Aug 12, 2012
Executives
Stefan Axell – Manager, IR David Harquail – President and CEO Sandip Rana – CFO Paul Brink – SVP, Business Development
Analysts
Stephen Walker – RBC Capital Markets Greg Barnes – TD Securities Adrian Day – Adrian Day Asset Management Tanya Jakusconek – Scotia Bank Brian MacArthur – UBS
Operator
Good morning. My name is Stephanie and I will be your conference operator today.
At this time, I would like to welcome everyone to the Franco-Nevada Corporation Second Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise.
After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.
Stefan Axell, Manager of Investor Relations, you may begin your conference.
Stefan Axell
Thank you, Stephanie. Good morning, everyone.
We are pleased that you have joined us today for a Franco-Nevada Q2 2012 financial results overview. Accompanying our call today is a presentation, which is available on our website, where you’ll also find our MD&A and financial results.
On the line, we have David Harquail, President and CEO; and Sandip Rana, CFO; as well as most of our management team to answer any questions during the Q&A period. Before we begin the formal remarks regarding our Q2 2012 results, we’d like to remind participants that some of today’s commentary may contain forward-looking information.
In this respect, we refer you to our detailed cautionary note regarding forward-looking statements on slide two of our presentation. I’ll now turn the call over to David Harquail, President and CEO of Franco-Nevada.
David Harquail
Thank you, Stefan. I think as most of you have seen the press release and this was a pretty solid quarter for Franco-Nevada.
Sandip is going to review the financial numbers after I make a few brief comments. I think in our press release, we also covered what I think was a lot of good news across the portfolio.
In general, we’re seeing positive developments among a number of our operating assets and as well in our development pipeline of assets. I think the press release covered that pretty well, so I’m not going to belabor all those updates.
The one thing that we couldn’t update you on, of course, last night was Tasiast, Kinross came out about the same time, we did, and I apologize to the analysts for that. We have a 2% revenue royalty at Tasiast.
And personally, I only see upside on that asset for Franco-Nevada. Last year, we booked a little short of $3 million on that royalty, this year we’re expecting closer to $7 million.
And even if the Kinross expansion, ultimately, is only half of what they previously projected, this royalty could potentially generate $25 million a year for over 20 years to Franco-Nevada. So, this is going to be – I expect it to be a great asset for Franco-Nevada going forward, and we’re confident we’re going to see the value out of this over time.
On the business development front, you recall our last quarterly we had a pretty busy first quarter with a number of smaller deals. We spent about $110 million in the first quarter.
In the second quarter, our focus has been on the larger opportunities, where we’re confident that we should be able to report some success in this area, and so we’re working very hard on that. Yesterday’s announcement by Silver Wheaton and HudBay, that type of transaction in our view is yet a further endorsement of the growth potential of the royalty streaming business model.
Royal Gold, as well, made some news this morning. There are more than enough opportunities for all the royalty and streaming companies and we fully expect to get our share of the deals.
I’ll be happy to take your questions after Sandip reviews our Q2 numbers. Sandip, if you can take it away from here.
Sandip Rana
Thank you, David. Good morning, everyone.
Thank you for taking the time to join us on our call to discuss the company’s financial results for the three and six months ended June 30, 2012. With respect to our financial results, as you will have seen from the press release issued yesterday, the company had another good quarter.
Our royalty and stream operations continued to perform well. This was the fifth consecutive quarter that the company surpassed the $100 million mark in revenue.
Revenue was slightly lower at $102.7 million for second quarter 2012, when compared to second quarter 2011. But our net income of $36.9 million was higher for the same period due to lower depletion and lower cost of sales reported.
As mentioned, revenue was $102.7 million for the quarter. This compares to $106.3 million for second quarter of 2011.
On a year-to-date basis, revenue was $207.7 million compared to $179.4 million a year ago, a 15.8% increase. Although, revenue was slightly less in second quarter 2012 compared to prior year, actual production attributable to (inaudible) Franco-Nevada from our royalty and stream properties was in line with our expectations for the quarter and six months ended June 30.
With respect to pricing, average commodity prices were mixed in the quarter. The average gold price was $1,611 per ounce for the quarter compared to $1,504 in second quarter 2011, an increase of 7.1%.
For the six months ended June 30, the average gold price was $1,651 per ounce compared to $1,444 per ounce for the six months ended June 30, 2011, a 14% increase. This increase in average gold prices did lead to an increase in gold revenue.
Gold revenue of $81.4 million was higher by 13% for the quarter ended June 30, 2012 compared to the prior year. This is not only due to this increased average gold prices in second quarter, but also a combination of acquisitions made by the company over the last year such as Timmins West and Edikan and organic growth from our portfolio with assets such as Musselwhite and Tasiast beginning to generate revenue.
Benefit of these drivers was slightly offset by the absence of a guaranteed minimum ounce requirement from Ezulwini in 2012. As you may recall, in 2011, the company did benefit from this minimum ounce requirement.
The full-year minimum ounce requirement was 19,500 ounces. That minimum ounce requirement is not in place for 2012.
PGM revenues have decreased from $23.3 million in second quarter 2011 to $11.4 million in second quarter 2012. The decrease is due to lower average platinum and palladium prices and a reduction in the number of stream ounces delivered from our Sudbury assets in second quarter 2012.
With respect to pricing, platinum averaged $1,500 per ounce, down just under 16% from $1,782 per ounce in second quarter of 2011. And palladium prices averaged $629 per ounce, down 17% from $759 per ounce in second quarter of 2011.
As we received gold equivalent ounces from our Sudbury assets, the lower PGM prices do have an impact on the number of gold ounces the company does receive. With respect to the six months ended June 30, 2012, revenue was $207.7 million compared to $154.9 million a year ago, a 34.1% increase.
The increase is due to a combination of higher average gold prices, recording of six months of financial results from Sudbury, Mine Waste Solutions and Ezulwini as in 2011 the company only owned these assets from March 14, 2011 onward. For second quarter 2012, net income was $36.9 million or $0.26 per share compared to $33.3 million or $0.27 per share in Q2 2011.
Although revenue was slightly lower quarter-over-quarter, the company did benefit from the lower cost of sales and depletion, resulting in higher net income in 2012. For six months ended June 30, 2012, net income was $83.7 million or $0.59 per share, compared to $54.5 million or $0.45 per share in 2011.
The company does use certain non-IFRS measures, which management believes do provide a better measure of performance, these being adjusted EBITDA and adjusted net income. For the three months ended June 30, 2012, adjusted EBITDA was $82.5 million or $0.57 per share compared to $82.6 million or $0.65 per share in second quarter of 2011.
Adjusted net income for the three months ended June 30, 2012 was $35.1 million or $0.24 per share compared to $33.2 million or $0.26 per share for three months ended June 30, 2011. The majority of our revenue was generated from five key assets: Palmarejo, Goldstrike, Mine Waste Solutions, Sudbury Basin and Weyburn.
Together, they accounted for 63% of our total revenue. Revenue earned from Goldstrike was $13.2 million in the quarter, a 23.4% increase over second quarter 2011.
The increase is due to higher gold price, which has led to a higher NPI payout in the quarter. Production this quarter was still affected by the continued maintenance and retrofitting taking place at the mine.
We do expect stronger performance in the second half of the year from Goldstrike as higher grade underground ore is mined. Palmarejo continues to perform well.
We purchased 32,000 gold ounces in the first half of the year, resulting in $52.9 million in revenue for the six months ended June 30, 2012. At this point in time, Coeur d’Alene, the operator, has not adjusted its full year production guidance of 98,000 to 108,000 gold ounces.
Turning to slide four, we illustrate revenue by commodity growth of the portfolio. As can be seen from the chart, revenue (inaudible) gold, PGM and other have seen growth (inaudible) with gold revenue showing the largest increase.
In Q1 2009, gold revenue was approximately $20 million. For second quarter 2012, gold revenue was $81.4 million, an increase of over 300% during this period.
When combining gold revenue with PGM revenue, precious metals overall comprises 90% of total revenue for second quarter of 2012 (inaudible). As you can see on the chart, there are some fluctuations in the results of certain numbers but this is due to timing of when certain NPIs and minimums are recorded for accounting purposes.
Turning to slide five, you can see that the company has achieved annual revenue growth each year with significant increases in 2010 and 2011. For the six months ended June 30, 2012, revenue has again shown significant growth, increasing 34% compared to the six months ended June 30, 2011.
This growth can be attributed to number of factors, the most influential being timely acquisitions and organic growth from within the portfolio. One of the key advantages that we like to stress of our business model is scalability.
Our costs have increased over the last few years as can be seen on slide six. The increase is due to addition of streams to our business model, in particular Palmarejo, Sudbury Basin and Mine Waste Solution streams.
In general, you have to pay $400 million per ounce for each ounce of gold delivered which after a period of time is adjusted for an inflation factor. This has led to an increase in our cost of sales line item.
However, the increase is far outweighed by the increase in revenue and even more impressive is how corporate administration costs have remained fairly constant. In fact, the Q2 2012 G&A is 4.7% of revenue compared to 4.9% in Q2 2011.
As you turn to slide seven, the geographic revenue profile continues to be lower risk with 84% of revenue being from North America with the U.S. being the largest contributor.
The African portion is now at 12% with the additions of Mine Waste Solutions, Ezulwini and Edikan and the start of the Tasiast royalty last year. Also please note that the diversification by asset is also expanding with revenue being sourced from more and more properties resulting in the company being less economically dependent on certain royalties as it once was.
This will continue to grow as our advanced stage royalties begin to provide revenue. The company now benefits from 43 revenue generating mineral assets.
Slide eight provides a reconciliation of net income earned in Q2 2011 to net income generated in Q2 2012. The positives for the yearly change include lower depletion due to the mix of assets generating revenue.
The Sudbury and Ezulwini assets have higher book values and with the lower revenue generated resulted in lower depletion order. As well this results in a lower cost of sales amount for the quarter.
Offsetting these positives were a reduction of overall revenue discussed earlier. Movements in foreign exchange and an increase in income tax expense.
The end result is an increase in net income from $33.3 million in Q2 2011 to $36.9 million in Q2 2012. On slide nine you can see that the company continues to have the resources to complete additional transactions.
The company has working capital at June 30, 2012, of just over $1 billion, marketable investments of $74 million and undrawn credit facility of $175 million. As a result, at the end of June 30, 2012, available capital was approximately $1.3 billion.
Slide 10 provides an update on the current capital structure of the company. There are currently $145 million shares outstanding as at June 30, 2012, on a fully diluted basis, including the warrants inherited from the Gold Wheaton transaction.
The share amount would be $161.5 million. In closing, as you are aware, the company issued revenue guidance earlier this year of $430 million to $460 million.
As stated earlier, the overall actual production of our royalty and stream properties has been in line with what our expectations were thus far in 2012. However, most commodity prices have averaged lower than what expectations were for the first six months of 2012.
Based on these realized prices and current spot commodity prices, we anticipate our full year revenue to be at the lower end of the previous range provided. And with that, I will turn it over to Stephanie to initiate the question-and-answer session.
Thank you.
Operator
(Operator Instructions) And your first question will come from the line of Stephen Walker with RBC Capital Markets. Your line is open.
Stephen Walker – RBC Capital Markets
Great. Thank very much.
Just a couple of questions on Mine Waste Solution and Ezulwini. On Mine Waste Solution, my understanding is that the grade that AngloGold Ashanti would be delivering would be slightly higher than what we’re being mined previously from those dumps.
In your guidance, you talk about production being very similar in the second half of the year to the first half of the year. Is there at some point an impact, positive impact on grades from Mine Waste Solutions?
Paul Brink
Stephen, it’s Paul Brink. Thanks for the question.
When you look at the overall reserves of the original Mine Waste dumps and then of the dumps that Anglo have, I think you’re quite right that they are – on average, they do have high grades. So, there’s some expectation over time that that would be a positive.
Obviously, in terms of putting in the piping to be able to start accessing those dumps, something that’s going to take time and also how they factor their dumps into the floor. So I think there is a longer-term benefit, just not quite sure when it’ll kick in, in terms of timing.
Stephen Walker – RBC Capital Markets
No discussion on when the piping is going to be installed at this stage?
Paul Brink
No. I don’t have any details yet.
Stephen Walker – RBC Capital Markets
With respect to Ezulwini, what’s the timing for Gold One to – are Gold One mining there now and what’s the scale of the operation? And what’s the timing on when that could be brought up to sort of a reasonable run rate versus sort of the dwindling run rate that we’ve seen previously?
Paul Brink
They have – Gold One has been running the operation for a couple of months now, Stephen. I think one of the things they want to do is first get a handle on the operation before they start making any projections in terms of what they would do to the throughput rate.
So, again, I don’t have any details on when they would expect to stabilize and hopefully improve that rate, although they have had control of the operation for a number of (inaudible).
Stephen Walker – RBC Capital Markets
Okay. Thanks, Paul.
Just one last question on the assets, KGHM up in Sudbury, do we have a sense on what the revenue split may be with respect to nickel and PGMs in the back half of the year and into 2013? And is it safe – you do suggest that similar production levels, is that on a tonnage basis, on a metal basis in the second half of 2012 versus the first half?
And is there any sense on what 2013 could look like?
Sandip Rana
That’s on a contained metal basis. In terms of 2013, they did announce at the end of last year that they’ll be shutting down Podolsky at the end of this year.
So that right now on McCreedy, they’re only mining on the nickel with some precious metals. You have Levack Morrison going, but Podolsky is not in the plan right now for next year.
Stephen Walker – RBC Capital Markets
Right. Okay.
That’s it for now. Thank you very much.
Operator
(Operator Instructions) And your next question comes from the line of Greg Barnes with TD Securities. Your line is open.
Greg Barnes – TD Securities
Yes. Thank you, operator.
I guess a question for David or Paul. The transaction announced yesterday between Silver Wheaton and HudBay, I assume you’re in the mix.
But was there a reason you didn’t pursue it harder? Or that you didn’t go out of the business?
David Harquail
Greg, maybe I’ll just reemphasize what I’ve said at the beginning. There’s going to be more than enough business for all the companies involved.
And so, I expect – I don’t think there should be an expectation that we’ll be doing everything out there. I think it’s healthy if you see deals being done sequentially by the different royalty companies just like any banks doing financing for projects.
I wouldn’t expect TD to finance everything out there. So we’ve got a good healthy market.
We’re going to get more than our fair share of the good deals out there.
Greg Barnes – TD Securities
Did – was this particular one a bit more further weighted than you would have liked?
David Harquail
Again, there’s different ways of cutting the deals. And you can look at different assets and how you want to package it.
I think it’s – again every company is looking at their own portfolios, how much do they want in term – or they need in terms of near-term cash flow accretion versus having some very long-term assets. I think all of us as well are looking at what is the right mixture of commodities.
We’re all starting at different weightings and we all have in mind what we believe are the optimal weightings. We’ve made it clear.
We’re trying to be at least 80% precious metals in this company. But we have the flexibility right now to make investments in different commodities.
We’re not short of investment opportunities at this stage. But right now, we’re just focusing and trying to do some more material larger deals but these tend to be chunky and they take time.
Greg Barnes – TD Securities
And how are you focused in terms of near-term cash flow accretion versus these bigger deals that maybe impact cash flow longer term?
David Harquail
Well in terms of – we’re somewhat agnostic in that. We just want to do the best deals in front of us as possible.
We don’t have to buy near-term cash flows because our portfolio is very strong. And we’re generating steady-state numbers.
We believe when we buy something that’s still even a number of years away from production, if there’s enough, I guess, visibility in terms of when those revenues will come in, we believe we’ll get credit for it from a Street perspective. And we are, ourselves, look at this company clearly from a very long-term net asset value accretion basis on a per share basis.
So whether it’s gold or whether oil and gas transactions or other commodities, we’ve got the flexibility as we can build our portfolio in all components, near term, long term, different commodities and different risk profiles. The nice thing is when you’ve already got 43 producing assets, the more you buy, I think, the more strength the portfolio is gaining from the increased diversity and we just intend to continue building it.
Greg Barnes – TD Securities
And how do you respond, David, when people put to you the point that if you buy these longer-term assets that your payback on the capital investment is stretching out to 7 to 10 years.
David Harquail
Yeah. It’s – I think, the people made those criticisms when we bought into – when you look back, assets such a Detour, when we bought that royalty back in the mid-1990s or even our Hemlo royalties, again, in the early 1990s absolutely long-dated.
And I think there is a large component of the market out there that wants, I guess, the instant gratification and near-term cash flows. We’ve been building this portfolio for over 25 years.
I’m actually very comfortable buying things that I might not even get the benefit of as the CEO of this company. It might be the benefit of the last – the next CEO of the company and Seymour Schulich, I can tell you in the old days, he was always complaining, he was buying stuff that Honnie Harco would benefit in the future.
And I think it’s the right thing to do. I think we have the luxury, a very few other companies have of actually thinking real long term.
I’d say there’s always going to be a component of our investment opportunities that we’re going to be active on that are going to be long-dated. But it doesn’t preclude us at the same time from doing other deals that are going to be near-dated.
So I think you’re always going to see a blend of near term and longer-dated acquisitions and you’re going to see a blend of different commodities as well. So we’ve got a large portfolio.
We’ve got a lot of flexibility and we continue to take full advantage of that.
Greg Barnes – TD Securities
Okay. Thank you.
Operator
Your next question comes from the line of Adrian Day with Adrian Day Asset Management. Your line is open.
Adrian Day – Adrian Day Asset Management
Yeah. Good morning.
I had a sort of general question, if I may. I think partly you touched on it.
But as you know, many of the big mining companies have put a lot of major projects on hold recently. And I’m wondering apart from showing up a royalty model as even better than we knew it was, I’m wondering if there’s any implications for you, and I’m thinking specifically, do you think the senior miners maybe – are going to be a little less likely to make acquisitions of specific properties from juniors and does that mean some of the royalty cash flow might be delayed for you?
David Harquail
Adrian, in terms of what we’re seeing right now is that there’s about 11,000 different projects being advanced around the world right now. A lot of them, I guess, we could almost say they’re already pregnant that they’re going to be pushed forward.
That’s creating just a cornucopia of investment opportunities for these royalty and streaming companies right now, that these projects need to get the balance of financing that get them through the various stages that they are right now. It only becomes a concern, I think, when the industry as a whole – and this is what we saw in the late 1990s, no longer is willing to invest risk capital in terms of exploration or development of projects.
And that’s what the old Franco-Nevada faced in late 1990s, is buying a royalty or a stream, if these projects aren’t being advanced, it’s dead mining. And that’s why we looked ultimately to emerge our company with an operating company.
We’re nowhere near that right now. I don’t think we will get to a stage where we’re running out of, I guess, that’s the bulk projects that need advancing for at least a number of years yet.
So, I see this is actually the most opportunity gifted year that I’ve ever seen in the mine financing business in my career. I couldn’t be more excited about it.
I believe we’ve got several years in front of us to take advantage of it. And what comes after that, I think we’ve demonstrated that we can evolve our business model, if we ever went (inaudible) that the risk capital is no longer going into the business because really our business model takes a lever to self from other people’s risk money going into properties for exploration or development.
We try to be at a more secure level. If that’s not available, then we’re going to evolve our business model, but there’s no need to do it right now.
Adrian Day – Adrian Day Asset Management
Great. Thank you.
Operator
Your next question comes from the line of Stephen Walker with RBC Capital Markets. Your line is open.
Stephen Walker – RBC Capital Markets
David, just a follow up to Greg’s question. Two parts to this question.
Over the years that I’ve been covering Franco and Euro and Royal Gold, we’ve seen the IRR for this number of the royalty and streaming agreements decline from range of 8% to 10%, 11% down to 5% to 6%. I’m only assuming that that’s because it’s much more competitive now that you’ve got three major companies that are looking for precious metals royalty and streaming agreements.
Is that in fact the way you’re looking at that, internal rates of return now or you’re now looking at the competitive environment for royalty streams?
David Harquail
Stephen, I’d actually disagree. If you – you can actually go back and benchmark some of our deals, when we went back in, I guess, in late 2008, 2009, we’re buying a royalty on Gold Quarry in Nevada.
And if you were looking at it, at the gold price then, I think it was $800 and what was known about the reserve then, you were looking at probably a 5% discount rate and how we price that project. What we are really looking for is what is the exploration or expansion or reserves and resource, additional potential beyond what we’re buying.
And that is what we see is what we’re getting for free on top of those, I guess what you might calculate as initial IRR rates. So I think it’s something that – it’s not the right way to measure transaction because you have to factor in that the upside resource and reserve upside for royalty or stream is so much higher than from the operating company.
They’re often mining lower grade materials at much and they have to make additional capital cost commitments. Generally, the royalty in streaming companies are getting those upsides for free.
So their IRR on those additional increments tends to be much higher than the operating companies. So, if you actually look at a lot of our assets, the initial IRRs look extremely low, but when you see the ultimate reserve and resource expansion that occur on the properties, then there’s an acceleration in terms of returns we’re getting on these assets.
And generally it was very hard, I can tell you with the deals we did back in the 1980s and 1990s, it was so slow. We would have to wait 10 years before we could actually see the potential of some of these assets, say Hemlo for instance or Detour.
Now we’re getting gratification so much faster, deals that we’ve just bought in the last two years, things such as the Aği Daği in Turkey where they found out Çamyurt on our same royalty property. The Edikan property with Perseus in Ghana where they’ve done a substantial expansion on the reserve numbers since we first bought in that property.
I’d say even the Timmins West, where they’re announcing additional zones on the Gold River where we’re seeing those additional ounce increments that weren’t part of the initial IRR calculation to start with coming to the forefront even faster. So if I had to call, Stephen, I think we’re actually getting better returns today than we did a decade ago when we’re first doing this business with no competition.
And I think it’s a great investment opportunity and also I think we’ve always said to buy these assets the sellers have a good understanding of what they have already. They also know what the consensus outlook is for gold prices.
They want to get a fair value for what they’re getting. We’re willing to pay them the fair value.
We’re just trying to pick the ones that have that upside and were willing to be patient to realize its upside. We’re just seeing that upside much earlier in this business model.
So, I can’t buy, the IRRs are getting lower in this business.
Stephen Walker – RBC Capital Markets
Okay. One last question, David.
One of the questions the investors keeping asking and we struggle as analysts is should we look at this streaming business and royalty business as having a hurdle rate or cost of capital of, whatever, 5% to 6% or should – given the cash position on debt position of these companies, should we be looking at as what is the opportunity cost of having $1 billion of working capital or excessive amounts of cash on the balance sheets that you’re getting 50 to 100 basis points? What is the benchmark here, I guess, for investors or for analysts when looking at what the actual hurdle rate is?
Is that opportunity cost 50 to 100 bps? Is it a cost of capital, a whack that you calculate internally?
What are your – out of curiosity, what are your thoughts on that?
David Harquail
Again, we look at this so differently Stephen, and really we look at the royalty and streaming segment as a different business segment from the operating companies altogether. We’re in between the gold ETF and we’re in between the gold operating companies.
And when you look at what is the hurdle rate or acquisition, I guess is a cost for gold ETF. It is now a $120 billion of investors’ money attached to those.
It’s negative. It’s because people are willing to pay 40 basis points just for someone to hold their gold with no opportunity for a dividend or return.
We can provide a dividend or return, but we shouldn’t be measured at the same metrics in operating company, because we have a lot of the same characteristics and lower risks closer to an ETF than an operating company. So what I like is actually having multiple royalty companies, streaming companies out there.
We’re becoming more and more at these conferences as a separate business segment. I think we’re also demonstrating we’re now the growth component within the precious metals industry and that we’re creating new product and able to actually even get into the bank financing side of the projects which is opening a lot of growth for us.
So I think the best thing to do is that the metrics for royalty and streaming companies should be on a relative basis for that segment and it’s got to be a hybrid between gold ETF and the operating companies. But we’re always a pure expensive when you put us on the same table as the operating companies.
But I think right now, the investment market is demonstrating the last four or five years the group, as a whole, has been able to perform, because I think there’s been a re-rating in terms of risk metrics attached to the type – our companies. So am I answering your question in terms of what’s the specific cost to capital or hurdle rate?
All I can do, Stephen, is say it’s a hybrid between the ETF and the operating companies.
Stephen Walker – RBC Capital Markets
Great. Thank you very much, David.
David Harquail
All right. Thank you, Stephen.
Operator
And your next question comes from the line of Tanya Jakusconek with Scotia Bank. Your line is open.
Tanya Jakusconek – Scotia Bank
Yes. Hi, good morning, gentlemen.
Maybe just a question for David. We just talked about your over $1 billion of cash in available lines of credit for acquisitions.
And I just wanted to get a feel, you talked about precious metals, oil and gas, other commodities. I know you had talked in the past about iron ore, phosphate, et cetera.
Just wanted to have your views on diamonds, lots of opportunities there and I know you are in Nevada, you used to own a portion of a diamond investment at some point in their past. Just wondered what your thoughts were on the diamond market.
David Harquail
Tanya, we love diamonds and we know you do too.
Tanya Jakusconek – Scotia Bank
Oh, I do. I do.
David Harquail
And we’ve looked it a lot and Pierre has a strong affinity. And, of course, even when we’re at Newmont, we were looking at diamond opportunities.
And I guess, it’s just our own experience as a diamond sector, it’s a fraction of the gold sector. It’s about – I think, one-seventh in terms of the value of commodity produced.
So you’re dealing with a much smaller space and two, it’s so much harder in terms of evaluating these projects in terms of what’s going to be the outcome. But I think the other key reason is the tenure on the land positions on a lot of these projects is so much more tenuous.
A lot of what we’re doing in the gold space, we’re dealing with patented lands or private lands in the U.S. where we know someone’s going to pay at least or even in Australia where that tenure’s going to last for 50 to 100 years.
So we have an opportunity to realize an expiration outcome through multiple commodity cycles. The trouble with a lot of the diamond projects especially in North America they’re very temporary rentals of land.
So they look like wonderful huge land positions, but they’re very expensive to hold and they tend to be shrunk very quickly, within seven years are often 5% of the original land holding and they’ll be focusing on a number of pipes. But again, what is the longer term optionality that we get out of these assets.
It’s harder to get that longer term optionality, your land optionality in diamonds and gold. So, the nature of the gold business is so many more projects.
They’re so much more easier to evaluate and you get much better land positions, that’s why we tended to gravitate 99% of our efforts on gold rather than diamond opportunities, just for those reasons.
Tanya Jakusconek – Scotia Bank
So would it be fair to say that today, your opportunities as you rank them would be first, gold, let’s say, gold, silver, then it’s the other non-gold as oil, gas other commodities and diamonds would be way at the bottom of your opportunities?
David Harquail
In terms of number of opportunities, I think – well, Paul, why don’t you speak to that...
Tanya Jakusconek – Scotia Bank
Yeah. Maybe, Paul.
Yeah.
David Harquail
(Inaudible) that?
Paul Brink
And, Tanya, you’re right in saying obviously we spend most of our time looking at gold and precious metal. In terms of the other commodities, for the most part, we’re agnostic.
We’re looking to expose ourselves to resources that we think have got good expansion potential. So whether that’s oil and gas, bulks, base metals, or diamonds, I think all of those – it’s more just a quality of the opportunity rather us saying – rather than us trying to rank or rate the commodity.
Tanya Jakusconek – Scotia Bank
All right, great. Thank you.
David Harquail
Sorry, about the diamonds, Tanya.
Operator
And your next question comes from the line of Brian MacArthur with UBS. Your line is open.
Brian MacArthur – UBS
Good morning. You’ve talked a little bit about doing larger transactions.
Can you give me like general views on size? I know you’ve said you do up to $1 billion.
But the second part of the question then is how do you risk adjust that, because as you do larger deals say versus 10 years ago when you were not making anything near the size you might be considering now, how you actually adjust for that in your IRR, or how you actually think about that?
David Harquail
Paul, why don’t you do that one?
Paul Brink
Sure. So, we don’t specifically adjust the IRRs based on the size of the transaction.
When we’re thinking of size, it’s – we’re looking at transactions to say, can they be meaningful to our organization, obviously, in terms of where we prioritize our time. The more meaningful the transaction, the more time we can put on it.
Whether it’s a smaller transaction or larger transaction, I think we look at them all on the same basis. And I think as David has alluded before, we look at what we’re confident will be mined.
We like to think that we’ll pay a fair price and as much as anybody else for what that is and we just like to participate with the operators if there is upside on the property. So really when we’re looking at prospects, it’s more that assessment of what you think the potential upside is that drives our level of interest.
Brian MacArthur – UBS
Let me ask it this way, if I give you four $250 million deals or $1 billion deals with the same IRRs, which – equal commodities, which would you do?
Paul Brink
You got to just asses – the reality comes down to, what’s actionable at the time.
Brian MacArthur – UBS
Right.
Paul Brink
And it’s more – rather than being faced with that theoretical option, as the deals come in, there’s a timeframe in which they’re actionable and we have to look at them and say, is this something that we want to do? Does it meet our criteria?
Is it actionable? And if it is, we go for it.
And you got to take them as they come.
Brian MacArthur – UBS
Great. Thank you.
Operator
And there are no further questions at this time. I’ll turn the call back over to the presenters.
Stefan Axell
Thank you, Stephanie. I want to remind investors that our Q3, 2012 results are expected to be released on November 6 and with a conference call scheduled for the following morning.
Thank you for joining us today and your interest in Franco-Nevada.
Operator
And this concludes today’s conference call. You may now disconnect.