EX-99.2 3 a16-5653_1ex99d2.htm EX-99.2

Exhibit 99.2

 



 

MANAGEMENT’S DISCUSSION AND ANALYSIS

 

This Management’s Discussion and Analysis (“MD&A”) of financial position and results of operations of Franco-Nevada Corporation (“Franco-Nevada”, the “Company”, “we” or “our”) has been prepared based upon information available to Franco-Nevada as at March 10, 2016 and should be read in conjunction with Franco-Nevada’s audited consolidated financial statements and related notes as at and for the years ended December 31, 2015 and 2014.  The audited consolidated financial statements and MD&A are presented in U.S. dollars and have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

 

Readers are cautioned that the MD&A contains forward looking statements and that actual events may vary from management’s expectations. Readers are encouraged to read the “Cautionary Statement on Forward Looking Information” at the end of this MD&A and to consult Franco-Nevada’s audited consolidated financial statements for the years ended December 31, 2015 and 2014 and the corresponding notes to the financial statements which are available on our website at www.franco-nevada.com, on SEDAR at www.sedar.com and in our most recent Form 40-F filed with the Securities and Exchange Commission on EDGAR at www.sec.gov.

 

Additional information related to Franco-Nevada, including our Annual Information Form, is available on SEDAR at www.sedar.com, and our Form 40-F is available on EDGAR at www.sec.gov. These documents contain descriptions and maps of certain of Franco-Nevada’s producing and advanced royalty and stream assets.  For additional information, our website can be found at www.franco-nevada.com.

 

1



 

Table of Contents

 

Overview

3

 

 

Highlights

4

 

 

Guidance

6

 

 

Selected Financial Information

9

 

 

Overview of Financial Performance — Q4 2015 to Q4 2014

10

 

 

Overview of Financial Performance — 2015 to 2014

28

 

 

Financial Condition Review

38

 

 

Balance Sheet Review

38

 

 

Financial Position, Liquidity and Capital Resources

38

 

 

Capital Resources

41

 

 

Critical Accounting Estimates

41

 

 

New Accounting Standards Issued But Not Yet Effective

43

 

 

Outstanding Share Data

44

 

 

Internal Control Over Financial Reporting and Disclosure Controls and Procedures

44

 

 

Non-IFRS Financial Measures

46

 

 

Cautionary Statement on Forward Looking Information

49

 

2



 

Overview

 

Franco-Nevada is the leading precious metals royalty and stream company by both gold revenue and number of precious metal assets. The Company is precious-metals focused but also has the largest and most diversified portfolio of royalties and streams by commodity, geography, revenue type and stage of project.  The portfolio is actively managed with the aim to maintain over 80% of revenue from precious metals (gold, silver & PGM).

 

Franco-Nevada Asset Counts at March 10, 2016

 

 

 

Precious
Metals

 

Other
Minerals

 

Oil &
Gas

 

TOTAL

 

Producing

 

40

 

6

 

59

 

105

 

Advanced

 

34

 

6

 

 

40

 

Exploration

 

138

 

38

 

19

 

195

 

TOTAL

 

212

 

50

 

78

 

340

 

 

The Company does not operate mines, develop projects or conduct exploration.  Franco-Nevada’s business model is focused on managing and growing its portfolio of royalties and streams. The advantages of this business model are:

 

·                  Exposure to precious metals price optionality;

 

·                  A perpetual discovery option over large areas of geologically prospective lands with no cost other than the initial investment;

 

·                  Limited exposure to many of the risks associated with operating companies;

 

·                  A free cash-flow business with limited cash calls;

 

·                  A high-margin business that can generate cash through the entire commodity cycle;

 

·                  A scalable and diversified business in which a large number of assets can be managed with a small stable overhead; and

 

·                  A forward-looking business in which management focuses on growth opportunities rather than operational or development issues.

 

Franco-Nevada’s financial results in the short-term are primarily tied to the price of commodities and the amount of production from its portfolio of producing assets.  From time to time, financial results are also supplemented by acquisitions of new producing assets.  Over the longer-term, results are impacted by the availability of exploration and development capital applied by other companies to expand or extend Franco-Nevada’s producing assets or to advance Franco-Nevada’s advanced and exploration assets into production.

 

Franco-Nevada has a long-term focus in making its investments and recognizes it is in a cyclical industry.  Franco-Nevada has historically operated by maintaining a strong balance sheet so that it can make investments during commodity cycle downturns.

 

3



 

Franco-Nevada’s shares are listed on the Toronto and New York stock exchanges under the symbol FNV.  An investment in Franco-Nevada’s shares is expected to provide investors with yield and exposure to gold price and exploration optionality while limiting exposure to many of the risks of operating companies. Since its IPO eight years ago, Franco-Nevada has increased its dividend annually and its share price has outperformed the gold price and all relevant gold equity benchmarks.

 

Franco-Nevada’s Relative Share Price Performance

 

 

Highlights

 

Financial — 3 months

 

·                  106,312 Gold Equivalent Ounces (“GEOs”)1  earned (2014 — 92,7741), an increase of 14.6% over Q4 2014;

·                  Revenue of $121.3 million (2014 - $123.0 million);

·                  Adjusted EBITDA2 of $95.8 million, or $0.61 per share (2014 - $96.2 million or $0.62 per share);

·                  Margin2 of 79.0% (2014 — 78.2%);

·                  Net loss of $31.4 million, or $0.20 per share (2014 — net income of $1.2 million or $0.00 per share);

 


1  GEOs include our gold, silver, platinum, palladium and other mineral assets. GEOs are estimated on a gross basis for NSR royalties and, in the case of stream ounces, before the payment of the per ounce contractual price paid by the Company. For NPI royalties, GEOs are calculated taking into account the NPI economics. Silver, platinum, palladium and other minerals were converted to GEOs by dividing associated revenue, which includes settlement adjustments, by the average gold price for the period. For average commodity prices used in calculation of GEOs, please refer to average commodity price tables on pages 10 and 28 of this MD&A.

 

4



 

·                  Adjusted Net Income2 of $23.7 million, or $0.15. per share (2014 - $31.6 million or $0.20 per share); and

·                  Operating cash-flow of $88.9 million (2014 - $93.9 million).

 

Financial — 12 months

 

·                  360,070 GEOs1 earned (2014 — 293,4151), an increase of 22.7% over 2014;

·                  Revenue of $443.6 million (2014 - $442.4 million);

·                  Adjusted EBITDA2 of $339.3 million, or $2.16 per share (2014 - $356.9 million or $2.37 per share);

·                  Margin2 of 76.5% (2014 — 80.7%);

·                  Net income of $24.6 million, or $0.16 per share (2014 — $106.7 million or $0.71 per share);

·                  Adjusted Net Income2 of $88.9 million, or $0.57 per share (2014 - $137.5 million or $0.91 per share); and

·                  Operating cash-flow of $317.2 million (2014 - $300.9 million).

 

Corporate

 

Antapaccay

 

On February 26, 2016, Franco-Nevada completed the acquisition of a $500.0 million precious metals stream from Glencore plc with reference to production from the Antapaccay mine located in Peru. Under the stream agreement, precious metals deliveries are initially referenced to copper in concentrate shipped. The Company will receive 300 ounces of gold and 4,700 ounces of silver for each 1,000 tonnes of copper in concentrate shipped, until 630,000 ounces of gold and 10.0 million ounces of silver have been delivered. Thereafter, the Company will receive 30% of the gold and silver shipped. The Company will pay an on-going price of 20% of the spot price of gold and silver until 750,000 ounces of refined gold and 12.8 million ounces of refined silver have been delivered. Thereafter, the on-going price will increase to 30% of the spot price of gold and silver.

 

Equity Financing

 

On February 19, 2016, the Company completed a bought deal financing with a syndicate of underwriters for 19.2 million common shares at $47.85 per common share. The net proceeds to the Company were $884.3 million after deducting share issue costs of $35.8 million.

 

Weyburn Unit

 

On November 6, 2015, Franco-Nevada purchased an additional 0.29% working interest in the Weyburn Unit for C$6.4 million.

 

Antamina

 

On October 9, 2015, Franco-Nevada acquired a silver stream from Teck Resources Limited (“Teck”) on production from the Antamina mine located in Peru. In exchange for a $610.0 million advance payment, Franco-Nevada will purchase all recovered silver from Teck’s attributable 22.5% interest in the Antamina mine, subject to a fixed silver payability of 90%.

 


2  Adjusted Net Income, Adjusted EBITDA and Margin are non-IFRS financial measures with no standardized meaning under IFRS. For further information and a detailed reconciliation, please see pages 47-49 of this MD&A.

 

5



 

Franco-Nevada will pay 5% of the spot silver price for each ounce delivered under the stream agreement. The stream will reduce by one-third after 86 million ounces of silver have been delivered under the stream agreement, which is estimated to occur in 30 years, assuming current throughput.

 

Cobre Panama

 

On November 2, 2015, Franco-Nevada finalized terms of a replacement precious metals stream agreement for First Quantum Minerals Ltd.’s (“First Quantum”) Cobre Panama project located in Panama. The changes from the original agreement relate to streamlining reporting arrangements and providing First Quantum with greater flexibility to finance the project while maintaining Franco-Nevada’s security package. The principal commercial terms of the replacement agreement remain the same as the original agreement including that Franco-Nevada will provide a $1.0 billion deposit against future deliveries of gold and silver from Cobre Panama. The deposit will be funded on a pro-rata basis of 1:3 with First Quantum’s 80% share of the capital costs in excess of $1.0 billion. Initial funding of $337.9 million was made by Franco-Nevada on November 3, 2015 using existing cash on hand and the use of Franco-Nevada’s credit facility.

 

Credit Facility

 

Franco-Nevada has increased its credit facility to $1.0 billion while maintaining a $250.0 million accordion and extending the maturity to November 12, 2020.

 

Franco-Nevada drew $480.0 million in aggregate under its credit facility to fund a portion of the Antamina acquisition and Cobre Panama funding with $20.0 million being repaid in December 2015 and $230.0 million being repaid in March 2016. As at March 10, 2016, Franco-Nevada had $230.0 million in debt outstanding.

 

Candelaria

 

On July 29, 2015, Franco-Nevada made an additional and final $7.5 million payment to Lundin Mining Corporation due to an increase in reserves following resolution of certain post-closing items pursuant to the Candelaria stream agreement. The amount has been recorded as part of the stream interest.

 

Ring of Fire

 

On April 28, 2015, Franco-Nevada acquired royalty rights in the Ring of Fire mining district of Ontario by providing $28.5 million in loan and royalty financing to Noront Resources Ltd.

 

Dublin Gulch (Eagle)

 

On January 14, 2015, Franco-Nevada acquired an existing 1.5% NSR and 2.0% gross royalty on certain claims that comprise the Eagle deposit located in the Yukon, Canada for cash consideration of $7.0 million.

 

The streams and royalties acquired were accounted for as asset acquisitions.

 

Guidance

 

The following contains forward looking statements about our guidance for 2016. Reference should be made to the “Cautionary Statement on Forward Looking Information” section at the end of this MD&A. For a description of material factors that could cause our actual results to

 

6



 

differ materially from the forward looking statements below, please see the Cautionary Statement and the “Risk Factors” section of our most recent Annual Information Form filed with the Canadian securities regulatory authorities on www.sedar.com and our most recent Form 40-F filed with the Securities and Exchange Commission on www.sec.gov.

 

Franco-Nevada realized record growth from its mineral assets in the fourth quarter and full year 2015. Mineral assets contributed 106,312 GEOs with $4.4 million in revenue from Franco-Nevada’s oil & gas assets for the fourth quarter of 2015, and 360,070 GEOs and $28.0 million in revenue from oil & gas assets for 2015.  This compares to Franco-Nevada’s updated guidance of 347,300 GEOs to 370,000 GEOs and $20.0 million to $30.0 million in revenue from oil & gas assets.

 

For 2016, Franco-Nevada is expecting to receive between 425,000 and 445,000 GEOs from its mineral assets and $15.0 million to $25.0 million from its oil & gas assets. Of the 425,000 to 445,000 GEOs, Franco-Nevada expects to receive 295,000 to 305,000 GEOs under its various stream agreements compared to 222,670 GEOs in 2015.

 

GEOs include our gold, silver, platinum, palladium and other mineral assets. GEOs are estimated on a gross basis for NSR royalties and, in the case of stream ounces, before the payment of the per ounce contractual price paid by Franco-Nevada. For net profit interest (“NPI”) royalties, GEOs are calculated taking into account the NPI economics. Silver, platinum, palladium and other minerals were converted to GEOs by dividing the associated revenue, which includes settlement adjustments, by the average gold price for the period. For our 2016 guidance, silver, platinum and palladium metals have been converted to GEOs using commodity prices of $1,200/oz Au, $15/oz Ag, $900/oz Pt and $500/oz Pd.  For 2016, the WTI oil price is assumed to average $35 per barrel with a $3.50 per barrel price differential for Canadian oil.  2016 guidance assumes the continued steady state of operations from our assets and is also based on the expectations set out below.

 

We expect to fund approximately $130.0 million to $150.0 million in 2016 in connection with our precious metals stream agreement on Cobre Panama.

 

More specifically, we expect the following with respect to our key asset categories for 2016:

 

·                                          Precious Metals — U.S.:  Overall GEOs from U.S. gold assets are expected to be slightly lower in 2016 compared with 2015. Goldstrike royalty ounces are expected to be higher with Barrick’s thiosulphate project continuing to ramp up. Fire Creek/Midas are expected to deliver 8,000 ounces in 2016 pursuant to the agreement. Gold Quarry is expected to deliver 11,293 royalty ounces in 2016 as payments will be based on the minimum royalty provision. GEOs from Stillwater and Bald Mountain are expected to be lower.

 

·                                          Precious Metals — Canada:  GEOs earned from Canadian assets in 2016 are expected to be slightly lower than 2015 levels. Detour and Hemlo royalty ounces are expected to be higher as Detour continues to ramp-up production and higher production levels are

 

7



 

expected at Hemlo. These increases are expected to be partially offset by declines in production from other Canadian assets.

 

·                                          Precious Metals — Latin America:  GEOs from Latin America will grow significantly with Franco-Nevada benefitting from a full year of production from Antamina and the Antapaccay acquisition.

 

·                                          Precious Metals — Rest of World:  Rest of World gold assets are expected to generate higher GEOs in 2016 with 12,500 GEOs expected under the Karma stream in 2016.

 

·                                          Other minerals:  GEOs from other minerals are expected to be lower in 2016 as Osborne has lowered its production forecast.

 

·                                          Oil & Gas: For 2016, oil & gas revenues are projected to be $15.0 million to $25.0 million reflecting significantly lower oil price assumptions compared to last year.

 

For 2016, the Company estimates depletion expense to be $250.0 million to $275.0 million.

 

8



 

Selected Financial Information

 

(in millions, except Average Gold Price, GEOs,
Margin and per share amounts)

 

For the
Year Ended
December
31, 2015

 

For the Year
Ended
December 31,
2014

 

For the Year
Ended
December
31, 2013

 

 

 

 

 

 

 

 

 

Statement of Income and Other Comprehensive Income (Loss)

 

 

 

 

 

 

 

Revenue

 

$

443.6

 

$

442.4

 

$

400.9

 

Depletion and depreciation

 

216.3

 

163.1

 

129.3

 

Impairments1

 

62.9

 

31.5

 

143.6

 

Operating income

 

53.5

 

156.7

 

80.3

 

Net income

 

24.6

 

106.7

 

11.7

 

Basic earnings per share

 

$

0.16

 

$

0.71

 

$

0.08

 

Diluted earnings per share

 

$

0.16

 

$

0.70

 

$

0.08

 

Dividends declared per share

 

$

0.83

 

$

0.60

 

$

0.72

 

Dividends paid (including DRIP)

 

$

129.0

 

$

118.0

 

$

104.4

 

Weighted average shares outstanding

 

156.9

 

150.5

 

146.8

 

 

 

 

 

 

 

 

 

Non-IFRS Measures

 

 

 

 

 

 

 

Average Gold Price

 

$

1,160

 

$

1,266

 

$

1,411

 

GEOs2

 

360,070

 

293,415

 

241,402

 

Adjusted EBITDA3

 

$

339.3

 

$

356.9

 

$

322.5

 

Adjusted EBITDA3 per share

 

$

2.16

 

$

2.37

 

$

2.20

 

Margin3

 

76.5

%

80.7

%

80.4

%

Adjusted Net Income3

 

$

88..9

 

$

137.5

 

$

138.3

 

Adjusted Net Income3 per share

 

$

0.57

 

$

0.91

 

$

0.94

 

 

 

 

 

 

 

 

 

Statement of Cash Flows

 

 

 

 

 

 

 

Net cash provided by operating activities, before changes in non-cash assets and liabilities

 

$

317.2

 

$

332.0

 

$

292.8

 

Net cash (used in) provided by investing activities

 

$

(1,045.3

)

$

(815.9

)

$

1.4

 

Net cash provided by (used in) financing activities

 

$

374.1

 

$

394.7

 

$

(94.0

)

 

 

 

As at

 

As at

 

As at

 

 

 

December
31, 2015

 

December 31,
2014

 

December
31, 2013

 

Statement of Financial Position

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

149.2

 

$

592.5

 

$

770.0

 

Short-term investments

 

18.8

 

 

18.0

 

Total assets

 

3,674.3

 

3,466.9

 

3,044.9

 

Deferred income tax liabilities

 

33.2

 

40.3

 

30.0

 

Total shareholders’ equity

 

3.163.0

 

3,405.5

 

2,963.8

 

 

 

 

 

 

 

 

 

Working capital

 

$

253.9

 

$

677.8

 

$

861.2

 

Debt

 

457.3

 

Nil

 

Nil

 

 

9



 


1                   Impairments include impairment charges on investments, royalties, streams and working interests.

2                   For average commodity prices used in calculation of GEOs, please refer to average commodity price tables on pages 10 and 28 of this MD&A.

3                   Adjusted EBITDA, Margin and Adjusted Net Income are non-IFRS financial measures with no standardized meaning under IFRS. For further information and a detailed reconciliation, please see pages 47-49 of this MD&A.

 

Overview of Financial Performance — Q4 2015 to Q4 2014

 

Average Precious Metal Commodity Prices

 

Quarterly Averages

 

Q4
2015

 

Q3
2015

 

Variance
(Q4’15-Q3’15)

 

Q4
2014

 

Variance
(Q4’15-Q4’14)

 

Gold1

($/oz)

 

$

1,104

 

$

1,124

 

(1.8

)%

$

1,200

 

(8.0

)%

Silver2

($/oz)

 

14.76

 

14.91

 

(1.0

)%

16.47

 

(10.4

)%

Platinum3

($/oz)

 

908

 

988

 

(8.1

)%

1,229

 

(26.1

)%

Palladium3

($/oz)

 

606

 

615

 

(1.5

)%

788

 

(23.1

)%

Exchange Rate4

 

 

 

 

 

 

 

 

 

 

 

 

CAD

 

 

0.7492

 

0.7639

 

(1.9

)%

0.8806

 

(14.9

)%

 


1                   Based on London Bullion Market Association (“LBMA”) Gold Price PM

2                   Based on LBMA Silver Price

3                   Based on London PM Fix

4                   Based on Bank of Canada noon rates

 

The prices of precious metals are the largest factors in determining profitability and cash flow from operations for Franco-Nevada. During the fourth quarter of 2015, average gold prices continued to experience significant volatility, trading between $1,049/oz and $1,184/oz with an average price of $1,104/oz. This compares to an average gold price of $1,200/oz for the fourth quarter of 2014, a decrease of 8.0%, and $1,124/oz for the third quarter of 2015. The decline in the average gold price in the quarter occurred primarily as a result of the strengthening of the U.S. dollar, which was due to increasing economic strength in the United States versus concerns over weakening economic performance in Europe and China, as well as the tapering of the monetary stimulus provided by the U.S. Federal Reserve and growing expectations of U.S. interest rate increases starting in late 2015. Platinum and Palladium prices averaged $908/oz and $606/oz for the fourth quarter of 2015 compared to $1,229/oz and $788/oz for the fourth quarter of 2014, decreases of 26.1% and 23.1%, respectively.

 

Despite the current volatility with commodity prices, the Franco-Nevada business model continues to deliver strong results as it is not impacted by reduced margins at the operator level. Royalty and stream payments/deliveries are based on actual production levels with no adjustments for the operator’s operating costs, with the exception of NPI royalties which are based on the profit of the underlying mining operation.

 

10



 

Average Commodity Prices and Total GEOs

 

 

Gold Equivalent Ounces and Revenue

 

Franco-Nevada continued to grow its GEOs with 106,312 GEOs earned in the fourth quarter of 2015, an increase of 14.6% over the fourth quarter of 2014.  Revenue for the quarter was $121.3 million compared with $123.0 million for the same period of 2014, a decrease of 1.4%. Although GEOs grew, the impact of lower average precious metals and oil prices resulted in lower revenue.

 

11



 

The following table outlines GEOs (excluding oil & gas) and revenue attributable to Franco-Nevada for the three months ended December 31, 2015 and 2014 by commodity, geographical location and type of interest:

 

For the three months ended December 31,

 

 

 

Gold Equivalents Ounces1

 

Revenue (in millions)

 

 

 

2015

 

2014

 

Variance

 

2015

 

2014

 

Variance

 

Commodity

 

 

 

 

 

 

 

 

 

 

 

 

 

Precious Metals

 

 

 

 

 

 

 

 

 

 

 

 

 

Gold

 

79,800

 

76,279

 

3,521

 

$

88.0

 

$

92.4

 

$

(4.4

)

Silver

 

17,112

 

4,021

 

13,091

 

18.9

 

4.8

 

14.1

 

PGM

 

7,523

 

9,529

 

(2,006

)

7.9

 

11.3

 

(3.4

)

Precious Metals - Total

 

104,435

 

89,829

 

14,606

 

114.8

 

108.5

 

6.3

 

Other

 

1,877

 

2,945

 

(1,068

)

2.1

 

3.5

 

(1.4

)

Oil & Gas

 

 

 

 

4.4

 

11.0

 

(6.6

)

 

 

106,312

 

92,774

 

13,538

 

$

121.3

 

$

123.0

 

$

(1.7

)

Geography

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

20,141

 

17,350

 

2,791

 

$

22.2

 

$

21.8

 

$

0.4

 

Canada

 

20,215

 

21,294

 

(1,079

)

26.2

 

36.4

 

(10.2

)

Latin America

 

48,243

 

33,296

 

14,947

 

53.6

 

39.7

 

13.9

 

Rest of World

 

17,713

 

20,834

 

(3,121

)

19.3

 

25.1

 

(5.8

)

 

 

106,312

 

92,774

 

13,538

 

$

121.3

 

$

123.0

 

$

(1.7

)

Type

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue-based

 

26,213

 

29,373

 

(3,160

)

$

29.7

 

$

39.3

 

$

(9.6

)

Streams

 

65,822

 

54,586

 

11,236

 

72.2

 

61.6

 

10.6

 

Profit-based

 

10,705

 

6,912

 

3,793

 

13.0

 

13.0

 

 

Other

 

3,572

 

1,903

 

1,669

 

6.4

 

9.1

 

(2.7

)

 

 

106,312

 

92,774

 

13,538

 

$

121.3

 

$

123.0

 

$

(1.7

)

 


1  For average commodity prices used in calculation of GEOs, please refer to average commodity price tables on page XX of this MD&A.

 

GEOs (excluding oil & gas) and revenue were earned from the following asset classes:

 

For the three months ended December 31,

 

 

 

Gold Equivalents Ounces1

 

Revenue (in millions)

 

 

 

2015

 

2014

 

Variance

 

2015

 

2014

 

Variance

 

Commodity

 

 

 

 

 

 

 

 

 

 

 

 

 

Precious Metals

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

20,064

 

17,312

 

2,752

 

$

22.1

 

$

21.9

 

$

0.2

 

Canada

 

19,196

 

21,294

 

(2,098

)

20.7

 

25.6

 

(4.9

)

Latin America

 

48,244

 

33,295

 

14,949

 

53.5

 

39.7

 

13.8

 

Rest of World

 

16,931

 

17,928

 

(997

)

18.5

 

21.3

 

(2.8

)

Precious Metals - Total

 

104,435

 

89,829

 

14,606

 

$

114.8

 

$

108.5

 

$

6.3

 

Other

 

1,877

 

2,945

 

(1,068

)

2.1

 

3.5

 

(1.4

)

Oil & Gas

 

 

 

 

4.4

 

11.0

 

(6.6

)

 

 

106,312

 

92,774

 

13,538

 

$

121.3

 

$

123.0

 

$

(1.7

)

 


1  For average commodity prices used in calculation of GEOs, please refer to average commodity price tables on page 10 of this MD&A.

 

12



 

Our portfolio is well-diversified with GEOs being earned from approximately 45 mineral interests and revenue being earned from 45 mineral and 59 oil & gas interests in various jurisdictions.

 

GEO Reconciliation — Q4 2014 to Q4 2015

 

 

GEOs earned from precious metal assets increased by 16.3% to 104,435 GEOs in the fourth quarter of 2015 from 89,829 GEOs in the fourth quarter of 2014. Growth in GEOs from precious metals was mainly attributable to the addition of the Antamina silver stream (13,021 GEOs) and gold NPIs which contributed 3,793 more GEOs in 2015 than 2014. For the quarter, Franco-Nevada earned 10,705 GEOs from our gold NPIs compared with 6,912 GEOs earned from gold NPIs in the same period in 2014.

 

Revenue from precious metal assets was $114.8 million in Q4 2015 compared with $108.5 million for the same period as 2014. The largest increase came from Latin American assets with Antamina and Candelaria contributing $14.4 million and $24.3 million, respectively, in the quarter.

 

U.S. GEOs and revenue from precious metals both increased in the fourth quarter of 2015 with 20,064 GEOs and $22.1 million in revenue, up from 17,312 GEOs and $21.9 million in revenue in the fourth quarter of 2014. The growth in GEOs was attributable to higher production from

 

13



 

Goldstrike, both from the NSR and NPI (5,769 GEOs), Mesquite (372 GEOs) and Marigold (250 GEOs). Although GEOs grew by 15.9%, revenue increased by 0.9% due to the impact of lower average commodity prices.

 

Canadian GEOs and revenue were 19,196 GEOs and $20.7 million, respectively, in the fourth quarter, a decrease of 2,098 GEOs, or 9.9%, and $4.9 million, or 19.1%. The decrease was attributable to:

 

·                  lower production at Sudbury (1,329 GEOs), Hemlo (742 GEOs), East Timmins (formerly Golden Highway) (639 GEOs) and Kirkland Lake (163 GEOs);

·                  partially offset by higher production at Detour Lake (579 GEOs), Musselwhite (126 GEOs) and Timmins West (67 GEOs) and other assets (3 GEOs).

 

Latin American assets, which include the recent Candelaria and Antamina acquisitions generated 48,244 GEOs and $53.5 million in revenue in Q4 2015, with the major contributions as follows:

 

·                  Candaleria’s production was 21,846 GEOs, or 45.3%, of total GEOs from Latin America and Antamina’s production was 13,021 GEOs, or 27.0%, of total GEOs from Latin America assets;

·                  production from Cerro San Pedro and other assets increased which resulted in 181 more GEOs for the quarter when compared to the fourth quarter of 2014;

·                  during the fourth quarter 1,321,101 ounces of silver were converted to GEOs which were received from the Candelaria, Antamina and Cerro San Pedro interests.

 

Rest of World assets generated 16,931 GEOs and $18.5 million in revenue, decreases of 5.6% and 13.1%, respectively, over 2014 levels, which was attributable to:

 

·                  one additional month of delivery from Sabodala (1,875 GEOs) and 163 more GEOs from Edikan;

·                  offset by lower production from all the other Rest of World assets, being Cooke 4 (629 GEOs), MWS (555 GEOs), Tasiast (346 GEOs), Subika (344 GEOs), Duketon (243 GEOs) and other assets (918 GEOs); and

·                  revenue was lower due to the lower production and the impact of lower average commodity prices.

 

Other Minerals generated 1,877 GEOs and $2.1 million in revenue.

 

Franco-Nevada’s revenue is generated from various forms of agreements, ranging from NSR royalties, streams, NPI royalties, net royalty interests (“NRI”), working interests and other. For definitions of the various types of agreements, please refer to our Annual Information Form filed on SEDAR at www.sedar.com or our Form 40-F filed on EDGAR at www.sec.gov.

 

The market prices of gold, silver, PGM, oil and natural gas are the primary drivers of our profitability and our ability to generate operating cash flow for shareholders.

 

14



 

Quarterly Revenue Breakdown

(millions of dollars)

 

 

15



 

Revenue by Commodity

 

Three months ended December 31, 2015

Three months ended December 31, 2014

GRAPHIC

 

Revenue by Region

 

Three months ended December 31, 2015

Three months ended December 31, 2014

 

16



 

Revenue for the three and twelve months ended December 31, 2015 was $121.3 million (2014 - $123.0 million) and $443.6 million (2014 - $442.4 million), respectively, and was comprised of the following:

 

(expressed in millions)

 

 

 

 

 

For the three months ended
December 31,

 

For the twelve months ended
December 31,

 

Property

 

Interest

 

2015

 

2014

 

2015

 

2014

 

PRECIOUS METALS

 

 

 

 

 

 

 

 

 

 

 

United States

 

 

 

 

 

 

 

 

 

 

 

Goldstrike

 

NSR 2-4%, NPI 2.4-6%

 

$

9.5

 

$

3.3

 

$

23.4

 

$

21.9

 

Stillwater

 

NSR 5%

 

3.2

 

4.8

 

15.6

 

22.1

 

Gold Quarry

 

NSR 7.29%

 

2.4

 

3.5

 

13.1

 

14.3

 

Marigold

 

NSR 1.75-5%, GR 0.5-4%

 

2.3

 

3.3

 

6.0

 

7.0

 

Fire Creek/Midas

 

Fixed to 2018 / NSR 2.5%

 

2.1

 

3.5

 

8.7

 

8.4

 

Bald Mountain

 

NSR/GR 0.875-5%

 

1.8

 

3.0

 

8.2

 

6.7

 

Mesquite

 

NSR 0.5-2%

 

0.8

 

0.5

 

2.1

 

1.7

 

Other

 

 

 

 

 

0.4

 

0.7

 

Canada

 

 

 

 

 

 

 

 

 

 

 

Sudbury

 

Stream 50%

 

6.4

 

8.9

 

23.2

 

36.3

 

Detour Lake

 

NSR 2%

 

3.3

 

2.9

 

11.7

 

11.2

 

East Timmins

 

NSR 2-15%

 

2.2

 

3.4

 

10.1

 

11.5

 

Musselwhite

 

NPI 5%

 

3.1

 

3.0

 

5.4

 

4.6

 

Hemlo

 

NSR 3%, NPI 50%

 

3.3

 

4.7

 

5.0

 

9.6

 

Kirkland Lake

 

NSR 2.5-5.5%, NPI 20%

 

1.1

 

1.3

 

4.6

 

4.8

 

Timmins West

 

NSR 2.25%

 

0.8

 

0.8

 

3.7

 

4.0

 

Canadian Malartic

 

GR 1.5%

 

0.5

 

0.5

 

1.6

 

1.2

 

Other

 

 

 

 

0.1

 

0.1

 

0.4

 

Latin America

 

 

 

 

 

 

 

 

 

 

 

Antamina

 

Stream 22.5% Silver

 

14.4

 

 

14.4

 

 

Candelaria

 

Stream 68%

 

24.3

 

23.9

 

101.6

 

23.9

 

Palmarejo

 

Stream 50%

 

13.8

 

15.0

 

59.6

 

66.6

 

Cerro San Pedro

 

GR 1.95%

 

0.7

 

0.5

 

2.9

 

2.0

 

Other

 

 

 

0.3

 

0.3

 

1.2

 

1.3

 

Rest of World

 

 

 

 

 

 

 

 

 

 

 

MWS

 

Stream 25%

 

6.5

 

7.9

 

26.2

 

30.5

 

Sabodala

 

Stream 6%, Fixed to 2019

 

6.1

 

4.6

 

28.3

 

26.3

 

Subika

 

NSR 2%

 

0.9

 

1.3

 

4.3

 

9.0

 

Tasiast

 

NSR 2%

 

1.1

 

1.5

 

5.0

 

7.1

 

Duketon

 

NSR 2%

 

1.6

 

1.9

 

6.7

 

7.1

 

Edikan

 

NSR 1.5%

 

0.9

 

0.7

 

3.7

 

3.4

 

Cooke 4

 

Stream 7%

 

0.7

 

1.5

 

4.2

 

5.0

 

Other

 

 

 

0.7

 

1.9

 

4.5

 

6.2

 

 

 

 

 

$

114.8

 

$

108.5

 

$

405.5

 

$

354.8

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER MINERALS

 

 

 

$

2.1

 

$

3.5

 

$

10.1

 

$

13.7

 

 

 

 

 

 

 

 

 

 

 

 

 

OIL & GAS

 

 

 

 

 

 

 

 

 

 

 

Weyburn

 

NRI 11.71%, ORR 0.44%, WI 2.56%

 

3.5

 

8.1

 

21.1

 

57.8

 

Midale

 

ORR 1.14%, WI 1.59%

 

0.3

 

0.7

 

1.8

 

3.4

 

Edson

 

ORR 15%

 

0.4

 

0.9

 

1.7

 

4.8

 

Other

 

 

 

0.2

 

1.3

 

3.4

 

7.9

 

 

 

 

 

$

4.4

 

$

11.0

 

$

28.0

 

$

73.9

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

$

121.3

 

$

123.0

 

$

443.6

 

$

442.4

 

 

17



 

Oil & Gas Revenue

 

Averages (C$/bbl)

 

Q4
2015

 

Q3
2015

 

Variance
(Q4’15-Q3’15)

 

Q4
2014

 

Variance
(Q4’15-Q4’14)

 

Edmonton Light

 

C$

52.46

 

C$

55.04

 

(4.7

)%

C$

74.86

 

(29.9

)%

Quality Differential

 

 

(8.14

)

 

(4.58

)

77.7

%

 

(5.01

)

62.5

%

Realized oil price

 

C$

44.32

 

C$

50.46

 

(12.2

)%

C$

69.85

 

(36.5

)%

 

Oil & gas revenue was $4.4 million for the quarter (94% oil and 6% gas) compared with $11.0 million for the same period of 2014 (94% oil and 6% gas), a decrease of 60.0%. The decrease is due to lower average oil prices realized in the fourth quarter of 2015. Production for the quarter was 3.6% lower than the fourth quarter of 2014.

 

Revenue from the Weyburn Unit for the quarter decreased to $3.5 million (2014 - $8.1 million) with $1.1 million earned from the NRI (2014 - $4.7 million), $2.0 million earned from the working interest (2014 - $2.9 million) and $0.4 million earned from the overriding royalties (2014 - $0.5 million). Revenue from the Weyburn NRI was lower due to the reduction in the average oil price partially offset by the increase in the C$/US$ foreign exchange rate.  Actual realized price from the NRI was C$45.87/boe for the quarter, down 31.7% from the realized price of C$67.12/boe for the fourth quarter of 2014.

 

Costs and Expenses

 

Costs and expenses for the quarter were $155.7 million compared to $109.2 million in 2014. The following table provides a list of the costs and expenses incurred for the three months ended December 31, 2015 and 2014.

 

 

 

Three months ended December 31,

 

(expressed in millions)

 

2015

 

2014

 

Variance

 

Costs of sales

 

$

24.3

 

$

24.7

 

$

(0.4

)

Depletion and depreciation

 

65.8

 

48.9

 

16.9

 

Corporate administration

 

2.9

 

4.4

 

(1.5

)

Business development

 

(0.1

)

0.3

 

(0.4

)

Subtotal

 

$

92.9

 

$

78.3

 

$

14.6

 

Impairment charges

 

62.8

 

30.9

 

31.9

 

 

 

$

155.7

 

$

109.2

 

$

46.5

 

 

Cost of Sales

 

Costs of sales, which are comprised of the cost of GEOs purchased under stream agreements, cost of prepaid gold ounces, oil & gas production taxes, operating costs on oil & gas working interests and net proceeds taxes on mineral interests, were $24.3 million for the fourth quarter of 2015 compared with $24.7 million for the fourth quarter of 2014.

 

 

 

Three months ended December 31,

 

(expressed in millions)

 

2015

 

2014

 

Variance

 

Per ounce cost of stream sales

 

$

20.8

 

$

20.0

 

$

0.8

 

Cost of prepaid ounces

 

1.7

 

2.6

 

(0.9

)

Production taxes

 

0.8

 

0.6

 

0.2

 

Oil & gas operating costs

 

1.0

 

1.5

 

(0.5

)

 

 

$

24.3

 

$

24.7

 

$

(0.4

)

 

18



 

The decrease of $0.4 million is attributable to fewer prepaid ounces delivered pursuant to the agreement in the fourth quarter of 2015 when compared to 2014 and lower oil & gas operating costs due to lower production and cost efficiencies implemented by the operators. These decreases were partially offset by higher cost of stream ounces, with 11,236 more stream ounces delivered in 2015 than 2014 and higher net proceeds taxes due to higher revenue. Upon the sale of the gold ounces delivered under the Fire Creek/Midas transaction, Franco-Nevada records an amount of $882.71/oz as a non-cash cost of sale. Franco-Nevada received 65,822 GEOs under its stream agreements compared to 54,586 GEOs received in Q4 2014.

 

Costs of Sales Reconciliation — Q4 2014 to Q4 2015

(expressed in millions)

 

 

Depletion and depreciation

 

Depletion and depreciation totaled $65.8 million for the quarter compared to $48.9 million in 2014. The increase of $16.9 million is due in part to the Antamina acquisition ($9.0 million), higher production from Goldstrike ($3.8 million) and higher depreciation due to a change in the depreciation rate on well equipment associated with the Company’s working interests ($5.3 million). These increases were partially offset by lower depletion on MWS and oil & gas assets due to lower production and the impact of a weaker Canadian dollar relative to the U.S. dollar.

 

19



 

Depletion Reconciliation — Q4 2014 to Q4 2015

(expressed in millions)

 

 

Corporate administration expenses decreased to $2.9 million in the quarter, representing 2.4% of revenue, from $4.4 million in 2014. The decrease is due to lower compensation expense and the impact of the weaker Canadian to U.S. dollar exchange rate as the majority of corporate administration expenses are incurred in Canadian dollars.

 

Business development expenses reflected a recovery of $0.1 million due to the capitalization of expenses to the mineral interest following the closing of transactions. Timing of incurring these costs typically varies depending upon the level of activity of the business development team and the timing of completing transactions.

 

Impairments of royalty, stream and working interests were $62.8 million for the three months ended December 31, 2015 (2014 - $31.1 million). The impairment charges were the result of an impairment analysis completed at the end of 2015 due to impairment indicators on the Weyburn and Midale oil interests and the Red Lake (Phoenix) mineral asset.

 

20



 

The impairment charges for the quarter are summarized in the following table:

 

 

 

2015

 

2014

 

Royalty, stream and working interests, net:

 

 

 

 

 

Weyburn Unit

 

$

41.3

 

$

 

Midale Unit

 

7.0

 

 

Red Lake (Phoenix)

 

11.4

 

 

Mine Waste Solutions

 

 

26.6

 

Exploration assets

 

0.1

 

4.5

 

Other non-current assets:

 

 

 

 

 

Oil well equipment

 

3.1

 

 

Total impairment losses

 

$

62.9

 

$

31.1

 

 

During 2015, the following were identified as indicators of impairment:

 

Weyburn Unit

 

The Company’s interest in the Weyburn Unit comprises an 11.71% net royalty interest (“NRI”), a 0.44% overriding royalty and a 2.56% working interest. Due to the significant deterioration of the oil prices in 2015, the associated impact on the Canadian oil industry and the results of the annual reserve assessment, management identified an indicator of impairment and, accordingly, performed an impairment assessment.

 

Midale Unit

 

The Company’s interest in the Midale Unit comprises a 1.14% gross override royalty interest and a 1.59% working interest. Due to the significant deterioration of the oil prices in 2015, the associated impact on the Canadian oil industry and the results of the annual reserve assessment, management identified an indicator of impairment and, accordingly, performed an impairment assessment.

 

Red Lake (Phoenix)

 

On January 11, 2016, the operator of the Red Lake (Phoenix) project, Rubicon Minerals Corporation, released an updated Mineral Resource Statement which reflected a 91% decrease in the Indicated resource category and an 86% decrease in the Inferred resource category over its 2013 Mineral Resource Statement. The Company holds a 2% net smelter return royalty (subject to a buy-back of 0.5%) on certain claims covering the Phoenix Gold project. Management assessed the decline in the Mineral Resource Statement as an indicator of impairment and, accordingly, performed an impairment assessment.

 

Key assumptions and sensitivity

 

The key assumptions and estimates used in determining the recoverable amount are related to commodity prices and discount rates.

 

The fair value less costs of disposal (“FVLCD”) for the Weyburn Unit CGU, Midale Unit CGU and Red Lake (Phoenix) royalty was determined by calculating the net present value (“NPV”) of the estimated future cash-flows expected to be generated by the production of oil or mining of gold, as appropriate. The estimates of future cash-flows were derived from a model for the Weyburn and Midale Units developed by management using cash-flows prepared by an independent

 

21



 

reserve engineer and expected performance based on publicly released technical information to predict future performance. Based on observable market or publicly available data, the Company’s management made assumptions of future commodity prices to estimate future revenues. These price assumptions were supported by longer-term consensus price estimates obtained from a sample of analysts and independent reserve evaluators, where appropriate. The future cash-flows were discounted using a pre-tax discount rate which reflects specific market risk factors associated with gold royalty assets or working interests, respectively.

 

The key assumptions used in the impairment testing are summarized in the table below:

 

 

 

2016

 

2017

 

2018

 

2019

 

2020+

 

Oil price (C$/boe)

 

$

48.49

 

$

57.16

 

$

61.21

 

$

66.16

 

$

83.43

 

Weyburn & Midale discount rate

 

8

%

8

%

8

%

8

%

8

%

Gold price (US$/oz)

 

$

1,156

 

$

1,174

 

$

1,192

 

$

1,216

 

$

1,201

 

Red Lake (Phoenix) discount rate

 

5

%

5

%

5

%

5

%

5

%

 

A sensitivity analysis was performed on the oil and gold commodity prices and discount rates, which are the key assumptions that impact the impairment calculations. For the Weyburn and Midale Units, the Company assumed a 10% change for the oil equivalent price assumptions, taking the oil price from an average of C$63.29/boe to C$75.09/boe and C$91.77/boe, respectively, while holding all other assumptions constant. In addition, the Company assumed a positive and negative 300 basis point change for the discount rate assumption, taking it from 8% to 5% and 11%, while holding all other assumptions constant. For the Red Lake (Phoenix) royalty, the Company assumed a 10% change for the gold price assumption, taking the gold price from an average of $1,188/ounce to $1,069/ounce and $1,307/ounce, respectively, while holding all other assumptions constant. In addition, the Company assumed a positive and negative 300 basis point change for the discount rate, taking it from 5% to 2% and 8%, while holding all other assumptions constant.

 

22



 

The table below shows the impairment amounts when key assumptions are changed, in isolation:

 

As at December 31, 2015

 

Carrying
Value

 

Impairment
Charge

 

Impairment recorded in statement of income

 

$

318.3

 

$

62.9

 

Impairment recorded if, in isolation:

 

 

 

 

 

10% decrease in commodity prices

 

 

 

 

 

Oil CGUs

 

$

256.8

 

$

107.8

 

Red Lake (Phoenix)

 

4.6

 

12.0

 

 

 

$

261.4

 

$

119.8

 

10% increase in commodity prices

 

 

 

 

 

Oil CGUs

 

$

358.1

 

$

6.4

 

Red Lake (Phoenix)

 

5.9

 

10.8

 

 

 

$

364.0

 

$

17.2

 

300 basis point decrease to the discount rate

 

 

 

 

 

Oil CGUs

 

$

359.6

 

$

4.9

 

Red Lake (Phoenix)

 

7.2

 

9.5

 

 

 

$

366.8

 

$

14.4

 

300 basis point increase to the discount rate

 

 

 

 

 

Oil CGUs

 

$

251.8

 

$

112.7

 

Red Lake (Phoenix)

 

3.9

 

12.8

 

 

 

$

255.7

 

$

125.5

 

 

23



 

During the year ended December 31, 2014, the following were identified as indicators of impairment:

 

(i)            MWS

 

MWS is subject to a stream arrangement that is capped at 312,500 ounces, which has produced at a steady rate since Franco-Nevada acquired the interest. Due to the limited optionality on the stream and its capped nature, management assessed that the reduction in consensus gold price estimates during the relatively fixed life of the asset is an indication of impairment on MWS and, accordingly, performed an impairment assessment.

 

(ii)        Exploration assets

 

Franco-Nevada was notified, pursuant to various royalty agreements, that the explorer/operator had abandoned tenements, concessions or ground which was subject to royalty rights held by Franco-Nevada. In these circumstances, Franco-Nevada wrote off the carrying value of the associated exploration assets to nil. For the three and twelve months ended December 31, 2014, the total amount written off was $4.3 million (2013 - $0.2 million) and $4.5 million (2013 - $0.2 million), respectively.

 

Key assumptions and sensitivity

 

The key assumptions and estimates used in determining the recoverable amount are related to commodity prices and discount rates.

 

The FVLCD for MWS was determined by calculating the net present value (“NPV”) of the estimated future cash-flows expected to be generated by the mining of the MWS tailings. The estimates of future cash-flows were derived from a life-of-mine model developed by Franco-Nevada’s management using MWS’s historical performance to predict future performance.  Based on observable market or publicly available data, Franco-Nevada’s management made assumptions of future gold prices to estimate future revenues. These price assumptions were supported by longer-term consensus price estimates obtained from a sample of analysts. The future cash-flows were discounted using a discount rate which reflects specific market risk factors associated with MWS.

 

The key assumptions used in the impairment testing are summarized in the table below:

 

 

 

2015

 

2016

 

2017

 

2018

 

2019 +

 

Gold price per ounce

 

$

1,262

 

$

1,276

 

$

1,267

 

$

1,261

 

$

1,277

 

Discount rate

 

5

%

5

%

5

%

5

%

5

%

 

A sensitivity analysis was performed on the gold price and discount rate, which are the key assumptions that impact the impairment calculations. The Company assumed a 10% change for the gold price assumptions, taking the gold price from an average of $1,273 per ounce to $1,146 per ounce and $1,400 per ounce, respectively, while holding all other assumptions constant. In addition, the Company assumed a 250 basis point change for the discount rate assumption, taking it from 5% to 2.5% and 7.5%, respectively, while holding all other assumptions constant.

 

24



 

The table below shows the impairment amounts when key assumptions are changed, in isolation, by 10% for commodity prices and 250 basis points for the discount rate.

 

As at December 31, 2014

 

Carrying
Value

 

Impairment
Charge

 

Impairment recorded in statement of income

 

$

172.0

 

$

26.6

 

Impairment recorded if, in isolation:

 

 

 

 

 

10% decrease in commodity prices

 

145.6

 

53.0

 

10% increase in commodity prices

 

198.3

 

0.3

 

250 basis point decrease to the discount rate

 

194.1

 

4.5

 

250 basis point increase to the discount rate

 

153.4

 

45.2

 

 

Foreign Exchange and Other Income/Expenses

 

Foreign exchange losses and other expenses were $2.5 million for Q4 2015 and Q4 2014. The following table provides a list of foreign exchange losses and other expenses incurred for the three months ended December 31, 2015 and 2014.

 

 

 

Three months ended December 31,

 

(expressed in millions)

 

2015

 

2014

 

Variance

 

Foreign exchange loss

 

$

(0.6

)

$

(1.5

)

$

0.9

 

Mark-to-market gain (loss) on warrants

 

(0.2

)

(0.2

)

 

(Loss) on sale of gold

 

(1.7

)

(0.8

)

(0.9

)

 

 

$

(2.5

)

$

(2.5

)

$

 

 

Foreign exchange gains and losses include foreign exchange movements related to investments in debt securities, such as treasury bills and intercompany loans, held in the parent company, which are denominated in either U.S. dollars or Mexican pesos. The parent company’s functional currency is the Canadian dollar. Under IFRS, all foreign exchange changes related to the debt securities are recorded in net income as opposed to other comprehensive income.

 

Finance Costs and Finance Income

 

Finance income was $2.1 million (2014 - $0.9 million) for the quarter which was earned on our cash equivalents and/or short-term investments. The increase in finance income was due to finance income earned from the True Gold option under the Karma stream agreement. Finance expenses were $1.4 million (2014 - $0.4 million) and consist of the costs of maintaining our credit facility, interest on debt and the amortization of the initial set-up costs incurred with respect to the facility.  Finance expenses were comprised of standby fees of $0.3 million (2014 - $0.3 million), interest expense of $0.8 million (2014- $Nil) and amortization of issuance costs were $0.3 million (2014 - $0.1 million).  Interest in the amount of $0.6 million associated with the debt was capitalized to the Cobre Panama stream interest.

 

Income Taxes

 

Franco-Nevada had an income tax recovery of $4.9 million (2014 — income tax expense of $10.2 million) for the quarter comprised of a current income tax expense of $5.3 million (2014 - $6.9 million) and a deferred income tax recovery of $10.2 million (2014 — deferred income tax expense of $3.3 million) related to our Canadian and Mexican entities.

 

25



 

Net Income

 

Net loss for the quarter was $31.4 million, or $0.20 per share, compared with a net income of $1.2 million, or $0.00 per share, for the same period in 2014. Adjusted Net Income was $23.7 million, or $0.15 per share, compared with $31.6 million, or $0.20 per share, for Q4 2014.  The decrease in Adjusted Net Income was driven primarily by:

 

·                  higher depletion expense due to recent acquisitions and lower revenue;

·                  partially offset by lower income tax expense.

 

Adjusted Net Income Reconciliation — Q4 2014 to Q4 2015

(expressed in millions)

 

 

26



 

Quarterly Financial Information

 

Selected quarterly financial information from our financial statements is set out below:

 

(unaudited, expressed in millions, except per share amounts, Average Gold Price, GEOs, and Margin)1

 

 

 

Q4
2015

 

Q3 2015

 

Q2
2015

 

Q1
2015

 

Q4
2014

 

Q3
2014

 

Q2
2014

 

Q1
2014

 

Revenue

 

$

121.3

 

$

103.7

 

$

109.4

 

$

109.2

 

$

123.0

 

$

107.6

 

$

107.7

 

$

104.1

 

Costs and expenses2

 

155.7

 

77.1

 

78.5

 

78.8

 

109.2

 

61.0

 

60.1

 

55.4

 

Operating income (loss)

 

(34.4

)

26.6

 

30.9

 

30.4

 

13.8

 

46.6

 

47.6

 

48.7

 

Other income (expenses)

 

(1.9

)

(2.9

)

2.0

 

(2.2

)

(2.0

)

(0.4

)

2.0

 

1.1

 

Income tax expense (recovery)

 

(4.9

)

8.5

 

11.3

 

9.0

 

10.2

 

13.0

 

12.7

 

14.4

 

Net income (loss)

 

(31.4

)

15.2

 

21.6

 

19.2

 

1.2

 

33.2

 

36.9

 

35.4

 

Basic earnings (loss) per share

 

$

(0.20

)

$

0.10

 

$

0.14

 

$

0.12

 

$

0.00

 

$

0.22

 

$

0.25

 

$

0.24

 

Diluted earnings (loss) per share

 

$

(0.20

)

$

0.10

 

$

0.14

 

$

0.12

 

$

(0.01

)

$

0.22

 

$

0.25

 

$

0.24

 

Average Gold Price

 

$

1,104

 

$

1,124

 

$

1,193

 

$

1,219

 

$

1,200

 

$

1,282

 

$

1,289

 

$

1,294

 

GEOs3

 

106,312

 

85,637

 

83,040

 

85,081

 

92,774

 

70,071

 

64,734

 

65,836

 

Adjusted EBITDA3

 

95.8

 

78.0

 

82.2

 

83.3

 

96.2

 

88.7

 

87.2

 

84.8

 

Adjusted EBITDA3 per share

 

$

0.61

 

$

0.50

 

$

0.53

 

$

0.53

 

$

0.62

 

$

0.59

 

$

0.58

 

$

0.58

 

Margin3

 

79.0

%

75.2

%

75.1

%

76.3

%

78.2

%

82.4

%

81.0

%

81.5

%

Adjusted Net Income3

 

$

23.7

 

$

19.4

 

$

22.9

 

$

22.9

 

$

31.6

 

$

34.5

 

$

36.0

 

$

35.4

 

Adjusted Net Income3 per share

 

$

0.15

 

$

0.12

 

$

0.15

 

$

0.15

 

$

0.20

 

$

0.23

 

$

0.24

 

$

0.24

 

 


1Due to rounding, amounts may not calculate.

2Includes impairment charges on royalty, stream and working interests.

3GEOs, Adjusted EBITDA, Margin and Adjusted Net Income are non-IFRS measures with no standardized meaning under IFRS. For further information and a detailed reconciliation, please refer to pages 47-49 of this MD&A.

 

27



 

Overview of Financial Performance — 2015 to 2014

 

Average Annual Precious Metal Commodity Prices

 

Annual Averages

 

 

 

2015

 

2014

 

Variance

 

Gold1

 

($/oz)

 

$

1,160

 

$

1,266

 

(8.4

)%

Silver2

 

($/oz)

 

15.68

 

19.05

 

(17.6

)%

Platinum1

 

($/oz)

 

1,054

 

1,385

 

(23.9

)%

Palladium1

 

($/oz)

 

691

 

803

 

(13.9

)%

Exchange Rates3

 

 

 

 

 

 

 

 

 

CAD

 

 

 

0.7820

 

0.9055

 

(13.5

)%

 


(1)             Based on London Gold Price PM

(2)             Based on LBMA silver price

(3)             Based on Bank of Canada noon rates

 

During 2015, average gold prices continued to experience significant volatility, trading between $1,296/oz in January 2015 and $1,049/oz in December 2015, with an average price of $1,160/oz for 2015. This compares to an average gold price of $1,266/oz for 2014, a decrease of 8.4%. The decline in the average gold price occurred primarily as a result of the strengthening of the U.S. dollar, which was due to increasing economic strength in the United States versus concerns over weakening economic performance in Europe and China, as well as the tapering of the monetary stimulus provided by the U.S. Federal Reserve and growing expectations of U.S. interest rate increases starting in late 2015. Platinum and Palladium prices averaged $1,054/oz and $691/oz for 2015 compared to $1,385/oz and $803/oz for 2014, decreases of 23.9% and 13.9%, respectively.

 

GEOs and Revenue

 

GEOs have grown from 237,722 in 2011 to 360,070 in 2015 with the majority of growth coming from precious metals assets.

 

28



 

 

The following table outlines GEOs (excluding oil & gas) and revenue attributable to Franco-Nevada for the twelve months ended December 31, 2015 and 2014 by commodity,  geographical location and type of interest:

 

For the twelve months ended December 31,

 

 

 

Gold Equivalents Ounces1

 

Revenue (in millions)

 

 

 

2015

 

2014

 

Variance

 

2015

 

2014

 

Variance

 

Commodity

 

 

 

 

 

 

 

 

 

 

 

 

 

Precious Metals

 

 

 

 

 

 

 

 

 

 

 

 

 

Gold

 

291,521

 

238,318

 

53,203

 

$

337.5

 

$

299.2

 

$

38.3

 

Silver

 

30,427

 

4,266

 

26,161

 

34.7

 

5.1

 

29.6

 

PGM

 

29,335

 

39,870

 

(10,535

)

33.3

 

50.5

 

(17.2

)

Precious Metals - Total

 

351,283

 

282,454

 

68,829

 

405.5

 

354.8

 

50.7

 

Other

 

8,787

 

10,961

 

(2,174

)

10.1

 

13.7

 

(3.6

)

Oil & Gas

 

 

 

 

28.0

 

73.9

 

(45.9

)

 

 

360,070

 

293,415

 

66,655

 

$

443.6

 

$

442.4

 

$

1.2

 

Geography

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

67,806

 

66,652

 

1,154

 

$

78.1

 

$

83.4

 

$

(5.3

)

Canada

 

60,677

 

66,297

 

(5,620

)

97.0

 

157.5

 

(60.5

)

Latin America

 

154,805

 

75,282

 

79,523

 

179.7

 

93.7

 

86.0

 

Rest of World

 

76,782

 

85,184

 

(8,402

)

88.8

 

107.8

 

(19.0

)

 

 

360,070

 

293,415

 

66,655

 

$

443.6

 

$

442.4

 

$

1.2

 

Type

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue-based

 

105,085

 

110,833

 

(5,748

)

$

127.7

 

$

156.9

 

$

(29.2

)

Streams

 

222,670

 

150,087

 

72,583

 

257.6

 

188.6

 

69.0

 

Profit-based

 

18,420

 

18,578

 

(158

)

32.1

 

61.2

 

(29.1

)

Other

 

13,895

 

13,917

 

(22

)

26.2

 

35.7

 

(9.5

)

 

 

360,070

 

293,415

 

66,655

 

$

443.6

 

$

442.4

 

$

1.2

 

 

29



 


1                   For average commodity prices used in calculation of GEOs, please refer to average commodity price tables on page 28 of this MD&A.

 

GEOs (excluding oil & gas) and revenue were earned from the following asset classes:

 

For the twelve months ended December 31,

 

 

 

Gold Equivalents Ounces1

 

Revenue (in millions)

 

 

 

2015

 

2014

 

Variance

 

2015

 

2014

 

Variance

 

Commodity

 

 

 

 

 

 

 

 

 

 

 

 

 

Precious Metals

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

67,292

 

66,161

 

1,131

 

$

77.5

 

$

82.8

 

$

(5.3

)

Canada

 

57,528

 

66,298

 

(8,770

)

65.4

 

83.6

 

(18.2

)

Latin America

 

154,805

 

75,283

 

79,522

 

179.7

 

93.8

 

85.9

 

Rest of World

 

71,658

 

74,712

 

(3,054

)

82.9

 

94.6

 

(11.7

)

Precious Metals - Total

 

351,283

 

282,454

 

68,829

 

$

405.5

 

$

354.8

 

$

50.7

 

Other

 

8,787

 

10,961

 

(2,174

)

10.1

 

13.7

 

(3.6

)

Oil & Gas

 

 

 

 

 

28.0

 

73.9

 

(45.9

)

 

 

360,070

 

293,415

 

66,655

 

$

443.6

 

$

442.4

 

$

1.2

 

 


1                   For average commodity prices used in calculation of GEOs, please refer to average commodity price tables on page 28 of this MD&A.

 

GEO Reconciliation – 2014 to 2015

 

 

GEOs earned from precious metal assets increased by 24.4% to 351,283 GEOs in 2015 from 282,454 GEOs in 2014. Growth in GEOs from precious metals was mainly attributable to the

 

30



 

addition of the Candelaria and Antamina streams. For 2015, Franco-Nevada earned 18,418 GEOs from our gold NPIs down slightly from 18,577 GEOs earned in 2014.

 

Revenue from precious metal assets was $405.5 million in 2015 compared with $354.8 million in 2014, an increase of 14.3%.  The increase came from Latin American assets with Antamina and Candelaria contributing $101.6 million (2014 - $23.9 million) and $14.4 million (2014 - $Nil), respectively, in 2015.

 

U.S. precious metals GEOs increased in 2015 to 67,292 GEOs (2014 - 66,161 GEOs) with revenue slightly lower at $77.5 million (2014 - $82.8 million) as a result of lower average commodity prices.  The growth in GEOs was attributable to higher production from Goldstrike, both from the NSR and NPI (2,875 GEOs), Bald Mountain (1,771 GEOs), Fire Creek/Midas (750 GEOs) and Mesquite (451 GEOs). The increases were partially offset by lower production from Stillwater (4,046 GEOs), Marigold (397 GEOs), Gold Quarry (134 GEOs) and other U.S. assets (139 GEOs). Although production was up by 1.7%, revenue was lower due to lower average commodity prices.

 

Canadian GEOs and revenue were 57,528 GEOs (2014 — 66,298 GEOs) and $65.4 million (2014 - $83.6 million), respectively, in 2015, representing decreases of 13.2% and 21.8%, respectively. The decrease was attributable to:

 

·                  lower production at Sudbury (7,926 GEOs), Hemlo (3,146 GEOs) and East Timmins (formerly Golden Highway) (299 GEOs);

·                  partially offset by higher production at Detour Lake (1,317 GEOs), Musselwhite (926 GEOs) and other assets (360 GEOs).

 

Latin American assets, which include the recent Candelaria and Antamina acquisitions generated 154,805 GEOs (2014 — 75,283 GEOs) and $179.7 million (2014 - $93.8 million) in 2015, with the major contributions as follows:

 

·                  Candaleria’s production was 86,824 GEOs, or 56.1%, of total GEOs from Latin America and Antamina’s production was 13,021 GEOs, or 8.4%, of total GEOs from Latin America assets;

·                  production from Cerro San Pedro and other assets increased, which resulted in 923 more GEOs  in 2015 when compared to 2014; and

·                  during 2015, 12,297,020 ounces of silver were converted to GEOs, which were received from the Candelaria, Antamina and Cerro San Pedro interests.

 

Rest of World assets generated 71,658 GEOs (2014 — 74,713 GEOs) and $82.9 million (2014 - $94.6 million) in revenue, decreases of 4.1% and 12.4%, respectively, over 2014 levels, which was attributable to:

 

·                  two additional months of delivery from Sabodala (3,750 GEOs), higher production from Edikan (468 GEOs) and Duketon (167 GEOs);

·                  offset by lower production from all the other Rest of World assets, being Subika (3,388 GEOs), MWS (1,489 GEOs), Tasiast (1,283 GEOs), Cooke 4 (350 GEOs) and other assets (932 GEOs); and

 

31



 

·                  Revenue was lower due to the lower production and the impact of lower average commodity prices.

 

Other Minerals generated 8,787 GEOs (2014 — 10,961 GEOs) and $10.1 million (2014 - $13.7 million) in revenue.

 

Revenue by Commodity

 

Twelve months ended December 31, 2015

Twelve months ended December 31, 2014


 

Revenue by Region

 

Twelve months ended December 31, 2015

Twelve months ended December 31, 2014

 

 

 

32



 

Oil & Gas Revenue

 

Averages ($/bbl)

 

2015

 

2014

 

Variance

 

Edmonton Light

 

C$ 

57.47

 

C$ 

93.67

 

(38.6

)%

Quality Differential

 

C$ 

(7.54

)

C$ 

(7.97

)

(5.4

)%

Realized oil price

 

C$ 

49.93

 

C$ 

85.70

 

(41.7

)%

 

Oil & gas revenue decreased 62.1% to $28.0 million for 2015 (96% oil and 4% gas) compared with $73.9 million for 2014 (94% oil and 6% gas). The decrease was due to lower average oil prices. Overall production for 2015 was 2.7% lower than 2014.

 

Revenue from the Weyburn Unit for the period decreased to $21.1 million (2014 - $57.8 million) with $11.4 million earned from the NRI (2014 - $38.5 million), $8.2 million earned from the working interest (2014 - $16.1 million) and $1.5 million earned from the overriding royalties (2014 - $3.2 million). Actual realized price from the NRI was C$50.06/boe for the period, down 43.1%, from the average price of C$87.99/boe for 2014.

 

Costs and Expenses

 

Costs and expenses for 2015 were $390.1 million compared to $285.7 million in 2014. The following table provides a list of the costs and expenses incurred for the twelve months ended December 31, 2015 and 2014.

 

 

 

Twelve months ended December 31,

 

(expressed in millions)

 

2015

 

2014

 

Variance

 

Costs of sales

 

$

93.1

 

$

72.9

 

$

20.2

 

Depletion and depreciation

 

216.3

 

163.1

 

53.2

 

Corporate administration

 

15.1

 

16.4

 

(1.3

)

Business development

 

2.7

 

2.2

 

0.5

 

Subtotal

 

$

327.2

 

$

254.6

 

$

72.6

 

Impairment charges

 

62.9

 

31.1

 

31.8

 

 

 

$

390.1

 

$

285.7

 

$

104.4

 

 

Costs of sales were $93.1 million for 2015 compared with $72.9 million for 2014.

 

(expressed in millions)

 

2015

 

2014

 

Variance

 

Per ounce cost of stream sales

 

$

80.1

 

$

57.7

 

$

22.4

 

Cost of prepaid ounces

 

6.6

 

6.0

 

0.6

 

Production taxes

 

2.6

 

2.5

 

0.1

 

Oil & gas operating costs

 

3.8

 

6.7

 

(2.9

)

 

 

$

93.1

 

$

72.9

 

$

20.2

 

 

The increase of $20.2 million is attributable to higher steam ounces delivered under our stream agreements, with the recent Candelaria and Antamina acquisitions, and more ounces delivered under the Fire Creek/Midas agreement with 7,500 ounces delivered in 2015 compared with 6,750 in 2014. These increases were partially offset by lower oil & gas production costs which benefitted from a weaker Canadian dollar. Franco-Nevada received 222,670 GEOs under its stream agreements compared to 150,087 GEOs received in 2014.

 

33



 

Costs of Sales Reconciliation — 2014 to 2015

(expressed in millions)

 

 

Depletion and depreciation totaled $216.3 million in 2015 compared to $163.1 million in 2014. The increase of $53.2 million is mostly due to recent acquisitions: Candelaria ($42.4 million), Antamina ($9.0 million), as well as higher production at Bald Mountain ($4.6 million) and Sabodala ($3.5 million). In addition, the Company adjusted its estimate of the depreciation rate on well equipment associated with its working interests which resulted in an increase to depreciation expense.

 

34



 

Depletion Reconciliation — 2014 to 2015

(expressed in millions)

 

 

Corporate administration expenses decreased to $15.1 million, representing 3.4% of revenue, from $16.4 million in 2014. The decrease is due to lower compensation expense and the impact of a weaker Canadian dollar, as the Company incurs the majority of its corporate expenses in Canadian dollars.

 

Business development expenses were $2.7 million and $2.2 million for the twelve months ended December 31, 2015 and 2014, respectively. Timing of incurring these costs typically varies depending upon the level of activity of the business development team and timing of completing transactions.

 

Franco-Nevada recorded $62.9 million in impairment charges in 2015. Please refer to the impairment charges section in the fourth quarter discussion above.

 

35



 

Foreign Exchange and Other Income/Expenses

 

Foreign exchange losses and other expenses for the year were $5.4 million compared to $1.6 million in 2014. The following table provides a list of the other income/expenses incurred for the twelve months ended December 31, 2015 and 2014.

 

 

 

Twelve months ended December 31,

 

(expressed in millions)

 

2015

 

2014

 

Variance

 

Foreign exchange loss

 

$

(3.6

)

$

(2.0

)

$

(1.6

)

Mark-to-market gain (loss) on warrants

 

(0.5

)

1.3

 

(1.8

)

(Loss) on sale of gold

 

(2.2

)

(0.9

)

(1.3

)

Gain on the sale of investments

 

0.9

 

 

0.9

 

 

 

$

(5.4

)

$

(1.6

)

$

(3.8

)

 

Franco-Nevada recorded a $2.0 million impairment charge (2014 - $0.4 million) on available-for-sale investments related to the continued decline in the fair value of certain equity instruments.

 

Finance Costs and Finance Income

 

Finance income was $5.3 million (2014 - $3.9 million) for the year which was earned on our cash equivalents and/or short-term investments.  The increase in finance income was due to a monthly fee earned in connection with the Karma gold stream. Finance expenses were $2.9 million (2014 - $1.6 million) consisting of the costs of maintaining our credit facility, interest charges on the drawdown of funds under the credit facility as well as the amortization of the initial set-up costs incurred with respect to the facility.  Finance expenses were comprised of standby fees of $1.5 million (2014 - $1.3 million), interest of $0.8 million (2014 - $Nil) and amortization of issuance costs of $0.6 million (2014 - $0.3 million).

 

Income Taxes

 

Franco-Nevada had an income tax expense of $23.9 million (2014 — $50.3 million) for the year comprised of a current income tax expense of $26.1 million (2014 - $31.7 million) and a deferred income tax recovery of $2.2 million (2014 — deferred income tax expense of $18.6 million) related to our Canadian, U.S. and Mexican entities.

 

Net Income

 

Net income for 2015 was $24.6 million, or $0.16 per share, compared with $106.7 million, or $0.71 per share, for 2014. Adjusted Net Income was $88.9 million, or $0.57 per share, compared with $137.5 million, or $0.91 per share, for 2014. The decrease in Adjusted Net Income was driven primarily by:

 

·                  higher depletion and costs of sales, both due to the recent Antamina and Candelaria acquisitions;

·                  partially offset by higher revenue and lower income tax expense.

 

36



 

Adjusted Net Income Reconciliation — 2014 to 2015

(expressed in millions)

 

 

37



 

Financial Condition Review

 

Summary Balance Sheet and Key Financial Metrics

 

 

 

As at December 31,

 

(expressed in millions, except ratios)

 

2015

 

2014

 

Total cash and cash equivalents

 

$

149.2

 

$

592.5

 

Current assets

 

274.7

 

698.9

 

Non-current assets

 

3,399.6

 

2,768.0

 

Total assets

 

$

3,674.3

 

$

3,466.9

 

Current liabilities

 

20.8

 

21.1

 

Non-current liabilities

 

490.5

 

40.3

 

Total liabilities

 

$

511.3

 

$

61.4

 

Total shareholders’ equity

 

$

3,163.0

 

$

3,405.5

 

Dividends paid (including DRIP)

 

129.0

 

118.0

 

Debt

 

457.3

 

 

Total common shares outstanding

 

156.9

 

156.5

 

Key Financial Ratios

 

 

 

 

 

Working Capital

 

$

253.9

 

$

677.8

 

Current Ratio

 

13.2:1

 

33.1:1

 

Debt to equity

 

0.14:1

 

0:1

 

 

Balance Sheet Review

 

Total assets were $3,674.3 million at December 31, 2015 compared to $3,466.9 million at December 31, 2014. Our asset base is primarily comprised of non-current assets such as our royalty, stream and working interests, and current assets of cash and cash equivalents, which reflect our business strategy of growing a diversified portfolio and ensuring cash is available for future acquisitions and dividends. Total liabilities at December 31, 2015 were $511.3 million, comprised primarily of debt of $457.3 million and current and deferred income tax liabilities.

 

Financial Position, Liquidity and Capital Resources

 

Operating Cash Flow

 

Cash provided by operating activities before changes in non-cash assets and liabilities, relating to operating activities, was $88.9 million and $93.9 million for the three months ended December 31, 2015 and 2014, respectively. The decrease was attributable to higher cost of sales paid in the quarter compared to the same quarter in 2014.

 

Cash provided by operating activities before changes in non-cash assets and liabilities, relating to operating activities, was $317.2 million and $332.0 million for the year ended December 31, 2015 and 2014, respectively. The decrease was attributable to higher cost of sales paid in 2015 compared to 2014.

 

Investing Activities

 

Cash used in investing activities was $963.5 million for the quarter compared to $670.8 million in the same period of 2014. The increase was due to the higher acquisitions of interests in mineral properties in 2015 compared to 2014.

 

For 2015, cash used in investing activities was $1,045.3 million compared to $815.9 million in

 

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2014. In 2015, Franco-Nevada invested over $1,016.8 million in new stream and royalty transactions as described in the Corporate section above.

 

Typically Franco-Nevada invests its excess funds in various term deposits, treasury bills of the U.S. government, Canadian federal and provincial governments and high quality corporate bonds.  As at December 31, 2015, the majority of funds were held in cash deposits with several financial institutions. As at December 31, 2015, investments had various maturities upon acquisition of between 92 and 101 days. Accordingly, as at December 31, 2015, the investments were classified as short-term investments.

 

Financing Activities

 

Net cash provided by financing activities was $445.2 million for the quarter compared net cash used of $20.0 million for 2014. The increase in cash provided is attributable to the drawdown of funds under the credit facility.

 

Financing activities provided $374.1 million in cash in 2015 compared with $394.7 million in 2014. The decrease is due to higher dividend payments in 2015 compared to 2014. Franco-Nevada increased its quarterly dividend in the second quarter of 2015 to $0.21 per share from $0.20 per share.

 

Cash Resources and Liquidity