Earnings Call: Q2 2019

Aug 1, 2019

Good morning, ladies and gentlemen, and welcome to the Acyclical Gold Royalties Q2 2019 Results Conference Call. After the presentation, we will conduct a question and answer session. Please note that this conference is being recorded today, August 1, 2019, at 10 am Eastern Time. Today on the call, we have Mr. Sean Roosin, Chair of the Board of Directors and CEO of Osisko Gold Royalties Mr. Brian Coats, President and Ms. Elif Levesque, Chief Financial Officer and VP of Finance. I would now like to turn the meeting over to our host for today's call, Mr. Sean Roussens. Welcome to the Q2 results presentation for Cisco Gold Royalties today. We have a presentation on our Web site marked Q2 2019 in the investment sector on the presentation that we'll be following this morning. Within that presentation, we have a forward looking statement disclaimer. Proof of their bias, we will be making a few statements. I'm attending the Sprott Investment Conference, Natural Resources Investment Conference here in Banquilla this morning. So I'll be handing it over to the Montreal team with signed quotes in El Tabasco and Dessa de la plant and on the La Belle to go through the deck with you. I want to thank our friends from Alliance Capital in New York. We most recently repurchased some of the positions within the Alliance portfolio. So Scott and our firm office in NRC has been a Board member with the company since 2017 and has designed along the same posture and the Orion team for the great support with the company It's a really tight period bringing to an introduction in 2017. We acquired the royalty insurance portfolio at the time. And they continue to be some source of the company with over 6% of the stock. And we thank the Alliance team for getting what's done in the quarter. And the team in Montreal is going to take you through the deck and talk a little bit more about that as we get into it. Thank you very much. And I'll be on for all the questions at the end of the year. Brian, over to you. Thanks, Sean. Good morning, everyone. The key length for us in our Q2 was obviously the reduction of the Orion shareholding to 6.2%. On June 25, we announced the secondary offering by Orion of 9,000,000 shares and also a transaction where we swapped portions of our equity book and returned for 12,400,000 shares that were acquired by Afesco and canceled. So overall, we've reduced the basic common shares outstanding by 8% without affecting our cash flow generating assets. We also will be realizing savings of $2,500,000 of dividends per annum as we maintain our dividend payout under current dividend payout. To date, we've returned $320,000,000 to our shareholders through dividends of $101,200,000 and share buybacks totaling 219.6 $1,000,000 So our buyback cost was $13.67 The other aspect in the quarter that's very interesting for us is the rise in the gold market. We're very pleased to see the increase both in the U. S. And Canadian dollar. But I can't. We believe that we're just getting into a very good gold market, gold post the quarter above 1400. And we believe that we're very well positioned to capture value through our royalty our growing royalty portfolio as well as our investment in our associates. So, this gold price, we believe, will continue to be strong, given that we believe the U. S. Dollar will weaken at the high debt levels. And if you add a little bit of geopolitical tension, it has all the good ingredients to reach record highs again. For the Q2 highlights where we produced where we received 19,651 GEOs. Our revenues from royalties and streams were $33,800,000 $131,000,000 if we include the offtake. Our net cash flow from operating activity was $21,400,000 We incurred a net loss of 6,500,000 dollars or $0.04 per share, and Ellif will go through, but many of that loss is basically generated from non cash costs and she'll go through that. Our adjusted earnings were $8,200,000 or $0.05 per share. During the quarter, we closed the 1st tranche of share repurchase with Orion $403,200,000 And subsequent to the quarter end, we completed the sale or the exchange of Victoria shares and canceled another 5,000,000 common shares. Our board yesterday declared a FICE dividend. It will be our 21st dividend for shareholders on record on September 30 and the dividend will be paid on October 15th. During the quarter, we also participated in the Renard restructuring and we continue to be focused on that. So again, if we look at our comparison, 19,651 GEOs compared to 20 1,506 GEOs last year. Our cash margin was 90% versus 87% last year. We maintain our guidance based on the operator's forecast. So, our guidance is maintained at between 8,500,000 GEOs for 2019. On slide 8, you have our portfolio of royalties that were within by assets that generated their GEOs. Again, Canadian Malare, flagship asset, basically had had one of their best quarter I think it's the 2nd best quarter we've had and we continue to benefit from that outstanding asset. When we look at our growth, again, we continue we feel that we have one of the best growth profile within the royalty sector, looking at a growth to 85,000 to 95,000 ounces for 2019, with a net of 88% cash margin. We're very excited that we're going to get a new royalty, but we should be receiving gold from a new royalties asset that we did in 2018, which is the Eagle project. We have a 5% NSR on the project. The construction is 95% completed, roughly 1,300,000 tonnes were mined. And basically, the team up there is going through the commissioning and the start up ore has been going to the leach pad and we certainly hope to see the first good then. We estimate they estimate, I should say, that they will be far and go in September 2019. So overall, we're very excited about this. We've done a good construction. And we congratulate the Eagle project team and encourage them to have a very successful ramp up. Unfortunately, during the quarter, we've been busy on working on some of our portfolio of assets that have some issues. At Renard, we're working with various financial partners to support that company in pursuing a restructuring transaction. And at Almasar, we continue to maintain positive dialogue with the government around the eventual restart of the project And financial stakeholders, partners in the project continue to provide their ongoing support to the company. With the rising gold price, we really feel that some of our portfolio of royalties and streams will be coming on stream as there's new mine development. And on Page 12 of the presentation, we highlight a number of opportunities, which we think will be coming forward over 20202021 and up to 2025. We're very excited about Eagle coming in. We've had great things happening on windfall, very encouraged there. And we believe that the Odyssey project will also be generating some great royalties for our company in the near term. Quick word on our accelerator companies. At Osisko Mining. The team there has been very successful in employing a 1,000,000 meter drilling program, probably one of the largest in the country, certainly one of the largest in the country. They've identified some new discoveries. We expect to see feasibility study in 2020. And they just raised over $40,000,000 of which $30,000,000 was flow through. So very exciting there. And as we continue to monitor the drill results and seeing the resource base increasing. At Barkerville, where we own 32%, we've got an updated underground resource and we continue to carry on exploration work to delineate further reserves and try to discover new deposits. At Faltco, where we own just under 20%, we've got a feasibility study on one of the most exciting deposits it's events. We've got ongoing dialogue with the stakeholders, including government and Glencore. And we're certainly working very hard at advancing project so we can deliver EIA as well as going to public hearings. At Cisco Metals, where we have a 10.6% ownership, we're still doing some exciting things and have very positive results in our base metals, particularly at the Pine Point project in Canada's North. Recently, they've raised $10,000,000 so they're well funded. Overall, our accelerator company has a combined market cap of $1,300,000,000 $1,400,000,000 Turning it over to Annalise. Thank you, Ryan. So we had a strong quarter in terms of our operating metrics. The yields were slightly lower compared to the same period last year, but the 4% shortfall was more than compensated with higher cash margins, mainly from a strong gold price. So we had 21% higher gross profit and 39% higher operating income. We're continuing to review our SG and A and business development expenses in an effort to reduce them further, including the conversion of our deferred and restricted share units to settlement in equity instead of cash, which will reduce the volatility considerably and reduction of our Board size as well. The higher cash margins have also had a positive impact on the operating cash flow generating $21,400,000 compared to $19,700,000 Our earnings were impacted by some non cash items during the quarter, mainly related to the disposition of Highland Copper as part of the share repurchase transaction with Orion and also some non cash share loss of associates of $8,800,000 during the quarter. As a reminder, we report our associates under the equity method, which are mainly exploration companies and report our percentage of their losses, which was affected by some impairments for this quarter. So if you look at the next two pages, the first one is kind of a breakdown of the different types of instruments that we have, royalty streams and offtake. And you will see that we had a strong quarter representing 89 point 8% cash margin compared to an 87.3% cash margin in the same period last year, mainly a result of higher, I guess, revenues from royalties. And if you look at page 17, in terms of our per share metrics, as the Orion transaction was closed at the end of June, we're not really seeing the positive impact just yet. But we will be starting the Q3 of 2019 to see the positive impacts of that. So we should hopefully see some increase in terms of our per share net earnings and per share cash flow. Page 18, our financial position. So currently, we still stand pretty strong with the firepower of over $800,000,000 If you look at our cash, our investments and our available credit facility of $460,000,000 Thanks, Elif. I'd just like to take a moment here to just reflect on 5 years of operations that we started our business in June 2014 with 4 royalties and a market cap of $500,000,000 Today, we will have over 135 royalties, strains and melalactape agreements. Our market cap is at $2,200,000,000 We've done 2 major acquisitions, acquiring Victoria and acquiring the Orion portfolio that are clients, acquiring Virginia Mine and the LNR royalty and also the Orion portfolio of streams royalties and offtake agreements. We've distributed over $100,000,000 in dividends and we've bought back for $219,000,000 of shares. We've raised $1,000,000,000 in permanent and temporary capital while creating also the accelerating room business And we highlighted that that business today has a margin cap of approximately $1,300,000,000 $1,400,000,000 So, in doing that, we really established ourselves as one of the largest explorer and developer in Canada and being well positioned to capture the rising gold price that we have. So in summary, we believe that we're the peer leading by investing in Sysco, you're getting a peer leading exposure to Canadian assets. During the quarter, we again received 19,651 ounces of GEOs. Our guidance is being maintained, 85,000 to 95,000 GEOs for 2019. We continue to deliver our quarterly dividend. So, the dividend yield is about 1.3%. We've got a strong balance sheet as Elif outlined, ready to fund our continued growth program. And we've been returning value to our shareholders through buybacks as well as dividends. So, dollars 320 million has been delivered back to our shareholders. As of June 30th, we have investments of $282,000,000 and we have cash resources of $84,000,000 So well positioned to continue growing the business. With that, Sean, I pass it back to you. Thank you very much, Brian. And then at this point in time, we'll open up the call for questions. Your first question comes from Cosmos Chiu from CIBC. Your line is open. Sean, Brian and Elise. May I see book to for a very good presentation today. Maybe my first question is on the guidance here. Your guidance, you've kept it at 85,000 to 95,000 ounces. You've done about 39,000 ounces in the first half. Clearly, your second half has to be stronger. What is that dependent on? Is that YIGO, Lamaque? Are there any other ones that I might be missing? So Cosmos, thanks for the question. Cosmos, we're counting on Canadian Malartic, Eleonore having strong second semester as well as the Eagle coming on stream, we believe that that will be the driving force for our growth. And then on YIGO, any concerns about it is Indiana heap leach. And so based on leach kinetics and delivery and any concerns that if there's any setbacks at Eagle that could impact your ability to get to your even your 85,000 ounces? Well, Cosmos, as you know, we are in the mining business. I think we're in pretty good shape at Eagle. But as you said, we are going to start to run the lead circuit here pretty soon. So we're starting out in the near surface oxide zone, which is the easiest zone. And the material that's going on the pad right now looks very good. So we're quite hopeful that things are the widgets behind us on this project. We continue to build forward on that. I don't know if you've had a chance to get up there, but things are in extremely good shape at Eagle right now. It's been one of the better line builds we've seen. Great. And maybe switching gears a little bit here. Based on the histogram that you put in your presentation, Renaud, the diamond asset is a significant part of your income, of your cash flow. And clearly, in Q2, diamond prices were not great, at least the realized price of the mine, dollars 76 per carat. I'm just wondering about your point of view in terms of diamond prices. And I don't know if you could share with us, like internally, how do you look at it? What kind of diamond price do you put in your models? I'll let Brian and the guys answer that one. They've been on the start of wave files significantly. But I'll just add a general comment that I expect that the diamond prices would have some pressure on them in 2019 'twenty and then should start to see a supply demand market developing as projects come offline like Argyle and some of the other De Beers assets. So Brian, over to you. Sure. Thanks, Sean. I mean, the whole Sean just highlighted, the whole diamond market has been suffering from very tough conditions. And in return, from the bottom of the start away has its challenge. So we're working on them from an internal planning process where we're currently reviewing the diamond prices and trying to see how that affects our plan going forward. We were into the $90 $95 per carat as part of our planning process. So, we certainly hope that we can have some improvements into the operations of the mine as well as the market recovers. Yes. I guess, as you said with Renault, based on the quality of the diamonds coming out, based on the size and everything else, it's really twofold. The general market could come up. And as the quality of the diamonds coming out of the mine itself improves as well, that could be an improvement on 2 fronts. Yes, exactly. Yes. And then certainly, the big deal in Q2 was Osisko Gold's royalties monetizing some of the portfolio investments or divesting some of the portfolio investments. With what happened in Q2 and the monetization of Victoria Gold Shares and some of the other ones here. Looking ahead, should we look at your incubator accelerator model any differently? How should we look at it? Well, I think, Cosmos, we've talked about the accelerator model now for 5 years. It was in nature when we brought it to the market. Both Orion and Arizona would have will be an example the accelerator equity model, having gone full circle where the equity was monetized and we've continued on carrier holders of the royalties. In this case, there has been an open market monetization that was with our partners that had arrived. And I think that when we clearly stated what we wanted to do with this incubation and accelerator process in the beginning, This was part of it. So I think it goes to proof of concept that we've been successful, both at holding equity while using streams and then the occasional situation, more complicated project finance structure. And I think that as we see project financing evolve and streaming evolve, our accelerator model will become a fairly standard part of the industry that was conceptual 5 years ago. Yes, for sure. Maybe one last question here, focusing on Canadian Malartic. As you mentioned, one of the growth areas is Odyssey and the NSR you have on Odyssey. My understanding is that it's actually a few separate parts to it. There's your Odyssey South. There's a different part for Odyssey North. And I also believe that you have the royalty on yeast Malartic. Could you maybe piece it together for me in terms of based on your understanding when those ones are coming in, which one is going to come in first and which one could potentially benefit OR first? Bob, I think, Cosmos, it's not appropriate for us to get too far into the detail of that structure as we're not the authors of the Odyssey development program. It's being run through the joint venture. We're quite keen to see the Odyssey project go forward. It's a very significant underground resource. We drilled into it when we in the spring of 2014. It's evolved significantly since then and represents a significant increase in the resource at the Canadian Arctic site and property. We have 2 pieces to Odyssey, North and South. And maybe, Joe, do you want to step in and provide a little more color? Yes. Hi, Pablo. Hi, Joseph. Essentially, there's as Sean mentioned, as we saw, there's these Malartis in Odyssey North and Odyssey South. The interesting thing is that a lot of the mineralization falls under our existing 5% NFR ROE, mostly in the East Malartic area. I don't think there's a current finalized plan in terms of how they want to develop all of this. But there seems to be the potential for an operation from 0 to 1200 meters that could perhaps ramp down into both Odyssey and East Malartic with a lot of that material being on our ground where we have our higher roll So that can give you some guidance there in terms of how we're thinking about it, but we won't know until the operators make a final determination in terms of plan. Yes, of course. Great. Those are all the questions I have. Thanks, Sean, Brian, Joseph and Aleith. And thanks again. Your next question comes from Terry Smith from Haywood Securities. Your line is open. Sean, do you have an internal expectation for ounces of production on Eagle this year? Well, I think we've been pretty conservative. We've looked for a minimum amount of ounces, and I'm not going to put a big number out there at this point in time. And we'll let the company come to guidance once they get pad loaded and the process. But there should be sort of the initial gold production this year. And then as the pad gets more stabilized into next year, but it is a ramp up the next 18 months of ramp up for the project. And obviously, the leach kinetics will stabilize better and temperature management will be easier once we have more rock on the pad. But I think we'll have some initial production going this year. As I said, the material that's going on the pad right now looks very good in terms of reachability. And hopefully, that carries through into barrel production. Okay. And maybe Brian can answer this question. Do you have a sense for the timing on the Renard restructuring? It's an ongoing process. I would expect we will get something through in the Q3. Okay. So completed this year then at worst case, Frank, is that fair? Absolutely. That would be what I've been hearing from the company. Okay. And one last question. Do you know if the Maccles Bankers expansion has been approved by the Board? I'm just trying to it's hard to find information, but do you know what the status is of that? Kerry, it's Joseph here. They have finished the study. They are currently putting together the financing plan. And we understand that's going well. And once that is in place, we'd likely get the go ahead from the company and the Board to proceed with the expansion. Okay. So again, maybe by year end, the net debt might be formally approved then. Would that be reasonable? Yes. Okay. And then do you know how long the construction is for that expansion? I think we're looking roughly 18 months. 18 months. Okay. Okay, that's great. Thanks very much. Thanks, Terry. We have no further questions. I turn the call back over to the presenters. Thanks, everybody, and appreciate the support throughout the quarter. We had quite a bit of busy quarter with the balance sheet and the treasury. And we'll set the course to take advantage of these rising gold markets. And then just by way of tone the conference here in Vancouver being run by Rick Rule and the slot group, it's very good to see quite a bit of energy coming back into the space as we're here. So I wish everybody a good summer and hopefully make some money as we head for Denver in September. Thanks very much, everybody.