Innovate or Die - An Investor's Perspective, Presented by David Harquail
- 1. “Innovate or Die – An Investor’s Perspective” Presentation to: CMIL Signature Event February 12, 2013
- 2. Franco-Nevada (FNV on TSX & NYSE) A gold focused royalty & stream company Low risk growing portfolio Participation in world class discoveries Profitable with increasing dividends Strong cash position Outperforming other gold investments FNV 2
- 3. Diversified Portfolio of Over 340 Assets* Mineral Assets Oil & Gas Exploration Assets Producing Advanced 45 28 137 136 Gold -US Both organic and Exploration Does not -Canada acquisition near- optionality at no include 158 -Australia term growth cost to FNV undeveloped oil -International & gas interests PGMs Other Minerals 210 mineral assets 136 producing Oil & Gas assets 346 total assets * As at December 31, 2012 FNV 3
- 4. Key Producing Assets* GOLD ASSETS PGMs U.S. Australia Stillwater Goldstrike Duketon Sudbury (3 mines) Gold Quarry Henty Pandora Marigold South Kalgoorlie Mesquite Bronzewing Other Hollister International Weyburn – oil Canada Tasiast Midale – oil Sudbury (3 mines) Palmarejo Edson – gas / ngl’s Golden Highway Subika Mt. Keith - nickel (3 mines) Musselwhite Cerro San Pedro Timmins West Edikan Available Capital Hemlo MWS ~$1 Billion A diversified global gold portfolio * See 2012 Annual Information Form and 2012 Asset Handbook for further detail FNV 4
- 5. Business Model Benefits FNV provides yield and more upside than a gold ETF with less risk than an operator Gold ETF FNV Operators Dividend Yield -0.4% >1% 0-2% Leverage to Gold Price 1 >1 >1 Exploration & Expansion 0% 100% 100% Reduced Exposure to: Capital Costs 0% 0%* 100% Operating Costs 0% 0%* 100% Environmental Costs 0% 0%* 100% *Revenue royalties & streams FNV 5
- 6. Outperforming Other Gold Investments 400% 360% FNV 320% 280% 240% GOLD 200% 160% 120% 80% S&P/TSX Global FNV IPO: Gold Index Dec 2007 40% FNV and S&P/TSX Global Gold Index converted to USD. Chart to Feb 4, 2013 0% 2007 2008 2009 2010 2011 2012 ~30% compounded annual growth rate ~$8 billion market cap FNV 6
- 7. Gold Equities vs. Gold 0.8 TSX Gold Index / Gold ($USD) 0.7 0.6 0.5 0.4 0.3 0.2 TSX GOLD/GOLD(US$) 0.1 13 week moving avg 52 week moving avg 0 FNV 7
- 8. New Finds are Proving Increasingly Elusive... Represents 189 gold deposits discovered since 1990, each with at least 2m oz of gold in total reserves, resources and past production (or at least 1m oz in reserves) Data sources: Metals Economics Group – Strategies for Gold Reserves Replacement 2012 FNV 8
- 9. Declining Discoveries Number of Gold Discoveries Per Year Over 5Moz 12 10 Operating Not Operating 8 7 7 5 6 6 2 4 4 1 3 1 4 2 2 6 5 2 4 4 4 4 4 4 3 3 3 1 3 3 2 2 1 1 1 1 1 1 0 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 Source: Intierra, Barrick Discovery Year FNV 9
- 10. Declining Supergiant Discoveries Number of Gold Discoveries Per Decade Over 20Moz (Supergiant) 20 18 16 14 12 10 18 8 14 6 11 4 6 5 5 2 4 3 3 0 1 1 1900s 1910s 1920s 1930s 1940s 1950s 1960s 1970s 1980s 1990s 2000s 2010s Discovery Year Source: Barrick FNV 10
- 11. It’s All About Grade High FNV 11
- 12. New Finds are Taking Longer to Bring to Market.. Data sources: Metals Economics Group – Strategies for Gold Reserves Replacement 2012 FNV 12
- 13. Cumulative Returns of Major Stakeholders 500 Government 400 “C-suite” 300 200 Employees / suppliers Investors 100 0 2005 2006 2007 2008 2009 2010 2011 -100 Source: Deutsche Bank, company data, datastream * The equity holder returns represent the returns for AAL, BHP, RIO, XTA FNV 13
- 14. The New Gold Equity Space Royalty & Stream Co's $30 Billion GOLD ETF's $150 Billion GOLD Equities $400 Billion One in three investors have chosen new gold investment options FNV 14
- 15. Franco-Nevada Provides: Growth • Participation in world class discoveries • Strong balance sheet for future acquisitions Yield • Dividend increases in each of past 5 years 400% Low Risk FNV 360% • Diversified and secure portfolio 320% • Minimized inflationary cost risks 280% 240% GOLD 200% 160% Why Own a 120% Gold ETF? FNV IPO: Dec 2007 S&P/TSX Global Gold Index 80% 40% FNV and S&P/TSX Global Gold Index converted to USD. Chart to Feb 4, 2013 0% 2007 2008 2009 2010 2011 2012 FNV 15
- 16. Peak Gold or Not? We are finding a lot of gold but: • Size and quality of deposits are much lower • Capital and Operating costs have ballooned • Margins and free cash flow have not increased with gold price Average cash costs versus Gold price 750 1,800 Total for the period Q4 2005 - Q2 2012 2011 Cash Costs +187% Gold Price +270% Current production +23% • 650 +12% 1,500 level can sustained for 2010 2012 +24% +-5% +12% next 10yrs at today’s Cash Costs (US$ per ounce) +16% Gold Price (US$ per ounce) 2009 550 1,200 +38% gold price 2008 +12% +1% 450 2007 +7% 900 +28% 2006 +30% +26% +23% 350 600 250 300 Source: Thomson Reuters, GFMS FNV 16
- 17. What is Needed A paradigm shift in: • Exploration Technology (An equiv. to 3D Geophysics in O&G) • Processing Technology (Heap leach 70s; Pressure Leach 80s) • Mining Technology (In Situ leaching?) Replacement Cost for an Ounce of Gold Easier access to land 1800 1600 Acceptable Profit Supportive fiscal regimes 1400 Tax Overhead OR 1200 Discovery Costs ? Construction US$ per ounce Capital New business models 1000 Sustaining 800 Capital 600 Cash Operating 400 Costs 200 0 Source: CIBC FNV 17
- 18. Thank You FNV 18
Editor's Notes
- #2: Thank you.I was invited here by Peter Kondos as we were both part of the World Gold 2011 conference in Montreal. My business is to invest in gold mining projects. We do not do technical R&D or innovation. Rather our innovation is through our unique royalty business model and investment criteria.I think Peter felt we could give a different perspective on the need for innovation in mining. So I am going to tell you what investors are thinking right now about the sector I know best, gold mining.
- #3: First, where I am coming from. Franco-Nevada is:, not an operating or exploration company avoid yellow truck disease an investment company objective is to have a board, robust, low risk portfolio exposure to the best aspects of the gold business (price and exploration optionality) without the downsides.
- #4: I have been doing royalty mining finance for 26 years. Over that time have built a very large global portfolio royalty interests. CategoriesBut over 80% of our business ins precious metals.$8 billion dollar capitalization which puts us in the high end of the mid tier global mining companies.
- #5: Also privileged, our portfolio is now a cross section of the entire gold business.Majors, mid tiers, exploration companies around the world.World class projects such as Goldstrike, Detour,, Sudbury on so forth.Upcoming projects such as Subika and Edikan in Ghana or Tasiast in Mauritania.This shows only our material producing assets. In August we did our biggest financing yet with a $1 billion commitment to help finance Inmet’sCobre Panama project from which we will receive the gold produced. As you might know First Quantum is now trying to acquire Inmet for this project.
- #6: What is innovative about what Franco-Nevada does: as I said, we don’t operate, develop or explore. Franco-Nevada has just a small piece of the revenue line of lots of projects - 2% A lot of investors are looking for exposure to gold without the risk of investing in individual mines. $140 billion in gold ETFs Franco ….
- #7: It has been just over five years since we went public.The relative results speak for themselves. >30% + compounded annual rate of return over 5 years.Out perform gold which has doubled over the last five years.But what is astonishing is despite gold doubling, the over all valuation of gold companies is even lower today than 5 years ago.
- #8: In fact its just not the last 5 years, chart for 10 yearsGold companies are supposed to provide a leveraged return to gold.Instead, gold stock have vastly underperformed the gold price itself over the last 10 years.
- #9: One of the reasons, not finding as much quality gold deposits as we used to. Francois Robert of Barrick and Alan Galley of CMIC are working on initiative here. You can see they are sorely needed.
- #10: Similar chart but rather than in total ounces, by number of projects.Same message.
- #11: It is the Supergiant deposits that create world class companies.Anglo and Goldfields – the WitswatersrandBarrick - GoldstrikeNewmont – Carlin and YanacochaBut caution, needs to be good grade…….
- #12: In absence of large good grade discoveries, developeing large low grade deposits.Can see it with trend in mined grades. MINE AND RESERVE GRADES HAVE DROPPED 50%.Bigger volume projects to produce the same amount of gold. CAPEX per ounce used to be $60 per ounce. Now it is $300 per ounce.Bigger volume drives operating costs. More mining, milling and energy to produce the same ounce. All in costs approaching $1200 per ounce, quadruple what it was 10 years ago.Even more scary, these costs are high grading the mines above the average reserve grade.Poor investors are seeing margin squeeze rather than benefiting from a higher gold price.
- #13: But from an investor perspective the coup de grace, is just time value.Now taking over 20 years to go from discovery to production.For an investor, time value of something out 20 years ago is nothing!Why there is so little interest in exploration stories today. You could find a world class project but can you monetize it in worthwhile period of time?
- #14: Then what also hurt investors is that they are putting in the risk capital yet see disproportionate returns paid to:Government wit h new taxesCompany executives - Mining has its own OCCUPY movementWage and input inflation – our of controlInvestors last.
- #15: People who have money are not stupid.It used to be the only way to invest in gold was through gold mining companies.No longer the case.Now 1 in 3 investors are getting their gold exposure through ETFs or companies such as my own.I showed this chart at the PDAC last year. It was not a popular message. Effectively one third of the market regards as the value add by geologists, developers and operators to be now totally irrelvant. They want gold exposure with out the issues.
- #16: Our company is competing with the Gold ETF rather than gold operating companies.
- #17: So these are the conclusions investors have about the gold industry today.From an investor perspective, it is a dying industry.
- #18: I think the this conference is addressing all the technical needs. If we can’t resolve technically, the alternative is innovating new ways of doing business or business models.The gold ETF has come from nowhere in 2004 to represent almost a third of gold investing.Gold royalty companies from nowhere 5 years ago to a major force.What could be next? Production sharing agreements on international projects as O&G does Aboriginal jv companies on reservation lands. Unique tax structure?