Osisko Gold Royalties Ltd

TSX:OR

Earnings Call Transcript 2019-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the Osisko Gold Royalties Q3 2019 Results Conference Call. [Operator Instructions] Please note that this call is being recorded today, November 7, 2019, at 10 a.m. Eastern Time.Today on the call, we have Mr. Sean Roosen, Chair of the Board of Directors and Chief Executive Officer of Osisko Gold Royalties; Mr. Bryan Coates, President of Osisko Gold Royalties; and Elif Lévesque, Vice President Finance and Chief Financial Officer.I would now like to turn the meeting over to your host for today's call, Mr. Sean Roosen. [Foreign Language]

[Sean E. O. Roosen, Chair of the Board & CEO]

[Foreign Language] Welcome, everybody, and welcome to the third quarter of 2019 conference call for updated financial results and outlook for Osisko Gold Royalties. We will be using a PowerPoint that's on our website and I would take on opportunity to review our forward-looking statements -- as we get into this, we will be providing some forward-looking statements as we get further into the presentation.The highlights for the third quarter of 2019: 18,123 GEOs were earned from our partners and revenues of 39 -- $33.9 million for the quarter; record cash flows from operating activities at $28.3 million; a noncash net loss of $45.9 million or $0.32 per share, basically reflecting the impairment on the stream and offtake interest of $60.8 million that Elif will be getting into in detail as we get further into the presentation; adjusted earnings of CAD 17.5 million or $0.12 per basic share and recorded operating margin of over 91% for royalty and streaming interest, which is a new record in terms of margins for us. We also closed the second tranche of the share repurchase with Orion for a total of 12,385,717 shares, which were canceled. This represented about 8% of the outstanding stock of Osisko Gold Royalties at a financial value of just under $175 million.We announced the silver stream on Mantos Blancos, renegotiated some of the conditions there that we'll get into in detail. Eagle Mine in the Yukon, which is now the Yukon's largest gold mine historically and is, today, has poured gold in September. We own a 5% royalty on that. We'd like to congratulate the Victoria team for the completion of the construction and the commissioning that's ongoing, as we speak. It's been a great mine build and a real tribute to John McConnell, and his team there.We also announced the definitive agreement to acquire the outstanding shares of Barkerville Gold, which owns the Cariboo gold project in Central BC of the Cariboo District. We'll get into that in more detail. We are currently in process to have the load on November 15 that we hopefully close around November 20 on the acquisition of the 67.4% shares that we did not own already. We also monetized the Brucejack Gold offtake through Pretium exploration for USD 41.3 million or CAD 54 million. We still have more cash coming from that transaction. The final $10 million won't come in until November, so that will increase our current cash balances as we move forward. On Page 4, the Q3 activities. Again, just a little more detail on what happened with the share buyback and [ our right ] for $71.4 million. We have purchased about 5 million shares. And in total, at the end of the day, was 12,385,000 (sic) [ 12,385,717 ] shares, as we said.Mantos Blancos stream amendment we put a further $25 million on deposit with the asset. Significant changes to the stream involved the reduction from 25% to 8% of the spot silver price for the delivery in terms of the offtake pricing. And also we increased the tail from 30% to 40% of payable silver after the first 19.3 million ounces is revised. And most importantly, the termination of the stream buyback clause. So there's no impediment on this stream as we go forward. The sale of the offtake agreement on Pretium was closed and we received a $41.3 million settlement, as I said, $10 million left to be deposited at the end of the month. That was a good deal for us in terms of deploying that cash flow at near-term to us and also to help Pretium provide easier clarity for their shareholders on their revenue stream. More importantly, for today, I guess, would be on Page 5, would be the Barkerville acquisition. We have bid for 67.4% of the shares held outside of our current position at Barkerville. Barkerville is the owner of -- 100% owner of the Cariboo project, which is over 2,000 square kilometers and has a resource in the inferred category of over 4.3 million ounces and continues to deliver successful drill results. A PEA study, outlining a plan to build a 185,000 ounce a year mine with a 10 -- 11-year mine life was submitted to the market in August of 2019. So we're quite proud of that accomplishment for the Barkerville assets. And we have a strong belief obviously that this is the beginning of a mining camp and we -- with -- they have a small amount of production that's being developed as we speak in the 20,000 ounce a year range. But more to the point, we believe that this is a camp that's been neglected, much like Malartic was back when we first got involved in that asset and we see a lot of the same hallmarks that -- we have a world-class camp that was tax worked on over the years, has been consolidated back into a large land pack. It's one of the largest in the world with continuous mineral rights over a 67-kilometer long trend and historic production there of over 4 million ounces. And as we get into it, we are suitably impressed with the amount of geological information that our team has been able to put together that lead us to believe that there's a significant amount of work to be done in this camp over the next 5 years and as we develop this opportunity to go forward.In the context of the Barkerville acquisition, we created the North Spirit Discovery Group. The mandate of the North Spirit Discovery Group is to channel financing from standard private equity and third-party private equity partners to allow for joint ventures and to look at also either trading and/or selling assets for royalties and streams. We believe this is the natural evolution of our accelerator model, and will set the stage for us to help simplify our equity and -- sorry, our royalty portfolio. And as we move forward, we will be looking to raise some partnership equity through North Spirit Discovery Group in the new year as we get more settled post the transaction.The main mandate for that financing will be project financing, engineering and management, which is really the value side of how we built the accelerator model. And if you remember correctly, 5 years ago, we talked about what the goal of the accelerator model, which was to create our own in-house organic opportunities. We now have -- those opportunities have been maturing, and we're evolving to take advantage of the hard work that's been done and the investments that have been made in the last 5 years.The key note, on Page 6, takes you through the time line, what we see at Barkerville. So it's a crucial point in the evolution of this story in that the feasibility study is underway. Permitting is underway. We have the resource that's been completed on the first portion of the project, which is about 4 kilometers of the trend out of 67 kilometers, so there's quite a bit of upside. And that we have an existing mill site with tailings pond, cyanide permitting. We'll be taking advantage of the way the PEA study is set up with low capital intensity of less than USD 240 million required to build 185,000 ounce a year mine in Canada. Page 7, a little bit of an overview from our friends from Victoria. Ramping up to 200,000 ounces a year, this will be the latest gold mine to come online in Canada for this gold to the gold port that we all enjoyed at the Denver Gold show in September. And we see this as a way forward as this is the Northern heap leach operation at 30,000 plus tonnes per day. It is a sizable mine, and it sets the stage for many more opportunities to be unlocked now that we have such a significant piece of infrastructure in the Yukon region.Page 8. Subsequent to September 30, post quarter, we also completed the credit bid for the Stornoway Diamond Corporation, and we will maintain our 9.6% stream on the Renard diamond mine as the credit bid was successful and is now closed. Congratulations to Bryan Coates and the other streaming partners on getting that deal done. It was a long and complicated process, but the diamond mine is up and running well, and we had the privilege of attending a diamond sale with our partners from the Caisse de dépôt et placement du Québec and some of the other groups that remain in the consortium. It is a good ownership structure for this project. And then we have a lot of individual institutions and individuals involved that are capable of managing asset -- this asset to the lower commodity price and hopefully, set the stage for success as we come through what everybody seems to believe is the next leg of the diamond market, with the closing of our grounds and some of the other producers in Canada, like Victor. So we see a lot of upside there. As the saying goes, buy low sell high, and we feel pretty good about what's happened with Stornoway in terms of maintaining our 9.6% diamond stream and being able to keep the mine in production moving forward.We also declared a $0.05 dividend on our stock payable January 15, 2020, to shareholders of record as of December 31, 2019, a fact that, as a team, we're particularly proud of as we set out in 2014 to be a different royalty company and to pay dividends and have a disciplined approach to capital allocation and to have a Canadian focus moving through our value proposition to shareholders.Page 9 is a summary of the royalties and streams that contribute to our current GEOs. We've achieved 18,123 ounces for the quarter ending in the -- at the end of September. Our allocation of metals within that space is at 69% gold, 18% silver, making it a total of 87% in precious metals. If you include diamonds, these precious metals or precious that we would be at 98% weighting at that, and we have achieved 91% margins on our portfolio this year. Canadian Malartic still is our cornerstone asset, having delivered just under 8,000 ounces for the quarter. And you can see the breakdown of the rest of contribution to the portfolio underneath. And we continue to build on that basis, and our friends from Victoria will hopefully be the lead course for next year as that mine continues to ramp up.Returning on capital on Page 10. We're very proud of this slide. We've managed to make money consistently since the IPO of this company in 2014, and we've had a disciplined approach to returning that capital to shareholders, with over $219 million having been returned to shareholders since we started this company through the share buyback and also total received. If we combine share buybacks with our dividend payments, we are at $328 million has been returned to shareholders through the process of value-building at OR. On Page 11, I'm going to hand it over to Elif, our Chief Financial Operating Officer, to take you through the quarter in more detail. Thank you.

[Elif Lévesque, VP of Finance & CFO]

Thank you, Sean. Good morning, everyone. Revenues from royalties and streams increased by 8% to $33.9 million compared to last year, mainly due to increase in our stream interest. And we also recognized record operating cash flow at $28.3 million compared to $20.6 million, mainly reflecting the increased cash margins and elimination of cash-settled share-based payments. If we go to the next page, Page 11 (sic) [ Page 12 ], our earnings, including impairments, stood at $13.1 million compared to $5.5 million for the same period last year, reflecting a strong quarter and the gain on sale of the Brucejack offtake. Net losses due to impairment charges, that I'd like to go in a little bit more detail on the next slide, were $59 million net of income taxes, and so our net losses for the quarter stood at $45.9 million, and our adjusted earnings, $5.7 million for last year's third quarter and $17.5 million for this quarter, mainly reflecting, again, like I said, the increase in the cash margins as well as the gain that we have made from the sale of the Brucejack interest. So if we go to Page 13, a little bit more detail in terms of our impairments. As we had announced previously, Stornoway Diamond, the operator of the Renard mine, was running a strategic process and Osisko, along with other creditors, was supporting the process. In September, the operator announced that it had applied to protection under the CCAA to structure its business and financial affairs. And this was considered an impairment for accounting purposes, and we have to run an impairment assessment, which resulted in the impairment that you see here, $47.2 million and $34.6 million net of the income taxes. So now the recoverable amount for Renard's stream for us stands at $70.2 million. And on the Amulsar, our stream and offtakes front, in September, Lydian, again, the owner of the Amulsar project, announced a delay and timing of the construction activity and the expected first gold pour and ramp-up for the full production as a result of the now 15 months blockade on construction as well as some changes to the expected life of mine and annual production that came in -- they came up with, was in the third quarter. And again, this resulted as an impairment indicator for us, and we did test our model, which resulted in a USD 9.9 million impairment coming up to CAD 13.1 million for the quarter. So after these adjustments, the Amulsar stream and the offtake recoverable value is about USD 73.7 million and CAD 97 million.For Falco Resources, the net investment was impaired. This is an associate for us. So the carrying value is not actually at fair value, and that's why we had to actually recognize a reduction in the fair value of the equity investment in Falco Resources to bring it down to its fair value, and we recorded an impairment charge of $12.5 million and $10.8 million net of income taxes for the quarter. So if you go to Page 14, a little bit of a breakdown in terms of the revenues and the type of interest that we have in royalty streams and offtakes. As Sean mentioned, it was a pretty strong quarter in terms of our royalty and stream interests, and we reported a 90.8% cash margin from those interests as well. In terms of offtakes, revenues stood at $75.3 million compared to $80 million last year. We're going to see a reduction, a considerable one in terms of the revenues because of the Brucejack Offtake sale. Just to give you an idea, the Brucejack Offtake agreement was bringing us about $80 million revenues per quarter, but of course, with a very low historical cash margin at 1%. So although the revenues will go down considerably because of the offtake agreement now not being there anymore, we're not going to see a material impact in terms of our cash operating inflow.Page 15 kind of gives us a breakdown in terms of the different products in our GEOs in terms of gold, silver, diamonds and other metals. We did have revenues of $109.2 million and a gross profit of $20.9 million. And again, with the strong cash flow from operations, $28.3 million as opposed to $20.6 million.So our financial position on Page 16, we have drawn on our credit facility for USD 15 million, coming up to about CAD 20 million. So that leaves us with the available credit of $480 million, including accordion. Looking at that, our cash and our fair value of our amendments in the marketable securities, we actually have almost $900 million in available capital for us for future investments.Page 17, we did have to revise our guidance this quarter. You will see on the left-hand side the original guidance, where we had a low and a high level in terms of what we were expecting. The revised guidance now is set at 78,000 GEOs. And the main results for the reduction is really the weak diamond prices that we've been seeing for the Renard mine during the year and the sale of the Brucejack Offtake and the impact that it will have for the fourth quarter. However, we do see that the cash operating margins and the operating cash flow are expected to be in line with what we had expected, and that is, of course, a good part as a result of the strong gold prices that we're seeing.So with that, Sean, back to you for investment strategy.

[Sean E. O. Roosen, Chair of the Board & CEO]

Thank you, Elif. And on to Page 18 is a slide that we discuss a lot and has been around for quite a while, and it sums up our investment strategy. As you know, we set out in 2014 with the accelerator model as a new introduction to the royalty streaming space, and that was essentially, on the left-hand side, in the 25% incremental investment where we said that we would invest 25% of our investment, available assets under management, in the accelerator model, and then we would invest 75% more in the traditional space of development opportunities, refinancing of debt or project expansion that we traditionally see in the gray and the gold-colored zones within this chart.What has happened over the last 5 years in the accelerator space, we've incubated Osisko Mining, which has gone from an $8 million market cap to $750 million, $800 million market cap with a successful discovery at Windfall Lake. It continues to be the largest driller in Canada, with over 24 drills turning on it as of yesterday, and continues to be discovering new and exciting ounces there. We also came along, we incubated the Horne 5 project, which went from 0 ounces of [ gold ] in 2015 to currently sitting at 6.1 million ounces of gold equivalent reserves at an overall resource there of over 9 million ounce -- gold equivalent ounces, which has got polymetallic and VMS deposits. So huge success there. Obviously, that project is currently in the trough in that, that is in the permitting cycle, and a full feasibility was published 2017.We also incubated Barkerville and Osisko Metals, which is operated by Bob Wares on the Pine Point project, which is our zinc-based metal company. And we would consider Victoria to have been one of the accelerator investment companies that we participated in, that was later on in cycle. So we've been very successful at that. I would say the most successful accelerator investment that we've made so far is Arizona Star, where we invested $5 million in equities and $10 million to buy a 1% royalty. We made a net return of $34 million on the equity portion of that investment. And we still own the 1% royalty on their Hermosa project in Arizona through that accelerator program. So it's been a very potent source and the royalties that we've earned in that accelerator space would include the 5% royalty -- or 4% royalty that we have on the Cariboo project, would include the 1% that we have on Hermosa, and the 1.5% to 2.5% that we have on the Windfall Lake project as well as the Back Forty project and some of the other significant royalties that we've earned along the way.As you see in the middle of the zone here, the development opportunities, we typically see that the projects are single asset companies, in particular, have a value challenge when they're in the development phase, and that's essentially after the first resource comes out the PEA study through the pre-feasibility study, feasibility study, permitting, EIA and project finance and then into construction, and we keep coming back out. As you can see on this curve, we've indicated Eagle. Eagle has completed construction as of September and is currently in ramp-up. So we've been through the cycle with Victoria. We bought into the company after they had achieved permitting, and we're the capital investor with our partners from Orion to get a $550 million finance package together in that window. And now we're seeing that, that project is bearing fruit for us as the retention of the 5% royalty that we still own on that project.Cariboo sits neatly here at just having put us as a PEA study. It continues to deliver exploration success and is now heading into the feasibility and permitting cycle. We expect to see permitting there to take on the phase -- a 4,000 tonne per day phase of the project to be somewhere around the 24-month mark. So after that project financing, it's a relatively low-cost mine build, again, at about USD 225 million, of which half of it could be financed by debt traditionally. So leaving the equity and royalty component sitting at around USD 120 million left to complete to production in that project after permitting cycle has been completed.If you look at the other opportunities where we participated and the producing opportunities, we -- with our partners at Orion, we did the largest royalty deal on the acquisition of the Orion portfolio in 2017 for $1.25 billion -- or $1.125 billion on that portfolio. We subsequently invested in the silver stream in Gibraltar, and we bought the Renard refinancing as we went through that diamond mine.So the message that I would like everyone to take away today is that we have not changed our strategy. We continue to work on the 25%-75% model. Cariboo is the most recent entry into the 75% zone. And we set out in 2014 to create our own opportunity set with a dominance in Canada, and we've looked at all the projects that can go sort of 4 million to 5 million ounces on the Canadian landscape, and we feel like we're involved with a good portion of them, and we see our growth being more organic within the accelerator model as we go forward.I know there's been some discussion about change in business model, but we remain on our accelerator model. And with the creation of North Spirit, we are looking forward to evolve our accelerator model and hopefully purify the royalty model in the eyes of our shareholders as we get that piece of work complete.In summary, on Page 19, the company is in very good shape with 135 royalties, dominant Canadian opportunity set in front of us and a dominant Canadian source of royalties here. We produced over 18,000 GEOs in the quarter, 91% cash margins and a dividend yield of over 1.6% as we go into the end of the year. And at December 31, so if you were to buy the stock today, your yields are going to be north of 2%. And an investment portfolio of $293 million with $123 million of cash on hand as at the end of September, and we have some cash coming in from our sales as well as our traditional cash flow from our royalties, leaving us with over $800 million available liquidity to manage the business and take advantage of the opportunity sets in front of us. On that note, I thank everybody, and we'll move into the Q&A period. Thank you.

[Operator]

[Operator Instructions] [ Foreign Language ] There are no questions at this time.

[Sean E. O. Roosen, Chair of the Board & CEO]

All right. Well, thank you, everybody. And as a final note, we'd like to send our condolences to the employees, workers at Semafo and Burkina Faso who recently suffered a significant loss. Our thoughts are with the families of the people that have been affected by this strategy. If anybody has any questions for us, we will be attending the Raymond James Conference in Austin, Texas this weekend, and we're available by phone if anybody would require us.Thanks very much, and look forward to seeing you at the next available occasion.

[Operator]

This concludes today's conference call. You may now disconnect.