Earnings Notes V (Q4 2023)

[Previous earnings notes for Q4 2023: I, II, III, and IV.]

Franco-Nevada Corporation (FNV)
As you may recall from our notes last year on Rise of the Mining Royalty Companies, Franco-Nevada was the original mining royalty company, and is the largest, with a $20 billion market capitalization. Newmont acquired Franco-Nevada in 2002 and spun it back out in 2007.

FNC gets 64% of revenue from gold, 17% from oil and gas, 10% from silver, 5% from "other mining," and 3% from PGM metals. The revenue mix is 32% Canada and U.S., 30% South America, and 26% Central America and Mexico. Unfortunately, their biggest asset, the Cobre Panama mine in Panama which is operated by First Quantum Minerals, is currently on preservation and safe maintenance because of a political dispute.

FNV has net cash on the balance sheet, so the enterprise value is $18.5 billion. For 2023, revenue was $1.2 billion and cash from operations was $985 million. (So the OCF/EV yield is 5.3% and the OCF margin is 82% of revenue.) They spent $520 million on acquisitions of new interests and paid $233 million of dividends. (A 1.2% dividend yield.) General and administrative expense is only 2% of revenue.

Note that FNV's average selling price for gold in the fourth quarter was just under $2,000/oz and it comprised 66% of their revenue, but the price of gold just hit $2,200/oz.

Costco Wholesale Corporation (COST)
Look at a chart of Costco - it's like a meme stock. Even after a post-earnings (fiscal Q2 2024 release) selloff, it is still up 50% (not including dividends) over the past year. The market capitalization is now $324 billion. 

Total revenue was up 5.7% year-over-year, and comp sales in the U.S. (adjusted for gasoline price changes) were up 4.8%. Operating income for the quarter was up 8.4%, to $2.1 billion. (Note that membership fees for the quarter of $1.1 billion are equal to 54% of operating income.) Operating cash flow for the first half of fiscal 2024 has been $5.4 billion. The company spent $2.1 billion on capex (new stores) and paid shareholders $8 billion of dividends.

So the shares are pricey, but growth is good.

OTC Markets Group Inc. (OTCM)
This is an idea for a royalty-like business that is not as expensive as a business of similar quality (e.g. Intercontinental Exchange) because it is smaller. In the fourth quarter, OTCM had an operating income margin of 35% of its revenue less transaction based expenses. The market capitalization is currently $670 million and the enterprise value $638 million.

Free cash flow for 2023 was $31.5 million, a 4.9% yield on the enterprise value. (If you subtract stock based compensation, the FCF is only $25.6 million, a 4% yield on the EV.) Last year, the company returned $26.5 million to shareholders via dividends and $3.4 million via repurchases, which is a shareholder yield of 4.5%.

One concern is that growth has not been great recently for how expensive the stock is. The free cash flow has been lower each of the past two years. However, if you look back five years (to 2018), net revenue then was $56 million (vs $101 million last year), free cash flow (excluding SBC) was $20 million (vs $26 million last year) and shareholder returns were $15 million. So free cash flow was only up 30% in five years, not nearly as good as Enterprise Products Partners (for example).

Petróleo Brasileiro S.A. (PBR)
Our guest writer @pdxsag first wrote about Petrobras for us last June when it was trading for $12.25 per share, an $85 billion market capitalization and an enterprise value of $118 billion. At the time, their recent quarter's free cash flow was $7.9B for a FCF/EV yield of 27%. The market capitalization (at $15 per share) is now $97 billion and the enterprise value is $124 billion. Last year (see results), Petrobras generated cash from operations of $43 billion and had $12 billion of capex, for free cash flow of $31 billion. They paid $19.7 billion in dividends and repaid $10 billion of debt. (A FCF/EV yield of 26% and a shareholder yield of 20%.)

Petrobras shares were down 10% on March 8th after some alarming comments from the company about reducing dividends to invest in an energy transition. Is it worth investing in a country where you would not want to drink the water just to get a bit higher free cash flow yield than you can get on Canadian oil sands?

Natural Resource Partners L.P. (NRP)
Let's start with the highlights from NRP's Q4 2023 conference call:

*Years of hard work and persistence are paying off. The business is generating robust levels of free cash flow, the capital structure is solid and our financial outlook is much improved. As of today, our total remaining obligations, which include debt, preferred equity and warrants, stand at approximately $270 million, a 40% decrease from just 1 year ago. I would like to express my sincere thanks for the support of our employees, external stakeholders and Board of Directors, without which none of these results would have been possible. We retired $178 million of preferred equity at par in 2023 and settled 1.5 million warrants, both with cash. And early this year, we settled an additional 1.2 million warrants utilizing cash and common units. There are two factors we consider when deciding whether to settle warrants with cash or common units: First, do we have ample liquidity, which we define quite conservatively, I might add; and second, is the market value of the common units less than our estimate of intrinsic value? If the answer to both of those questions is yes, we settle with cash. While we will not comment specifically directly on our view of intrinsic value, I will say that it was our inability to answer yes to the liquidity question that caused us to issue units to settle a portion of the warrant exercises early this year. We continue to add additional bank revolver capacity that will provide financial flexibility to settle warrants with cash and accelerate redemptions of preferreds.

*We received $81 million in cash distributions from Sisecam Wyoming in 2023, which is the highest annual amount of regular distributions we've ever received. This result was driven by record high sales prices, both domestic and export during the first half of the year. Unfortunately, global soda ash export prices fell significantly in the back half of the year as new low-cost soda ash supply came online in China, Turkey and the United States. We expect 2024 to be a challenging year as global soda ash markets absorb significant new production volumes, a process that we believe will take several years to complete. Cash distributions to NRP will adjust accordingly as profit margins compress due to the combination of lower sales prices and inflation-driven cost increases. Despite the current headwinds facing the soda ash industry, our long-term view of our investment in Sisecam Wyoming has not changed. We are one of the world's lowest-cost producers of a product that has favorable long-term fundamentals, driven by urbanization, the megatrends for renewable energy and the electrification of the global auto free fleet.

*You are right in what you summarized initially that at our current run rate that it's not too long before we get to the point where we're obligation free. But I don't want to speculate now on what we would do in 1.5 years, 2 years from now if we had excess cash. I can tell you at this point in time, we don't see opportunities in the market. If we were in that theoretical situation where we had excess cash today, they are not on the horizon overly attractive opportunities to deploy capital. That being said, I will point out that we are focused on the task at hand right now, and we're not out beating the bushes for places to deploy capital. I think you can rest assured that we are going to be quite thoughtful about anything we do with respect to deploying capital in any manner other than distributing it out to unit holders. 

At the current unit price of $92, the market capitalization is $1.2 billion (using the February 2024 unit count and not the year-end). They have spent $55.7 million repurchasing warrants in Q1 2024 and have hopefully earned about the same amount from two months of cash flow. If that is the case, the enterprise value is currently around $1.4 billion. Last year's free cash flow of $313 million represents a 22% yield on the enterprise value.