Earnings Call: Q4 2018

Feb 21, 2019

Good morning, ladies and gentlemen. Welcome to the Osisko Gold Royalties Q4 and year-end 2018 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 one on your telephone keypad. Please note that this call is being recorded today, February 21st, 2019, at 10:00 A.M. Eastern Time. Today on the call we have Mr. Sean Roosen, Chair of the Board of Directors and Chief Executive Officer of Osisko Gold Royalties, Mr. Bryan Coates, President of Osisko Gold Royalties, and Ms. Elif Lévesque, Chief Financial Officer and Vice President, Finance. I would now like to turn the meeting over to our host for today's call, Mr. Sean Roosen. Bonjour, mesdames et messieurs, et bienvenue à l'appel conférence des résultats du quatrième trimestre et de l'année 2018 de Redevances Aurifères Osisko Ltée. Après la présentation, nous procéderons à une séance de questions-réponses. Si vous désirez poser une question, veuillez décrocher le combiné du téléphone et appuyer sur la touche étoile suivie du numéro un. Veuillez prendre en note que cet appel est enregistré aujourd'hui, le 21 février 2019, à 10:00 A.M., heure de l'Est. Nous avons sur la ligne aujourd'hui Monsieur Sean Roosen, Président du Conseil d'Administration et Chef de la Direction de Redevances Aurifères Osisko, Monsieur Bryan Coates, Président de Redevances Aurifères Osisko, et Madame Elif Lévesque, Chef de la Direction Financière et Vice-Présidente aux Finances. Je vais maintenant céder la parole à votre hôte, Monsieur Sean Roosen. Merci beaucoup. Bienvenue à la quatrième trimestre et appel annuel pour Osisko Gold Royalties. On va utiliser la PowerPoint qui se trouve sur notre site web, qui est nommée 2018 quatrième trimestre and year-end results. Pour cette PowerPoint, il y a un disclaimer. I'd ask everybody to have a look at the forward-looking statements. We will be going from the PowerPoint that is on our website, that is titled, 2018 Q4 and year-end results. I'm going to start on page three. I want to make sure everybody had a look at the forward-looking statements prior to that. 2018, an interesting year in terms of market conditions, gold price, and the bit of a disconnect between capital markets and commodity price. Here today, we're enjoying an increased share price from last year. We're currently trading around the CAD 14.50, rating up from a little over CAD 9 change in 2018. Highlights from Q4 2018 with a little over 20,000 gold equivalent ounces earned in the fourth quarter, revenue of CAD 30.7 million, creating a cash flow from operating activity of CAD 18.6 million. We did, however, take a write-down on Éléonore which resulted in a CAD 0.73 per share impairment. We at a later point we'll talk more about that when we get into Éléonore and Lake Pool to give more details on that. Adjusted earnings for the year at CAD 13 million or CAD 0.08 per basic share. Overall for 2018, a record of just over 8,500 ounces produced, with a significant margin of 290%. Record revenues of CAD 127.6 million. Cash flows, again, an all-time high of CAD 82.2 million. The loss, of course, attributed to the company through the write-down of CAD 105.6 million, which is a special write-down, which we'll get into later. We also repaid CAD 123.5 million on our revolving credit facility, meaning that we are completely paid down with what we paid down in December of 2019 as well. We received CAD 159.4 million in from credit of exploration to repay and purchase back the stream that we had acquired during the Orion transaction in 2013. For our net profit to Osisko shareholders of CAD 9.1 million. All in all, pretty good return for that period amount of time that we were invested. We also acquired a 5% net smelter return on the Eagle project over by Victoria in the Yukon. We'll have a look at that a little bit later in the presentation. Another fun item from 2018 was the amended Renard Stream, where we invested an extra CAD 21.6 million and significantly improved the economics to the Osisko shareholders on that asset well, which we'll touch on in more detail. We acquired a 1.75% royalty for CAD 20 million on the Cariboo property held by Barkerville Gold, increasing our overall net smelter return on that property to 4%. We also have an option to increase to 5%. Subsequent to December 31st, we've repaid the remaining CAD 30 million we had on our revolver, meaning that we now have a full CAD 450 million available to us on our revolver if required. Also acquired 152,000 shares for CAD 10.2 million at an average price of CAD 11.95 for the Osisko common stock, which will be canceled and then returned to treasury. Declared a quarterly dividend of CAD 0.05 per common share, payable on April 15, 2019. Bernie, as the record date of March 29, 2019, is when it will apply for that dividend. On page five, production in terms of gold equivalent ounces and our guidance. For the last year, we significantly outperformed in terms of our margins. We were mid of our guidance of 80,553,000 ounces, up from 58,933,000 ounces in 2017. Our guidance for 2019 is 85,000-95,000 GEOs. We're looking for about 88% operating margin, making it one of the highest in the sector. We did achieve just under 90% margins in 2016. In terms of production, mine production, we saw our key asset, which is the 5% NSR royalty at Canadian Malartic, performing well. The mine average produced just under 700,000 ounces at 697.2 thousand ounces, with gold equivalent ounces of zero cost down linked to fiscal royalties of 35.4 thousand ounces, creating a record royalty earner for us on that. I would highlight that Canadian Malartic is Canada's largest gold mine and 14th in the world, with cash costs in the first quartile at running at CAD 579 an ounce. It is one of the world's best mine jurisdictions between Val-d'Or and Rouyn-Noranda, with a significant amount of mine lifespan to go and significant upside as they start to develop the Barnat portion of this project. Also, there's been some significant regrowth out of the Sheehan and Odyssey zones, which will be going through feasibility prepared for mine development as we get further into 2019 and 2020. A little more detail on Eagle Construction, which is on Victoria Gold, on which we own 15.5% of the equity as well as the 5% royalty on the asset. The project is now at 75% complete. The team there, the management team have done an excellent job. We are only a degree and a half off the Arctic Circle, and they have been able to carry through gold for the winter with all of the mining equipment for commission and construction progressing well even at this time in the colder months of the year, being January and February. Construction continues to proceed, and they are looking forward to their first ore on site in July, having their first gold pour sometime in the last half of 2019. We applaud the efforts of management and the team at Eagle for having fought through a bit of a wet spring and some harder weather earlier in 2018, then really stepped on the gas in the last half of 2018 and into 2019 to work well. Page eight, a look at where our assets are performing. Obviously, Canadian Malartic remains the cornerstone asset with Éléonore in second place at about 7,500 zero cost royalty ounces being delivered to it. I will not go through the rest of the assets. They all range between sort of 1,000 and 3,500 ounces earned. In terms of silver, still getting a good GEO of silver ounces from Mantos and Mesa. Sikoli continues to contribute as well. A little bit of silver coming out of Malartic here. Some diamonds, obviously. A big portion of our quarter right now representing 11% of our GEOs and gold equivalent ounces of 8,400 ounces. This leaves us, as we look at the way that our revenue is split up, 69% from gold, 17% from silver, for a total of 86% represented by precious metals. If we add diamonds into that mix, we get to 97%, with only 3% coming from other metals. Pretty much pure precious metals, with a few diamonds as well. I am going to hand it over to Elif Lévesque to go through the impairment charge that we took for Éléonore now. Thank you, Sean Roosen. We have reviewed our assets for impairment indicators for the fourth quarter and recognized impairment charges of CAD 166.3 million, amounting to CAD 123.7 million net of income taxes. The most important component of that was on Éléonore for CAD 148.5 million and CAD 109.1 million net of income taxes. During the fourth quarter, Goldcorp issued updated reserve and resource estimates on the Éléonore gold mine, which tested a total loss of mineral inventory of over 2 million ounces. In January, Newmont also announced the acquisition of Goldcorp and deals valued at about CAD 10 billion. As a consequence, on February 13, 2019, Goldcorp announced an impairment of CAD 1.6 billion, representing CAD 1.4 billion net of income taxes on the Éléonore gold mine due to the decrease in the reserve and resources and reduction in the estimated fair value of Éléonore's exploration potential. Let's just go evaluate all the facts and circumstances and conclude on an impairment of CAD 123.7 million net of income taxes. We still believe that the exploration potential on the Éléonore project is there. It's just the valuation currently is not reflecting the potential. Going forward, based on Goldcorp guidance, we would still be expecting about 8,800 ounces of gold annually from this royalty. If we go to the next page 10, we have record cash flow from operating activities of CAD 82.2 million. Even with higher finance costs compared to previous year of CAD 13 million, we still had a pretty good year, and that's really a reflection of the chart that you see on the right that's kind of based on the record revenues. Basically from a very good year from Canadian Malartic, as well as reflecting a full year of results and cash margins from the Orion portfolio that was acquired in 2017. If you look at the net loss for the year, 2018 and 2017, both reflecting the impairment charges. We stand at a loss of CAD 105.6 million for 2018 and operating loss of CAD 113.5 million. If we do exclude the impairment charges, the operating income would be at CAD 52.8 million versus an CAD 18.6 million in 2017, which shows the growth in cash margin and the CAD 9.1 million gain that we made, as Sean said, on the buyback of the Brucejack stream. If you look at the adjusted earnings, that actually also reflects the positive impact that we just talked about previously, standing at CAD 31.4 million for 2018 compared to CAD 22.7 million for 2017. Page 11 gives you a breakdown of the revenues by our interest. I think a strong cash margin showing at 89% for the year 2018, which reflects almost 100% of cash margins from our royalty and 63% on the stream, as well as a 1.4% on the offtakes. Of course, the royalty interest being a majority of our interest that we hold reflects for 2018 a strong outcome of 89%. Going on to page 12, the results at a summary level, as we previously discussed, I would just like to draw your attention here on the realized gold price in Canadian dollars. We're standing at CAD 1,649 per ounce this year, and we have seen over CAD 1,700 an ounce in Canadian dollars at the end of 2018 as well as the beginning of 2019. This is quite a big increased level if we look at five years back when we just started the business in 2014, when we were mainly in the CAD 1,400 level for Canadian dollars. In USD, we may look at it more in line with the Canadian dollars we have seen for the increase since we started operations. Page 13 shows the stable and growing dividends that we've been declaring. We have declared another CAD 0.05 per share dividend for this quarter as well. Currently, the amount return to shareholders stand at CAD 86.3 million since our inception in 2014. Going on to page 14, we do finish the year with a very strong balance sheet. As you have seen, we have used the payment that we received from the buyback of the Brucejack stream to pay down our debt. We have been very disciplined about that in 2018, we had already started the program paying down our debt using our operating cash flows. With the Brucejack stream pay down, we actually reduced this bill as of January, the full revolving credit facility remains available at this point. With that, Sean, back to you. Thank you, Julie. As you know, we announced the normal course issuer bid for CAD 100 million, up to CAD 100 million. The normal course issuer bid is still active, leaves our discretion as to when and where we may purchase stock at any given time. We have purchased 1.7 million shares at an average cost of CAD 1,195 for a total investment of CAD 20 million under our normal course issuer bid that we take. Page 16 is a bit more detail on the Eagle project, as you can see some of the photos there. This is a 30,000 tonnes per day heap leach operation being built just north of Mayo in the Yukon, 64 and a half degrees latitude. Just to put things in context, precipitation at the Eagle mine site is the same as Phoenix, Arizona, it doesn't get a lot of snow, but it can be cold in January and February. For the average, the reserve life here gives us 10 years of 100,000 ounces through our royalty. We're quite keen to see this mine get up and going, right now construction is very much on track for gold production in the second half of the year as we move forward. Page 17, a bit more detail and color on the amendment of the Stornoway stream. We paid CAD 21.6 million to pay for the Stornoway balance sheet, we still hold a clear and concise stream of 9.6% of all the diamonds produced at Renard. What changed in the deal was the way the transfer price was structured. Transfer price is 40% of the sheet diamond sale price, or a maximum of CAD 40 per carat with no escalation. It's much easier and cleaner for us to understand. We make money on each and every diamond that is produced through our stream at that point in time. The ESG applies to the life of mine production over the entire diamond property, we've expanded the footprint, increased our cash margins on the stream. We also have better downside protection on any pressure that may come to bear on the diamond market itself. We also capture the exploration upside as well as creating the liquidity for Stornoway to carry out the optimization work needed at the mill site and to continue their underground development at this time. We see that as a pretty good win-win on that project. We look forward to 2019 being a pretty good year for Stornoway in terms of getting into- known in the underground and to see the time optimization of the mill process. Barkerville Gold, a large play here, over 2,000 square kilometers of mineralized contained here. Historic production in this camp has been north of 4 million ounces. For those of you who followed the story, we really got involved in a significant way in 2016. We increased our 2.25% royalty to 4% during 2018. We have an option to buy another 1% for CAD 15 million. On the project, the benefits to Osisko, of course, is that we're exposed to all the exploration in this land package. We've seen a significant amount of drill results with over 120,000 meters of drilling carried out in 2018, very much positive. The mine also carrying out test mining, which generated a little over 21,000 ounces of gold production last year, and is fully permitted to continue on with the main mining in 2019 and 2020. Optics on the development of the resource there, which currently stands at 1.6 million ounces of measured indicated, with another inferred resource there of 2.1 million ounces. Our overall resources, if you look at it just from an inferred level, sitting at about 3.5 million ounces there. More to come, one of the more exciting drill stories out there at this point in time. An increased royalty to 4% on that. In terms of our asset distribution on page 19, as you can see, we have over 100 assets in North America. Éléonore, Renard, La Mancha, Canadian Royalties being the top producers for us at this point in time, with Island Gold coming on strong with reported increased resource last week. A significant amount of assets in North America as we move forward. Our main asset in South America at this point in time is the Mantos Silver Stream. We also have Brazil 1% there. Others that are outside of North America would be El Pachón, Gualey and Casilda that are between- Page 20 is just a graphic representation of that. We have over 130 royalties right now, with streams and precious metal offtakes included within that number, 103 in North America, nine in South America, and the rest mostly in Europe and Australia. The simple story on Osisko at this point in time, very strong balance sheet between our capitalized cash on hand and our portfolio of equities. We have more than CAD 1 billion available for investment. We continue to generate strong cash flows. Page 22. Before I summarize, I just want to say thank you to Mr. André Gaumond, who has served with the board for a little over five years since we acquired Virginia Gold and the Éléonore royalty. André is taking his retirement from the board right now. I thought with Elif, I would be very remiss because he's been hunting in several jurisdictions as we speak. I look forward to working with André as we go forward. André pioneered the Éléonore discovery in the James Bay area and really set the stage for discovery and development in a territory that most people had shied away from prior to André carrying out the successful discovery of Éléonore there, and Goldcorp subsequently building that mine and setting a beachhead to a brand new mining camp that we think will be around for a long time to come. We also have the retirement of Pierre Chouinard because he has been issued, he's assumed the role of Executive Vice President of Strategy and Business Development at AngloGold. Pierre was previously the nominee for the Quebec depot on our board, and a legal advisor at Rio Tinto. We're very excited to see Pierre in his new role, and we look forward to working with Pierre as he takes on that role, and it should be an exciting time for Pierre, and he's done a great job helping us with his insights and his long history in Quebec, and knows our team very well. We wish him luck, and hopefully his fortune will be ours as well. The numbers for the day, obviously, the cornerstone assets in Osisko being Canadian Royalties and Éléonore, and the attributable ounces this year of over 80,000 ounces, looking for 85,000-95,000 GEOs for 2019. Dividend yield is currently at about 1.5%. I think we've demonstrated that our accelerator model is starting to provide benefits to us, generating significantly higher returns on our royalty and stream acquisitions through that model as we move forward. As we see a lot of opportunity in the current environment, at least for the theme for 2019, there seems to be a lot of consolidation discussion going on. We see streaming and royalties as part of the finance package to be incorporated in some of those transactions, as well as we hope to see more project finance come to be. I think that in 2019, we have a significant amount of opportunity in front of us for performance to our shareholders as we move forward. We're celebrating our fifth year of business. We're sitting at about a CAD 2.2 billion market cap now from an IPO at around CAD 700 million market cap. It's been pretty good growth all in all. We are cash flow profitable, and we make money every day of the week. I think where we're sitting right now is that Osisko is one of the stronger companies in the space as we move forward with our business plan for 2019. At that, I will open up for any questions that we may have regarding 2018 year-end. At this time, I would like to remind everyone that in order to ask a question, please press star, then the number one 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 Dan Rollins with RBC Capital Markets. Your line is open. Putting you through. Yeah. Thanks very much, Sean. I'm just wondering if you'd provide a little bit of color around the strategy of the company going forward. Obviously, it starts to evolve here as you start to build the base. My first question on that is, with respect to the incubator model, realizing that you have done some deals through Equity that have gotten you some pretty nice royalties. You also continue to take equity stakes without royalties. Is there a thought process of what differentiates between buying an equity stake in a company versus taking an equity stake and then actually clipping that royalty coupon as well? I'm just wondering if that's going to change, and you're going to get a little bit more aggressive and start to say, "If you want money, we're going to need a royalty, and here's some equity as well. The only equity position I think that we own where we didn't have a royalty, we actually earned a financing right. Typically speaking, our equity investments are tied to either a royalty opportunity or a project financing opportunity. To my knowledge, we've not issued too many equity positions. IGF and a couple of smaller stuff, which were sort of chip shots to set the stage on an exploration story. Typically, we'll stick to our strategy of equity as a means to an end in terms of setting the stage for other project financing or royalty streaming opportunities. I don't think you'll see us do a lot of straight equity that's not incorporated in the deal. The big equity deal that we did do last year was CAD 50 million into Victoria, which was tied to a CAD 98 million acquisition of a 5% royalty on the Eagle project subsequent to that. We did put some more equity into Barkerville, but we also have a 4% royalty with the right to go to 5% on that project. We'll continue to stick to that theme, Dan. Our equity, as we say, is part of a package and a way to an end. Even on these smaller deals, we see the CAD 2.5 million, CAD 3.5 million bucks here or there. They tend to have a financing link to them through that equity. We just don't see it when it's press released. That's correct. Yeah. We typically have a ROFR or some other financing right. That's great. Then just, obviously, there's struggle for small single-asset companies. There's struggles for development stage companies. You seem to have built yourself a bit of a portfolio of high-quality projects in Canada. Is there any thought process of trying to massage the various equity vehicles to put themselves together to create something with a little bit of critical mass, once one gets into production, and then you can start to lever it, and then sort of use that as a growth vehicle, and then you can repeat it through going down the road? I don't think I'd want to get into anything specific on- Not specific. Corporate transactions. Just your opportunity on that, yeah. As a general trend, I think that we're all looking at the cost of running a single-asset public company and trying to manage that G&A exposure and to consolidate expertise and focus on getting money into the ground. As a general theme, the answer is definitely. We do see advantages there, but key criteria to all that is access to capital. Our strategy is twofold. We like to be at the very beginning of an exploration where we own royalty and an equity. Then we also like to be in the last financing strategy, which is essentially coming through the time value curve out the other side, where we're part of a fully financed allocation. Those are our two main drivers. Anything in between there that would involve consolidation to the advantage of those outcomes, we would be supportive. I would say pretty much to first principles about how we earn our royalty and get paid on the equity as we did in Arizona or in the case of Victoria, where we're part of the project financing on the last financing strategy. Okay. Last one from me. Just on the return of capital to investors. With the share prices that are coming off the lows of late last year, are you still committed to completing the share buyback? Number 2, depending on what your deal flow is a potential dividend increase in the cards here for 2019? Well, being a shareholder myself, I always like a dividend. In terms of our use of capital this year, there's a bit of a target-rich environment out there. There's decision product process to decide whether we buy our own stock or whether we're investing in something else will be opportunity-driven. If we have better returns on a growth story that we can bring onto the balance sheet, we'll be focused on that. However, if we feel that our stock is undervalued, we will act as we did last year in terms of purchasing our stock back. I think that's the best use of shareholder capital. We think we were pretty effective last year on the fifth. We're very happy to see the share price rebounded up about 45% from our lows of last year, this year. We're happy to see that valuation coming back into the marketplace, which is more in line with our belief system of what the asset base at Osisko should be earning in the marketplace. It was opportunity driven depending on what we have in front of us. Okay. That's great. Appreciate the color. Good luck in 2019. Thank you. If you would like to ask a question, please press star, then the number 1 on your telephone keypad. French. Your next question comes from the line of Kerry Smith with Haywood. Your line is open. Thanks, operator. When you went through your assets and looked at the write-down on Éléonore, what was the thought process as it relates to Amulsar with what's happening over there? Could you just remind me what your book value is on that asset? The thought process on Amulsar is it's in a delayed pattern, but I'll defer to Hélène, who's more knowledgeable of these things than I. Yeah. As you know, we have two interests in the Amulsar project. We have Stream and offtake. Together they're about CAD 150 million. We hold this asset in USA. The thought process when we did the acquisition, as you know, we still had some time ahead in terms of the consulting and construction process. It was about a year. I guess the thing is right now, what we were really waiting on was what was happening with the government over there as they went through elections again in December. Now actually, really the popular person in terms of the PM was elected, and so far what we're seeing is some movement in terms of trying to get the project going. Of course, it still depends on the speed of how things will go through. So far what happened, what we've seen is that they've elected a third-party consulting company just to go through their impact again overall. We think that process should probably take about two to three months, and we're hoping that with the new government in place, things will take up a little bit of momentum speed. Of course, that's going to be a project that we're going to be following very closely in 2019. Just for clarity's sake, it was CAD 115 million, not CAD 150 million. Oh, sorry. 115, Sean. Okay. Thank you. Thought it was 150. I appreciate that. Thanks very much. Yeah. The Stream and offtake. The offtake is very small. Correct. Okay. Thank you. There are no further questions at this time. All right. If there are no further questions, I thank everybody for their time this morning. Good luck out there, and we appreciate any inbound. If you didn't get a chance to ask your question now, please give us a call at your leisure. We are happy to answer questions at this point. Good luck everyone. Thank you. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.