Franco-Nevada's CEO Hosts Investor Day (Transcript)

Franco-Nevada Corporation (NYSE:FNV)

Investor Day Conference Call

March 20, 2014 10:00 AM ET

Executives

Stefan Axell - Manager of Investor Relations

Sandip Rana - Chief Financial Officer

Paul Brink - SVP, Business Development

Phil Wilson - VP Technical

David Harquail - Chief Executive Officer

Geoff Waterman - Chief Operating Officer

Analysts

Cosmos Chiu - CIBC World Markets

Operator

Good morning. My name is Sally, and I will be your conference operator today. At this time, I would like to welcome everyone to the Franco-Nevada Corporation 2013 Results and 2014 Outlook. All lines have been placed on mute, to prevent any background noise.

After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. Mr. Stefan Axell, Manager of Investor Relations. You may begin your conference.

Stefan Axell

Thank you, Sally. Good morning, everyone. We are pleased that you have joined us either in person or over the phone for the Franco-Nevada 2013 results Investor Day conference call. Accompanying our call today is a presentation which is available on our website, where you will also find our updated 2014 Asset Handbook as well as our 2013 MD&A and financial results.

Before we begin formal remarks we’d like to remind participants that some of today’s commentary may contain forward-looking information and I refer you to our detailed cautionary note on slide two of our presentation.

Participating on our call today is our entire executive team, but more specifically we have Sandip Rana who will discuss our 2013 results; Paul Brink who will provide insight into our business model; Phil Wilson will discuss gold ounces associated with our assets and provide an REU update and finally David Harquail, our CEO will detail our outlook moving forward.

I will now turn the call over to Sandip to discuss our 2013 results.

Sandip Rana

Thank you, Stefan. As you will see from the press release, we issued yesterday, the company did report lower revenue for fourth quarter of 2013 and for the full year of 2013. In addition, we did record a net loss for the quarter and lower net income for the full year. But I think if you step back and you look at 2013 in general for the mining industry as a whole, it was a period volatiles commodity prices, period of depressed share prices in just the general negative markets sentiment towards the industry as a whole.

But I think, Franco-Nevada was not immune to this, but when you step back and you look at our company it showed the strength of our business model, the quality of our assets and the diversity of our portfolio and this is clearly evident in the number of gold equivalent ounces that we earned in 2013.

If you turn to slide 6, we provide a summary, sorry. If you would look at slide 6, we provide a summary of our gold equivalent ounces for 2013. Last year we provided guidance to the street of a range of 215,000 gold equivalent ounces to 235,000. This was done at a gold price of $1600 per ounce, platinum price of $1600 an ounce and palladium of $725. We also guided oil and gas revenue of $55 million to $65 million.

While I am happy to say that we beat both of those guidance levels, we surpassed our 2012 actual results as well as the guidance that we did provide. We achieved 241,000 gold equivalent ounces. Sorry we achieved 241,000 gold equivalent ounces for the year and at lower commodity prices. On the oil and gas side we achieved revenue of $67 million in revenue.

Contributing to this exceeding guidance was a number of key assets Palmarejo delivered 59,000 gold equivalent ounces to the company in 2013, our Subika royalty had higher production and accordingly higher mining levels on our royalty lands resulting in higher GEOs for the company. This was an asset that generated revenue and GEOs to us in 2012 for a partial year versus full year in 2013. Our Sudbury stream assets performed very well for us in 2013 as did our South African stream assets. With respect to new royalties, we started receiving production from Detour and we look forward to a full year of production from Detour in 2014. In addition we received GEOs from the Rosemont property at Duketon in Australia in 2013 and look forward to some additional production from there in 2014.

With respect to oil and gas for the year as you will recall we purchased an additional interest in the Weyburn assets in late 2012 that contributed a significant increase in oil and gas revenue for us in 2013. The higher volume combined with higher oil prices allowed us to exceed our guidance of $55 million to $65 million with $67 million in revenue. So, we did beat on our GEO guidance but obviously with lower commodity prices and in particular gold and platinum for our Franco-Nevada did result in lower revenue.

If you turn to slide number 7, you’ll see a table that separates out our IFRS measures versus non-IFRS for both the quarter and the year. And as you’ll see on a revenue basis, for the quarter we achieved $100 million in revenue versus $114.1 million last year. To put it in perspective the average gold price in Q4 was lower by $447 per ounce versus 2012 and so obviously that did have an impact across the board.

On a full year basis, our revenue was $400.9 million versus $427 million a year ago. On a net income basis as I mentioned we did book a net loss for the quarter. This was due to some impairments that were recorded which I will speak to shortly. But as we’ve said previously we like to focus on non-IFRS measures as a performance metric. I’ve already spoken about gold equivalent ounces and how well we did in Q4 and in the full year 2013. However, when you factor in the lower commodity prices it did have an effect on our adjusted EBITDA and our adjusted net income for the year.

On an adjusted net income basis, we did $30.5 million or $0.21 per share versus $47 million or $0.32 per share for the quarter. And on a full year basis a $138.3 million net income or $0.94 per share versus a $171 million or $1.19 a year ago. So they are both lower year-over-year. But what is also lower for us is our corporate G&A and corporate admin cost. For the year we’re down approximately 10% year-over-year. And if you go back to 2008 at that time we had approximately $15 million in G&A, $18 million last year, not a significant increase. And if you look at the revenue growth that this company has delivered going from a $150 million in revenue to an excess of $400 million, I think it shows another strength of our business model which is the scalability. We can grow this company without increasing our G&A significantly.

You will notice that on the margin line, we are at 77.3% for the quarter, which is lower than historically achieving the 80% range, the reason for this is that in Q4 we did receive a higher number of stream ounces, in particular Palmarejo, the Sudbury assets and our South African assets. And with that we had a higher cost of sales which is associated with the ongoing fix payment of $400 an ounce that we pay. So it resulted in a lower margin percentage for the quarter.

Slide number eight provides a breakdown further of our GEOs for 2013 versus 2012. And across the commodity categories gold, PGM and other minerals you can see that they are all up year-over-year for the reasons I have mentioned earlier in those specific properties.

But one area that is affected by the lower commodity price in particular gold is our NPIs and Goldstrike to be specific. And that property was affected in 2013 not only by lower gold price, lower production, but also a thiosulphate project that they are doing there, resulting in some significant capital being spent which did affect our NPI.

But our NPIs are very leveraged to the gold price. But if you do adjust our GEO performance in 2013 for NPIs, you can actually see that our GEOs from our revenue royalties and our streams increased by over 13%. And in a rising gold pricing environment, we look forward to the NPIs contributing more as they are highly leveraged to the gold price.

Turning to slide nine, we provide a breakdown of our revenue sources by commodity and by jurisdiction. And so by commodity, 80% precious metals, 17% oil and gas and 3% other minerals.

In terms of geographic profile, 77% of our revenue is from North America, with Canada being the largest contributor at 36%. In total, we have 47 revenue producing properties and as we add new assets and we have organic growth, this number will grow.

Turning to slide 10, it is a chart that takes our adjusted net income from a year ago to adjusted net income for 2013. And the biggest movement is obviously revenue, due to the lower commodity prices. In addition, we have lower finance income, which is a result of the composition of our cash for holding predominantly U.S. dollars which are earning less interest and we’ve had lower finance income associated with that. We had an increase in depletion; on the positive side, we had a lower income tax expense. So when you net everything through, we’ve gone from a $171 million adjusted net income down to a $138.3 million for the year.

Slide 11, with respect to impairments, we did book some impairments in the quarter, resulting in a net loss. There were some small ones associated with some securities recorded, but the two larger ones were McCreedy and Falcondo.

Now with respect to McCreedy, this is an asset we purchased in 2011 when we did the Gold Wheaton transaction. At that time, Quadra FNX, now KGHM made a decision to start mining the nickel ore and putting on hold the mining of the PM zone. And earlier this year, I guess Q1 2014, they came out and they said, they were going to stop mining the nickel zone and not resume the PM zone at this time. We took that from an accounting standpoint as a triggering event and accordingly we booked an impairment of $107.9 million.

Falcondo run by Glencore, an asset down in Dominican Republic has been in operation now for over 20 years, it’s a nickel asset, we hold an interest there. Again they made a decision in Q4 to put that on care and maintenance. From an accounting standpoint, we consider that a triggering event and recorded impairment accordingly.

What I would like to point out that both these assets have reserves and resources, the infrastructure is still there, so in a rising commodity price environment these assets should be -- these deposits should be mined as well. There is no impact in the 2013 results in terms of our revenue and EBITDA associated with these assets or for 2014. So yes, we booked some impairments, but there is no financial impact at this time.

Turning to slide 12, it gives you an update on our credit facility. We have amended it, it was previously a three year facility, now it is a five year facility, expires -- matures in March of 2019, remains unsecured. We’ve managed to get some lower pricing at a leverage ratio of less than or equal to one. Our pricing will be 30 day LIBOR plus 120 basis points. The Accordion feature to take it up to $750 million is still there. So we think this facility along with our strong balance sheet still provides us with great financial flexibility to grow this company.

And with that, I will turn it over to Paul Brink.

Paul Brink

Thanks, Sandip. And good morning everybody. I am going to start with just some comments on our business principles. The royalty and the streaming business keeps changing over time but our core principles really don’t change. And when we are investing in a deposit, key thing that we are looking to do is share in any future exploration success over the long-term in the deposit. So a key thing in doing that is obviously tenure, we need to make sure there is good tenure, we need to make sure we’re going to be there over the long-term.

What we are trying minimize is obviously an exposure to cost inflation, also any encroachments on the property, mostly that means trying to avoid increases in tax rates resource maximizing.

We don’t operate any of the assets that we are involved in. And really the key to that is it means we can spend all of our management time on trying to find new opportunities to grow the company. So turning to the latest of the new ones, the small acquisition. This is a 2% NSR that we are acquiring. It’s on Yamana’s Cerro Moro property; it’s in Santa Cruz Province in Argentina. The Yamana team, both the operating tam and the asset development team in the region has done a terrific job over time. So, we are very pleased to have an asset or piece of an asset that’s in their hands. They are due to put out a feasibility later on this year. They are looking for first production in 2016 on this asset.

We like the property position here. There are similarities to (inaudible) multiple vein structures, the shallow structures. We think there is a great potential to expand the production coming out of this asset and to add a lot more ounces over time.

In terms of the way that our business has evolved, the Old Franco or the principal business was buying third party royalties which has been a good business; it’s a steady business but the model changed and really while we were part of new market with Silver Wheaton who invented the byproduct streaming model and it’s been a great model for all of the players in streaming business. It’s been a second avenue for growth; it’s allowed all of us to do very well. Some examples of that Cobre Panama, Palmarejo for ourselves.

Really what’s happened though over the last 24 months now with the malaise in the gold market is that there has been a net set of opportunities and that’s gold companies that have been looking to finance new projects. They just aren’t able to get these in terms and the debt over the equity markets. And so we’ve been challenging ourselves to say how can we adapt our model and take advantage of this additional opportunity; and will go back, didn’t mean to go forward there. So, we started off with a couple of smaller deals with Golden Meadows with Midas Gold, a small royalty on Kirkland Lake, both financing the operator there and then by the end of the year to other transactions, one with Teranga and Sabodala and another one with Klondex on their Fire Creek Mine, all those where we’re now financing gold companies helping them to develop their assets.

So the key thing in terms of these financings is not that there is a particular structure that works, it’s more that we’re able to be flexible in terms of what we provide to the operator and come up with a structure that works for their particular requirements if they’re looking to either replace debt or equity in the way they think about their capital structure. But in particular, the last two transactions that we’ve done has been a new structure for us. That’s worked well for the operators. And that’s been a fixed number of prepaid ounces at the front-end and then the smaller royalty stream on the back-end. And that’s been attractive to the gold players particularly because they’re trying to maximize their exposure to gold optionality in the back-end. And so by reducing the stream, it allows them to do that; gives us more certainty in our return on the front end but we still get to participate in a piece of the longer-term exploration success.

And in particular the structure is more debt like than a straight royalty structure. But some of the advantages that the operators have been seeing in it, is even though there are fixed payments; it doesn’t come with all the bells and whistles that come with a debt package. There is no cash flow suite, no covenants but again to trip them up which makes it a more attractive, more flexible form of financing for them.

And we’ve also in the past on the streams we all used the fixed for a $100 per ounce, we’re happy to do that going forward. We also found another way to do those operating costs is just do them as a percentage of the gold price going forward. Really what that does is it makes stream economics comparable to the economics on an NSR, but also makes it easier for an operator both for them to conceptualize and also speaking to the investors, they can take something that’s a 5% stream, if we get 80% of the economics. That really is like a 4% NSR; it’s easier for everybody to think about and go into deal with the other.

So, two of the transactions that we’ve done of this and the first was with Klondex Mines, where they were -- we were helping to finance the acquisition of the Midas Mill with the process, they all coming out of Fire Creek, Paul Huet is the CEO of the company. Paul we know from our days at Newmont, that couldn’t be a better guy to be putting these assets, consolidating assets in Nevada. Paul has operated the Midas Mill, he has operated Hollister. So, we think he is a -- he and his team are tremendous group to be supporting and doing this.

We couldn’t be more comfortable with the Midas Mill. It is the only mill that Franco has built in its history. And we still think the Midas property has got some good legs on it. But in particular, the draw in this transaction is the Fire Creek property. The resource there is an analogy to the Midas resource. It’s very high grade, vein type systems. To-date, they’ve outlined some more resources about 800,000 ounces, but to put it in perspective that resource is about a 1,000 foot of what's an 8,000 foot structure that really is part of an 8 mile long trend. And so we think that there is a lot more room to add ounces on this property overtime.

The bigger of the two transactions was with Teranga. Again, similarity is here we were putting together what was their Sabodala property and existing mill together with the adjacent property, the OJVG property adding good resources to existing infrastructure. The team Richard Young and his group we think did just a phenomenal job, there were a lot of pieces to pull together in getting this done, both with the various parties through the OJVG joint venture, the government at the time. So very impressed with what they were able to achieve in a very short amount of time on this property.

I wanted to speak just a little bit about the property position and this really is what caught our eye initially. When you look at the location of it, the Sabodala property is just over the border in Senegal from Mali. You've got the Mali and shear that runs right down that border and right along that shear zone you've got number of large deposits, you've got Sadiola which is 12 million ounces -- sorry Loulo which is 12 million ounces, you've got [Gounkoto], Fekola which is Pappilon Resources which is being discovered, both of those 4 million to 5 million ounces. So, right along that shear zone you’ve had continued success in finding new ounces.

Sabodala is around the set of shear zones that are parallel to that just on the Senegal side what would point out to the north of that and in the same volcanic co-structure. You’ve got Sadiola that 30 million ounces, you've got Yatela, which is another 4 million ounces. So you are sitting on the same shear structures, you are sitting on the same [host] rocks and our view is overtime that structure is going to fill in just like the parallel structure with multiple deposits down it.

Already on that property the total resource is 8.8 million ounces, but they have defined. It’s a very large property, they cover it from end-to-end that’s about 70 kilometers of strike length that they have got covered, so very perspective property and we think there is good chance of adding a lot more ounces overtime.

The transaction was a win-win, we are very happy with it; it’s being very well received for ourselves and also for Teranga. The announcement of the transaction was very fortuitous and that the gold price was running at the time. The sector is up roughly 33% of that time; Teranga [lowers] up 125%. I think the deal is being perceived very positively for them.

And to finish off then despite the money that we spent, we still have $1.2 billion in available capital. We see a lot of opportunities out there and we’re confident there will be more acquisitions as we go down the line. Thanks, and I’ll hand it to David.

Phil Wilson

All right thank you Paul. All right good morning, everybody. So the next few slides where I am going to cover the gold ounces that are associated with some of our assets, we will examine the impact of gold prices on these ounces and then finally we will take a look at the royalty equipment units and see if that make a comparison of those two to previous years.

So if we get start up with that and turn to slide number 24. This chart is showing the total ounces on roughly 60 properties where we hold royalties or streams. Just want to emphasize a couple of points here. We are showing all the ounces on the property by category and it’s based on the operators’ public disclosures and we are only showing the gold ounces here, there is no silver equivalent, there is no platinum or metal equivalent.

Now obviously looking at a slide like this that has its limitations and principally that is not all of these ounces are covered by our royalty position and so they are certainly not our attributable share. Nevertheless it is somewhat indicative of the level of activity on this property is somewhat directional so find it a useful slide to show.

Now as Stefan mentioned earlier, this morning we released our updated asset handbook. That’s available on our website or you can get hard copies here in the offices. And this contains all the supporting information behind this slide, as well as more discussion on the limitation of a slide such as this. So we do encourage you to pick up a copy of the handbook and study it.

If we move on to slide number 25, so we are just staying with the associated ounces for the while still, but this time we are looking at some of the key drivers behind the changes from a year ago and in particular the impact of gold price and of acquisitions.

In the reserves category we are seeing a reduction of a little over 9% mainly due to gold price effect. And that said we also saw the acquisitions during the year we are able to offset these reductions and show a net increase year-on-year.

On the measured and indicated categories, we didn’t see any negative effect on gold price during the year. And moreover we actually added a substantial amount of ounces to acquisitions and also we are able to move a couple of assets from our exploration classification through to advanced classification and include them in account for the first time.

Net result was a sizable increase in the M&I associated ounces. And together the gains on the reserves and the M&I associated ounces more than offset the reduction that we saw in the inferred category.

If you can move to slide number 26, again still with associated ounces, but now we are looking at the changes year-on-year on a per share basis. And as you can see from the slide, both the reserves and the resource categories which is shown in gold and blue respectively, we’re seeing a continuation of the upward trend of recent years.

Moving on then to slide number 27, this one is all about the royalty equivalent units or the REUs. And you’d probably recall that this is a concept that we introduced a couple of years ago primarily to overcome some of the limitations of just looking at a simple counts of associated ounces and also to try and give a better representation of the value to royalty and streaming company. And essentially what we do is we look at the different types of royalty and we normalize them to that of an NSR equivalent and then we apply our best judgment to what portion of the associated ounces are actually covered by the royalty ground.

So the REU is certainly an improvement over a simple ounce count, but they’ve also got the limitations as well. And again I’d encourage you to look at the asset handbook to see how we calculated them this year and to lay the discussion on the royalty equivalent units.

The final slide for me is number 28. And this one is showing the changes in the REUs on a year-on-year basis. And as you can see compared to last year, this essentially is stable and certainly somewhat higher than the count from a year or two ago.

So with that, I am going to pass it on to David who will talk about outlook and Q&A. Thank you.

David Harquail

Thank you Phil and thank you for being here on Franco-Nevada Investor Day, I can’t think of a better way to start spring. You’ve just had some very high level of summaries from Phil on our associated ounces and our REUs. And it’s a great comfort that we actually have slightly higher numbers in total in terms from our assets. I think one of the things we get asked by investors is always the stress test, our portfolio what’s going to be challenged. And the way I look at our portfolio is what I particularly focus on is the M&I REUs from our portfolio because in my mind, essentially what we’re going to grow from our assets that we can measure today.

And so we're still looking at slightly higher M&I REUs of just north of 10 million ounces. So in my mind I expect to grow over the life of mine about $13 billion of today’s gold price. And so to me I think it’s a measure of, a personal measure to me is the strength of the portfolio and how well it’s doing.

In slide number 30, it’s a plug for the asset handbook; it came out hard off the press as of just this morning, just posted on our website. It’s a lot of work that’s been put in by the management team here to put it together. I think this is something that’s much more relevant than any annual report that’s put out by any company. And I think what we’ve done is we’ve gone the extra mile in terms of try to provide disclosure on our over 370 assets that we have in this company. We just can’t do them justice in our presentation like this.

And besides having an update at least on our advanced and producing properties, there is about 60 of those in the book, plus there is a listing of all the exploration assets. We also have our oil and gas reserve information in the book, as well as the NPVs put out by an independent consultant whose details are there.

Last year we had a very lengthy discussion on our oil and gas assets. Really nothing has changed, mostly dominated by Weyburn, the reserve and resource numbers have been very stable and so you will find those details in the book, Geoff Waterman is here though, if there is any questions so he can talk about oil and gas.

You will also find information on our land position, we’re up to now 44,000 square kilometers of lands that are covered by our royalties and streaming interest and some other corporate information. So please take this, this is a buy born our company. And as I say, I think we’ve gone the extra mile in terms of trying to provide you the best disclosure in the resource business.

For any of those that want to get a hard copy, you can email Stefan at info@franco-nevada.com.

On slide number 31, just I would like to take great pride is that I am the CEO of a company that can differentiate itself. And despite declining gold prices, we are again increasing the dividend for the seventh consecutive year, since we’ve come back in the business. And so I think it’s a great demonstration of the strength of our business model, the strength of our portfolio.

I also get challenged all the time, I get various investors that say, what, your yield is only 1.7%, we want more. I keep reminding them that it’s because our share price has been going up over time that anyone who’s bought our shares at our IPO six years ago is now getting almost 6% yield on their cost base from our IPO. So I think that’s the much more important aspect as in terms of how is that dividend growing over time and what is the yield in any specific time. So anyways, the track record is driven totally by the eagle of the Board and management here and we hope to continue to increase our dividend going forward.

On the next slide, we will move onto our outlook and how do things look going forward. And what you can see is that for 2014, we are projecting some modest growth from our existing portfolio. And what this shows you is the various components of what we expect to be higher or lower in 2014 compared to 2013.

We have a number of new assets; of course those are accretive and some other assets are ramping up. Offsetting growth is we are again assuming Palmarejo at its minimum. Now if you recall, we have a minimum 50,000 ounce commitment from Coeur d'Alene. We always use that in our assumptions and Palmarejo always used to surprise us by doing a better than that. But since we don’t know any better, we continue to assume the 50,000 ounce minimum and we’ll probably continue to doing that. And I think the other changes are self explanatory. So that’s the sum up for 2014.

If you go into the next slide, we actually pulling together in the range that we’re expecting for 2014 and that’s again as I said modest growth up to 245,000 ounces to 265,000 ounces of GEOs. This compares to the 241,000 that we produced in 2013 and 230,000 that we did in 2012.

Oil and gas revenues are projected between $60 million to $70 million, roughly where we are right now, but what we’re assuming now is $95 WTI oil with a higher differential than we had last year, because that’s what we’re experiencing right now. So that’s the best projection we can make.

We’re also expecting to begin funding of our Cobre Panama asset this year. As you know, we are discussing with First Quantum some changes to the reporting and security arrangements under the existing contract. We do not expect the commercial terms of our contract to change. Based on First Quantum’s publicly announced capital spending plans, we expect Franco-Nevada to contribute in the area of $200 million to Cobre Panama this year.

On slide 34 is our five year outlook. And what we’ve done is we’ve netted out the pluses and minuses for a lot of operations and projects. And overall, we’re seeing positive growth. And for those of you that have really good memories, last year we projected exactly the same number out five years, 300,000 ounces to 325,000 ounces. But the big difference last year is that we expected Inmet would actually have the Cobre Panama project fully in production by 2017. We’re aiming to get an early 2016 start. And so we were factoring that into our forecast.

Now, we are only factoring First Quantum because they are working on a longer timeline to be only at half of their new capacity numbers by 2018. So, we are reflecting only half of that number in our five year projection. So actually next year, I am hoping when we bring all Cobre Panama in was to be able to show you even more growth. But this is the best expectation we can get right now.

And again our projections for oil and gas revenues, somewhat higher and that’s assisted by some expectation that will get some normalizing in the WTI -- Canadian oil price differentials going forward.

So with slide 35, I am going to try to wrap this up by this up, at least the formal part of the presentation. And what I am showing you is our 6 year performance chart. What I am proud of is that this management team has been able to create real value for shareholders since our IPO. And we just calculated this morning our total return compounded annual growth rate for shareholders as of the close of yesterday is 23.8%. So that is something that is going to be tough to keep it up at that level, but it’s a great six year performance number for us.

I believe that we have a business model that can continue to provide investors with the gold investment that can provide -- that can also provide yield an alpha to gold. We want Franco-Nevada to continue to be the gold investment that works.

And with that, I think the management team is ready to take questions. We have people on the conference line. What I like to do is, we also have some visitors in our boardroom here in Toronto, so what we will do is we’ll queue up some questions on the phone, but before we start that, I would like to take any questions that might be in the room from any of the analysts here. And there is a microphone here. So, are there any questions in the room? Please, Cosmos? Cosmos, we’re going to just give you mic here just so others can hear.

Question-and-Answer Session

Cosmos Chiu - CIBC World Markets

Thanks David and team. Congrats on a good year. I guess my first question is given what we have seen in the past week or so in terms of base metal prices, especially copper prices coming under pressure. There has been some concern in terms of gold companies exposure to copper prices. Maybe you talked about that as well in terms of stress testing your model but could you give us a sense in terms of your exposure to copper, I guess one will be Cobre Panama but beyond that as well?

David Harquail

Yes. Just off the top of my head, Cobre Panama by far but the nice thing about it is I think we are somewhat hedged is that if they slow down the project, well, we slow down putting money into that project because there is a formula there basically we put in $1 for every $5 other that go into that project. And in terms of First Quantum spending, they have to put $3 for every $1 we put in then [Koreans] put another dollar. So what it might turn out is we might have a longer term option on a very good gold deposit that will take longer to come. I am looking at it in the very long-term; I am not particularly concerned if it starts in 2017 or 2020 as that we have the rights for that gold forever and it’s something that I am confident, will get reduced at some point.

In terms of other projects, most of our gold projects are established primary gold producers. I can think of Robinson which is in material in Nevada which is a byproduct copper operation; our Sudbury operations which are really mostly platinum and palladium driven rather than gold and depend a bit on some nickel production and nickel offtake and copper offtake. But beyond that I think we are much less exposed to base metal retrenchment than almost any other company out there.

Cosmos Chiu - CIBC World Markets

That’s great, thanks David. So maybe another question here, for those of us in Toronto and also certainly in other parts of Canada; it’s actually been quite cold. I’m happy that as you said it’s the first day of spring today. Maybe this is a question for Geoff here. You talked about oil and gas being 17% of your portfolio in terms of revenue, how much of that is kind of direct exposure to echo gas prices and how should we look at that in terms of what you’ve kind of factored in, in terms of your 2014 guidance?

Geoff Waterman

Thanks Cosmos. With respect to 2014 guidance, it’s based on -- well, 12% of our volumes are going to come from gas. And that’s going to generate about 6% of our forecast revenues in 2014, it’s directly from gas.

Cosmos Chiu - CIBC World Markets

It’s a safe, really, it’s a pretty safe assumption that sort of have a positive impact at least on Q1 2014?

Geoff Waterman

Yes.

Cosmos Chiu - CIBC World Markets

Maybe just one last question from me, I don’t want to be hugging the mic here. In terms of the write-down, this isn’t the first write-down that we’ve seen I guess the last one was also related to the Gold Wheaton assets which Sandip, you mentioned that it was acquired back in 2011. What’s the current carrying value now for those former Gold Wheaton assets?

Sandip Rana

Okay. So, there is a slide in the appendices that does give our net book value of our assets, but in total the Gold Wheaton assets, so including the two South African streams is about $450 million remaining in book value, large portion is obviously Mine Waste Solutions and then the Morrison Levack deposit.

Cosmos Chiu - CIBC World Markets

Okay, great. Thank you.

David Harquail

Yes.

Unidentified Analyst

Hey, good morning guys. I just had a question on your oil and gas division. Last year, you had guided to revenues from wave earned by 2017 around $67 million this year, currently you’re guiding to revenues for your oil and gas business entirely 65 to 75 by 2018. I’m just wondering what’s happened there, are costs, the wavering unit going up or are we seeing lower rates production at the other units, you were also using $90 last year and $95 this year, so what are expected higher revenues?

David Harquail

It’s mainly production; it’s not the size we anticipated. Cenovus as the operator is in the past tended to try to maximize production and speed up or push out that EUR program as quickly as they can. Right now they are taking a view on that property is a cash flowing property from, they look at it as a cash flow machine. So they’re concentrating more on just maintaining existing production, slower disposition of capital going forward. So that will impact the production numbers in the future. It doesn’t impact recovery of reserves; we’re just going to get them over a longer period of time.

Unidentified Analyst

Okay, perfect. Thank you.

Unidentified Analyst

Hi. David, can we just chat about Cobre Panama? You said that the commercial terms aren’t changing, so what exactly are you working on?

David Harquail

Well, as we’ve stated, it’s the reporting, because what we had is our business development team, it is always the concern when we’re within that, would they have enough money to finish off a project. And part of our deal was we said okay, we’ll put in our money pro rata with you, but we want to constant test in terms of is there enough -- what’s the ultimate project capital going to be and there is enough to cover it and as well as we want to see the progress, how efficient was the money being spent, was it being spent -- where we expect it. So as a result, we have the ability to use an independent consultant to review the spending being put on a project. We had access to all the joint venture monthly reports.

And I think First Quantum, quite rightly saying is we’re a better credit and also they are not accustomed to really joint venture relations, they do want the flexibility to change their plans as they go along. So, I think we’re willing to be flexible on that. We hear their issue on that; they are a different company than Inmet was, so we can consider that.

And then the other aspect is that, because we were providing a $1 billion financial commitment to this project and was actually core for Inmet being able to proceed on the project that we actually obtained a security essentially a good portion of the equity that Inmet had on the project and they were restricted in terms of the borrowing capacity against that project.

Again First Quantum is making the point is we’re on a better credit than Inmet. And we would like -- we think it’s proper to be able to do project lending against the project. And will you consider possibly going pari passu with some guarantees from First Quantum. And so, we said we’re willing to discuss that. And so, we expect to be able to sort this out in the next few months.

What’s happened is really First Quantum has been focused on a whole bunch of other issues, this has not been a huge priority; we expect it will be resolved sometime this summer.

Unidentified Analyst

So, the borrowing is really that they’ve changed in terms of being able to borrowing the project?

David Harquail

Yes. In terms of they don’t -- they think we have too much security relative to our position in the project. And as again, we’re just going to make a judgment call, okay, what will the new security package look like? And we have to negotiate that. So it’s just too early to say what the final outcome will be. But we are having a constructive dialog with First Quantum and we hope to resolve, have the specific detail to you this summer. It’s just First Quantum has a lot of things to do right now.

Unidentified Analyst

Okay. And maybe just on your acquisition strategy, we think we had talked about maybe acquisitions in the $100 million to $300 million range for you in 2014. Has that changed versus doing $1 billion type acquisition?

David Harquail

It’s our sweet spot, I know as you saw Teranga worked I think very well, it’s a nice accretive deal for us. I think most of the things, all that we have on the pipeline right now are both sided type of dimension deals. We are working primarily precious -- on gold deals right now. And I think the sweet spot is deals in the few hundred million dollars for us. We can build a very nice diversified portfolio that way.

Unidentified Analyst

Thanks. And just if I can quickly follow-up on the First Quantum, should we expect negotiations to conclude before you would begin making the payments that you’ve guided for this year 200 or…?

David Harquail

I think so, that’s part of our handshake right now as they said because they -- handshake is essentially is we don’t want to do all this extensive reporting on the project. So, we’re not going to cash call you right now. So, we don’t -- but once we can sort out what do you really need, at that point, we will cash call you. So that’s why we kind of judge it, sometime this year we’ll get a deal done and then we’ll catch up on our contribution and that’s how we’ve estimated that $200 million.

Unidentified Analyst

Okay, thanks. And then just a couple of questions on potential deals with the oil production, oil and gas production a bit lower than you had previously expected, differentials have been higher, it’s now slightly lower part of the revenue mix. Does that free up room to do some essential oil deals or…?

David Harquail

It does and then there is a number of things out there especially on the royalty side in Western Canada, it’s just as nothing that we can’t do another $400 million wavering acquisition as we did in 2012. But is there room for us to do another $100 million or $150 million, we could squeeze that in now, especially now that we’ve been adding other gold assets. So pro rata, there is room to do some smaller oil and gas asset acquisitions.

Unidentified Analyst

Okay, thanks. And just lastly on the slide you gave us here with the 3rd Avenue deal flowing gold royalty stream financings, can you comment a bit, are they -- is this just open up the field to more deal potential or are these deals in more attractive inherently because…

David Harquail

I think what Paul is trying to get across is just open up the universe because before we really couldn’t do royalty and streaming deals in gold companies because that was a primary optionality. And then I think what’s happened now is because of the way the markets have turned, all of a sudden gold, royalty and streaming financing actually is very competitive relative to debt and equity markets. So that’s something we never actually expected. We actually expected streaming will always be a byproduct type business. And the arbitrage is on byproduct mines. Now we are seeing, geez, we are competitive right across the board and we are competitive against project lending from commercial banks because we can make it more of a one stop shop rather than having a syndicate.

For a couple of hundred million dollars right now, you have a very large syndicated banks; you have all kinds of cash sweep accounts, all kinds of fees and consultants. And we are so much simpler to deal with and we are actually partnering with the companies and taking production risks, won’t take the commodity risk, we won’t require hedging. And so I think companies are now seeing us as a much better alternative. So, what I am impressed with is since we’ve come public with the IPO, our universe of possibilities just continues to expand and that’s why I think there is a lot more running room to grow this company.

Unidentified Analyst

Okay, thanks.

Unidentified Analyst

A question on the dividend, had increasing dividend for seven years now, how do you think about that going forward?

David Harquail

Upward and onwards; so I think one of things is as we’ve said our policy is to be sustainable. We like to set it at a level that we think we’ll never have to cut it and progressive. And so I think we’ve been able to achieve the progressive part. I wasn’t sure in terms of whether we get enough deals done to justify it, but happily we’ve booked enough deals late in the year or early this year so the Board felt comfortable, okay those are accretive enough, we can add a bit more of a dividend.

I’d say the future dividend increases are going to be dependent on us booking more and more assets to be able to justify those dividend increases. So I can’t guarantee it, but I think it expresses that we’re confident right now that we have a dividend that is absolutely sustainable at the levels we’re doing it. We’ve been able to increase our estimate each year. So, our ambition is to continue to increase each year.

Unidentified Analyst

Is there a set formula in the way that you think about it, no?

David Harquail

No, there isn’t. We don’t want to tie it to earnings or cash flow or set payout ratio, we think that’s a mistake. The last thing you should be doing is cutting your dividend when gold prices go down because that’s when investors need even more support for your share price. So, we think actually having a dividend that is sustainable irrespective of a gold price, makes our stock even more defensive and lower risk. And that’s what we want to do is to continue to differentiate ourselves.

Unidentified Analyst

David, just 3rd Avenue open up more potential for that to be counted as debt by any of your rating agencies?

David Harquail

Maybe Paul, you talk about it. I look at it as almost a gold loan from our part. But Paul, do you want to talk about being rated as debt?

Paul Brink

I think the most important point is the folks that we’re dealing with in most of these structures are more junior intermediate type players. So ratings for them is not top their list of consideration. So I don’t think that’s anything that’s going to affect the amount of deals that you can do in this space or not.

I think if you’re dealing with senior companies, yes. I think our interpretation of the S&P when they put out their report, all there, their view on streaming was they said, there are elements of stream transactions that if you have them, we would treat them as debt. And so, our view and what we’re trying to put out on business model is we're not banks that are set with a particular structure. We can be flexible upon how we do our deals and if somebody is concerned its rating we can structure a deal where that’s not going to be an issue in the particular deal. So we don’t think too much about rating agencies.

Unidentified Analyst

And would you consider to take silver stream transaction?

David Harquail

We consider silver stream transaction, where I don’t have; I don’t see it as a precious metal and is obviously a good correlation with gold, so we have looked at deals that have been silver stream transactions. Obviously our principal commodity is gold and I think focus for the company will always be principally as a gold company.

But if there is a good transaction that came along, we're driven in all deals whether it’s gold or whether it’s oil or gas or other minerals. We don’t start with the commodity, we start with the resource. Our business is invest in resources that we think overtime have got a great potential to expand that’s really where our business is successful. What the commodity is, is the second consideration that goes into that.

Unidentified Company Representative

And I think the big advantage to doing these go forward, loans and having the trailing royalties is open up that [action of a] deal, so for instance you look at both Teranga and Klondex they essentially need it, a set amount of money, but if we actually made it all royalty or streaming deal it would have been too oppressive for the company or it would be taking too much of the margin.

So by doing it alone with the trailing a royalty or stream, I think it’s much more palatable because often these folks would be looking at borrowing money from some other loan shark out there. And we can give a much better rate because what we are looking for is that longer term participation of a project and by packaging that way we're not ruining economics longer term for these projects. We think it’s a positive for both sides. So perhaps operator, if there is anyone on the line that has any questions, if you could just pull that?

Operator

(Operator Instructions).

David Harquail

Our objective was to be just under one hour. It can probably be right…

Operator

(Operator Instructions).

David Harquail

I think everybody is here.

Operator

There are no questions from the phone at this time.

David Harquail

Thank you operator. Are there any more questions in the room? Please, Annie.

Unidentified Analyst

You are thinking about the future deals and the opportunities out there, obviously everybody is looking exactly for the long life asset, the good asset, so there is a lot of…

Operator

We have a question from the phone.

David Harquail

Annie will come back. So you could go ahead please, operator. All right, so operator, are we done there? Okay. Annie why don’t you go ahead there with that question?

Unidentified Analyst

So back to my thought, now the competition also being what it is today for good assets and the rise in yields and the cost of capital going up, how you do you think about the returns that you should expect with the huge deals coming up. Is the profitability going to be squeeze and you really need to think about the optionality as the queen of the crop and getting your returns that way?

David Harquail

I think you just have to look at more recent deals; our returns are getting higher and more certainty in terms of the return and timing on those deals with faster paybacks. So I think what’s been happening is that reflection of the overall I guess competition for capital in the market that very scares. And as a result we’ve actually been able to improve the returns on our transactions.

So I think what we’re doing is we have less comp at -- always our biggest competitors has always been the equity markets and the bought deals. And you can actually imagine just about every bought deal that’s been announced in the last three months we had a term sheet, but we were knocked out by the bought deals instead. And I think that’s fair enough, but there will be opportunities for us to be what exercise our business. And what I am pleased about is we’re getting better deals now than we did in the old days, albeit there is not the long-term assets you’re talking about, but again they have that fantastic exploration optionality either in Senegal or Nevada that we really love. So we actually do think they are going to be longer-term, we can’t measure them today.

So, are we seeing a lot of head-to-head competition with other royalty companies, not really. Two years ago we had almost a dozen of the royalty companies being financed in the market; just about all of them are orphans today that are being asked to be acquired. So I see if anything my hope is that actually the royalty companies as a group will actually start acting like commercial bankers and we are beginning to actually start in the syndicate deals between each other so that none of us is taking a disproportionate risk and yet we can make even more material deals and financings for operating companies.

And so I see that as another avenue that would be the Fourth Avenue growth for our business. And so what I like is we are finding new ways to continue to grow our company [little] over $7 billion market cap company today.

Unidentified Company Representative

Appreciate it. (Inaudible) is there a question?

Unidentified Analyst

What’s your total capital or cash commitment for 2014 and 2015 right now?

David Harquail

We have, we're estimating $200 million for Cobre Panama, oil and gas will be $4 million in terms of capital requirement. And beyond that there is nothing else, except the $400 we pay on some of our streaming ounces. So we’ll pay our streaming requirements.

And then I have to pay salaries, I guess for management, but we're going to be down 10% this year, so very proud of this. So cash wise, we are down to about $15 million all-in to run this company and we got actually a great lease on these new offices here, so it doesn’t, so it’s not as expensive as it looks.

Unidentified Analyst

(Inaudible).

David Harquail

2015 is 280 I think, we are guessing about 280 the year after I think, based on the First Quantum schedule. I suspect we’ll get more refined as First Quantum refined better spending plans as well. And so it will change, but it’s the best estimate we can give you right now. So a nice thing, about it is at least this year, we're funding Cobre Panama just on a cash flow and next year might be a bit more than our free cash flow on our dividends, but it’s really future investment for us.

What I’d like to do if there is no other question. I just like to thank everybody, I think this has been a new arrangement we’ve invited people to participate essentially in our conference call and our Board room to take advantage of the large rental space that we have here.

So I think it’s worked very well, and I’ll consider doing it again in the future, as well as we don’t do a really extended Analyst Day or Investor Day dissertation, because we think everything is in the book that’s come out today. So encourage everybody it’s much more valuable than the annual report, please take one of those, it will answer most of your questions.

Management is available after this call. We have a fewer refreshments out here for the people there, in our Board room. And then we're inviting everybody for our next quarterly results, our first quarter results will be released after the market close on May 7th and on the same date we are having our Annual General Meeting which would be at the TMX Broadcast Center here in Toronto. So all of you are invited for that and we’ll have some refreshments after that as well.

So thank you very much. And look forward to the next call. Bye, bye.

Operator

This concludes today’s conference call. You may now disconnect.

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