Franco-Nevada Corporation (FNV) Earnings Call Transcript

Good morning, and welcome to Franco-Nevada Corporation's Second Quarter 2026 Results Conference Call and Webcast. This call is being recorded on August 12, 2026. [Operator Instructions] I would now like to turn the conference over to your host, Bonavie Tek, VP Finance, Investor Relations.. .

Thank you, Andi. Good morning, everyone. Thank you for joining us today to discuss Franco-Nevada's Second Quarter 2026 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 webcast. During our call this morning, Paul Brink, President and CEO, 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 executive team is available to answer any questions. Participants may send the questions by 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 the presentation. I will now turn over the call to Paul Brink, President and CEO of Franco-Nevada.

Thanks, Bonavie, and good morning. We had a strong second quarter with GEOs sold up 18% year-over-year due to higher production at Antamina and South Arturo. New contributions from the recently acquired Copegold and Casabe interests and start production at Valentine Gold. In addition to record gold prices in the quarter, we saw strong gold prices with the higher energy contribution and the processing of stockpiles at Cobre Panama, we're tracking towards the upper half of our annual guidance range for 2026. At Cobre Panama, the environmental audit was completed, indicating no major findings and an overall compliance rate by the operation of 87.7%. The government then established a commission of senior ministers to evaluate both the environmental aspects and the economic contribution of a potential mine restart. Simply put in our business, you want to grow through acquisition in the Bayer market and organically in a bull market. In particular, with our deep royalty portfolio that organic growth can be very powerful. Due the spring quarter, and we saw green shoots across the portfolio. We received good news on future mine expansions at Olof Cote, Decor, Magino, Valentine, CondoSafe, Caserones and Satella. At Candelaria, we had news of a potential pushback. And at Porcupine, we had the kid acquisition that may ultimately allow a doubling new airport. Guadalupe-Palmarejo, Hemlo, Bullabulling, and Almac all announced resource expansions. There was positive progress on mine development at Copper oil and Stibnite Gold. Profit Nickel received its federal approval and PSG Mendocino, previously Canmore, that's Argentinian Rigeapproval. And lastly, success at the drill bit. Great exploration results in the Polpaico, Borden, oil, out Creek and others. Midas, where Hecla considering the restart stibnite where they start drilling again after more than a decade and at Almac and Bullabulling where we have new interests. Net revenue was up on stronger oil prices, while operator capital discipline prevails they have been to pick up in U.S. oil rig rates, 450 rigs now up from 420 three months ago in the lower 48 also reinvestment rates amongst the U.S. producers are moving up 55% now on average versus 51% earlier in the year, both of which bode well for higher future production rates. The leverage on the NPI at our Weyburn interest in Canada gave a nice boost to our Canadian Energy segment. On the sustainability front, we continue to expand our engagement with and contributions to communities at mine sites. Franco-Nevada was recognized as one of Corporate Knight's best 100 Best 50 Corporate Citizens in Canada for 2026 and achieved an A rating from CDP. We're in the progress of evaluating candidates for our expanded scholarship program and are delighted with a bumper crop of excellent Africans this year. The business development team had a strong pipeline of opportunities. Unfortunately, total available capital stands at $4.3 billion. So we're well positioned to add attractive new assets to the portfolio. With that, I'll hand the call over to Sandip.

Thanks, Paul. Good morning, everyone. Franco Nevada reported another quarter of solid financial results as our portfolio of royalty and stream assets continue to perform well and in line with our expectations. The performance during the quarter continued the very strong start to the year with record financial results achieved for revenue, adjusted EBITDA and adjusted net income and operating cash flow for the first 6 months of 2026. On Slide 4, you will see a summary of commodity prices for second quarter 2026 and '25. Precious metal prices have increased significantly year-over-year with the average gold price higher by 38% and silver by 118% in the quarter. However, both gold and silver prices have retreated from the highs reached during the first quarter. For the diversified commodities with the continued conflict in the Middle East, oil price has seen a sharp increase over prior year. The WTI price has been volatile over the last few months but remains above $80 a barrel. Energy revenues did benefit from the higher price in the quarter, and we expect this to carry through the third quarter. Slide 5 provides an overview of our key financial results. The performance from our assets, combined with stronger commodity prices resulted in an increase in revenue of 57%; adjusted EBITDA of 45% and adjusted net income of 46%. And Total GEOs sold for the quarter increased by 18% to 132,405 compared to just over 112,000 in the second quarter of 2025. Cautious metal geos sold in the quarter were 114,111, higher by 23% compared to prior year. 56% of total GEOs sold during the quarter were sourced directly from mines where precious metals are the primary commodity. For the quarter, we received strong contributions from several assets. At Antamina, we benefited from both higher deliveries, but also benefited from the higher silver price resulting in an increase in revenue from $23.3 million in Q2 2025 to $57.4 million this quarter. France Macae benefited from the processing of higher grade ore which we expect to continue in the second half of 2026. At South eToro, we had a significant increase in GEOs as we benefited from the Phase I production of the open pit. Please note that strong performance was always weighted towards the first half of the year. At Candelaria, production at the mine was lower compared to prior year as last year, the mine had the benefit of higher grade ore from Phase 11. Lundin Mining expects production to be weighted towards the second half of 2026 due to increased availability of higher wage Phase 12 ore combined with increased underground mining rates as the underground in-sourcing initiative nears completion. Diversified GEOs sold were 18,209 for the quarter compared to 19,644 for prior year despite the diversified revenue being 31% higher at $82.2 million. The decrease in GEOs is the result of converting revenue to GEOs at a higher gold price. As you know, we are converting GEOs using a gold price of $4,500 per ounce. With respect to costs, we did have an increase in cost of sales compared to Q2 2025 due to higher fixed costs paid for stream ounces as a portion of our streams have a fixed cost base on the percentage of the gold price. Cost of sales was $45.9 million versus $32.5 million last year. Depletion increased $84 million versus $64 million a year ago, the increase being due to depletion being reported on some of our recent transactions Yanacocha, Casa Berardi, Porcupine and Cote. These assets are higher per ounce depletion assets. We expect the depletion rate to decrease over time as the reserves on the properties grow. And net adjusted net income was $349.2 million or $1.81 per share for the quarter, both higher by 46% year-over-year. Slide 6 highlights the continued diversification of the portfolio. 86% of our second quarter revenue was generated by precious metals, with revenue being sourced 88% from the Americas and no 1 asset generated more than 10% of revenue as we have one of the most diverse portfolios in the industry. The model continues to be a very high-margin business, as shown on Slide 7. And the margin per GEO has increased from 1,559 per GEO in 2022 to 4,352 per GEO in 2026, a 179% increase while during this time, the gold price has increased to 116%. As we turn to dividends on Slide 8, the company continues to pay a quarterly dividend with $84 million being paid to shareholders during the quarter. With respect to our guidance summarized on Slide 9, we had guided to 510,000 to 570,000 total GEO sold for the full year 2026. With the strong performance of our portfolio for the first 6 months of '26 with approximately 269,000 GEOs sold at an expected stronger second half of the year, we are tracking towards the upper half of the annual guidance range. We expect stronger second half performance from several assets, including Candelaria, Tokanzinyo, Cote and Valentine. We expect to receive between 9,000 and 10,000 GEOs from Cobre Panama as First Quantum has begun processing stockpile ore. And with the continued strong oil price, we expect energy revenue to remain strong in the second half of the year. And lastly, Slide 10 highlights our available capital. As at June 30, 2026, the total available capital is $4.3 billion, comprised of $1 billion in cash $2.25 billion of credit facility, including the accordance and $1.2 billion in liquid market securities. The company continues to remain debt-free and is well capitalized to continue to add quality assets to the portfolio. And with that, I will pass it over to Andis as management is happy to answer any questions.

[Operator Instructions] The first question comes from Carson CIB.

Maybe my first question is on the NPIs. I noticed that Hemlo was down quarter-over-quarter whereas the Musslewhite NPI was up quarter-over-quarter. But I guess, it is always volatile in terms of these NPIs. But how should we look at it based on what we know in Q1 and Q2 on what we should expect in Q3 and Q4?

You said it correctly. They are volatile. And for us, a lot of it is based on visibility. At Hemlo, in Q2, Hemlo Mining produce less on our intraplant than previous quarters, which impacted the NPI. I think for the second half of the year, also we gather production should increase. Does it hit what was achieved in Q1, I don't know, but it should be higher than Q2. So I would expect a slightly higher NPI for the second half of the year from Hemlo. Obviously, that's all contingent on commodity prices as well. . On that Muscle Lite, we did have strong performance in Q2. A large component of that was a catch-up entry for 2025. For Muscle White, we have limited visibility, and then there's a finalization of the NPI calculation that happens in the following year. So in Q2 is when we got that final number, and we recorded that. But considering where commodity prices are right now, I would expect a very strong NPI from Mustowave for 2026.

Great. And then maybe diving a little bit deeper into Hemlo last night, I guess, they reported earnings and they're deferring formal guidance, production guidance from sometime in 2026 into 2027. And where you're standing, and there's a lot of moving pieces. It's based on actual production from the asset, but also the Interlake component, but any concerns in terms of that deferral of guidance? It seems like things are kind of ramping up potentially slower than expected.

I think Camel is doing -- the team is doing a very good job there. They just took over the asset last year. From our perspective, we're pretty confident that mining centric will continue for the next number of years. Obviously, it will be volatile just depending on how development is going, but we're pretty call that the NPI will be there for the foreseeable future.

And maybe switching gears a little bit to Guadalupe and Palmarejo. As you mentioned in your prepared remarks, it continues to be one of the larger contributors of GEOs. But I guess my question is, when we talk to core mining and the management team continues to remind us that exploration continues beyond the Franco-Nevada area of influence. I guess from that perspective, how should we look at it? Is there any kind of near-term concerns to Franco-Nevada?

They've had very good exploration results, both on stream brand and offstream brand on our ground, specifically Hidalgo based upon what we've seen, production on our land will continue for the foreseeable future. A large portion of their production is still on Franco stream ground. Obviously, they are trying to find additional resources on adjacent lands where the stream doesn't apply. But right now, we don't have any concern.

And then maybe 1 last question, tracking your margins here. And just I think you did a good job in terms of looking at the margin expansion. Another way I looked at it was the adjusted EBITDA margin, I noticed that the increased 87.6% 4 quarters ago to 90.6%, 91% now to 91.2%, again, the agreed EBITDA margin. Is that just a function of us the increase in commodity prices coupled with not as much of an increase or no increase at all to cost. And is that percentage that you track yourself? Are you happy with a 91.2% right now?

Yes. No, it's -- we are a very high-margin business. Obviously, it's composed of a number of factors. One is how much of our GEOs and revenue and EBITDA is being generated by streams. It just so happens right now in our -- the recent deals we've done have been royalty deals, and they're obviously limited or no cost associated with those. So it's just the leverage of the portfolio overall. .

your next question comes from Lawson Winder with Bank of America Securities. .

Thanks for today's update. Can I start with the 2026 guidance and your expectation to be in the top half of the range, and that includes Cobre Panama potentially stronger oil prices. if you just take the midpoint of the GEO volume guidance range of $540 and then add core Panama, it's about 27.5 GEOs and then you assume higher oil prices, I think you could comfortably get above range , so it would suggest that you're tracking to above the range? Or I mean it might also suggest that excretion higher oil prices, the portfolio is tracking to perhaps well below the midpoint. Could you maybe just clear out what would be the right way to think about that? .

Yes, it's a good question, Lawson. So for us, obviously, if you looked at our numbers, as you said, the midpoint was 540 of our guidance range. coverage to 9 to 10 energy prices will add some additional geos assuming oil prices stay where they are. And then we are expecting stronger performance from Candelaria, Cote, Valentine, a few others, we're expecting weaker performance from the South Atura, which was more focused on the first half of the year. So as we've said, it's going to be tracking at the higher end of the overall range. we're still in the middle of the year. And there is the possibility that you could surpass the range, but a lot of things have to happen for that to occur. So right now, we're comfortable with just providing that guidance range.

And you have a follow-up have color. .

You spoke in the release also about the pipeline and you noted a relatively robust pipeline. Yes, like a number of the transactions you did in the quarter, while they were relatively numerous were relatively small, I mean, total value in the $84 million including the July transaction what you're seeing in the pipeline in terms of like substantially large transactions? I mean particularly in light of $4.3 billion. And -- maybe the other side of the question would be, I mean if you're not seeing really substantial media deals in the pipeline, if it's a lot more of the smaller transactions like you guys completed in Q2 and Q3 to date, is there a thought to perhaps considering a special dividend?

Asit's Ian speaking here. Thank you for the question. So it's a good question. What I would say is we're active across a range of development phases and deal sizes. You're right that during the quarter, the size did step down from the cadence and magnitude that you had seen in prior quarters. I don't think that's reflective of the pipeline going forward necessarily though. What I do see at the moment is a number of opportunities in project finance, which suits our financial backer strategy well. So we're hopeful that with time, we'll see more of those types of transactions come forward. And in terms of overall liquidity looking at the magnitude of the pipeline, do you feel comfortable at the stage that we're going to be able to deploy quite a bit of our capital before we have to think about any other ways to return it.

Okay. And then just -- so thinking about some of the larger transactions that you might have in the portfolio, can you help sort of narrow that down to a bit of a size range? Are we talking about $100 million size range? Or are there potential like $1 million transactions in the pipeline?

It's a wide range, as I highlighted, there are some significantly larger transactions, which are required to deploy the kind of capital that we've accumulated. So I think what you've seen over the last couple of years in terms of transactions is reflective of kind of the potential we see in the pipeline going forward? So we were successful to going in the past, and I believe we'll be successful going forward. .

And then maybe just one final follow-up on the pipeline. To what extent would you describe the current pipeline as urgent? Or how would you describe the nose of the deals within the pipeline? Is this stuff you could see completed in Q3? Or are we looking at sort of a longer time line, maybe looking out 12 to 18 months? .

Sure. That's a good observation. What I would say is the alarm transactions tend to be a little bit lumpier. The time line can be longer for those. So hard to kind of handicap exactly when deals are going to close. But I'd see the cadence perhaps just based on what I'm seeing now picking up later in the year and into next year? .

Your next question comes from Daniel Major with UBS.

Yes. First question on just on Cobre Panama. My understanding is First Quantum has sort of started or is imminently starting negotiations with the government on the fiscal terms to facilitate to restart. Have you had any engagement with the Panamanian government? Has there been any discussions around any potential changes to the economics of the stream?

Daniel, it's Paul. First bottom is the operator there. there party that we'll engage with the government here. As you know, now form negotiations yet, but we're not at that taking.

Okay. So there's no discussion at this point of any potential changes to the fiscal terms as part of any negotiated or any settlement to start the mine?

No other.

Okay. That's clear. My second question is on the Energy diversified portfolio. You also highlighted the benefit from higher revenues and made a reference to the increase in the rig count in the U.S. Would you also expect to see any pickup in sales volumes on not on a GEO basis, but on a unit basis in the second half and potentially following through into 2027?

I'm hopeful that they will be and my own estimation for the U.S. plays, you need at least 6 months for people to change their growth programs. So Q2 is still too early. If you go 6 months ahead of that, our oil prices were probably still in the $60 range. So I expect back end of this year, as you see beginning of next year that you'll see those the higher drill as translating into production and for we'll see higher unit volumes as well.

Okay. So there's a potential tailwind independent of energy pricing into 2020 from a geo basis?

Yes.

Okay. And then the next one, just thinking about a question on the project pipeline. New prosperity has been something you've mentioned on previous calls. Can you give us an update on the catalysts we should be looking for there?