2017 Second Quarter Report Management s Discussion and Analysis. for the three and six months ended June 30, 2017

Transcription

1 2017 Second Quarter Report Management s Discussion and Analysis for the three and six months ended June 30, 2017

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 August 8, 2017 and should be read in conjunction with Franco-Nevada s unaudited condensed consolidated interim financial statements and related notes as at and for the three and six months ended June 30, 2017 and The unaudited condensed consolidated interim 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 ) applicable to the preparation of interim financial statements in accordance with IAS 34 Interim Financial Reporting. 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, 2016 and 2015 and the corresponding notes to the financial statements which are available on our website at on SEDAR at and in our most recent Form 40-F filed with the Securities and Exchange Commission on EDGAR at Additional information related to Franco-Nevada, including our Annual Information Form, is available on SEDAR at and our Form 40-F is available on EDGAR at These documents contain descriptions of certain of Franco-Nevada s producing and advanced royalty and stream assets, as well as a description of risk factors affecting the Company. For additional information, our website can be found at Second Quarter Management s Discussion and Analysis FNV TSX NYSE

3 TABLE OF CONTENTS 4 BUSINESS OVERVIEW AND STRATEGY 5 HIGHLIGHTS 7 GUIDANCE 8 MARKET OVERVIEW 9 SELECTED FINANCIAL INFORMATION 10 REVENUE BY ASSET 11 OVERVIEW OF FINANCIAL PERFORMANCE Q2/2017 TO Q2/ OVERVIEW OF FINANCIAL PERFORMANCE H1/2017 TO H1/ SUMMARY OF QUARTERLY INFORMATION 25 BALANCE SHEET REVIEW 26 LIQUIDITY AND CAPITAL RESOURCES 29 CRITICAL ACCOUNTING ESTIMATES 30 OUTSTANDING SHARE DATA 30 INTERNAL CONTROL OVER FINANCIAL REPORTING AND DISCLOSURE CONTROLS AND PROCEDURES 31 NON-IFRS FINANCIAL MEASURES 34 CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION Abbreviations used in this report The following abbreviations may be used throughout this MD&A: Abbreviated Definitions Periods under review "H1/2017" The six-month period ended June 30, 2017 "H1/2016" The six-month period ended June 30, 2016 "Q2/2017" The three-month period ended June 30, 2017 "Q1/2017" The three-month period ended March 31, 2017 "Q4/2016" The three-month period ended December 31, 2016 "Q3/2016" The three-month period ended September 30, 2016 "Q2/2016" The three-month period ended June 30, 2016 "Q1/2016" The three-month period ended March 31, 2016 Places and currencies Measurement "U.S." United States "GEO" Gold equivalent ounces "$" or "USD" United States dollars "PGM" Platinum group metals "C$" or "CAD" Canadian dollars "oz" Ounce "oz Au" Ounce of gold Interest types "oz Ag" Ounce of silver "NSR" Net smelter return royalty "oz Pt" Ounce of platinum "GR" Gross royalty "oz Pd" Ounce of palladium "ORR" Overriding royalty "LBMA" London Bullion Market Association "GORR" Gross overriding royalty "bbl" Barrel "FH" Freehold or lessor royalty "boe" Barrels of oil equivalent "NPI" Net profits interest "WTI" West Texas Intermediate "NRI" Net royalty interest "WI" Working interest The Gold Investment that WORKS Franco-Nevada Corporation 3

4 BUSINESS OVERVIEW AND STRATEGY Franco-Nevada is the leading gold-focused royalty and stream company by both gold revenue and number of gold assets. The Company 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 Count at August 8, 2017 Precious Metals Other Minerals Oil & Gas TOTAL Producing Advanced Exploration TOTAL 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 additional 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. Financial results have also been 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 investment outlook and recognizes the cyclical nature of the industry. Franco-Nevada has historically operated by maintaining a strong balance sheet so that it can make investments during commodity cycle downturns. 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 Initial Public Offering ( IPO ) almost ten 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 revenue is generated from various forms of agreements, ranging from net smelter return royalties, streams, net profits interests, net royalty interests, working interests and other. For definitions of the various types of agreements, please refer to our most recent Annual Information Form filed on SEDAR at or our Form 40-F filed on EDGAR at Second Quarter Management s Discussion and Analysis FNV TSX NYSE

5 HIGHLIGHTS Financial Update Q2/2017 GEOs (1) : 122,541 GEOs recognized in revenue in Q2/2017, an increase of 8.6% from 112,787 GEOs in Q2/2016; Revenue: $163.6 million in Q2/2017, an increase of 8.4% from revenue of $150.9 million in Q2/2016; Adjusted EBITDA (2), (3) : $125.5 million, or $0.69 per share in Q2/2017, an increase of 4.1% from $120.5 million or $0.68 per share, in Q2/2016; Margin (2), (3) : 76.7% in Q2/2017, compared to 79.9% in Q2/2016; Net income: $45.6 million, or $0.25 per share, for Q2/2017, an increase of 7.8% compared to $42.3 million, or $0.24 per share, in Q2/2016; Adjusted Net Income (2), (3) : $46.1 million, or $0.25 per share in Q2/2017, an increase of 15.3% compared to $40.0 million, or $0.22 per share, in Q2/2016; Net cash provided by operating activities (3) : $126.5 million in Q2/2017, an increase of 22.2% compared to $103.5 million in Q2/2016; Share purchase warrant exercises: C$479.0 million, or approximately $356.3 million, in proceeds were added to Franco-Nevada s treasury in Q2/2017; Available capital: Approximately $1.9 billion available as at June 30, 2017, comprising $680.8 million of working capital, $106.7 million in marketable equity securities, and $1.1 billion available under the Company s credit facilities. (1) GEOs include our gold, silver, platinum, palladium and other mineral assets, and do not include Oil & Gas 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 are converted to GEOs by dividing associated revenue, which includes settlement adjustments, by the relevant gold price. The gold price used in the computation of GEOs earned from a particular asset varies depending on the royalty or stream agreement, which may make reference to the market price realized by the operator, or the average for the month, quarter, or year in which the mineral was produced or sold. For illustrative purposes, please refer to average commodity price tables on pages 11 and 18 of this MD&A for indicative prices which may be used in the calculation of GEOs for the three and six months ended June 30, 2017, respectively. (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 the Non-IFRS Financial Measures section of this MD&A. (3) In Q3/2016, the Company adopted a retrospective change in accounting policy with respect to its classification of proceeds from sales of gold bullion in its statement of cash flows and statement of income and comprehensive income. For further information, refer to Note 16 of the unaudited condensed consolidated financial statements for the three and six months ended June 30, The Company s non-ifrs measures, as defined in the Non-IFRS Financial Measures section of this MD&A, were also adjusted accordingly to reflect gains/losses on sales of such gold bullion as an operating activity that is part of the Company s underlying operating business. Comparative information has been adjusted to conform to current presentation. The Gold Investment that WORKS Franco-Nevada Corporation 5

6 Financial Update H1/2017 GEOs: 254,119 GEOs recognized in revenue in H1/2017, an increase of 15.8% from 219,408 GEOs in H1/2016; Revenue: $336.3 million in H1/2017, an increase of 18.9% from revenue of $282.9 million in H1/2016; Adjusted EBITDA: $254.0 million, or $1.41 per share, in H1/2017, an increase of 13.0% from $224.7 million or $1.28 per share, in H1/2016; Margin: 75.5% in H1/2017, compared to 79.4% in H1/2016; Net income: $91.2 million, or $0.51 per share, in H1/2017, an increase of 26.1% compared to $72.3 million, or $0.41 per share, in H1/2016; Adjusted Net Income: $90.9 million, or $0.50 per share, in H1/2017, an increase of 33.7% compared to $68.0 million, or $0.39 per share, in H1/2016; Net cash provided by operating activities: $246.3 million in H1/2017, an increase of 8.3% compared to $227.5 million in H1/2016. Corporate Development Additional acquisition of U.S. Oil & Gas Royalties STACK, Oklahoma On June 30, 2017, Franco-Nevada, through a wholly-owned U.S. subsidiary, entered into an agreement to purchase for $27.8 million, a second package of mineral titles in the core of the STACK shale play in Oklahoma from a private company. This transaction will complement our existing position acquired in late 2016 in one of the leading shale plays in the U.S. The transaction will have an effective date of June 1, 2017 and is expected to close in November Revenue from the royalties attributable to the mineral title is expected to grow with further development of the play. Acquisition of U.S. Oil & Gas Royalties Midland Basin, Texas As previously announced, Franco-Nevada, through a wholly-owned U.S. subsidiary, entered into an agreement on March 13, 2017 to purchase a package of royalty rights in the Midland Basin of West Texas for $110.0 million. Following completion of title due diligence, the first part of the portfolio was acquired for $89.8 million and closed on May 24, The second part of the portfolio is expected to close in Q3/2017, bringing the adjusted total purchase price to approximately $107.0 million. Acquisition of Railroad Royalty Carlin Trend, Nevada On May 26, 2017, Franco-Nevada, through a wholly-owned U.S. subsidiary, acquired an existing 1% NSR on certain claims that comprise the Railroad deposit located on the Carlin Trend in north-central Nevada for cash consideration of $0.9 million. Funding of Cobre Panama During the quarter, the Company funded an additional $52.4 million of its share of construction capital for the Cobre Panama project, for a total of $102.6 million in H1/2017. As at June 30, 2017, the Company has funded a cumulative total of $564.8 million of its $1 billion maximum commitment. First Quantum Minerals Ltd. reported that as of the end of Q2/2017, the project is over 58% complete and remains scheduled for phased commissioning during 2018, with continued ramp-up over Estimated total capital expenditures for 2017 remain at $1.06 billion in 2017, of which Franco-Nevada expects to contribute $200-$220 million. Financing Share purchase warrant exercises During the first half of 2017, the Company received proceeds of C$479.1 million, or approximately $356.4 million, from the exercise of share purchase warrants which had an exercise price of C$75.00 per warrant, contributing to a cash balance of $614.3 million as at June 30, The warrants were due to expire on June 16, Credit facilities On March 22, 2017, the Company extended the maturity of its existing $1 billion credit facility, from November 12, 2020 to March 22, On March 20, 2017, Franco-Nevada s subsidiary, Franco-Nevada (Barbados) Corporation ( FNBC ), entered into an unsecured revolving credit facility (the FNBC Credit Facility ). The FNBC Credit Facility provides for the availability over a one-year period of up to $100.0 million in borrowings. Refer to Liquidity and Capital Resources for details. Dividend Increase In Q2/2017, the Company increased its quarterly dividend by 4.5% from the previous $0.22 per share to $0.23 per share, marking the tenth consecutive annual dividend increase for Franco-Nevada shareholders Second Quarter Management s Discussion and Analysis FNV TSX NYSE

7 GUIDANCE The following contains forward-looking statements. 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 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 and our most recent Form 40-F filed with the Securities and Exchange Commission on EDGAR at guidance is based on assumptions including the forecasted state of operations from our assets based on the public statements and other disclosures by the third-party owners and operators of the underlying properties (subject to our assessment thereof). With a strong performance in the first half of 2017, Franco-Nevada expects to meet the higher end of its previously announced GEO guidance. H1/2017 Actual 2017 Guidance 2016 Actual Mineral assets - GEO production (1),(2) 254,119 GEOs 470, ,000 GEOs 464,383 GEOs Oil & Gas assets - Revenue (3) $20.5 million $35.0 million - $45.0 million $30.1 million (1) Of the 470,000 to 500,000 GEOs, Franco-Nevada expects to receive 335,000 to 345,000 GEOs under its various stream agreements. For the six months ended June 30, 2017, the Company has earned 178,384 GEOs from its stream agreements. (2) In forecasting GEOs for 2017, gold, silver, platinum and palladium metals have been converted to GEOs using commodity prices of $1,200/oz Au, $17.50/oz Ag, $950/oz Pt and $750/oz Pd. (3) In forecasting revenue from Oil & Gas assets for 2017, the WTI oil price is assumed to average $50 per barrel with a $3.50 per barrel price differential between the Edmonton Light and realized prices for Canadian oil. We expect to fund approximately $200.0 million to $220.0 million towards the Cobre Panama precious metals stream in In Q2/2017, the Company funded $52.4 million and $102.6 million in H1/2017, for a cumulative total of $564.8 million of its $1 billion maximum commitment. In addition, the Company estimated depletion and depreciation expense to be $265.0 million to $295.0 million for For H1/2017, depletion and depreciation expense totaled $138.7 million. Franco-Nevada strives to generate 80% of revenue from precious metals over a long-term horizon which includes gold, silver and PGM. In the short-term, we may diverge from the long-term target based on opportunities available. With 91.7% of revenue earned from precious metals in H1/2017, the Company has the flexibility to consider diversification opportunities outside of the precious metals space and increase its exposure to other commodities. The Gold Investment that WORKS Franco-Nevada Corporation 7

8 MARKET OVERVIEW The prices of precious metals, gold in particular, are the largest factors in determining profitability and cash-flow from operations for Franco-Nevada. Historically, the price of gold has been subject to volatile price movements and is affected by numerous macroeconomic and industry factors that are beyond the Company s control. Major influences on the gold price include macroeconomic factors such as the level of interest rates, inflation expectations, currency exchange rate fluctuations including the relative strength of the U.S. dollar, and the supply of and demand for gold. Commodity price volatility also impacts the number of GEOs contributed by non-gold mineral assets when converting silver, platinum, palladium and other minerals to GEOs. Silver, platinum, palladium and other minerals are converted to GEOs by dividing associated revenue, which includes settlement adjustments, by the relevant gold price. The gold price used in the computation of GEOs earned from a particular asset varies depending on the royalty or stream agreement, which may make reference to the market price realized by the operator, or the average for the month, quarter, or year in which the mineral was produced or sold. The gold price performed well in the first quarter of 2017, but on average remained flat during the second quarter of While the U.S. Federal Reserve increased its benchmark interest rate twice in 2017, first in March 2017 and again in June 2017, the pace of future hikes is expected to slow down as inflation remains low. Gold prices may also benefit from the recent decline in the U.S. dollar, and as uncertainty persists while the current U.S. administration continues to advance its political and economic agenda. Gold prices traded between $1,220/oz and $1,294/oz in Q2/2017, ending at $1,242/oz on June 30, 2017 and averaging $1,257/oz for the quarter, compared to $1,219/oz for Q1/2017, and $1,259/oz in Q2/2016. Silver prices traded between $16.22/oz and $18.56/oz, closing the quarter at $16.47/oz, and averaging $17.26/oz in Q2/2017, compared to $17.42/oz in Q1/2017 and $17.17/oz in Q2/2016. Despite the volatile commodity prices, the Company continued to deliver strong results and significant increases in GEOs compared to Q2/2016, reflecting the performance of our mineral assets. One of the strengths of the Franco-Nevada business model is that our business is not impacted when producer costs increase as long as the producer continues to operate. Royalty and stream payments/deliveries are based on production levels with no adjustments for the operator s operating costs, with the exception of NPI and NRI royalties, which are based on the profit of the underlying mining operation. Profit-based royalties accounted for approximately 6.2% of total revenue in Q2/2017, and 5.6% in H1/ Second Quarter Management s Discussion and Analysis FNV TSX NYSE

9 SELECTED FINANCIAL INFORMATION For the three months ended For the six months ended (in millions, except Average Gold Price, June 30, June 30, GEOs, Margin and per share amounts) Statistical Measures Average Gold Price $ 1,257 $ 1,259 $ 1,238 $ 1,220 GEOs sold (1) 122, , , ,408 Statement of Income and Other Comprehensive Income Revenue $ $ $ $ Depletion and depreciation Cost of sales Operating income (2) Net income Basic earnings per share $ 0.25 $ 0.24 $ 0.51 $ 0.41 Diluted earnings per share $ 0.25 $ 0.24 $ 0.51 $ 0.41 Dividends declared per share $ 0.23 $ 0.22 $ 0.45 $ 0.43 Dividends declared (including DRIP) $ 42.5 $ 39.3 $ 81.9 $ 77.8 Weighted average shares outstanding Non-IFRS Measures Adjusted EBITDA (2),(3) $ $ $ $ Adjusted EBITDA (2),(3) per share $ 0.69 $ 0.68 $ 1.41 $ 1.28 Margin (2),(3) 76.7 % 79.9 % 75.5 % 79.4 % Adjusted Net Income (2),(3) $ 46.1 $ 40.0 $ 90.9 $ 68.0 Adjusted Net Income (2),(3) per share $ 0.25 $ 0.22 $ 0.50 $ 0.39 Statement of Cash Flows Net cash provided by operating activities (2) $ $ $ $ Net cash used in investing activities (2) $ (137.2) $ (28.1) $ (199.1) $ (535.0) Net cash (used in) provided by financing activities $ $ (23.8) $ $ As at As at June 30, December 31, Statement of Financial Position Cash and cash equivalents $ $ Total assets 4, ,221.6 Deferred income tax liabilities Total shareholders equity 4, ,146.5 Working capital (1) Refer to Note 1 at the bottom of page 5 of this MD&A for the methodology for calculating GEOs, and, for illustrative purposes, to the average commodity price tables on pages 11 and 18 of this MD&A for indicative prices which may be used in the calculations of GEOs for the three and six months ended June 30, 2017, respectively. (2) In Q3/2016, the Company adopted a retrospective change in accounting policy with respect to its classification of proceeds from sales of gold bullion in its statement of cash flows and statement of income and comprehensive income. For further information, refer to Note 16 of the unaudited condensed consolidated financial statements for the three and six months ended June 30, The Company s non-ifrs measures, as defined in the Non-IFRS Financial Measures section of this MD&A, were also adjusted accordingly to reflect gains/losses on sales of such gold bullion as an operating activity that is part of the Company s underlying business. Comparative information has been adjusted to conform to current presentation. (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 the Non-IFRS Financial Measures section of this MD&A. The Gold Investment that WORKS Franco-Nevada Corporation 9

10 REVENUE BY ASSET Our portfolio is well-diversified with GEOs and revenue being earned from 46 mineral assets (not including the Brucejack gold mine which commenced production in July 2017) and 61 Oil & Gas interests in various jurisdictions. The following table details revenue earned from our various royalty, stream and working interests for the three and six months ended June 30, 2017 and 2016: For the three months ended For the six months ended (expressed in millions) June 30, June 30, Property Interest PRECIOUS METALS United States Goldstrike NSR 2-4%, NPI 2.4-6% $ 4.4 $ 7.4 $ 8.0 $ 13.2 Stillwater NSR 5% Gold Quarry NSR 7.29% Marigold NSR %, GR 0.5-4% Fire Creek/Midas Fixed to 2018 / NSR 2.5% Bald Mountain NSR/GR % South Arturo GR 4-9% Other Canada Sudbury Stream 50% $ 8.8 $ 8.6 $ 15.3 $ 14.4 Detour Lake NSR 2% Golden Highway NSR 2-15% Musselwhite NPI 5% Hemlo NSR 3%, NPI 50% Kirkland Lake (1) NSR %, NPI 20% Timmins West NSR 2.25% Canadian Malartic GR 1.5% Other Latin America Antapaccay Stream (indexed) $ 21.9 $ 24.7 $ 40.4 $ 35.9 Antamina Stream 22.5% Candelaria Stream 68% Guadalupe-Palmarejo (2) Stream 50% Other Rest of World MWS Stream 25% $ 8.6 $ 7.4 $ 17.2 $ 14.5 Sabodala Stream 6%, Fixed to Subika NSR 2% Tasiast NSR 2% Stream 4.875%, Fixed to 80,625 oz Karma Duketon NSR 2% Edikan NSR 1.5% Other $ $ $ $ Other Minerals $ 3.7 $ 1.9 $ 7.5 $ 4.3 Oil & Gas Weyburn NRI 11.71%, ORR 0.44%, WI 2.56% $ 6.5 $ 6.7 $ 14.8 $ 9.0 Midale ORR 1.14%, WI 1.59% Edson ORR 15% STACK Effective Royalty Rate 1.61% Midland Basin Effective Royalty Rate 0.14% Other $ 9.6 $ 7.8 $ 20.5 $ 11.4 Revenue $ $ $ $ (1) In October 2016, the overlying NSR on the Kirkland Lake Gold properties was reduced from 2.5% to 1.5% pursuant to Kirkland Lake s buy-back of 1% of the NSR. (2) In July 2016, Coeur met its obligation to deliver 400,000 ounces under the Palmarejo agreement. Deliveries under the new Guadalupe agreement commenced in Q3/ Second Quarter Management s Discussion and Analysis FNV TSX NYSE

11 OVERVIEW OF FINANCIAL PERFORMANCE Q2/2017 TO Q2/2016 The prices of precious metals, oil and gas and the actual production from mineral and Oil & Gas assets are the largest factors in determining profitability and cash flow from operations for Franco-Nevada. The following table summarizes average commodity prices and average exchange rates during the periods presented. QOQ YOY Quarterly average prices and rates Q2/2017 Q1/2017 Q2/2016 (Q2/17-Q1/17) (Q2/17-Q2/16) Gold (1) ($/oz) $ 1,257 $ 1,219 $ 1, % (0.2) % Silver (2) ($/oz) (0.9) % 0.5 % Platinum (3) ($/oz) ,004 (4.2) % (6.4) % Palladium (3) ($/oz) % 44.2 % Edmonton Light (C$/bbl) (4.8) % 12.0 % Quality Differential (C$/bbl) (5.70) (7.59) (8.08) (24.9) % (29.5) % Realized oil price (C$/bbl) (2.1) % 19.1 % CAD/USD exchange rate (4) (1.6) % (4.2) % (1) Based on LBMA Gold Price PM Fix. (2) Based on LBMA Silver Price. (3) Based on London PM Fix. (4) Based on Bank of Canada noon and daily average rates. Revenue and Gold Equivalent Ounces Revenue for Q2/2017 was $163.6 million compared with $150.9 million for Q2/2016, an increase of 8.4%. The increase year-over-year is due to the increase of 8.6% in GEOs sold, to 122,541 GEOs in Q2/2017, from 112,787 GEOs sold in Q2/2016. Of this $163.6 million in revenue, precious metals revenue comprised 91.9% in Q2/2017, compared to 93.6% in Q2/2016, while revenue from the Americas was 82.2% in Q2/2017, compared to 83.8% in Q2/2016. The proportion of revenue earned from precious metals assets decreased year-over-year as a result of higher Oil & Gas revenues which benefitted from higher prices and production levels, as well as the recent additions of the STACK and Midland royalty portfolios within the last year. The Gold Investment that WORKS Franco-Nevada Corporation 11

12 The following table outlines GEOs and revenue attributable to Franco-Nevada for the three months ended June 30, 2017 and 2016 by commodity, geographical location and type of interest: Gold Equivalent Ounces (1) Revenue (in millions) For the three months ended June 30, Variance Variance Commodity Precious Metals Gold 92,706 85,724 6,982 $ $ $ 8.3 Silver 18,139 18,523 (384) (0.8) PGM 8,801 7,053 1, Precious Metals - Total 119, ,300 8, Other Minerals 2,895 1,487 1, Oil & Gas , ,787 9,754 $ $ $ 12.7 Geography United States 19,463 16,816 2,647 $ 25.9 $ 21.2 $ 4.7 Canada 19,388 15,898 3, Latin America 60,548 60,899 (351) (0.8) Rest of World 23,142 19,174 3, , ,787 9,754 $ $ $ 12.7 Type Revenue-based 25,638 24,018 1,620 $ 35.3 $ 30.9 $ 4.4 Streams 84,159 81,180 2, Profit-based 5,144 4, Other 7,600 3,364 4, , ,787 9,754 $ $ $ 12.7 (1) Refer to Note 1 at the bottom of page 5 of this MD&A for the methodology for calculating GEOs, and, for illustrative purposes, to the average commodity price table on page 11 of this MD&A for indicative prices which may be used in the calculations of GEOs. GEOs and revenue from precious metals were earned from the following geographical locations: Gold Equivalent Ounces (1) Revenue (in millions) For the three months ended June 30, Variance Variance Geography for Precious Metals Precious Metals United States 19,350 16,707 2,643 $ 24.4 $ 21.1 $ 3.3 Canada 17,097 14,919 2, Latin America 60,548 60,899 (351) (0.8) Rest of World 22,651 18,775 3, Precious Metals - Total 119, ,300 8,346 $ $ $ 9.1 Other Minerals 2,895 1,487 1, Oil & Gas , ,787 9,754 $ $ $ 12.7 (1) Refer to Note 1 at the bottom of page 5 of this MD&A for the methodology for calculating GEOs, and, for illustrative purposes, to the average commodity price table on page 11 of this MD&A for indicative prices which may be used in the calculations of GEOs Second Quarter Management s Discussion and Analysis FNV TSX NYSE

13 Precious Metals Revenue from precious metals assets was $150.3 million in Q2/2017 compared to $141.2 million in Q2/2016, reflecting 119,646 GEOs sold from precious metals assets in Q2/2017, up 7.5% from 111,300 GEOs in Q2/2016. GEOs and revenue increases for the quarter are attributable to the following assets: Candelaria - The Company sold 21,981 GEOs from its Candelaria stream, compared to 16,247 in Q2/2016, an increase which was largely expected based on the life of mine plan. South Arturo - The South Arturo mine generated payments of 2,366 GEOs for which there is no comparative in Q2/2016 as South Arturo mine poured its first gold pour in August Karma - The Company sold 4,453 GEOs in Q2/2017 in relation to its Karma stream, compared to 2,500 GEOs in Q2/2016. Deliveries from Karma are fixed in the initial years of the stream at a rate of 1,250 ounces per month, but include an additional quarterly delivery of 703 ounces starting in Q2/2017. Q2/2016 also only included two months of deliveries, further contributing to the year-over-year increase. Hemlo - Hemlo generated payments of 2,329 GEOs, compared to 493 GEOs in Q2/2016, primarily from the Company s NPI interest on the property. The above increases in GEOs were partially offset by decreases in GEO deliveries compared to Q2/2016 from the following assets: Guadalupe - The Guadalupe stream, which became effective in Q3/2016, delivered 9,683 GEOs in Q2/2017, compared to 12,501 GEOs under the Palmarejo agreement in Q2/2016. Antapaccay - The Company sold 17,364 GEOs under its Antapaccay agreement in Q2/2017, compared to 19,581 GEOs in Q2/2016. Under the streaming agreement, gold and silver deliveries are initially referenced to copper in concentrate shipped. Goldstrike Payments from both the NSR and NPI royalties were lower in Q2/2017 compared to Q2/2016, resulting in 2,419 fewer GEOs. During Q2/2017, 1,389,760 ounces of silver were received from our Candelaria, Antapaccay, Antamina and Cerro San Pedro interests, of which 1,348,340 ounces were sold in the quarter. Ounces of silver sold converted to 18,139 GEOs. The Gold Investment that WORKS Franco-Nevada Corporation 13

14 Other Minerals Other Minerals generated 2,895 GEOs and $3.7 million in revenue, compared to 1,487 GEOs and $1.9 million in revenue in Q2/2016. Oil & Gas Oil & Gas assets generated revenue of $9.6 million for the quarter (94% oil and 6% gas), compared to $7.8 million for the Q2/2016 (99% oil and 1% gas). Q2/2017 benefitted from an increase in production of 14.3%, coupled with higher oil prices. Revenue from the Weyburn Unit for the quarter slightly decreased to $6.5 million (Q2/ $6.7 million) with $3.7 million earned from the NRI (Q2/ $4.4 million), $2.3 million earned from the working interest (Q2/ $2.0 million) and $0.5 million earned from the overriding royalties (Q2/ $0.3 million). Although the Weyburn NRI benefited from higher average realized prices and higher production levels, these were most than offset by higher operating and capital expenses which were 17% and 53% higher in Q2/2017 than in Q2/2016, respectively. The actual realized price from the NRI was 24% higher in Q2/2017, at C$57.48/boe, compared to C$46.48/boe for Q2/2016. Oil & Gas revenue also included $0.7 million from each of the STACK and Midland acquisitions. Operating Costs and Expenses The following table provides a list of operating costs and expenses incurred in the periods presented: For the three months ended June 30, (expressed in millions) Variance Costs of sales $ 33.9 $ 27.7 $ 6.2 Depletion and depreciation (1.0) Corporate administration Business development (Gain) loss on sale of gold bullion (0.1) (1.6) 1.5 $ $ $ 7.3 Costs of Sales The following table provides a breakdown of cost of sales incurred in the periods presented: For the three months ended June 30, (expressed in millions) Variance Cost of stream sales $ 29.7 $ 24.5 $ 5.2 Cost of prepaid ounces Mineral production taxes Oil & Gas operating costs $ 33.9 $ 27.7 $ 6.2 The increase in costs of sales of $6.2 million reflects the increase in stream ounces sold of 84,159 GEOs in Q2/2017 compared to 81,180 GEOs in Q2/2016. Cost of stream sales in Q2/2017 also increased due to the higher per ounce cost under the Guadalupe agreement of $800 per ounce of gold received, compared to the inflation-adjusted cost of $400 per ounce of gold under the prior Palmarejo agreement. The ongoing stream costs per ounce are either a fixed amount per ounce delivered (typically adjusted for inflation each year) or an amount based on a percentage of the spot price of gold or silver Second Quarter Management s Discussion and Analysis FNV TSX NYSE

15 Depletion and Depreciation Depletion and depreciation totaled $67.2 million in Q2/2017 compared to $68.2 million in Q2/2016. Depletion from higher royalty payments and stream deliveries from Candelaria, South Arturo, and Karma were offset by lower depletion expense for the Antapaccay and Antamina assets. Depletion expense also benefitted from a lower depletion rate on the Guadalupe stream, which became effective in Q3/2016, compared to the depletion rate on the Palmarejo agreement which ended in July The Gold Investment that WORKS Franco-Nevada Corporation 15

16 Corporate Administration The following table provides a breakdown of corporate administration expenses incurred for the periods presented: For the three months ended June 30, (expressed in millions) Variance Salaries and benefits $ 1.1 $ 1.3 $ (0.2) Professional fees Office costs (0.2) Board of Directors cost (0.2) Share-based compensation Other $ 5.8 $ 5.7 $ 0.1 Corporate administration expenses, representing 3.5% of revenue for Q2/2017, remained relatively consistent with expenses incurred in Q2/2016. Board of Directors fees vary according to the mark-to-market of the value of deferred share units that are granted to the directors of the Company. Although the Company s share price increased both during Q2/2017 and Q2/2016, the 23% share price increase in Q2/2016 was more significant than the increase of 7% in Q2/2017, resulting in a higher mark-tomarket of the deferred share unit liability in Q2/2016 compared to Q2/2017. Business Development Expenses Business development expenses totaled $0.8 million compared to a $0.3 million in Q2/2016. Timing and amount of these costs typically vary depending upon the level of business development related activity, and the timing of completing transactions. Business development expenses related to completed transactions are capitalized to the relevant mineral interest asset following the closing of transactions. Gain or Loss on Sale of Gold Bullion The Company recognized a gain on the sale of gold bullion of $0.1 million in Q2/2017, compared to a gain of $1.6 million in Q2/2016. Gold bullion is physical ounces of gold which the Company receives as settlement from certain of its royalty interests, and is presented as other current assets on the statement of financial position. Foreign Exchange and Other Income/Expenses The following table provides a list of foreign exchange and other income/expenses incurred for the periods presented: For the three months ended June 30, (expressed in millions) Variance Foreign exchange gain (loss) $ 0.2 $ $ 0.2 Other income $ 0.4 $ $ 0.4 Foreign exchange losses and other income/expenses comprised a foreign exchange gain of $0.2 million, reflecting a weakening of the U.S. dollar relative to the Canadian dollar. Under IFRS, all foreign exchange gains or losses related to monetary assets and liabilities held in a currency other than the functional currency are recorded in net income as opposed to other comprehensive income. The parent company s functional currency is the Canadian dollar, while the functional currency of certain of the Company s subsidiaries is the U.S. dollar. Other income includes dividend income on certain of the Company s equity investments. Finance Income and Finance Expenses The following table provides a breakdown of finance income and expenses incurred for the periods presented: For the three months ended June 30, (expressed in millions) Variance Finance Income Interest $ 1.1 $ 0.9 $ 0.2 Finance Fees 0.1 (0.1) $ 1.1 $ 1.0 $ 0.1 Finance Expenses Standby Charges $ 0.6 $ 0.6 $ Interest Amortization $ 0.8 $ 0.8 $ Second Quarter Management s Discussion and Analysis FNV TSX NYSE

17 Finance income was $1.1 million for the quarter (Q2/ $1.0 million), while finance expenses were $0.8 million (Q2/ $0.8 million). Finance income is earned on our cash equivalents and/or short-term investments. Finance income also includes interest income in the amount of $0.5 million accrued on the Noront Resources Ltd. loan during Q2/2017. Finance expenses consist of the costs of standby charges, which represent the costs of maintaining our credit facilities; and amortization of the costs incurred with respect to the initial set-up or subsequent amendments of the facilities. In Q2/2017, the Company incurred no interest expense as it had not drawn on its credit facilities. Income Taxes Income tax expense for the quarter totaled $11.1 million (Q2/2016 $11.3 million), representing a slight decrease year-over-year, and comprised a current income tax expense of $7.7 million (Q2/ $11.6 million) and a deferred income tax expense of $3.4 million (Q2/2016 deferred income tax recovery of $0.3 million). Net Income Net income for Q2/2017 was $45.6 million, or $0.25 per share, compared to $42.3 million, or $0.24 per share, for the same period in Adjusted Net Income was $46.1 million, or $0.25 per share, compared to $40.0 million, or $0.22 per share, earned in Q2/2016. The increase in net income and Adjusted Net Income was driven primarily by higher revenue due to a strong performance from the Company s portfolio, namely with respect to the Candelaria, South Arturo, Karma and Hemlo assets. The Gold Investment that WORKS Franco-Nevada Corporation 17

18 OVERVIEW OF FINANCIAL PERFORMANCE H1/2017 TO H1/2016 The prices of precious metals, oil and gas and the actual production from mineral and Oil & Gas assets are the largest factors in determining profitability and cash flow from operations for Franco-Nevada. The following table summarizes average commodity prices and average exchange rates during the periods presented. Annual average prices and rates H1/2017 H1/2016 Variance % Gold (1) ($/oz) $ 1,238 $ 1, % Silver (2) ($/oz) % Platinum (3) ($/oz) % Palladium (3) ($/oz) % Edmonton Light C$/bbl % Quality Differential C$/bbl (6.65) (8.58) (22.5) % Realized oil price C$/bbl % CAD/USD exchange rate (4) (0.3) % (1) Based on LBMA Gold Price PM Fix. (2) Based on LBMA Silver Price. (3) Based on London PM Fix. (4) Based on Bank of Canada noon and daily average rates. Revenue and Gold Equivalent Ounces Revenue in H1/2017 was $336.3 million compared with $282.9 million for the same period in 2016, an increase of 18.9%. The increase year-over-year is due to the increase of GEOs sold to 254,119 GEOs in H1/2017, an increase of 15.8% from 219,408 GEOs sold in H1/2016, coupled with higher average precious metals prices. Of this $336.3 million in revenue, precious metals revenue comprised 91.7%, compared to 94.4% in H1/2016, while revenue from the Americas was 81.6%, compared to 82.8% in H1/2016. The proportion of revenue earned from precious metals assets decreased year-over-year as a result of higher Oil & Gas revenues which benefitted from higher prices, higher production levels, and lower capital expenditures, as well as the addition of the STACK and Midland royalty portfolios Second Quarter Management s Discussion and Analysis FNV TSX NYSE

19 The following table outlines GEOs and revenue attributable to Franco-Nevada for the six months ended June 30, 2017 and 2016 by commodity, geographical location and type of interest: Gold Equivalent Ounces (1) Revenue (in millions) For the six months ended June 30, Variance Variance Commodity Precious Metals Gold 193, ,477 30,769 $ $ $ 39.7 Silver 37,885 41,150 (3,265) (3.2) PGM 17,025 12,249 4, Precious Metals - Total 248, ,876 32, Other Minerals 5,963 3,532 2, Oil & Gas , ,408 34,711 $ $ $ 53.4 Geography United States 39,097 31,091 8,006 $ 50.4 $ 38.1 $ 12.3 Canada 33,989 29,182 4, Latin America 130, ,408 11, Rest of World 50,056 39,727 10, , ,408 34,711 $ $ $ 53.4 Type Revenue-based 51,552 47,163 4,389 $ 69.4 $ 59.6 $ 9.8 Streams 178, ,474 21, Profit-based 7,953 8,891 (938) Other 16,230 6,880 9, , ,408 34,711 $ $ $ 53.4 (1) Refer to Note 1 at the bottom of page 5 of this MD&A for the methodology for calculating GEOs, and, for illustrative purposes, to the average commodity price table on page 18 of this MD&A for indicative prices which may be used in the calculations of GEOs. GEOs and revenue from precious metals were earned from the following geographical locations: Gold Equivalent Ounces (1) Revenue (in millions) For the six months ended June 30, Variance Variance Geography for Precious Metals Precious Metals United States 38,879 30,873 8,006 $ 48.1 $ 37.7 $ 10.4 Canada 29,749 27,171 2, Latin America 130, ,408 11, Rest of World 48,551 38,424 10, Precious Metals - Total 248, ,876 32,280 $ $ $ 41.2 Other Minerals 5,963 3,532 2, Oil & Gas , ,408 34,711 $ $ $ 53.4 (1) Refer to Note 1 at the bottom of page 5 of this MD&A for the methodology for calculating GEOs, and, for illustrative purposes, to the average commodity price table on page 18 of this MD&A for indicative prices which may be used in the calculations of GEOs. The Gold Investment that WORKS Franco-Nevada Corporation 19

20 Precious Metals Revenue from precious metals assets was $308.3 million in H1/2017 compared to $267.1 million in H1/2016, reflecting a 15.0% increase in GEOs from precious metals assets, from 215,876 GEOs in H1/2016 to 248,156 in H1/2017. GEOs and revenue increases for the period are attributable to the following assets: Candelaria - The Company sold 44,464 GEOs from its Candelaria stream, compared to 34,873 in H1/2016. Although the increase was largely due to the life of mine plan, the sale of 2,032 GEOs which had been delivered in Q4/2016 also contributed to the increase year-over-year. South Arturo - The South Arturo mine generated payments of 6,758 GEOs, compared to 83 GEOs in H1/2016. The South Arturo mine poured its first gold pour in August Karma - The Company sold 9,453 GEOs in H1/2017 in relation to its Karma stream, compared to 3,750 GEOs received and sold in H1/2016. Deliveries from Karma, which are fixed in the initial years of the stream at a rate of 1,250 ounces per month, commenced in March Additionally, starting in Q2/2017, deliveries include an additional 703 ounces per quarter. The year-over-year increase is also partly due to the sale of 1,250 ounces received in Q4/2016 which were sold in early Guadalupe - The Guadalupe stream delivered 28,983 GEOs in H1/2017, compared to 25,002 GEOs under the Palmarejo agreement in H1/2016, due to higher production year-over-year and a reduction of inventory that had built up from the prior quarter. Antapaccay - The Company sold 32,383 GEOs under its Antapaccay agreement in H1/2017, compared to 28,499 GEOs in H1/2016. Stillwater - Stillwater generated payments of 7,849 GEOs, compared to 5,239 GEOs in H1/2016, as a result of higher platinum and palladium production in H1/2017. The above increases in GEOs were partially offset by decreases in GEO deliveries compared to H1/2016 from the following assets: Antamina Sales from the Antamina stream decreased by 5,468 GEOs year-over-year, as 2016 was an exceptionally strong year of silver production for Antamina. Goldstrike Payments from both the NSR and NPI royalties were lower in H1/2017 compared to H1/2016, resulting in 4,268 fewer GEOs. During the first half of 2017, 2,834,743 ounces of silver were received from our Candelaria, Antapaccay, Antamina and Cerro San Pedro interests, of which 2,734,261 ounces were sold in H1/2017. Ounces of silver sold converted to 37,885 GEOs. Other Minerals Other Minerals generated 5,963 GEOs and $7.5 million in revenue, compared to 3,532 GEOs and $4.4 million in revenue in H1/ Second Quarter Management s Discussion and Analysis FNV TSX NYSE

21 Oil & Gas Oil & Gas assets generated revenue of $20.5 million in H1/2017 (94% oil and 6% gas), compared to $11.4 million in H1/2016 (98% oil and 2% gas). Production for the first half of 2017 was 9.9% higher than in the same period in 2016; coupled with higher oil prices and lower capital costs from the operators. Revenue from the Weyburn Unit in H1/2017 increased to $14.8 million (H1/ $9.0 million) with $9.2 million earned from the NRI ( $5.3 million), $4.7 million earned from the working interest (H1/ $3.2 million) and $0.9 million earned from the overriding royalties (H1/ $0.5 million). Revenue from the Weyburn NRI was higher due to the higher average realized prices, coupled with lower capital costs and higher production levels. Although operating expenses were 14% higher than in H1/2016, capital expenses were 9% lower in H1/2017 compared to H1/2016. The actual realized price from the NRI was 43% higher in H1/2017, at C$57.65/boe compared to C$40.18/boe in H1/2016. Oil & Gas revenue in H1/2017 also included $1.3 million from the STACK acquisition, and $0.7 million from the Midland acquisition. Operating Costs and Expenses The following table provides a list of operating costs and expenses incurred in the periods presented: For the six months ended June 30, (expressed in millions) Variance Costs of sales $ 73.8 $ 52.1 $ 21.7 Depletion and depreciation Corporate administration Business development (Gain) loss on sale of gold bullion (0.1) (2.1) 2.0 $ $ $ 29.7 Costs of Sales The following table provides a breakdown of cost of sales incurred in the periods presented: For the six months ended June 30, (expressed in millions) Variance Cost of stream sales $ 66.1 $ 46.2 $ 19.9 Cost of prepaid ounces Mineral production taxes Oil & Gas operating costs $ 73.8 $ 52.1 $ 21.7 The increase in costs of sales of $21.7 million is largely due to the increase in stream ounces sold of 178,384 GEOs in H1/2017 compared to 156,474 GEOs in H1/2016. Cost of stream sales in H1/2017 also reflects the higher per ounce cost under the Guadalupe agreement of $800 per ounce of gold received, compared to the inflation-adjusted cost of $400 per ounce of gold under the prior Palmarejo agreement. The ongoing stream costs per ounce are either a fixed amount per ounce delivered (typically adjusted for inflation each year) or an amount based on a percentage of the spot price of gold or silver. The Gold Investment that WORKS Franco-Nevada Corporation 21

22 Depletion and Depreciation Depletion and depreciation totaled $138.7 million in H1/2017 compared to $133.7 million in H1/2016. The majority of the increase of $5.0 million is due to higher royalty payments and stream deliveries from Candelaria, Karma, South Arturo, and Guadalupe, partly offset by Antamina and Goldstrike. Depletion expense also benefitted from a lower depletion rate on the Guadalupe stream, which became effective in Q3/2016, compared to the depletion rate on the Palmarejo stream Second Quarter Management s Discussion and Analysis FNV TSX NYSE