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Franco-Nevada Corporation (NYSE:FNV)
Q1 2019 Earnings Call
May 9, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. And welcome to the Franco-Nevada Corporation Q1 2019 conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require assistance, please press *0 for the operator. This call is being recorded on Thursday, May 9th, 2019. And I would now like to turn the conference over to Candida Hayden. Please, go ahead.

Candida Hayden -- Corporate Affairs

Thank you, Joanna. Good morning, everyone. Thank you for joining us today to discuss Franco-Nevada's first quarter 2019 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. Sandip Rana, CFO Franco-Nevada will provide a brief review of our results followed by Paul Brink, President and COO of Franco-Nevada, who will provide a closing summary. This will be followed by Q&A periods. Representatives from all our offices, including Toronto, Barbados, Denver, Perth, and some of our directors are present in our boardroom to answer any questions.

Before we begin formal remarks, 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 two of this presentation. I will now turn over the call to Sandip Rana, CFO of Franco-Nevada.

Sandip Rana -- Chief Financial Officer

Thank you, Candida. Good morning, everyone. As you will have seen from the press release issued yesterday, the company delivered another strong quarter of financial results. As you turn to slide three, you can see the key financial results for the quarter ended March 31st, 2019 compared to prior year. The company achieved a number of financial records which are all highlighted. This strong financial performance was achieved despite the average price for gold, silver, platinum, and the WTI oil price being lower in Q1 2019 versus Q1 2018. Only the palladium average price was higher year-over-year. With the increase in revenue and due to the lower cost nature of our business model, EBITDA and net income were also higher in Q1 2019 versus Q1 2018. Adjusted net income for the quarter was $65.2 million or $0.35 per share. These strong financial results continue to showcase the strength of the Franco-Nevada business model, in particular, the quality and diversity of the assets.

From an operational standpoint, our royalty and stream assets continue to perform well. As you turn to slide four, the chart illustrates the gold and gold equivalent ounces for each of the last five quarters. The GEOs earned for the quarter were 122,049, compared to 115,671 in Q1 2018. This is a 6% increase. The largest source of the increase is Candelaria. We did expect an improvement in gold and silver deliveries from Candelaria in the second half of 2019 but are pleased with the outperformance in the first quarter. In addition, Hemlo and Subika were also strong performance in the quarter when compared to a year ago. The one negative was Musselwhite where we had to adjust the NPI we had recorded for 2018. We over accrued the 2018 NPI, and this was reversed in Q1 2019. We are expecting a minimal NPI payment for Musselwhite for 2019. As you can see from the bar chart, PGM GEOs have increased compared to 2018.

This is partially due to the impact of higher palladium prices on a conversion to GEOs, but also the company did benefit from higher production at Sudbury as KGHM, the operator, restarted mining the McCreedy deposit in Q4 2018. The PM zone within McCreedy is higher grade precious metals from which we are benefiting. This will continue into 2020. Turning to slide five, we have two charts on the page. The first highlights the total revenue earned by the company for the previous five quarters. For Q1 2019, the revenue amount of $179.8 million is a record for the company. As mentioned, this is a result of strong performance from our Candelaria, Hemlo, and Sudbury assets. The bottom chart highlights energy revenue and the average WTI oil price for the last five quarters. Q1 2019 was a strong reporter for energy, compared to a year ago and fourth quarter 2018.

However, the revenue associated with realized production increases at our US assets was partially impacted by lower WTI prices. The company did fund $38.2 million during the quarter for the continental royalty venture with an additional $13.2 million accrued as an accounts payable on the balance sheet. On slide six, we provide a breakdown of our revenue by commodity and geographic location. As shown, 88% of revenue for the quarter was generated by gold and gold equivalent assets with 63% being from gold, 11% silver, 11% PGMs, and 3% other. The geographic revenue profile has revenue sourced 82% from the Americas. Slide seven highlights the diversification of our portfolio. The first chart highlights that only two assets contributed more than 10% of our revenue with another being at 7% for the quarter. Those three assets, Candelaria, Antapaccay, and Antamina in total, generated 35% of our revenue. The company is not economically dependent on any one single asset.

Diversification is our strength. The second chart highlights how revenue is distributed from a legal perspective. Legal ownership perspective with no legal entity accounting for greater than 45% of revenue in first quarter 2019. Finally, the last chart highlights our operator diversity. Our largest exposure to revenue being generated by any one operator is 15% which is Lundin mining who operates Candelaria. We are fortunate to have royalties and streams on many properties mined by some of the most reputable mining companies in the world. I always like to stress the strength of our business model and the scalability. I think that this cannot be illustrated any more clearly than slide eight. Here we have highlighted our quarterly revenues and our quarterly general and administrative expenses since our IPO. Since 2008, our revenues have grown from approximately $25 million to almost $180 million this quarter. This while our G&A has remained fairly stable over this time period.

General and administrative cost have approximated $5 million to $8 million per quarter for the last 11 years. For Q1 2019, G&A was less than 4% of revenue. Management believes we can continue to add to our portfolio and grow our business without adding significant overhead to the company. Before I turn it over to Paul, I would like to mention that there is no update to the CRA audits currently under way. We continue to provide information and answer questions to CRA. I will now turn it over to Paul.

Paul Brink -- President and Chief Operating Officer

Thank you, Sandip. Our balance sheet is positioned to make substantial investments, and we have current available capital of $1.4 billion. We're seeing good opportunities for both precious metals and energy additions. In both cases, transaction sizes are in the $150 million to $300 million range. On the precious metal side, the predominant theme is asset sales from the majors. And we're active supporting intermediates to acquire some of these assets. Equity capital for the energy sector remains constrained, and there's pent-up demand for the monetization for royalty portfolios.

We're seeing a good amount of product and can be discriminating in our bidding. Our innovative partnering structure with Continental has drawn attention in the sector, and there are also prospects for partnering with other operators. We continue to be opportunistic bidding on precious metal on non-precious mining assets that would also add to the quality of the portfolio. Turning to slide ten, our commodity mix objective is to maintain the portfolio with at least 80% gold equivalent production. This quarter, energy made up 12% of our revenue. With the increased contribution of the US energy assets over time and the ramp-up of Cobre Panama, we expect energy assets to contribute 16% to 17% of revenue by 2023, leaving room for additional energy acquisitions. With that, I'll hand it back to Joanna for Q&A.

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer session. Should you have a question, please press the * followed by the 1 on your touchtone phone. You will hear a three-tone prompt acknowledging your request. And questions are polled in the order received. If you are using a speakerphone, please lift the handset before pressing any keys. And your first question is from Cosmos Chiu from CIBC. Please go ahead.

Cosmos Chiu -- CIBC -- Analyst

Thanks, David, Paul, and Sandip. David, I think you're still there somewhere. Congrats on a very good start to the 2019.

[Crosstalk]

Cosmos Chiu -- CIBC -- Analyst

Oh, yeah. David. Hey.

David Harquail -- Chief Executive Officer

Yeah. I am not retired yet.

Cosmos Chiu -- CIBC -- Analyst

Maybe first off on the Candelaria, clearly a very good Q1. It was a surprise to me as well in terms of how well it did. I just want to confirm that that's like a sustainable level for the rest of 2019, especially the contribution coming to Franco-Nevada. It sounds like it is higher grade. It sounds like there is stripping, new equipment, and $1 billion investment. But I just want to confirm with you?

Sandip Rana -- Chief Financial Officer

So, Cosmos, Sandip here.

Cosmos Chiu -- CIBC -- Analyst

Hi, Sandip.

Sandip Rana -- Chief Financial Officer

Hi. How you doing? Q1 was obviously an outperformer for us. I would not expect Q2 to be to the same level of Q1. So, I would expect less ounces being delivered and sold in the second quarter. But then again, starting in Q3, we start to see the benefits of the higher grade and the equipment and their placement.

Cosmos Chiu -- CIBC -- Analyst

Great. And maybe switching gears a little bit here, Cobre Panama clearly is a key driver for Franco-Nevada in 2019. You've given us a range of 20,000 to 40,000 ounces of contribution in 2019. Is that mostly coming in Q3 and Q4? Or is it just Q4? And when I talk about the lower end of that range, 20,000 ounces, and the upper end of that range, 40,000 ounces, what's the difference here? Is it just timing of shipments coming from First Quantum? Or how does that work?

Sandip Rana -- Chief Financial Officer

Hi. Hey, Cosmos. We would expect to start receiving gold and silver being delivered in Q3. And obviously, as they ramp up, we will receive more. So, we will receive something in Q3. But then you would see more in Q4. So, it'll ramp up over time just as the project is ramping up. In terms of the 20,000 to 40,000, it's all based on timing. We get paid when First Quantum gets paid. So, it depends upon where they are shipping. So, if it's gonna take six weeks to ship somewhere, we're not gonna get paid for a period of time. So, it's just a timing difference.

Cosmos Chiu -- CIBC -- Analyst

Yeah. And then maybe a question on oil and gas. The Continental partnership in the MD&A you talk about good success in terms of Continental acquiring additional royalties. Clearly, Franco-Nevada contributed about $50 million in Q1. I think when I look back when you form the joint venture partnership, the intention has always been for Continental to acquire lands that are getting drilled pretty near term. Is that still the case in terms of what they've acquired? And could we expect some kind of near-term upside coming to Franco-Nevada? I guess you realized about $2.8 million in Q1 from the Continental partnership. Can we see near-term upside from that partnership there?

Jason O'Connell -- Vice President, Oil & Gas

Hi, Cosmos. It's Jason O'Connell here. We still expect the model to hold true. So, Continental is still acquiring acreage which is directly in front of their drill bit. It does take time for them to drill those wells, have them come online, and then have the royalty payments come through to us. So, in terms of the revenue that we expect to see over the course of the year, we would expect to see a slightly higher revenue contribution in Q2 and really, more of an increase at the back half of the year as those wells really come online. Those wells are, right now, predominantly in front of a project area called Project SpringBoard. The Continental is currently focused on. And so, as that ramps up toward the end of the year, we'll see more and more revenue coming to Franco-Nevada, again, probably Q3-Q4.

Cosmos Chiu -- CIBC -- Analyst

Great. And maybe one last question from me, if I may. On Nevada, you certainly touched on the potential benefits of the Barrick, Newmont joint venture partnership on Nevada and how that could potentially have a positive impact on Goldstrike and Gold Quarry and, especially, the MPI at Goldstrike here. Have you had a chance to maybe potentially quantify what the potential upside may be? And other than Goldstrike and Gold Quarry, are there any sleepers that could potentially benefit from this joint venture partnership?

Sandip Rana -- Chief Financial Officer

I think it's too early to tell, Cosmos. There is the possibility to benefit at Goldstrike. And then, as you mentioned, Gold Quarry. We don't know what would happen there either. So, I think Barrick has to get the joint venture reviewed and figure out what they're going to do. And then as they provide information, we'll assess the impact of that.

Cosmos Chiu -- CIBC -- Analyst

Great. And that's all the questions I have. Great start.

Operator

Thank you, ladies and gentlemen. As a reminder, should you have any questions, please press * followed by 1. And your next question is from Josh Wolfson from Desjardins. Please go ahead, Josh.

Josh Wolfson -- Desjardins -- Analyst

Thanks. Just looking at the PGM division result. They're seeming very strong. I would have assumed a lot of that was partially contributed by higher palladium prices. I think our expectation was the Stillwater operation would have been lower based on some of the results that the operator put out. Is there any sort of information you can provide as to what drove the higher result there beyond just the palladium price and maybe what the expectations are at Sudbury after some of the combined operating changes that were announced?

Sandip Rana -- Chief Financial Officer

Sure. So, Josh, with respect to Sudbury portion, yes. It was the higher palladium price when you do convert to GEOs. But it was a truly increased production, platinum, palladium, and gold production just because of the McCreedy deposit. And as I said, we will see that continue through the rest of 2019. At Stillwater, it was timing. There were some royalties due from 2018 that got booked in 2019. So, you will see a somewhat lower amount likely in Q2 but not significantly.

Josh Wolfson -- Desjardins -- Analyst

Okay. And then one other question for Musselwhite. In terms of the operator who mentioned that there is insurance on mine that would recover some lost revenues, would that apply for the NPI as well, such that the loss revenues could to be made up in future periods? Or is that something at the corporate level for them?

Sandip Rana -- Chief Financial Officer

No. It does apply. If they receive anything from insurance proceeds and it's recorded as income, it flows through to Franco through our NPI.

Josh Wolfson -- Desjardins -- Analyst

Okay. Great. Thank you very much.

Operator

Thank you. Your next question is from Tanya Jakusconek from Scotia Bank. Please go ahead, Tanya.

Tanya Jakusconek -- Scotia Bank -- Analyst

Yes. Good morning, everyone. And congratulations on a very strong quarter. Question for Sandip. On your one-year term loan, can you confirm that you are not able to pay this down until it matures in 12 months' time?

Sandip Rana -- Chief Financial Officer

We can repay at any time without penalty.

Tanya Jakusconek -- Scotia Bank -- Analyst

Okay. Thank you, because we just wondered why you would put that in rather than just pay off the loan facility just with cash on hand as it comes due.

Sandip Rana -- Chief Financial Officer

Two reasons. 1) It was better pricing on our existing credit facility. And secondly, by putting the term loan in place, it frees up to $1.1 billion available under the facilities already in place.

Tanya Jakusconek -- Scotia Bank -- Analyst

Okay. And then maybe one for Paul, if I could. Paul, you mentioned some of the size of the transactions that you are seeing in the oil and gas space which I think you mentioned within the $150 to $300 million. How about the opportunities that you're seeing in the non-precious -- so, excluding oil and gas -- space? Is it in similar sort of price range?

Paul Brink -- President and Chief Operating Officer

Yes. I'd say they are, Tanya. And I call those mid-size type transactions. But that's the sort of size that we're looking at.

Tanya Jakusconek -- Scotia Bank -- Analyst

Okay. Thank you so much.

Operator

Thank you. Your next question is from John Tumazos from John Tumazos Very Independent Research. Please go ahead.

John Tumazos -- John Tumazos Very Independent Research -- Analyst

Thank you very much. A smaller company, all these minerals started to do financings on renewable energies such as hydroelectric. Could you see other energy forms besides oil and gas growing into the Franco mix? It interests me because the US electricity market is a lot bigger than the gold market and, historically, is a little more stable.

Paul Brink -- President and Chief Operating Officer

Hey, John. It's Paul. It was interesting to see that type of transaction. And it's fascinating to see how the royalty model is applied in a lot of different industries and with a lot of attractions to the low-risk nature of a royalty. I think for our business, where we see our core competency being around our technical team and our ability to look at resources in the ground. And what we've really enjoyed is the optionality that you get in investing in a deposit and the potential effect that can be two-three times and, in rare cases, 100 times bigger of the life of a deposit. And so, I think our inclination is to stick with resources both on the mining side and on the energy side.

John Tumazos -- John Tumazos Very Independent Research -- Analyst

Thank you.

Operator

Thank you. Are you finished with your question, John?

John Tumazos -- John Tumazos Very Independent Research -- Analyst

Yes. I'm not as long winded as the others.

Operator

Thank you. And your next question is from Ralph Profiti from Eight Capital. Please go ahead.

Ralph Profiti -- Eight Capital -- Analyst

Good morning. Thanks for taking my questions. Specifically, with the oil and gas, you talked about the market still continuing to be quite robust. And we've had two or three quarters since the Continental deal. I'm wondering are you seeing deal activity pick up? Or is it the actual structure of the Continental deal that's actually resonated with potential partners?

Jason O'Connell -- Vice President, Oil & Gas

Yeah. It's Jason here again. The depth of opportunities in the US royalty space is really quite huge right now. That's a consequence of the fact that there is a lot of private money in the space that's looking for a home in longer-term capital such as in ourselves and other public companies. And so, there continues to be a lot of opportunities along that vein. And then in addition to that, I think the Continental transaction that we announced a while back has gotten a lot of traction with other operators. And so, there are people that are considering a similar structure where they are trying to take advantage of the arbitrage that exists in the market between what the market price is and the value of these royalties if you know the timing of when they're developed. So, really, the scope of opportunities is large. We'll continue to pursue both the royalty packages that we've acquired and that structure, and we'll continue to pursue discussions with other operators on how to potentially work together to extract value by buying ahead of the drilling program.

Ralph Profiti -- Eight Capital -- Analyst

Okay. So, it sounds like it's both. And you keep this deal structure quite separate from the deal structures in the metal space. Am I to assume that it's very difficult to transfer this type of deal accretion to Franco into metals deals? And I'm specifically talking Continental versus purchase metals deals.

Paul Brink -- President and Chief Operating Officer

I'd say the way to think about it is, with the mining asset, when somebody has made a decision to build a mine or a mine is built, you've got a -- on the royalty aspect, you've got two benefits. You got the benefit of knowing the timing of your production, plus you got the benefit of a low-risk royalty interest. And that's what's made our business so good. The beauty of the Continental deal is it allows you to get something similar but in the energy space because we're able to combine both the knowledge that the operator has on the timing of their drill programs -- that gives us the production certainly -- plus, we're applying the low-risk royalty element of that. So, in doing deals like the Continental deal in the energy space, let's us get a similar low-risk profile for what we can get in the mining space.

Ralph Profiti -- Eight Capital -- Analyst

Yeah. Okay. Thanks for that Paul. And maybe if I can just finish off with a higher-level question. When you think about competing sources of capital to Franco-Nevada, everything from public debt markets to private equity to sovereign wealth, where do you think you're gonna see the most competitive tension, say, in the next one to two years?

Paul Brink -- President and Chief Operating Officer

And you're thinking of parties that would be bidding against us for assets?

Ralph Profiti -- Eight Capital -- Analyst

Correct. Yeah.

Paul Brink -- President and Chief Operating Officer

Yeah. Hard to note. Certainly, the trend has been a lot more private capital. Or maybe that's just a dearth of public capital competing. I'd say overall, there's so much capital that's come out of the public equity markets, both on the mining side and the energy side, that mostly what we see is a lack of capital competing for these assets. So, if that persists for the next number of years. I think that'd be a terrific opportunity.

Ralph Profiti -- Eight Capital -- Analyst

Yeah. Agreed. Okay. Yeah. Great. Thanks very much.

Operator

Thank you. There are no further questions at this time. You may proceed.

Candida Hayden -- Corporate Affairs

Thanks, Joanna. We expect to release our second quarter 2019 results after market close on August 7th, with the conference call held the following morning. Thank you for your interest in Franco-Nevada. Goodbye.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating. And we ask that you please disconnect your lines.

Duration: 25 minutes

Call participants:

Candida Hayden -- Corporate Affairs

Sandip Rana -- Chief Financial Officer

Paul Brink -- President and Chief Operating Officer

David Harquail -- Chief Executive Officer

Jason O'Connell -- Vice President, Oil & Gas

Cosmos Chiu -- CIBC -- Analyst

Josh Wolfson -- Desjardins -- Analyst

Tanya Jakusconek -- Scotia Bank -- Analyst

John Tumazos -- John Tumazos Very Independent Research -- Analyst

Ralph Profiti -- Eight Capital -- Analyst

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