{"id":1127542,"date":"2019-07-18T13:15:22","date_gmt":"2019-07-18T18:15:22","guid":{"rendered":"https:\/\/www.mining.com\/?p=996997"},"modified":"2019-07-18T13:15:22","modified_gmt":"2019-07-18T18:15:22","slug":"david-harquail-on-franco-nevadas-new-long-life-assets-succession-plans","status":"publish","type":"post","link":"https:\/\/juniorminingnews.com\/?p=1127542","title":{"rendered":"David Harquail on Franco-Nevada\u2019s new long-life assets, succession plans"},"content":{"rendered":"<p><em>The following is an edited transcript of remarks made by Franco-Nevada (TSX: FN; NYSE: FN) CEO<\/em><strong> <\/strong>David Harquail<em> at<\/em>\u00a0The Northern Miner<em>\u2019s Canadian Mining Symposium held at Canada House in London, U.K., on May 22, 2019, followed by a question and answer session. For the full audio, listen to <\/em><a href=\"https:\/\/www.northernminer.com\/news\/the-northern-miner-podcast-episode-143-guiding-a-gold-royalty-juggernaut-ft-david-harquail-ceo-of-franco-nevada\/1003807890\/\">Episode 143 of The Northern Miner Podcast<\/a>. <\/p>\n<div class='d-flex justify-content-center'>\n<div id='div-gpt-ad-1561499308230-0'><script>googletag.cmd.push(function() {googletag.display('div-gpt-ad-1561499308230-0');});<\/script><\/div>\n<\/div>\n<p><strong>David Harquail:<\/strong>&nbsp;In terms of our business principles at Franco-Nevada, we\u2019re trying to do all the good stuff in the industry and avoid the bad stuff. We\u2019re not a mining company, we don\u2019t operate or build mines. We don\u2019t even do any exploration. So, for that reason, we don\u2019t get a lot of coverage in The Northern Miner because it\u2019s more of a financial business.<\/p>\n<p>But over 30 years we\u2019ve collected royalties on mining properties around the world. And the way, when I\u2019m in New York and have to explain this to investors, I describe it is our company is essentially the Airbnb of the gold industry. We get a little piece of a lot of different mines.<\/p>\n<p>We find that royalties on great geology is really the most accretive thing you can do in the business.<\/p>\n<p>We\u2019re not financial engineers. We\u2019re trying to expose ourselves to the exploration potential of good geology, and we describe Franco-Nevada to investors as the low-risk way to get exposure to the industry.<\/p>\n<p>We try to give the investors the best aspects of a gold ETF and the best aspects of a gold operator. The message has worked with investors, and Franco-Nevada\u2019s market cap as of yesterday was over $14 billion. So we\u2019re just behind Newmont and Barrick and among the global gold companies by market capitalization.<\/p>\n<p>The other thing that\u2019s important is having a broad portfolio. And because it\u2019s such a simple business, we can be involved in a lot of properties and manage it with few people.<\/p>\n<p>We\u2019re involved in not only producing and advanced projects but also a lot of exploration projects. We add to these small properties every month.<\/p>\n<p>If it\u2019s good geology, we\u2019re very patient with them, but we\u2019re always interested in the upside.<\/p>\n<p>What I think we\u2019ve done is because we have such a broad portfolio, we\u2019ve become a proxy of the entire gold industry, so we\u2019re covering all stages of projects.<\/p>\n<p>It\u2019s about 370 assets that we\u2019re administering now and we\u2019re doing it with 34 employees. Our properties cover about 44,000 square kilometres, and that\u2019s about the size of Switzerland.<\/p>\n<p>But I think it\u2019s better than Switzerland because we\u2019re trying to do it on the right trends. So we\u2019re trying to pick the good geology within that. It\u2019s an advantage that it\u2019s a simple business, and so it doesn\u2019t cost a lot to run this business.<\/p>\n<p>I have my past auditor here and he\u2019ll verify the numbers, but our G&amp;A costs on a quarterly basis have been almost flat for over a decade, and that\u2019s despite our revenues going up six-fold. So, this is an absolutely scalable business.<\/p>\n<p>I would love to have a thousand royalties and maybe we add one or two auditors, but I think we\u2019ve got that capacity because every asset we buy is incremental, and there\u2019s not a lot of management effort going forward.<\/p>\n<p>I\u2019m told that with our number of employees at 34, we have the highest market capitalization per employee of any company on the New York Stock Exchange, so we\u2019ll try to maintain that.<\/p>\n<p>Some of the things that have really driven our portfolio in the last few years is that we\u2019ve got long-life assets. And an advantage of being in the royalty business is, we\u2019re not restricted to just gold properties and gold companies.<\/p>\n<p>What we\u2019ve been able to do is buy gold and silver from the large porphyry gold projects and the skarn projects in Latin America. The advantage of some of these assets is that they can go for 30 to 50 years. It\u2019s hard to find those types of assets in the gold industry.<\/p>\n<p>What you see on the upper left of this slide is Cobre Panama, and you see one of the initial ships just arriving. They\u2019re going to be making their first official concentrate shipment next month [in June 2019]. This is going to be a cornerstone asset for our company. First Quantum has been developing it, and it\u2019s still probably the largest mining development project in the world, just coming to completion right now. We\u2019re very proud to be associated with that.<\/p>\n<p>These are mines that are run by BHP, Glencore, Teck, First Quantum, the Lundins of the world. We have very quality franchises here that we\u2019re participating in.<\/p>\n<p>In terms of performance, you can see there\u2019s a good strong linear trend from the lower left to the upper right. Our performance was off just a bit in 2018 because there was a pit slide at our Candelaria mine in Chile, which is one of our largest cash flow producers.<\/p>\n<p>It was the first year we didn\u2019t make guidance, but I feel like we\u2019ve hit the ground running for this year.<\/p>\n<p>Just a week and a half ago [in early May 2019], we had our first quarter release and we had record earnings and record revenue numbers for the company.<\/p>\n<p>And what we\u2019re telegraphing right now is this is really the start of a bunch of records because with Cobre Panama coming, with Candelaria getting back to normal operations, and we have a lot of growth coming from our own gas assets, we expect to be hitting further records in the second half of this year and through next year.<\/p>\n<p>We\u2019re one of the growth companies in the industry. It\u2019s a very good story. I like to point out that we measured G&amp;A as a percentage of the value of our company because one of the things that a lot of investors buy is the gold ETF, the GLD. And to be exposed to gold through ETF, it costs you 40 basis points, 0.4%, of every year to hold that gold.<\/p>\n<p>With our company right now, our entire overhead is running about 17 basis points. We\u2019re kind of twice as efficient as a gold ETF and we can do that with active management of these assets.<\/p>\n<p>And then, of course, its dividends. I listened to Steve Letwin from Iamgold this morning, and we have achieved the dream: we are a free cash flow generating business that not only generates enough cash for dividends and growing dividends but also to do the reinvestment. We\u2019re self-financing going forward.<\/p>\n<p>We\u2019ve raised our dividend every year for the last 12 years. We just made our last announcement again 10 days ago at our annual meeting.<\/p>\n<p>If anyone who bought us at our IPO in Canada is now getting almost a 9% yield from their investment in Franco-Nevada, if they bought us 11 years ago. It just shows you the power of compounding dividends.<\/p>\n<p>One of the nice things about this company is, I can\u2019t even screw it up. If our entire management team and board gets hit by a bus, we\u2019re only going to grow for the next five years, just from the projects coming in. We can maintain these dividends for the next 35 years and still have billions leftover in the treasury. So I\u2019d have to make a major mistake to screw it up at this stage.<\/p>\n<p>We have got a very powerful business model, and what we\u2019re now focused on is proper succession planning to keep the DNA in order, so we can preserve this model going forward. We\u2019ve coined ourselves as \u201cFranco-Nevada: the gold investment that works.\u201d<\/p>\n<p>We now have a 11.5 years of returns to our investors. It\u2019s a 17% CAGR, or compounded annual growth rate, of total return to our investors.<\/p>\n<p>And this has been in a market that\u2019s been a bit of a bull, bear, and neutral market for the last 11 and a half years. I\u2019m just wondering what we can do in a bull market.<\/p>\n<p>So this has been a demonstration that active management, that it is possible to outperform passive management. You can outperform the commodity, and our business model and portfolio demonstrates that.<\/p>\n<p><strong>Q&amp;A session<\/strong><\/p>\n<p><strong>The Northern Miner<\/strong>:&nbsp;<em>My first notes I wrote down as I prepared for this interview were: \u201cone of the greatest success stories in the gold sector this millennium\u201d \u2026 \u201cin a class by itself.\u201d<\/em><\/p>\n<p><em>Your first quarter results were spectacular, and then you had some big news, that your co-founder of Franco-Nevada 1.0, Pierre Lassonde, will be retiring next year. If you could comment on your search for a new chairman and your broader thoughts on succession in a corporation like yours.<\/em><\/p>\n<p><strong>David Harquail:<\/strong>&nbsp;What we\u2019d been doing is this. I\u2019ve been with the original Franco and the new Franco for about 32 years. It was started about in 1985, when we first bought that Goldstrike royalty in Nevada that made the company.<\/p>\n<p>What\u2019s important is what makes companies successful. And you can even look at Agnico Eagle, they kind of have the DNA of the founder, and there are certain things that makes the company successful, that you don\u2019t want to turn over everything all at once and then you\u2019ve lost that DNA.<\/p>\n<p>So we\u2019ve been very cautious in terms of trying to remember what Seymour Schulich and Pierre did differently back in 1985 in terms of building that company in the 1980s and \u201990s. And when we came back and relaunched Franco-Nevada, we tried to bring back as many of the original people as possible.<\/p>\n<p>And then when we bring new people in, it\u2019s always educating them in terms of: keep those overheads low; keep the organization focused on new investments, not taking care of existing investments; and manage the ego of the CEO \u2014 don\u2019t let him think he\u2019s the master of the universe.<\/p>\n<p>All of the organization is there to keep me humble. Whoever\u2019s going to be the new CEO of the company, well, we\u2019ve kind of lined that up right now. We\u2019re trying to have an organization where we\u2019re more of a partnership than having a large ego running the company.<\/p>\n<p>We\u2019re doing all of this internally because it\u2019s important to keep the DNA. Last year we appointed Paul Brink, who\u2019s been with me for 14 years, as the president and chief operating officer. Essentially, he\u2019s the CEO designate, and Pierre, this year, has announced that one year from now he\u2019ll step down as chair.<\/p>\n<p>I\u2019ve been going through Europe, and we\u2019d just been marketing in the U.S. as well to touch base with the institutions to say, \u201cWhat is the proper choice going forward and governance-wise?\u201d<\/p>\n<p>Because they\u2019re the owners of the company. So we\u2019re consulting with them on the choice.<\/p>\n<p>I have my hand up to be the next chair of the Franco-Nevada. But we have to consult with the large institutions before we make a decision later this year. We\u2019re getting good feedback on that.<\/p>\n<p><strong>TNM:<\/strong>&nbsp;<em>Good to hear. When I think of Franco-Nevada, I think of some superstar singer or film actor who makes it all look very easy, but there\u2019s a lot of work going on in the background. Could you comment on how you best craft a royalty deal, like choosing between royalties, streaming or net profits, how to negotiate the deal, when to renegotiate, that kind of thing?<\/em><\/p>\n<p><strong>DH:<\/strong>&nbsp;John, it\u2019s easy. The thing is the luxury we have, it\u2019s good to remember that our very first royalty was Goldstrike. So that was a cash cow right there.<\/p>\n<p>And when you have that, then you have the ability to buy things when the market dips. And because it\u2019s such a cyclical industry, if you\u2019ve got the ability to buy things when the market dips, and you can buy great assets.<\/p>\n<p>I guess the only tough part is not to buy things when there\u2019s a bull market.<\/p>\n<p>What happens is, we\u2019ve done our best deals when the downturn happened. For instance, the global financial crisis, we did the Palmarejo-Guadalupe deal and they\u2019re company makers for us. We had the dip in the base metal companies in 2014 to 2016. It was BHP, there\u2019s Glencore, and Teck, and Freeport that were coming to us for help on their balance sheet.<\/p>\n<p>We\u2019re able to buy into their best mines and buy the gold out of those copper mines.<\/p>\n<p>The other thing we have to resist is when we\u2019re in the bull market and we\u2019re not spending money, we\u2019re actually piling up. Suddenly we have more than $1 billion in cash, and I get this: \u201cOh, you have a lazy balance sheet. Dividend it out or go buy something and accelerate your growth.\u201d<\/p>\n<p>I think that\u2019s the only hard part is not spending money sometimes. What we want to do is keep that money because we want to be the only ones that can write a check on the next downturn.<\/p>\n<p>Right now we\u2019ve just dipped into our revolver, so we have just a bit of debt in the company, and that\u2019s because we\u2019re finding a lot of things to buy. So, we\u2019re countercyclical.<\/p>\n<p><strong>TNM:&nbsp;<\/strong><em>How much of your time is tracking existing royalties out there just waiting, who knows, 10 years to buy a royalty off someone when their life changes or something, and how much of your time is spent creating royalties from scratch, that kind of thing?<\/em><\/p>\n<p><strong>DH:<\/strong>&nbsp;Opportunity comes in waves, because we had the base metal companies in trouble, our money and time was spent on that capital, helping them fix their balance sheets. I think right now there\u2019s not a lot of that, so we\u2019re doing just the small exploration or early stage projects because we can afford to get into some of these projects early.<\/p>\n<p>Just earlier this year we put about $20 million in Marathon Gold\u2019s Valentine Lake deposit in Newfoundland, because we think that\u2019s a great orebody, and someone\u2019s going to build that mine. We\u2019re in early, we have a royalty.<\/p>\n<p>We\u2019ve just done Salares Norte with Gold Fields. We bought the underlying ore in that project, and there a pre-final feasibility on it. But again, we\u2019re absolutely confident both of these will be mines in the next 5 to 10 years, and we think we\u2019re buying it at a price that even if it takes 10 years, we\u2019re still make money on them.<\/p>\n<p>We have the luxury. We can buy some of these long-dated assets beyond the timeframe of most other investors because of the nature of the portfolio.<\/p>\n<p>In terms of creating royalties, that\u2019s when you\u2019re into the mine financing and building stage. We\u2019re really not at that stage, and I think that\u2019s going to start happening next year.<\/p>\n<p>Right now where we\u2019re spending most of our time is deploying in the oil and gas industry on the U.S. side. We\u2019re finding a lot of opportunity there, so there\u2019s been a lot of focus on that recently.<\/p>\n<p><strong>TNM:<\/strong><em>&nbsp;Something I\u2019ve always been curious with Franco is, what kind of relationship do you have with these companies after you\u2019ve struck the royalty deal? Is it hands off or do you kind of want to \u201chelp out.\u201d<\/em><\/p>\n<p><strong>DH:<\/strong>&nbsp;It\u2019s hands off, and, you know, it\u2019s a nice thing. What I\u2019m proud of is, in 32 years and hundreds of royalties, I\u2019ve never had a lawsuit with any of the operators. We have very simple royalty contracts in Western courts of law. So no one\u2019s ever challenged them. Sometimes there\u2019s an auditing issue \u2026 we\u2019ll do it, but it\u2019s very rare we ever go to an arbitration on an audit issue.<\/p>\n<p>So, I think we\u2019re seen as good partners. We help out on local community and social investments, and we\u2019ll contribute to it. We help fund the school program around a mine. At Detour, there was a fatality there, and so, we\u2019re helping to fund some of the efforts to support the families that have lost their main partner.<\/p>\n<p>We finance, of course, the Canadian Mining Hall of Fame. We sponsor that, and I was chair, but also the Prospectors and Developers Association of Canada Awards.<\/p>\n<p>We want to help bring out the best in the industry.<\/p>\n<p><strong>TNM<\/strong>:&nbsp;<em>On the world map of Franco\u2019s assets, there are 227 exploration assets. They\u2019re obviously not material, but there\u2019s a lot of them. What\u2019s your philosophy towards investment in juniors?<\/em><\/p>\n<p><strong>DH:<\/strong>&nbsp;Well, it\u2019s good geology. It\u2019s not so much the juniors, it\u2019s is that an interesting property? Is that a great geological expertise? Our view is we can buy it, whoever owns it, because if it\u2019s a good property, it\u2019s going to go to stronger hands eventually.<\/p>\n<p>We were into Goldstrike before Barrick was. We were into Cobre Panama before First Quantum was.<\/p>\n<p>If it\u2019s a good orebody, it\u2019s always going to attract a stronger operator, and so it\u2019s the deposit itself. That\u2019s where we have the tenure. It outlasts management teams because those change all the time.<\/p>\n<p><strong>TNM:<\/strong>&nbsp;<em>One last question, on a more personal note. You are a significant donor to charities, especially medical research and education. There\u2019s the Harquail School of Earth Sciences at Laurentian University. Any reflections on this whole experience?<\/em><\/p>\n<p><strong>DH:<\/strong>&nbsp;I\u2019m following my mentors\u2019 footsteps. Seymour Schulich has been one of the biggest benefactors in Canada, so is Pierre Lassonde.<\/p>\n<p>Our philosophy is we don\u2019t use the company to give money to charities. We do it with our own money. And so we just do mining-related charity in institutions. But for hospitals and universities, it has to come from your own pocket.<\/p>\n<p>I\u2019ve done it, but it\u2019s actually my family. My wife and daughter are here, and we called it the Midas Touch Foundation because if you remember the Midas mine was where we made a lot of our money.<\/p>\n<p>Our dog is named Midas, and he happens to be a Golden Retriever. So, the whole family\u2019s involved in this effort.<\/p>\n<p>What I like is that Pierre has done the Lassonde mining school. I\u2019ve done the exploration school in Sudbury because I think the biggest wealth, as I go back, is not by financial engineering, it\u2019s by finding new orebodies.<\/p>\n<p>If we can have some of these kids find new orebodies in Canada,  everybody\u2019s going to win. So that\u2019s the fun part. And I hope to get more involved in it over time. <\/p>\n<p><em>(This article first appeared in <a href=\"https:\/\/www.northernminer.com\/\"  rel=\"noreferrer noopener\" aria-label=\"The Northern Miner (opens in a new tab)\">The Northern Miner<\/a><\/em>)<\/p>\n","protected":false},"excerpt":{"rendered":"<p>&#8220;Our company is essentially the Airbnb of the gold industry. We get a little piece of a lot of different mines.&#8221;<\/p>\n","protected":false},"author":7,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""}},"footnotes":""},"categories":[624,2849,369,4],"tags":[],"_links":{"self":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/1127542"}],"collection":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/users\/7"}],"replies":[{"embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1127542"}],"version-history":[{"count":1,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/1127542\/revisions"}],"predecessor-version":[{"id":1127543,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/1127542\/revisions\/1127543"}],"wp:attachment":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1127542"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1127542"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1127542"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}