Earnings Call: Q3 2019

Nov 7, 2019

Good morning, ladies and gentlemen, and welcome to the Offisco Gold Royalties Q3 2019 Results Conference Call. After the presentation, we will conduct a question and answer session. Please note that this call is being recorded today, November 7, 2019 at 10 am Eastern Time. Today on the call, we have Mr. Sean Roussens, Chair of the Board of Directors and Chief Executive Officer of Afesco Gold Royalties Mr. Brian Cope, President of Afesco Gold Royalties and Elif Leveque, 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 Brewson. Welcome everybody and welcome to the Q3 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 an 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 Q3 of 2019, 18,123 GEOs were earned from our partners and revenues of CAD33.9 million for the quarter, record cash flows from operating activities at CAD28.3 million, a non cash net loss of CAD45.9 million or CAD0.32 per share, basically reflecting the impairment on the stream and offtake interest of CAD60.8 million that Elif will be getting into in detail as we get further into the presentation. Adjusted earnings of CAD17.5 million or CAD0.12 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 2nd tranche of the share repurchase with Orion for a total of 12,385,007 117 shares which were canceled. This represented about 8% of the outstanding stock of Osisko Gold Royalties and a financial value of just under CAD175 1,000,000 We enhanced the silver stream on Mentos 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 today, is Port 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 Caribou Gold Project in Central BC of the Caribou 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 to Pareteum Exploration for US41.3 million dollars or CAD54 million. We still have more cash coming from that transaction. The final CAD10 1,000,000 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 Orion. For CAD 71,400,000 we had purchased 5,000,000 shares. And in total at the end of the day, it was 12,385,000 shares as we said. On Mantos Blocko stream amendment, we've further CAD25 1,000,000 on deposit with the asset. Significant changes to the stream involved a 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 19,300,000 ounces is revised. And most importantly, the termination of the stream buyback clause. So there is no impediment on this stream as we go forward. The sale of the offtake agreement on Pretium was closed and we received a CAD 41,300,000 settlement. As I said, CAD 10,000,000 left to be deposited at the end of the month. That was a good deal for us in terms of pulling that cash flow in near term to us and also to help Credium 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 100 percent owner of the Caribou project, which is over 2,000 square kilometers as a resource in the inferred category of over 4,300,000 ounces and continues to deliver successful drill results. A PEA study outlining a plan to build 185,000 ounces a year mine with a 10, 11 year mine life was submitted to the market in August of 2019. So we are 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 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 with that asset. And we see a lot of the same hallmarks that we have a world class camp that was Tax Board owned over the years and has been consolidated back into a large land package, one of the largest in the world with continuous mineral rights over a 67 kilometer long trend and historic production there of over 4,000,000 ounces. 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 made 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 North Spirit Discovery Group is to channel financing from private standard private equity and third party private equity partners to allow for joint ventures and to look at also other 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 opportunity. 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 keynote on Page 6 takes you through the timeline of what we see at Barkerville. So it's a crucial point in the evolution of this story that the feasibility study is underway, permitting is underway. We now have the resources 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 we have an existing mill site with tailings pond cyanide permitting. We'll be taking advantage of the way the PA study is set up with low capital intensity of less than US240 $1,000,000 required to build a 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 and produce gold through the gold pour that we all enjoyed at the Denver Gold Show in September. And we see this as the way forward as this is a 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. The credit bid was successful and is now closed. Congratulations to Brian Coats and the other streaming partners on getting that deal done. It was a long complicated process, but the Diamond mine is up and running well. And we had the privilege of attending a Diamond sale with our partners in the Casa DuPont and Esma cum back and some of the other groups that remain in the consortium. It is a good ownership structure for this project and that we have a lot of individual institutions and individuals involved that are capable of managing this asset to lower commodity price and ultimately 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 Argyle 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 Thornaway in terms of maintaining our 9.6 percent 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 as of December 31, 2019. The 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 and Trojan 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 achieved 18,123 ounces for the year 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, that's precious metals or precious that we would be at 98% weighting. Add 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 the contribution to the portfolio underneath. And we continue to build on that basis and our friends from Victoria will hopefully be the lead horse for next year as that mine to ramp up. Returning on capital on Page 10. We're very proud of this slide. We've managed to make money consistently since we IPO ed this company in 2014 and we've had a disciplined approach to returning that capital to shareholders with over CAD219 1,000,000 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 were at 3 CAD328 1,000,000 has been returned to shareholders through the process of value building that 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. Thank you, Sean. Good morning, everyone. Revenues from royalties and streams increased by 8% to CAD 33,900,000 compared to last year, mainly due to increase in our stream interest. And we also recognized record operating cash flow at $28,300,000 compared to CAD20,600,000 mainly reflecting the increased cash margins and elimination of cash settled share based payments. If we go to the next page, Page 11, earnings excluding impairments stood at $13,100,000 compared to $5,500,000 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 next slide we're CAD59 1,000,000 net of income taxes. And so our net losses for the quarter stood at CAD45 $900,000 And our adjusted earnings, dollars 5,700,000 for last year's Q3 and $17,500,000 for this quarter, mainly reflecting, again, like I said, the increase in the cash margins as well as the gains that we have made from the sale of the Boots Jack interest. So if you 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 protection under the CCAA to structures 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, dollars 47,200,000 and dollars 34,600,000 net of the income taxes. So now the recoverable amount for Renard's stream for us stands at C70.2 million dollars And on the Amulsar stream and off day front, in September, Lydian, again the owner of the Amulsar project announced a delay and timing of the construction activities and the expected first gold pour and ramp up for the full production as a result of the now 15 month blockade on construction as well as some changes to the expected life of mine and annual production that they came up with within the Q3. And again, this resulted as an impairment indicator for us and we did test our model, which resulted in a US9.9 million dollars impairment coming up to US13.1 million dollars for the quarter. So after these adjustments, the amulsar stream and the off take recoverable value is about USD 73,700,000 and USD 97,000,000. For Falco Resources, the net investment was impaired. It's an associate for us. So the carrying value is not at fair value and that's why we have to actually recognize the reduction in the fair value of the equity investment in Falcon Resources to bring it down to its fair value and we reported an impairment charge of $12,500,000 $10,800,000 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 offtake. As Sean mentioned, it was a pretty strong quarter in terms of our royalty and stream interest and we reported a 90.8% cash margin from those interests as well. In terms of offtakes, revenues stood at $75,300,000 compared to $80,000,000 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 $80,000,000 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 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 $109,200,000 and a gross profit of $20,900,000 and again with the strong cash flows from operations $28,300,000 as opposed to $20,600,000 So our financial position on Page 16, we have drawn on our credit facility for US15 $1,000,000 coming up to about CAD20 1,000,000 So that leaves us with the available credit of CAD480 1,000,000 including accordion. Looking at that, our cash and our fair value of our investments in the marketable securities, we actually have almost CAD900 1,000,000 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're expecting. The revised guidance now stands for 28,000 GEOs and the main result for the reduction is really the weak diamond prices that we've been seeing for the Rouenard mine during the year and the sale of the Brucejack Alt offtake and the impact that it will have for the Q4. 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. Thank you, Lyth. And on to Page 18 is a slide that we discussed a lot and it's been around for quite a while and it sums up our investment strategy. As you know, we set out in 20 in 2014 with the accelerator model as a new introduction to the royalty and 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 Accelerator space, we've incubated Osisko Mining, which has gone from an $8,000,000 market cap to $750,000,000 to $800,000,000 market cap with the 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 Horn 5 project, which went from 0 ounces in 2015 to currently sitting at 6,100,000 ounces of gold equivalent reserves and an overall resource there of over 9,000,000 ounce gold equivalent ounces because it's a polymetallic BMS deposit. So huge success there. Obviously, that project is currently in the trough and that it's in the permitting cycle and full feasibility was published in 2017. We also incubated Barkerville, Anosysco Metals, which is operated by Bob Myers 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 the cycle. So we've been very successful at that. I would say, one of the most successful accelerator investment that we've made so far is Arizona Star where we invested CAD5 1,000,000 in equities and $10,000,000 to buy a 1% royalty. We made a net return of $34,000,000 on the equity portion of that investment and we still own the 1% royalty on the 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's place would include the 5% royalty or 4% royalty that we have on the Cariboo project. We include the 1% that we have on our Moza 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, single ethane 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 PE study through the pre feasibility study, feasibility study, permitting EIA and project finance and then into construction and we keep them 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 were the catalyst investor with our partners from Orion to get a $550,000,000 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. Caribou sits neatly here. It's just having put out the PEA study and continues to deliver exploration success and is now heading in to the feasibility and permitting cycle. We expect to see permitting there to take on the phase the 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 US225 $1,000,000 of which half of it could be financed by debt traditionally. So leaving the equity and royalty component sitting at around US120 $1,000,000 left to complete to production in that project after permitting cycle has been completed. If you look at the other opportunities where we participated in the producing opportunities, with our partners at Orion, we did the largest royalty deal on the acquisition of the Orion portfolio in 2017 for $1,250,000,000 or CAD1.125 billion on that portfolio. We subsequently invested in the Silverstream and 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. Caribou 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 4000000 to 5000000 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 has 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 wealth 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 GGOs in the quarter, 91% cash margins and a dividend yield of over 1.6% as we go into the end of the year. And as December 31, if you were buying the stock today, your yields are going to be north of 2%. And an investment portfolio of CAD293 1,000,000 with CAD 100 and 23 1,000,000 of cash on hand as of 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 CAD 800,000,000 available liquidity to manage the business and take advantage of the opportunity set in front of us. And on that note, I thank everybody and we'll move into the Q and A period. Thank you. There are no question at this time. All right. Well, thank you everybody. And as a final note, we'd like to send our condolences to the employees, workers at Semaphone Burkina Faso have recently suffered a significant loss. Our thoughts are with the families of people that have been affected by this tragedy. And 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 the next available occasion. This concludes today's conference call. You may now disconnect.