDA are lower in Q1 2024 compared to prior quarters. The company recorded $256.8 million in revenue in first quarter and $216.1 million adjusted EBITDA. A margin of 84.2% was achieved for the quarter. The lower revenue and adjusted EBITDA are due to less GEOs sold during the quarter compared to prior year. Impact on both revenue and adjusted EBITDA of the lower GEOs was partially offset by higher gold and silver prices. In fact, while GEO sold are lower by 15% year-over-year, total revenue was lower by 7%. As you turn to slide 7, you’ll see the key financial results for the company. As mentioned, total GEOs were 122,897, generating $256.8 million in revenue and $216.1 million in adjusted EBITDA.

On the cost side, we did have a decrease in cost of sales compared to prior year as we did not incur the ongoing fixed cost per ounces delivered by Cobre Panama. Also, cost of sales is dependent on which assets deliver stream ounces as not all fixed payments per stream are equal. Depletion decreased to $58.2 million versus $61 million a year ago. The decrease in depletion was a combination of no depletion being recorded for Cobre Panama being partially offset by higher depletion for Antapaccay and the new Haynesville Natural Gas acquisition. Adjusted net income was $146 million, compared to $152.2 million in Q1 2023 and adjusted EPS was $0.76 per share for the quarter lower by 3.8% versus prior year. Slide 8 highlights the continued diversification of the portfolio.

From the chart, you can see that 76% million of our first quarter 2024 revenue was generated by precious metals with revenue being sourced 83% from the Americas. Slide 9 illustrates the strength of our business model to generate high margins. For Q1 2024, the cash costs per GEO, which is essentially cost of sales divided by gold equivalent ounces sold was $2.73 per GEO. This compares to $2.63 per GEO in Q1 2023. Margin was approximately $1,800 per ounce in the first quarter. The average gold price was higher by $183 per ounce for Q1 2024 compared to Q1 2023. At the same time, Franco-Nevada’s margin was higher by $173 per ounce or 95% of the gold price increase in the same period. In a rising commodity price environment, we expect to benefit fully as the cost per GEO sold should not increase significantly.

The other cost component for the company besides cost of sales is our corporate administration costs. The royalty streaming business model is a scalable model. Our corporate admin costs have increased at a much slower rate than our revenue. Revenue has increased 9-fold from Q1 2008, while corporate admin cost has increased by 2.5 times for the same period. Management believes we can continue to add to our portfolio and grow our business without adding significant overhead to the company. Earlier this year, we had guided to $10 million to $15 million in estimated costs for the Cobre Panama arbitration. For Q1, we incurred $1.4 million in cost. We expect the cost to be weighted more towards the second half of the year. And lastly, slide 11 summarizes the financial resources available to the company.

When including our credit facility of $1 billion total available capital as at March 31, 2024, is $2.3 billion. And now, I’ll pass it over to Julie and we’re happy to answer any questions.

Operator: [Operator Instructions] Your first question comes from Brian MacArthur from Raymond James. Please go ahead.

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Q&A Session

Brian MacArthur: Good morning and thank you for taking my question. You’ve left guidance of GEOs unchanged. but there’s a lot of different assumptions, which you sort of talked about commodity prices moving in the first quarter. I mean, now, you’re much higher gold price assumptions going forward, much lower gas prices. My question really is, is there anything on a volume basis that significantly changed that you’re seeing in your portfolio since the beginning of the year. and maybe, it’s oil and gas, because gas prices are — have gone down? And secondly, it looked like Antapaccay versus what you give on a gold GEO basis had a pretty good first quarter. Is that sustainable? Or does it fall off through the year? It kind of goes into the overall volume question.

Paul Brink: Thanks for the question, Brian. On a production basis, as we said, the assets both mining and energy from a production volume basis are in line with expectations. So right now, from a production standpoint, they’re in line. Obviously, commodity prices are moving around. But we are within our guidance range at this point. With respect to Antapaccay, I would expect or we do expect Antapaccay to fall off towards — for the rest of the year and still be within that guidance range we have provided as part of our year-end results.

Brian MacArthur: Thank you. My second question just relates to Condestable and the increase from up to 37.5% and 25%. I assume everything else the points, where it kicks in are all still the same. So, it’ll be kind of middle 2030s or if you can guide when that 30%, you see that 25% to 37.5% kicking in please?

Eaun Gray: Hi, Brian, it’s Eaun speaking. Good morning. Yes. the change really just relates to the final rate. So, we wouldn’t expect the rest to change meaningfully in the near to medium term.

Brian MacArthur: And is mid-20s, 30s sort of where you see that now kicking up? I just don’t have the data on how that’s developed since the original deal.

Eaun Gray: Yes. I don’t have that immediately handy. We are fixed deliveries. I think it was for the first five years.

Brian MacArthur: Yes.

Eaun Gray: Those come off and it goes to a variable percentage in terms of the exact estimate as to when those second variable percentage kicks in. I don’t have that offhand unfortunately. We can chat offline.

Brian MacArthur: Great. Thank you. And maybe, my final question. Just Sandip, on the accounting for the taxes on a global basis, can you just review how you’re going to do that given when it technically gets enacted?

Sandip Rana: So right now it’s not enacted, neither Barbados or Canada. So for the foreseeable future, our effective tax rate will be 15% roughly. But when it is enacted, assuming it’s retroactive, there will be an adjustment in that quarter, which we did highlight. It’ll be an adjustment to taxes of about $47 million. And as guided, at the end of the year, we expect our effective tax rate to be about 19% going forward.

Brian MacArthur: Thank you very much. I appreciate it.

Operator: Your next question comes from Heiko Ihle from H.C. Wainwright. Please go ahead.

Heiko Ihle: Hey there. Thanks for taking my questions.

Sandip Rana: Hi, Heiko.

Heiko Ihle: You’ve made quite a meaningful number of acquisitions here in the last few months. In your intro to the earnings release, you also state that you still have an active deal pipeline. Unsurprising, but still good to hear. Conceptually, are you seeing pricing improvement from sellers of streams that are more willing to negotiate right now? And if so, are you seeing this phenomenon more in mining or more in energy?

Paul Brink: Heiko, it’s Paul. I’d say the — in this environment, probably the main impact is with gold prices moving up, players that have got precious metal byproducts, it’s a very attractive environment for them to raise capital through the sale of a precious metal stream. So I’d say that’s the predominant trend right now, and that’s making for an active deal pipeline.

Heiko Ihle: Fair enough. Building on that last question, I mean, with gold prices where they are, inflation levels where they are, has there been a bit of a shift with sellers looking for fixed fees versus a percentage of spot pricing as your cash payment, or is there — is it just the same and they more or less take whatever they can get?

Euan Gray: Hi, Heiko, it’s Euan. Good morning. I would say generally the market has shifted towards the percentage in terms of the fee we pay to the seller. Fixed is far less common these days, and I haven’t seen any trend there recently other than to kind of maintain that.

Heiko Ihle: Fair enough. That’s helpful. Thank you guys for your time.

Operator: Your next question comes from Cosmos Chiu from CIBC. Please go ahead.

Cosmos Chiu: Thanks, Paul, Sandip, and team. Maybe my first question is on Panama. As you know, the elections coming up this weekend on May 5th. Is this something that you’re watching closely? Any variables that you might be watching for? And do you see a potential outcome that could impact Franco-Nevada in the near term, or is it really a longer-term sort of event to you?

Paul Brink: Cosmos, yes, we’re watching it closely in the lead-up to the election, and no surprise, given what happened in the country and the populist sentiment against mining and against the mine. I’d say all the candidates have been quite circumspect in terms of commenting on what their approach might be. But still, we’re hopeful that with a new government in place, that there can be a new dialog. And I’m sure that the first quantum will be engaging with whoever that is to see if there is a route to find a way to reopen the mine.