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. Please note that this call is being recorded today, May 2, 2019 at 10 am Eastern Time. Today on the call, we have Mr. Sean Roussan, Chair of the Board of Directors and CEO of Osisko Gold Royalties Mr. Brian Coats, President and Ms. Elif Leveik, Chief Financial Officer and VP, Finance. I would now like to turn the meeting over to your host for today's call, Mr. Sean Roussom. Mr. Brian Coats, President and Madame Elise Leibanc, Chief 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 set up to $33,500,000 up nearly CAD1 1,000,000 on quarter on quarter from 2018. And net cash flows from operating activities to the CAD24.8 million, up another CAD1 1,000,000 from the Q quarter on quarter for 2018. We have a net loss of $26,500,000 attributed to us, which is essentially the impairment of the tax pool. It incurred a fair amount charge of $38,900,000 on the Renard Street, which we'll talk about. We have adjusted earnings for CAD5.8 million or CAD0.04 per basic share for the quarter. We recorded cash operating margins of 89% from royalty and streaming interest. We closed the previously announced senior secured silver stream, the reference to 100 percent of future stream from the 1 on 5 property loaned by Fossil Resources. We also repaid in full our revolving credit facility. We now $450,000,000 available on our credit facility. We acquired again for cancellation 850,500 common shares of the company for $10,200,000 in our end of the normal course issuer bid at an average of $11.96 per share. We also declared a quarterly dividend of $0.05 per common share, paid April 15, 2019 for shareholders on that record date. We're going to talk first about the Ricard impairment that we took this quarter, and I'm going to pass it to Lise Lavec to run you through that. Good morning, everyone. One of our cornerstone assets is a 9.6% undivided interest in all diamonds produced from the Redar mine, which we have, as you know, and it's actually secured ranking in terms of its position. And in March 28, 2019, Stornoway, who's the operator of the Renard mine, announced significant impairment charge, which was $83,200,000 on the Renard mine, which was reflecting an outlook of lower than expected diamond pricing. And this was determined to be an indicator of impairments and we had to actually test our asset as well and it's resulted in impairment of $38,900,000 $28,600,000 net of income taxes. I think what is encouraging to note that is that the operations at the Red Arm mine are going well and the diamond coming out of the mine is a good flow with a good loyal demand from the buyers. So the pressure is really coming from the current diamond pricing environment, but 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 gyo 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 streams versus royalties. So we're still anticipating to meet our guidance with stronger GEOs this year between 85,000 to 95,000 GEOs with an 88% cash margin. Slide 6 kind of shows GEOs by asset and by product. You will see again a strong quarter from Canadian Lawyerly 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 percent from precious metals GEOs. So if we have a look at our cornerstone asset, the Canadian Malarie mine, we'll continue to see exceptional performance from this mine over 69,000 ounces produced in 2018 and Q1 produced 167,300 1,000 ounces for net royalty to us of 8,300,000 8,300 ounces so far in Q1 this year on a year to date. So Kanewater continues to be a great performer. Over to Page 8, if you look at our growth for the CN section of the company in 2014, we've seen continued growth from a full year of 3,500 ounces to our current 80,000 ounces from 2018 and on to our guidance for this year of 85,000 to 95,000 GEOs and still maintaining high margins, looking at 58% operating margins on that. Ramesh, what would you say to the financial performance for your whole business? Sure, Sean. So again, if you look at the performance in terms of financials, the revenues, non cash flow from operating activities and earnings were pretty much in line with the same period last year. We had slightly higher in cash flow through operating activities, which results a little bit better working capital impact as well as some lower interest as we paid out our debt. If you look at the earnings and loss year over year or quarter over quarter compared to last year, Again, the losses is a result of the impairment charge from Banar. Other than that, if it wasn't for that, I think we would be sitting at $2,100,000 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, dollars 29,900,000 compared to $29,500,000 last year. Offtakes as a result of last year having a more steady increasing gold price was sitting at $700,000 compared to $2,400,000 last year, with our cash margin still standing pretty strong at 89% for 2019 Q1. 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 is kind of thoughtful about different activities affecting our cash flow. If you look at the inside investing items, we invested $28,000,000 in acquisitions and royalty and stream interest. Of that, dollars 19,600,000 was actually for the Eagle Gold project. If you remember, we have committed $98,000,000 last year for acquisition of 5% NSR. And of that, the $19,600,000 represents the remaining amount have been paid and now is completely paid. And the construction is going very well at the Eagle project with 90% complete. Another $5,000,000,000 was on the Falco Silver Stream. We closed during Q1 the Falco Silver Stream. We had originally paid $20,000,000 before this year. So the $5,000,000 represents the remaining amount of the first tranche on the payment of $25,000,000 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 BRL13,100,000 in short term investments and BRL5,800,000 in acquisition of Marshable Securities. If you look on the financing side, the financing activities amounted to $42,700,000 of that $30,000,000 was the payment of revolving revolving credit facility. With that, we have no amount remaining drawn on our credit facility. And also in January, we paid $7,900,000 under the 2018 NCIB program with an acquisition price just a little under $12 per share. And we also continued our payment for the dividends representing $6,300,000 for the Q1. Thank you, Lee. So the financial position as we sit today is very strong, C108 $1,000,000 of cash. We have a convertible outstanding at $324,000,000 It's not due for another 2, 3 years. Investment portfolio is valued at $403,000,000 And as we said, our debt credit facility sits in an undrawn amount of $450,000,000 So between the credit facility and the cash, about $550,000,000 available for investment plus the $403,000,000 of investment portfolio of over $1,000,000,000 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 to take dividends in the 1st year of the existence of this company. And today, we've returned $139,000,000 to shareholders in 2014, of which in 2019, cumulated with CAD94 1,000,000 of dividends in addition to CAD45 1,000,000 in share buyback to get to that CAD139 1,000,000 So 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. And as we go forward in the period from 2020 to 'twenty three, we see the continue mining project, the Odyssey zone developing Mac-forty in Michigan. We have the Ancillary project as well, the Eagle and the Victoria half and the Yukon is scheduled to come online. With ore going on, we have that here at maybe at the end of the month and hopefully the 1st goal for in the second half of the year. Windfall Lake is our lead project in our accelerator model with the over 21 drill turning there and an exceptional out tab and also Bibbond underground to take bulk samples. We're also a participant in the Mont Belancos 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. And then within the other internal growth assets within the group, we see another 10000 to 15000 ounces in that period coming up. After the 2023 period, I won't go into too big a detail, but we see continued expanded resource growth in the existing pipeline. And that means there's no further investment required from a Cisco turn. This growth is how we baked in to our existing portfolio. So we have a lot of growth built into the next 5 years into the existing portfolio. Just a quick update on the Eagle Project owned by Victoria on Page 16. I went to visit this operation last week. We're plus 90% complete on the construction. Things have gone exceptionally well. And these are going to be in the heat range here at the end of the month. It's worth noting that in the Eagle project, the weather conditions there, they have the same level of precipitation as Phoenix, Arizona. So we're able to carry out construction all throughout once a year. We can move any days through the winter and we're quite excited to see what happens this year as we get that line into operations and continue to go forward. What's that is a $550,000,000 mine mill that's on time, on budget as we speak. And I would think it looks great to provide us with the leg that mine comes online at about £180,000 for the year, which we have a 5% royalty. So that'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 sitting at CAD108 1,000,000 with our investment portfolio of CAD403 and our debt facility of CAD 450 for close to $1,000,000,000 available liquidity on the balance sheet and on schedule between 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 and then Barkerville and Falco is in the permitting cycle and then, of course, Victoria, which has already come online. In terms of where we sit in in the pack of royalty companies, we continue to be a growth portfolio. And 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 that. On that, I'll only add one summary comment. 2018 was a pretty good building year. 2019 is very strong. And I think here at Stifel, we're pretty excited about what the prospects are for this year 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. And at that point, I will pass it over to questions. Thank you very much, everyone. Everyone. Thank you. Your first question about Premier Castile 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 2 years. They're not really making a lot of money yet or not no money yet. The open bid has been shut down. There were some mechanical issues in January February. There's been management changes, Orion selling out. I know you wrote down your investment by $20,000,000 You still have about $100,000,000 in book value in Renard. How close are you to it? How concerned are you with it? Well, I think where we sit, Cosmos, is 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 the financial side. We're teamed up to help the company. Our partners in the Caisse de depot, Investo Quebec, which is the government of Quebec and also partners at Triple Flag. We've all been working to shore up the balance sheet. It's how we did the 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 where they are, they come as they go. We think that the natural diamond market is strong and we've reviewed with the diamoneers what they see. And there is a slight demand story developing in the sector as some of the other mines like Argo will come offline. So I think it's 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. But the good thing for this company is to have great sponsorship, both from the government of Quebec and the East Depot and the other streamers such as ourselves and Triple Fly. We're pretty close to the story at COSL. And it's here in Quebec. So we have the benefit of the Canadian dollar. And I think that this is going to be a great mine. Unlike all great mines that the ramp ups are OE tops. Yes. Certainly, Elyse sort of mentioned that as well, saying that you have secured ranking on the asset here. But could you remind us like not saying it's going to happen, but in the case where it does go through bankruptcy, ceases to be a going concern, how does your investment rank against all the other investments? So we are senior secured and we share Prairie Pasoo with only one other lender. I think that's as far as we can go at this point. So there's nothing ahead of you, Alif? No. Okay. And how much is the other lenders investment? Sorry, how much? CAD 120 million. Okay, okay. Got it. And 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. But you mentioned diamond prices here. And we've been hearing a lot about synthetic diamonds and that's 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? So I think I think I've got the target audience, the millennials are. But we had an update on diamond pricing a couple of days ago. And we still have a top 2 millennial man who would buy a diamond and propose it to their wife 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. And as you know, we also worked on a project with Lucera on the blockchain traceability of original diamonds. We're fairly well up to speed on the space of what's happening there. And we think that providence of luxury goods is on the growth side of it, and people are spending money, especially millennials, on things that they see as genuine. So we actually see a luxury goods space, especially anything that has problems. There's a very strong growth pattern right now. Obviously, there's a bit of a transition. So we're quite optimistic. When we originally got into this investment, we had looked at a 2021, 2022 sort of increased diamond price to view that there was probably some choppy markets to get through and we took on the investment. Unfortunately, that prediction has proven true. But as we look forward and everything that we're seeing on the diamond space, especially the Canadian diamond side, Canadian diamond side still has the brand. And here in Canada, we see other mines shutting down like Victor. In Cachi doesn't have much mine life left. And then, of course, we have some bigger ones like Argyle and the rest that are certainly short timelines. So all in all, to the extent, I think that this is a medium term issue, but obviously, we're dealing with short term stuff. Yes. And maybe switching gears a little bit turning to another sort of problem child for you, Amesser operated by Lydian. Number 1, what's your current book value on that investment? And number 2, I'm reading up on this forbearance facility that you and the other creditors have in place with Lydian, essentially helping them through this more difficult period. But there's also sort of I don't want to call it like a deadline, but there's a date here, June 30, 2019 in terms of and 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? So book value is on US83 million dollars In terms of what's going on directly on the project, I'd rather not comment on any specifics on that situation as there's 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 to site closure. So those things are evolving. But 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. We're 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 EPRT. So I think been evolution on it. The management team at the company is done well and we continue to deal with it. It really revolves around the continued concern over water quality there, which I think that's been dealt with by a few different consulting groups. And hopefully, we can put that issue behind us to get off the project. It really is a spectacular project that from a heap leach standpoint, it's at 1.2 to 1.4 grams. So all the equipment is on-site. So unfortunately, they've experienced this delay, but the project is exceptionally high quality. So we continue to be a participant and monitor on this. We feel that this project goes forward. But obviously, we're not going to predict time schedules at this point in time. And I know you can't tell us much, Sean, but should we expect a lot of increased activity around the June 30, 2019 date? Or is this or is that just really just a number? I think we'll have to see how it evolves, Cosmos. I don't really want to comment further than that because I got you. Ongoing issues there that are beyond our control. Okay, great. That's all I have. Thanks a lot Sean and Elik. All right. Thanks, guys. Your next question about Prashanth Kastin comes from the line of George Topping with Industrial Alliance. Your line is open. Go ahead, Mr. Topping. Your line is open. And we'll proceed to the next question. Your next question about question Castillo 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 Q1, for several projects, your revenues didn't seem to exactly coincide with the mines, maybe there's delays in 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 SaaS stream and 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? George or John, in terms of where we are, obviously, in Q1 seasonality, there is some weather issues around different mining operations. But specifically on Brucejack, the offtake agreement can vary a bit because it's really a volatility trade. So gold prices are stable, volatility is down and the earnings on the trade are down. So if we have significant volatility within the gold price, we can see that revenue go up. In terms of what we're doing, at least not a super significant amount of gold that comes to us in terms of what we're doing with other operations that we have to take deep dive into which ones you're referring to exactly, but we've seen good growth in most of our assets and a variation from Q1 quarter on quarter from year to year is less than 1,000 ounces. So we're pretty happy to see some of those things. And we did take a little bit less on on our GEOs on Storaway 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 to see you soon, as we are. 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 in both in M and A and project financing. So we're full of work right now. And I think that our growth pattern in the company as we see our other projects evolve, continues to offer us significant amount of value building that we can create for our shareholders. And I also like to say, Andre Delon retired from our Board to go and continue his hobbies of hunting moose and making maple syrup. We'd like to thank Andre Gomot, who has been an exceptional friend to the company and supporter and a Board member for a long time, having joined us when we acquired his company, Virginia. And we'd like to wish Andre 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? Yes. I hear you now, George. Okay. Great. Some technical error there. I apologize if it's already been asked, but the on Mantos, the 70 $1,000,000 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. I mean, we buy stock back when we feel that it's appropriate. We don't have any set schedule for it and it's sort of a quarter by quarter thing. But we feel 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. Yes, understood. There was a meaning on MANTOS where they have an option to buy down the stream at €70,000,000 Sorry. I'll pass it over to Joseph, who's on the call. Hey, George. They do have that option, the option of conditional on them delivering a third number of ounces before it being before them being able to execute on it. We will see that those number of ounces will be met. However, in discussions with the operator, what we can understand is their capital allocation business right now focused on expanding the mine over allocating money to the buyback. Right. Great. And then just lastly on the Jim Bay area, obviously, it's very exciting area right now. You do have Ernan there with Cisco Mining. Are you actively looking up for other properties? And 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 were subsequently transferred to Osisko Mining. Osisko Mining has continued to evaluate and they have one of the largest exploration budgets and not the largest exploration budget in Canada this year with the focus being on the windfall camp, which they have 2,000 square kilometers lands on. Osisko Metals is also working in the area, and we continue to evaluate those areas. Maybe one more comment on the James Bay area. With Newmont taking on Eleonore, we expect to see intensified exploration on the Eleonore site as well. So anything we can do to support in the James Bay area, obviously, it's an area of significant interest for the group, and we continue to see what can happen there. Well, Cisco Mining is also generating an exploration spinco for some of these things called 03. And they're going to be they're going to prioritize their opportunities. But we think we're obviously very Canadian centric and very Quebec focused. And because it's part of the area of the plant are 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.