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. [Operator Instructions] This call is being recorded on Thursday, May 9, 2019. And I would now like to turn the conference over to Candida Hayden. Please, go ahead..

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 2018 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 2 of this presentation. I will now turn over the call to Sandip Rana, CFO of Franco-Nevada..

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 3, you can see the key financial results for the quarter ended March 31, 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 4, 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 5, 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 U.S. 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 6, we provide a breakdown of our revenue by commodity in 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 7 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 anymore clearly than Slide 8. 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 $118 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 underway. We continue to provide information and answer questions to CRA. I will now turn it over to Paul..

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 10, 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 U.S. 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..

Thank you. [Operator Instructions] And your first question is from Cosmos Chiu from CIBC. Please go ahead..

Thanks, David, Paul and Sandeep. David, I think you're still there somewhere. Congrats on a very good start to the 2019. [Multiple Speakers] Oh, yes, David. Hi..

Yes. I am not retired yet..

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's sort of 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 wanted to confirm with you?.

So, Cosmos, Sandip here..

Hi, Sandip..

Hi. How're 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 should start to see the benefits of the higher grade and the equipment and their placement..

Great. And maybe switching gears a little bit. 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?.

Yes. Hi, Cosmos. So, the – 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 will ramp up over time just as the project is ramping up. In terms of the 20,000 to 40,000 ounces. 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 going to take six weeks to ship somewhere, we're not going to get paid for a period of time. So, it's just a timing difference..

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 contribute above $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?.

Hi, Cosmos it's Jason O'Connell here..

Hi, Jason..

We still expect, I guess, the model as a whole choose, the Continental is still acquiring acreage, which is directly in front of the drill bit. It does take time for them to drill those wells, haven't 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, as well as our – right now, predominantly in front of project area called Project SpringBoard, the Continental is currently focused on.

And so, as that ramps up towards the end of the year, we'll see more and more revenue coming to Franco-Nevada, again, probably Q3, Q4..

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 impact, potentially have a positive impact on Goldstrike and Gold Quarry and especially the MPI 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?.

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..

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

Thank you, ladies and gentlemen. [Operator Instructions] And your next question is from Josh Wolfson from Desjardins. Please go ahead, Josh..

Thanks. Just looking at the PGM division result, they're seeing very strong and 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 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 of after some of the combined operating changes that were announced?.

Sure. So, Josh, with respect to Sudbury portion, yes, it was the higher palladium price when you do convert to GEOs, but it was truly increased production; platinum, palladium and gold production just got in 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..

Okay.

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

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

Okay. Great. Thank you very much..

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

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?.

We are – there is – we can repay at any time without penalty..

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?.

Two reasons; one it was better pricing than 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..

Okay. And then maybe one for Paul, if I could. And 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 million 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?.

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

Okay. Okay, thank you so much..

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

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

Hi, John, its 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 a lot of attractions to the low risk nature of 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 the deposit and the potential effect that can be two, three times and in rare cases 100 times bigger of the life of the deposit.

And so, I think our information is to stick with resources both on the mining side and on the energy side..

Thank you..

Thank you.

Are you finished out with your question, John?.

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

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

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 sort of 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..

Yes, Jason here again. The depth of opportunities in the U.S. 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 done 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, I guess, the arbitrage that exists in the market between what the market prices and the value of these royalties, if you know the timing of when they're developed. So, really be the scope of opportunities is large.

We'll continue to pursue both sort of the royalty packages that we required 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..

Okay. So, it sounds like it's both.

And you keep this kind of deal structure quite separate from sort of the deal structures in the middle space, am I to kind of assume that is be very difficult to transfer this type of deal accretion to Franco into metals deals and I'm specifically talking Continental versus purchase metals deals?.

Yeah, 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 mine is drilled, 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 we 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 are applying the low risk royalty element of that.

So beside saying and doing deals like the Continental deal in the energy space, let's just get us some of the low risk profile for what we can get in the mining space..

Yes. Okay. Thanks for that Paul. 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 going to see the most competitive tension, say, the next one to two years?.

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

Correct. Yes..

Yes. 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, is the lack of capital competing for these assets.

So, if that persists for the next number of years. I think that'll be a terrific opportunity..

Yes. Agreed. Okay. Yes. Great. Thanks very much..

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

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

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