Designated News Release
(in U.S. dollars unless otherwise noted)
TORONTO, April 19, 2021 /PRNewswire/ - Franco-Nevada has
acquired 14.7% of Vale's
outstanding Participating Debentures ("Royalty Debentures") from
the Brazilian Development Bank ("BNDES") and the Government of
Brazil for $538M. The Royalty Debentures provide holders
with life of mine net sales royalties on Vale's Northern and Southeastern Iron Ore
Systems and on certain copper and gold operations (together, the
"Royalty"). This transaction provides royalty exposure to some of
the world's largest and most profitable integrated iron ore mines
with reserve weighted mine lives of 30 years and potential for
multiple additional decades through reserve growth. The Royalty
covers a total of 15.6 thousand square kilometers of mineral
properties held by Vale in
Brazil, also offering exposure to
a number of development properties. The Royalty currently generates
an annualized pre-tax cash yield of 10% based on acquisition cost
and the most recent semi-annual Royalty Debenture payment. The
amount of production capacity subject to the Royalty is expected to
grow by approximately +60% by 2026 which would imply an 8% yield on
investment at that time, assuming consensus long term iron ore
prices.
Franco-Nevada has also
accumulated a 9.9% equity investment in Labrador Iron Ore Royalty
Corporation ("LIORC"). The position was acquired over a number of
years for a total investment of C$93M, representing an average cost of
C$14.72/share, versus recent trading
of approximately C$38/share. An
investment in LIORC functions as a flow through of income from its
royalty and equity interest in the Iron Ore Company of Canada's ("IOC") Carol Lake mine operated by
Rio Tinto in Labrador. Reserves at
Carol Lake are sufficient to sustain mining for 24 years and
resources indicate potential for further multi-decade extensions.
Since starting to accumulate the position, Franco-Nevada has
recouped more than 95% of its original investment (inclusive of Q1
2021 dividends declared and to be paid April
26, 2021). Our LIORC investment is generating an annualized
cash yield of 27% based on acquisition cost and the most recent
dividend payment. Franco-Nevada
has no intention of increasing the position at current prices.
Both investments provide exposure to mines producing high grade
iron ore products that are preferred by steelmakers seeking to
reduce CO2 and other emissions from their operations. The two
transactions further diversify Franco-Nevada's asset, geographic
and operator mix. Assuming the commodity prices used in
Franco-Nevada's five-year guidance and consensus iron ore prices,
iron ore is expected to contribute between 5-6% of total revenues
in 2021 and 4-5% in 2025. Franco-Nevada's revenue mix is expected to remain
greater than 80% precious metals through 2025.
"The Vale Royalty and the LIORC equity investments, along with
our by-product precious metal streams from copper mines, provide a
base of low-risk long-life cash flow. We believe the combination of
this foundation with exposure to the exploration success and
commodity price optionality of our gold royalties and streams and
energy assets is a very attractive investment proposition,"
commented Paul Brink, President and
CEO.
$538 Million Vale Royalty
Debenture Acquisition
Franco-Nevada acquired 57
million Royalty Debentures for $538
million on April 16, 2021. The
acquisition represents 14.7% of the total issued Royalty
Debentures. The acquisition was made through a secondary offering
of Royalty Debentures held by BNDES and the Government of
Brazil. The Royalty Debentures
were issued in 1997 with the privatization of Vale to provide the existing shareholders
exposure to future resource growth. The Royalty Debentures are
economically equivalent to royalty interests with no maturity until
the underlying mining rights are extinguished.
The Royalty terms, on a 100% basis, provide for a 1.8% (0.264%
attributable) net sales royalty on (i) iron ore sales from the
Northern System and (ii) approximately 70% of sales from the
Southeastern System. Both systems are fully integrated, allowing
strong margins and a low cost position.
- The Northern System covers Serra Sul (i.e. S11A-D), Serra Norte
and Serra Leste and represents one of the most profitable mining
complexes globally with long-life reserves and excellent potential
for mine life extensions. The Northern System produced 192 Mt of
premium +65% iron ore in 2020. Production capacity is expected
to be 206 Mt in 2021 and to increase
to 260 Mt long term through the approved expansion of Serra
Sul and other growth projects, representing an increase of +26%
over 2021 levels. Royalty payments from the Northern System
commenced in 2H 2013.
- The Southeastern System is a key global producer of pellet feed
and will start contributions to the Royalty once a cumulative sales
threshold of 1.7 Bt of iron ore has been reached, expected during
2024. The Southeastern System is expected to increase capacity
from reduced 2021 levels of 77 Mt to 101
Mt capacity in 2022. At this level of production, the
Southeastern System is expected to increase attributable production
to the Royalty by a further 35% once the threshold is met.
The Royalty also provides for a 2.5% (0.367% attributable) net
sales royalty on certain copper and gold assets. The Royalty
applies on a 50% basis (i.e. 1.25% of net sales) to Sossego,
reflecting Vale's ownership at the
time of issuance. Additionally, the Royalty provides for a 1%
(0.147% attributable) net sales royalty on all other minerals
(covered mining rights include prospective deposits for other
minerals including zinc, manganese, amongst others), subject to
certain thresholds. The 1% (0.147% attributable) also applies to
proceeds in the event of an underlying asset sale. In total, the
Royalty covers 15.6 thousand square kilometers of prospective
geology.
Royalty payments are made on a semi-annual basis on March 31st and September
30th of each year reflecting production in the preceding
half calendar year period. The first payment for 1H 2021 will be
payable to Franco-Nevada on September 30,
2021, making the transaction effective as of
January 1, 2021. Franco-Nevada will accrue the Royalty revenue
quarterly with the revenue from the Royalty received by
Franco-Nevada to be reflected as Other Mining Assets in our public
disclosure and will be included in Franco-Nevada's calculation of
GEOs, consistent with the treatment of LIORC revenue. While
production attributable to the Royalty is expected to increase
through 2025, analyst consensus iron ore prices decline over that
period. As a result, Franco-Nevada expects to record between
25,000 and 35,000 GEOs in both 2021 and 2025 from the
Royalty.
The transaction was financed with a combination of cash on hand
and a draw on the Company's $1B
credit facility. Following the acquisition, Franco-Nevada has
approximately $1.2B of available
capital to complete additional transactions and continues to be in
a net cash position.
Investment in Labrador Iron Ore Royalty Corporation
Franco-Nevada has accumulated
holdings of 6.3M common shares of
LIORC (9.9% of total issued). The investment in LIORC functions
similar to a royalty given the flow through of revenue generated
from LIORC's underlying 7% gross overriding royalty interest,
C$0.10 per tonne commission, and
15.1% equity interest in IOC's Carol Lake mine, operated by Rio
Tinto. LIORC normally pays cash dividends from net income derived
from IOC to the maximum extent possible, while maintaining
appropriate levels of working capital. Similar to Vale's Northern and Southeastern Systems, IOC
produces high grade +65% Fe iron ore concentrate for sale and
pellets with a reserve-only 24-year mine life and a large mineral
resource supporting further extensions. IOC has nominal capacity of
23 Mtpa (combined concentrate and pellets) with 2020 attributable
royalty sales of 18.3 Mt and Rio Tinto has provided 2021 guidance
of saleable production between 17.9 Mt and 20.4 Mt. IOC benefits
from integrated infrastructure, including the mine,
concentrator/pellet facilities, railway, and a port at Sept-Îles,
Quebec. IOC has a long history as
a supplier of high quality, low impurity, premium iron ore and
pellets which has typically received premium prices from the
European steel making industry. The expected contribution from the
LIORC investment is already included in Franco-Nevada's GEO
guidance for 2021 and 2025, provided in March 2021.
Additional information on both investments is included in the
Virtual Analyst Day presentation available on our website.
Revised 2021 Guidance and 5-Year Outlook
Reflecting the acquisition of the Royalty Debentures,
Franco-Nevada now expects attributable royalty and stream sales in
2021 to total 580,000 to 615,000 GEOs from our Mining assets, an
increase from 555,000 to 585,000 GEOs previously, and additional
revenue of $115 to $135 million from our Energy assets. For 2021
guidance, silver, platinum, palladium and iron ore prices have been
converted to GEOs using commodity prices of $1,750/oz Au, $25.00/oz Ag, $1,100/oz Pt, $2,200/oz Pd and $150/t Fe 65%. The WTI oil price and Henry Hub
natural gas price are assumed to average $55 per barrel and $2.50 per mcf. We estimate depletion expense to
be $265 to $300 million.
For its 5-year outlook, Franco-Nevada now expects its existing
portfolio to produce between 630,000 and 660,000 GEOs by 2025, an
increase from 600,000 to 630,000 GEOs, and additional revenue of
$150 to $170
million from our Energy assets. The commodity price
assumptions (excluding Fe 65% at $89/t) are the same as those used for our 2021
guidance and assume no other acquisitions other than the
Condestable stream, Séguéla royalty and Royalty Debentures.
Statements regarding Vale's and
LIORC's operational performance and expectations and
Franco-Nevada's 2021 guidance and 5-year outlook are based on
public forecasts and other disclosure by the third-party owners and
operators of our assets or on our assessment thereof including
certain estimates based on such information.
Corporate Summary
Franco-Nevada Corporation is the leading gold-focused royalty
and streaming company with the largest and most diversified
portfolio of cash-flow producing assets. Its business model
provides investors with gold price and exploration optionality
while limiting exposure to cost inflation. Franco-Nevada uses
its free cash flow to expand its portfolio and pay dividends.
It trades under the symbol FNV on both the Toronto and New
York stock exchanges. Franco-Nevada is the gold
investment that works.
Forward-Looking Statements
This press release contains "forward-looking information" and
"forward-looking statements" within the meaning of applicable
Canadian securities laws and the United States Private Securities
Litigation Reform Act of 1995, respectively, which may include, but
are not limited to, statements with respect to future events or
future performance, management's expectations regarding
Franco-Nevada's growth, results of operations, estimated future
revenues, performance guidance, carrying value of assets, future
dividends and requirements for additional capital, mineral reserve
and mineral resource estimates, production estimates, production
costs and revenue, future demand for and prices of commodities,
expected mining sequences, business prospects and opportunities,
the performance and plans of third party operators, audits being
conducted by the Canada Revenue Agency ("CRA"), the expected
exposure for current and future assessments and available remedies,
the remedies relating to and consequences of the ruling of the
Supreme Court of Panama in
relation to the Cobre Panama project, the aggregate value of common
shares which may be issued pursuant to the Franco-Nevada's
at-the-market equity program (the "ATM Program"), and the Company's
expected use of the net proceeds of the ATM Program, if any. In
addition, statements (including data in tables) relating to
reserves and resources and gold equivalent ounces ("GEOs") are
forward-looking statements, as they involve implied assessment,
based on certain estimates and assumptions, and no assurance can be
given that the estimates and assumptions are accurate and that such
reserves and resources and GEOs will be realized. Such
forward-looking statements reflect management's current beliefs and
are based on information currently available to management. Often,
but not always, forward-looking statements can be identified by the
use of words such as "plans", "expects", "is expected", "budgets",
"potential for", "scheduled", "estimates", "forecasts", "predicts",
"projects", "intends", "targets", "aims", "anticipates" or
"believes" or variations (including negative variations) of such
words and phrases or may be identified by statements to the effect
that certain actions "may", "could", "should", "would", "might" or
"will" be taken, occur or be achieved. Forward-looking statements
involve known and unknown risks, uncertainties and other factors,
which may cause the actual results, performance or achievements of
Franco-Nevada to be materially different from any future results,
performance or achievements expressed or implied by the
forward-looking statements. A number of factors could cause actual
events or results to differ materially from any forward-looking
statement, including, without limitation: the price at which common
shares are sold in the ATM Program and the aggregate net proceeds
received by the Company as a result of the ATM Program;
fluctuations in the prices of the primary commodities that drive
royalty and stream revenue (gold, platinum group metals, copper,
nickel, uranium, silver, iron ore and oil and gas); fluctuations in
the value of the Canadian and Australian dollar, Mexican peso, and
any other currency in which revenue is generated, relative to the
U.S. dollar; changes in national and local government legislation,
including permitting and licensing regimes and taxation policies
and the enforcement thereof; regulatory, political or economic
developments in any of the countries where properties in which
Franco-Nevada holds a royalty, stream or other interest are located
or through which they are held; risks related to the operators of
the properties in which Franco-Nevada holds a royalty, stream or
other interest, including changes in the ownership and control of
such operators; influence of macroeconomic developments; business
opportunities that become available to, or are pursued by
Franco-Nevada; reduced access to debt and equity capital;
litigation; title, permit or license disputes related to interests
on any of the properties in which Franco-Nevada holds a royalty,
stream or other interest; whether or not the Company is determined
to have "passive foreign investment company" ("PFIC") status as
defined in Section 1297 of the United States Internal Revenue Code
of 1986, as amended; potential changes in Canadian tax treatment of
offshore streams; excessive cost escalation as well as development,
permitting, infrastructure, operating or technical difficulties on
any of the properties in which Franco-Nevada holds a royalty,
stream or other interest; access to sufficient pipeline capacity;
actual mineral content may differ from the reserves and resources
contained in technical reports; rate and timing of production
differences from resource estimates, other technical reports and
mine plans; risks and hazards associated with the business of
development and mining on any of the properties in which
Franco-Nevada holds a royalty, stream or other interest, including,
but not limited to unusual or unexpected geological and
metallurgical conditions, slope failures or cave-ins, flooding and
other natural disasters, terrorism, civil unrest or an outbreak of
contagious disease; the impact of the COVID-19 (coronavirus)
pandemic; and the integration of acquired assets. The
forward-looking statements contained in this press release are
based upon assumptions management believes to be reasonable,
including, without limitation: the ongoing operation of the
properties in which Franco-Nevada holds a royalty, stream or other
interest by the owners or operators of such properties in a manner
consistent with past practice; the accuracy of public statements
and disclosures made by the owners or operators of such underlying
properties; no material adverse change in the market price of the
commodities that underlie the asset portfolio; the Company's
ongoing income and assets relating to determination of its PFIC
status; no material changes to existing tax treatment; the expected
application of tax laws and regulations by taxation authorities;
the expected assessment and outcome of any audit by any taxation
authority; no adverse development in respect of any significant
property in which Franco-Nevada holds a royalty, stream or other
interest; the accuracy of publicly disclosed expectations for the
development of underlying properties that are not yet in
production; integration of acquired assets; and the absence of any
other factors that could cause actions, events or results to differ
from those anticipated, estimated or intended. However, there can
be no assurance that forward-looking statements will prove to be
accurate, as actual results and future events could differ
materially from those anticipated in such statements. Investors are
cautioned that forward-looking statements are not guarantees of
future performance. In addition, there can be no assurance as to
the outcome of the ongoing audit by the CRA or the Company's
exposure as a result thereof. Franco-Nevada cannot assure investors that actual
results will be consistent with these forward-looking statements.
Accordingly, investors should not place undue reliance on
forward-looking statements due to the inherent uncertainty
therein.
For information regarding Franco-Nevada's 2021 and 2025 GEO
guidance, please refer to Franco-Nevada's most recent annual
Management's Discussion and Analysis filed with the Canadian
securities regulatory authorities on www.sedar.com and
filed with the SEC on www.sec.gov. For additional information with
respect to risks, uncertainties and assumptions, please refer to
Franco-Nevada's most recent Annual Information Form filed with the
Canadian securities regulatory authorities on
www.sedar.com and Franco-Nevada's most recent Annual
Report filed on Form 40-F filed with the SEC on www.sec.gov.
The forward-looking statements herein are made as of the date of
this press release only and Franco-Nevada does not assume any
obligation to update or revise them to reflect new information,
estimates or opinions, future events or results or otherwise,
except as required by applicable law.
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SOURCE Franco-Nevada Corporation