Earnings Call: Q1 2019

May 2, 2019

Good morning, ladies and gentlemen, and welcome to the Osisko Gold Royalties Q1 2019 Results Conference Call. After the presentation, we will conduct a question and answer session. If you would like to ask a question, please pick up your receiver and press star followed by the number 1 on your telephone keypad. Please note that this call is being recorded today, May 2, 2019, at 10:00 A.M. Eastern Time. Today on the call, we have Mr. Sean Roosen, Chair of the Board of Directors and CEO of Osisko Gold Royalties, Mr. Bryan Coates, President, and Ms. Elif Lévesque, Chief Financial Officer and VP Finance. I would now like to turn the meeting over to your host for today's call, Mr. Sean Roosen. [Foreign language] Bonjour, mesdames et messieurs, et bienvenue à l'appel conférence des résultats du premier trimestre de l'année 2019 de Redevances Aurifères Osisko Ltée. Après la présentation, nous procéderons à une séance de questions et réponses. Si vous désirez poser une question, veuillez décrocher le combiné du téléphone et appuyer sur la touche étoile suivie du numéro 1. Veuillez prendre en note que cet appel est enregistré aujourd'hui, le 2 mai 2019 à 10 h, heure de l'Est. Nous avons sur l'appel d'aujourd'hui Monsieur Sean Roosen, président du conseil d'administration et chef de la direction de Redevances Aurifères Osisko, Monsieur Bryan Coates, président, et madame Elif Lévesque, chef de la direction financière et vice-présidente aux finances. J'aimerais maintenant céder la parole à votre hôte, monsieur Sean Roosen. Merci beaucoup et bienvenue à l'appel de conférence sur le premier trimestre d'Osisko Gold Royalties. [Foreign language] On travaille avec la présentation sur notre site web qui marque les premiers trimestres résultats pour cet appel aujourd'hui. Welcome to the call everybody. We're working from our presentation on our website, Q1 results for Osisko Gold Royalties. If you look at the presentation, we have a forward-looking statement there that we would like everybody to review because we will be making some forward-looking statements and examining some other aspects that are outside of our control. On to page 3 of the presentation, the highlights for Q1 of 2019, we earned just under 20,000 GEOs at 19,753,000 ounces. Revenues from royalties and streams sat at CAD 33.5 million, up nearly CAD 1 million quarter-over-quarter from 2018. Net cash flow from operating activities to the CAD 24.8 million, up another CAD 1 million from the quarter-over-quarter from 2018. We have a net loss of CAD 26.5 million attributed to us, which is essentially the impairment of a tax pool. Incurred an impairment charge of CAD 38.9 million on the Renard Stream, which we'll talk about. We have adjusted earnings for CAD 5.8 million, or CAD 0.04 per basic share for the quarter. We recorded a cash operating margin of 89% from royalty and streaming interests. We closed the previously announced senior secured silver stream reference to 100% of future stream from the Horne 5 property owned by Falco Resources. We also repaid in full our revolving credit facility. We now have CAD 450 million available on our credit facility. We acquired again for cancellation 850,500 common shares of the company for CAD 10.2 million in our NCIB, the Normal Course Issuer Bid at an average of CAD 11.96 per share. We also declared a quarterly dividend of CAD 0.05 per common share, paid April 15th, 2019 for shareholders on that record date. We're going to talk first about the Renard impairment that we took this quarter, and I'm going to pass it to Elif Lévesque to run you through that. Good morning, everyone. One of our cornerstone assets is the 9.6% undivided interest in all diamonds produced from the Renard mine, which we have, as you know, and it's actually the secured ranking in terms of its position. In March 20, 2019, Stornoway, the operator of the Renard Mine, announced a significant impairment charge, which was CAD 83.2 million on the Renard Mine, which was reflecting an outlook of lower than expected diamond pricing. This was determined to be an indicator of impairment, and we had to actually test our asset as well, and it's resulted in impairment of CAD 38.9 million, CAD 28.6 million net of income taxes. I think what is encouraging to note that is that the operations at the Renard Mine are going well, and the diamond coming out of the mine is a good loyal demand from the buyers. The pressure is really coming from the current diamond pricing environment. I think it's also important to note that we do see a steady growth in the demand for diamonds. If we go to the next page, in terms of the GEO production, actually this year, other than the Renard diamond mine impairment charge was quite in line with the same period last year. We stand at 19,753 GEOs compared to a little over 20,000 GEOs last year, with 89% cash operating margin compared to 91% last year, which is pretty much in line. As I mentioned, the slight reduction is really kind of a result of the mix of stream versus royalty. We're still anticipating to meet our guidance with stronger GEOs this year between 85,000-95,000 GEOs with an 88% cash margin. Slide six kind of shows the mixture of the GEOs by asset and by product. You will see again a strong quarter from Canadian royalty coming out from the royalty side. We're still pretty much focused on precious metals. If you look at the GEOs by product, gold and silver together result in 85% from precious metal GEOs. If we have a look at our cornerstone asset, the Canadian Malartic Mine, we're continuing to see exceptional performance from this mine. Over 697,000 ounces produced in 2018, and Q1 produced 167,300 ounces for a net royalty to us of 8,300 ounces so far in Q1 this year on a year-to-date. Canadian Malartic continues to be a great performer. Over to page eight, if you look at our growth since the inception of the company in 2014, we've seen continued growth from a first full year of 30,500 ounces to our current 80,000 ounces until 2018, and onto our guidance for this year for 85,000-95,000 GEOs, and still maintaining high margins, looking at 88% operating margins on that. Maybe over to you for the financial performance, Elyse, first. Sure, Sean. Again, if you look at the performance in terms of financials, the revenues, net cash flow from operating activities, and earnings were pretty much in line with the same period last year. We had a slightly higher net cash flow from operating activities, which results a little bit better working capital impact as well as some lower interest as we paid down more debt. If we look at the earnings and loss year-over-year or quarter-over-quarter compared to last year, again, the loss is as a result of the impairment charge from Renard. Other than that, if it wasn't for that, I think we would be sitting at CAD 2.1 million earnings, which would be very similar to the same period last year. Page 10 is a kind of a revenue breakdown as well as our cash margins in terms of the different interests that we own. If we look at the royalties and streams together, this year was slightly better than last year, CAD 29.9 million compared to CAD 29.5 million last year. Offtake as a result of last year having a more steady increasing gold price was sitting at CAD 0.7 million compared to CAD 2.4 million last year, with our cash margin still standing pretty strong at 89% for 2019 first quarter. Page 11 is kind of a summary. We've kind of mostly went through all of those items. I would go actually to page 12, which kind of talks a little bit about different activities affecting our cash flow. If you look at the investing items, we invested CAD 28 million in acquisitions in royalty and stream interest. Of that, CAD 19.6 million was actually for the Eagle Gold Project. If you remember, we had committed CAD 98 million last year for acquisition of a 5% NSR, and of that, the CAD 19.6 million represents the remaining amounts which have been paid and now is completely paid. The construction is going very well in the Eagle project. We're at 90% complete. Another CAD 5 million was on the Falco Silver Stream. We closed during first quarter. The Falco Silver Stream, we had originally paid CAD 20 million before this year. The CAD 5 million represents the remaining amount of the first tranche on the payment of CAD 25 million. The future payments will be depending on obtaining some of the milestones by Falco, the first one being the receipt of all the material third party approvals. We also disbursed CAD 13.1 million in short-term investments and CAD 5.8 million acquisition of marketable securities. The financing activities amounted to CAD 42.7 million. Of that, CAD 30 million was the payment of revolving credit facility. With that, we have no amounts remaining drawn on our credit facility. Also in January, we paid CAD 11.9 million under the 2018 NCIB program with an acquisition price just a little under CAD 12 per share. We also continued our payments for the dividends representing CAD 6.3 million for the first quarter. Thank you, Elyse. The financial position, as we sit today, is very strong, CAD 180 million in cash. We have our convertible outstanding at CAD 324 million. That's not due for another two to three years. Investment portfolio is valued at CAD 403 million. As we said, our credit facility sits at an undrawn amount of CAD 450 million. Between the credit facility and the cash, about CAD 550 million available for investment plus the CAD 403 million of investment portfolio, over CAD 1 billion of liquidity on the balance sheet. Page 14, cumulative return to shareholders. This is a slide that we as a management team are particularly proud of. We started paying dividends in the first year of the existence of this company. To date, we've returned CAD 139 million to shareholders since 2014, of which in 2019 cumulative was CAD 94 million of dividends in addition to CAD 45 million in share buyback to get to that CAD 139 million. From our standpoint, we continue to work on our balance sheet, but we're in great financial shape and continue to return investment to shareholders. In terms of page 15, in terms of our growth, we see the 85,000 to 95,000 ounces from this year. As we go forward in the period from 2020 to 2023, we see at the Canadian Malartic Project, the Odyssey Zone developing, Back Forty in Michigan. We have the Amulsar project as well, the Eagle at the Victoria asset. The Yukon is scheduled to come online with ore going on the pad here in maybe at the end of the month. Hopefully the first gold pour in the second half of the year. Windfall Lake is our lead project in our accelerator model with over 21 drills turning there and an exceptional outcome. Also, they've been underground to take bulk samples. We're also a participant in the Mantos Blancos Mine expansion, located in Chile, which we have a silver stream on, and they're looking to get about 10,000 GEOs a year from that asset. Then within the other internal growth assets within the group, we see another 10,000 to 15,000 ounces in that period coming up. After the 2023 period, I won't go into it in too big a detail, but we see continued expanded resource growth in the existing pipeline. That means that there's no further investment required from Osisko to earn this growth. It's already baked into our existing portfolio. We have a lot of growth built in for the next five years into the existing portfolio. Just a quick update on the Eagle Gold Project owned by Victoria Gold Corp. on page 16. I went to visit this operation last week. We're +90% complete on the construction. Things have gone exceptionally well. It's going to be in the heap leach here at the end of the month. It's worth noting that in the Eagle Gold Project, the weather conditions there, they have the same level of precipitation as Phoenix, Arizona. We're able to carry out construction all 12 months of the year. We can lose any days through the winter, and we're quite excited to see what happens this year as we get that mine into operation and continue to go forward with that. The CAD 550 million mine build is on time, on budget as we speak. Looking great to provide us with the leasing if that mine comes online with about 180,000 ounces a year, of which we have a 5% royalty. It's going to add significantly to our GEOs, representing somewhere between 8,000 and 10,000 ounces of GEOs per year on a go-forward basis. Page 17, brief summary of the company. As we talked about, the cash position is sitting at CAD 108 million with our investment portfolio of CAD 403 million and our debt facility at CAD 450 million for close to CAD 1 billion available. Liquidity on the balance sheet and on schedule to meet our guidance for this year at 85,000 to 95,000 ounces, still paying a dividend of 1.3% and still executing our strategy on the accelerator model, where we've had some exceptional results on our development assets led by Windfall. Barkerville, Windfall goes in the permitting cycle. Of course, Victoria Gold Corp., which is ready to come online. In terms of where we sit in the pack of royalty companies, we continue to be a growth portfolio. I think that as we move forward, these assets start to mature. We're going to be able to deliver some significant returns to shareholders on it. On that, I would only offer one summary comment. 2018 was a pretty good building year. 2019 is starting strong. I think here at Osisko, we're pretty excited about what the prospects are for this year and as we go forward. We're quite optimistic in terms of where we can see further investment in the sector as well. Lots of things are going on in the space, and we continue to see significant opportunity for us on a growth side for both streaming and royalties. At that point, I will pass it over for questions. Thank you very much, everyone. Thank you. At this time, I would like to remind everyone that in order to ask a question, please press star, then 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Cosmos Chiu with CIBC. Your line is open. Hi, Sean. Hi, Elyse. Thanks for the conference call here. Maybe first off, if I could start off with Stornoway and what's happening at Renard. Clearly the market was concerned yesterday. Your share price was down 8% with a write-down. Sean, how concerned are you? Clearly, they've been in production for two years. They're not really making a lot of money yet or no money yet. The open pit has been shut down. There were some mechanical issues in January and February. There's been management changes, Orion selling out. I know you wrote down your investment by CAD 20 million. You still have about CAD 100 million in book value in Renard. How close are you to it? How concerned are you with it? Well, I think where we sit, Cosmos, actually, we're trying to lead the charge and make sure that we're part of the solution here, both on a technical side and a financial side. We're teamed up to help the company. Our partners are the CDPQ, Investissement Québec, which is the government of Québec, and also our partners at Triple Flag, we've all been working to shore up the balance sheet. As you know, we did a financing earlier. We continue to be very positive on the mine. The shutdown of the open pit doesn't really concern us because the transition to the underground is what's important. The underground is fully online and working right now. We see the diamond quality has been well accepted by the diamond market. We're seeing the product has a loyal following. Obviously, commodity prices are what they are. They come and they go. We think that the natural diamond market is strong. We've reviewed with the diamantaires what they see. There is a slight demand currently developing in the sector as some of the other mines like Argyle come offline. I think it's a standard ramp-up story. We're not too concerned about it at this point in time from an overall medium term basis. Obviously, the short term. We're there to work with our other partners. The good thing for this company is they have great sponsorship, both from the government of Québec and the CDPQ and the other streamers such as ourselves and Triple Flag. We're pretty close to the story, Cosmo, and it's here in Quebec, so we have the benefit of the Canadian dollar. I think that this is going to be a great mine. Like all great mines, the ramp-ups are always tough. Yeah. Certainly, Elyse sort of mentioned that as well, saying that you have secured ranking on the asset here. Could you remind us, not saying it's going to happen, but in the case where it does go through bankruptcy, it ceases to be a going concern, how does your investment rank against all the other investments? We are senior secured, and we share pari passu with only one other lender. I think that's as far as I can go at this point. There's nothing ahead of you, Elyse? No. Okay. How much is the other lender's investment? About CAD 120. Sorry, how much? 120 million. Okay. Got it. I don't know if this is, Sean, I'm not sure if you're the best person to ask here. Clearly, you might not be the target market. I'm not the target market either. You mentioned diamond prices here. We've been hearing a lot about synthetic diamonds and its impact on real diamonds or whatever you want to call it. How do you see the competition coming from synthetic diamonds, and is that going to have any kind of long-term impact on what they're producing at Stornoway? I just think, well, I'm not the target audience, the millennials are. Yeah. We had an update on diamond pricing a couple of days ago. We still haven't talked to millennial men who would buy a diamond and propose to their wives using a synthetic. That's good research. That's a fairly risky proposition from what we were led to believe. We do see growth in the diamond market. As you know, we also worked on a project with Lucara on the blockchain traceability of original diamonds. We're fairly well up to speed on the space and what's happening there. We think that provenance of luxury goods is on the growth side of it, and people are spending money, especially millennials, on things that they see as genuine. We are seeing the luxury goods space, especially anything that has provenance, is a very strong growth pattern right now. Obviously, there's a bit of a transition. We're quite optimistic. When we originally got into this investment, we had looked at a 2021, 2022 sort of increased diamond price. We knew that there was probably some choppy markets to get through when we took on the investment. Unfortunately, that prediction has proven true. As we look forward and everything that we're seeing on the diamond space, especially the Canadian diamond side, Canadian diamond side still has a brand. Here in Canada, we see other mines shutting down, like Victor. Ekati doesn't have much mine life left. Of course, we have the bigger ones like Argyle, and the rest that are fairly short mine lives. All in all, as I said, Cosmos, I think that this is a medium-term issue, but obviously we're dealing with short-term stuff. Maybe switching gears a little bit, turning to another sort of problem child for you, Amulsar, operated by Lydian International. Number one, what's your current book value on that investment? Number two, I'm reading up on this forbearance facility that you and the other creditors have in place with Lydian International, essentially helping them through this more difficult period. There's also sort of, I don't want to call it a deadline, but there's a date here, June 30th, 2019, in terms of they need to figure out if there's any alternative ways or alternative strategies. I guess my second question is, after the book value, is how rigid is that date, and what do you need to see to kind of continue with this forbearance? Book value is on at $83 million U.S. In terms of what's going on directly on the project, I'd rather not comment on any specifics on that situation as it somewhat political. There's ongoing discussions with the government. There's been a couple of court dates where they went through that were positive for the projects in terms of dealing with the access site closure. Those things are evolving. I don't think it's productive for us to do too much deep dive on it right now, because I'm not directly involved with the execution of that work. On the financial side of it, we are very active with our other partners on this. Again, it's a good investor group that's quite capable of dealing with this, including the EBRD involved in it. I think there's been evolution on it. The management team with the company has done their work. We continue to deal with it. It really revolves around the continued concern over water quality there, which I think has been dealt with by a few different consulting groups. Hopefully we can put that issue behind us. It really is a spectacular project that, from a heap leach standpoint, is at 1.2-1.4 grams. All the equipment is on site. Unfortunately, they've experienced this delay, but the project is exceptionally high quality. We continue to be a participant and a monitor on this. We feel that this project goes forward. Obviously, we're not putting time schedules at this point in time. I know you can't tell us much, Sean, should we expect a lot of increased activity around the June 30, 2019 date, or is that just really just a number? I think we'll have to see how it evolves, Todd. Okay really want to comment further than that because. I got you. There are ongoing issues there that are beyond our control. Okay, great. That's all I have. Thanks a lot, Sean Elyse. All right. Thank you, Todd. Your next question comes from the line of George Topping with Industrial Alliance. Your line is open. Hi, George. Are you there? Go ahead, Mr. Topping. Your line is open. We'll proceed to the next question. Your next question comes from the line of John Tumazos with John Tumazos Very Independent Research. Go ahead, your line is open. Thank you very much for taking my question. In the first quarter, for several projects, your revenues didn't seem to exactly coincide with the mines. Maybe there's delays and different payment cycles. For example, the Brucejack offtake revenues were off about 40%. The other category in gold fell 137 from 782 GEOs. Could you give us a little explanation of the Saskatchewan Stream and the quality of base metals royalty that also had declines? The flagship projects were up, these other little things, I guess, are a little more volatile. John, in terms of where we are, obviously, Q1 seasonality, there is some weather issues around different mining operations. Specifically on Brucejack, the offtake agreement can vary a bit because it's really a volatility trade. If gold prices are stable, volatility is down, and the earnings on the trade are down. If we have a significant volatility within the gold price, we can see that revenue go up. In terms of what we're doing, it's not a super significant amount of gold that comes to us. In terms of what we're doing with other operations, we'd have to take a deep dive into which ones you're referring to exactly. We've seen good growth in most of our assets. The variation from Q1 quarter on quarter from year to year is less than 1,000 ounces. We're pretty happy to see some of those things. We did take a little bit less on our GEOs on Stornoway again, which was part of the difference. I don't know if I've answered your question completely or not, but let me know if that helps. Thank you. Thank you, John, and continue on with your Very Independent Research, and we're hoping to see you soon down in New York. Thank you. We have, as of now, no other questions. I just offer a final comment. In terms of our opportunities in this space, we see quite a bit going on both in M&A and project financing. We're full on working right now, and I think that our growth pattern in the company, as we see our other projects evolve, continues to offer us a significant amount of value building that we can create for the shareholders. I'd also like to say, André Gaumond retired from our board to go and continue his hobbies of hunting moose and making maple syrup. We'd like to thank André Gaumond, who has been a personal friend to the company, and supporter, and a board member for a long time, having joined us when we acquired his company, Virginia. We'd like to wish André a very happy retirement. I see we have Mr. Topping maybe back online. Operator, can you see if George Topping's question can be asked? Yes, certainly. Mr. Topping with Industrial Alliance Securities, go ahead, your line is open. Great. Can you hear me this time? We have you now, George. Okay, great. Some technical error there. I apologize if it's already been asked, but on Mantos, the CAD 70 million buy-down option, are you expecting that to be exercised or is your base case not to be? It's contingent on market conditions, obviously, George. We buy stock back when we feel that it's appropriate. We do not have any set schedule for it. It's a quarter by quarter thing. Most of the time, we keep a Normal Course Issuer Bid in place in terms of market volatility management. We believe in our own stock, and we believe in our company, and if it is undervalued, we will participate. Yeah. Understood. I was meaning on Mantos, where they have an option to buy down the stream for CAD 70 million. Sorry, I will pass it over to Joseph, who is on the phone. Hey, George. They do have that option. The option was conditional on them delivering a certain number of ounces before them being able to execute on it. We would assume that those number of ounces will be met. However, in discussions with the operator, what we can understand is their capital allocation this year is right now focused on expanding the mine over allocating money to the buyback. Right. Great. Just lastly on the James Bay area, obviously, it's a very exciting area right now. You do have Ernen there with Osisko Mining. Are you actively looking up for other properties or perhaps getting more involved in the funding of exploration in that area? Well, as you know, we picked up the Virginia portfolio of projects in James Bay, which was ultimately transferred to Osisko Mining. Osisko Mining has continued to evaluate. They have one of the largest exploration budgets, if not the largest exploration budget in Canada this year, with the focus being on the Windfall camp, which they have 2,000 sq km of lands on. Osisko Metals is also working in the area. We continue to evaluate those areas. Maybe one more comment on the James Bay area. With Newmont taking on Éléonore, we expect to see intensified exploration on the Éléonore site as well. Anything we can do to support in the James Bay area is obviously an area of significant interest for the group, and we continue to see what can happen there. As you may have seen, Osisko Mining is also generating an exploration spinco for some of these things called O3. They're going to prioritize their opportunities. We think, we're obviously very Canadian-centric, and very Quebec focused. Because it's part of the area of the Plan Nord, we see that as a place of significant opportunity and investment for us as a Quebec specialist. Sure. Good. Okay. Thank you. All right. Thanks everybody, and have a great day. Ladies and gentlemen, this concludes today's conference call. You may now disconnect. [Foreign language]