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. Please note that this call is being recorded today, February 21, 2019, at 10 am Eastern Time. Today on the call, we have Mr. Sean Roussen, Chair of the Board of Directors and Chief Executive Officer of Osisko Gold Royalties Mr. Brian Coats, President of Osisko Gold Royalties and Ms. Elise Lebeic, 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 Roussien. Mr. Brian Coates, that is titled 2018 Q4 of Your End Results. I'm going to start on Page 3. I want to make sure everybody has looked at the forward looking statements prior to that. 2018, an interesting year in terms of market conditions, gold price and the disconnect between capital market and commodity price. Certainly, we're enjoying an increased share price from last year with market trading around the CAD14.50 rate, up from a little CAD9 change in 2018. I like from Q4 2018, a little over 20,000 gold equivalent ounces, earned in the 4th quarter revenue of 30,700,000 dollars creating net cash flow from operating activities of $18,600,000 We did that, when we take a write down on Eleonore, which resulted in a $0.73 per share impairment. And we will talk more about that when we get into Elliot or Emily who will give you more details on that. Adjusted earnings for the year at $13,000,000 or $0.08 per basic share. Overall, for 2018, a record of just over 8,500 ounces produced with a significant margin of just 190 percent. Record revenues of CAD127.66 million. Cash flows, again, a lot high of $82,200,000 The loss, of course, attributed to the company through write down of $105,600,000 which is special write down, which we'll get into later. We also repaid $123,500,000 on our revolving credit facility, meaning that we are completely paid down we will be paid down in 2019 as well. And we received $159,400,000 from credit and exploration to repay and purchase the back of the stream that we had acquired during the Orion transaction in 2013. For our next profit to Osisko shareholders of $9,100,000 So all in all, we did return to that considering the amount of time that we were invested. We also acquired 5% net smelter return on the Eagle project overlying Victoria and the Yukon. We'll have a look at that a little bit later in the presentation. Another item from 2018 was the incentive for our stream, where we invested an extra 21,600,000 dollars to significantly improve the economics to the Cibco shareholders on that asset well, which we'll touch on in more detail. We acquired 1.75% royalty $20,000,000 on the Cariboo property held by Barco Road, only increasing our overall net profit return on that property to 4%. We also have options to increase to 5%. Subsequent to December 31, we repaid the remaining $30,000,000 of reserves on our revolvers, meaning that we now have a full $450,000,000 available to us on our revolver if required. We also acquired 185,000 shares for $10,200,000 at an average price of $11.95 of the historical common stock, which will be canceled and then returned to treasury. We earned a quarterly dividend of $0.05 per common share payable on April 15, 2019, and bringing us to the record change of March 29, 2019. If you want to qualify for that Q and A. On Page 5, we're actually in terms of gold equivalent ounces in our guidance. Last year, we definitely outperformed in terms of our margins, and we were mid of our guidance at 8,553,000 ounces, up from 58,933,000 ounces in 2017. Our guidance for 2019 is 95,000 to 95,000 GEOs, and we're looking for about 88% operating margin, making it one of the highest in the sector. We did achieve 6 90% margins in 2018. In terms of production, mine production in Asia, we saw our key asset, which is 85% top line royalty at Biena Malarie top performing wells. The mine averaged just 700,000 ounces at 697,200 ounces. With gold and cardinal losses, 0 cost down to 2 fiscal royalties of 35,400 ounces, we're seeing a tax cost in the 1st quartile, with tax cost in the 1st quartile at $5.79 an ounce. And it is one of the best world world's best mine you should see between Valor and Rua Noranda with significant amount of time left back to go and sitting outside as they start to develop the Barnett portion of this project. And also there's been some significant rigor added a shot at CNG Spalarto, which will be going through these drilling prepared for mine development as we get further into 2019 2020. A little more detail on Eagle Construction, which is 1 by Victoria Gold, in which we own 15.5 percent of the equity as well as the 5% royalties on the asset. The project is now at 75% complete. The team there is a team of one next good job, nearly a degree and a half off the Arctic Circle. And they've been able to carry through over the winter with all of the mining schemes being fully commissioned and construction progressing well, given at the time of the quarter, month of the year, between January February, shipment production continues to proceed and they're looking forward to refer to our fab in July, having a first goal for sometime in the last half of twenty nineteen. And we applaud the efforts of management and team at Eagle for having fought through a bit of the wet spring and supported weather earlier in 2018. And that really worked on the gas in the last half of twenty eighteen and into 2019, it worked as well. Page 8, a look at where our assets are performing. Obviously, St. Vartic remains the cornerstone asset with Eleonore in 2nd place. About 2,500 Surpass will be out to take delivery to us. And I won't go through the rest of the assets. It already has a point for 1,000 and 3,500 ounces earned. And in terms of silver, still getting a good value of silver ounces from Mantos and Lassa. Volta continues to contribute as well. Had a little bit of color coming out of the market here on the timing, obviously. A big portion of our quarter right now representing 11% of our GEOs and Goldie Gold ounces, I think, 400 ounces. This leaves us, if we look at the way that our revenue split up, 69% from gold, 17% from silver for a total of 86% represented by precious metals. And if we had diamonds in the second we probably get to 97% but only 3% coming from other metals. So pretty much pure correct metal. I'm going to hand it over to Amit to go through the impairment charge that you took For Heli and Orno? Thank you, Sean. So we have reviewed our assets for impairment indicators for the Q1 with R and C and I's impairment charges of 160 $6,300,000 amounting to $123,700,000 net of income taxes. The most important component of that was on Eleonore for 148 $500,000 109,100,000 net of income taxes. During the Q4, Goldcorp issued updated reserve and resource estimates on dealing in our gold mine, which led to a total loss of mineral inventory of over 2,000,000 ounces. In January, Newmont, Hoka announced a position of Goldcorp in a deal value of about $10,000,000,000 As a consequence, on February 13, 2019, Goldcorp announced an impairment of US1.6 billion dollars representing US1.4 billion dollars net of the income taxes on the Eleonore gold mine due to the decrease in research and resources and reduction in the estimated fair value of Eleonore Exploration Essential. Elvisko evaluated all the past and circumstances and concluded an impairment of $123,700,000 net of income taxes. We still believe that the exploration potential of the Eleonore project is there. It's just the valuation currently is not reflecting the potential. So going forward, based on both our guidance, we would still be expecting about 8,800 ounces of gold annually from this royalty. If you go to the next page on Page 10, we have record cash flow from operating activities of $82,200,000 And even with prior guidance compared to previous year of $13,000,000 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 in cash margins from the results in cash margins from the Orion portfolio that was higher than 2017. And if you look at the net loss for the year, 2018 'seventeen both reflecting the impairment charges we've granted, a loss of $105,600,000 for 20.18 and operating loss of $113,500,000 But if we do exclude the impairment charges, the operating income would be at RMB52.8 million versus an RMB18.6 million in 2017, which shows the growth in cash margin and the $9,100,000 gain that we made, as Sean said, on the buyback of the bootstrap stream. So if you look at the adjusted earnings, that actually also reflects the positive impact that we just talked about previously, standing at $31,400,000 for 20.18 compared to $22,700,000 for 2017. Page 11 gives you a breakdown of the revenues by our interest. And I think the strong cash margin showing at 89% for the year 2018, which reflects almost 100 percent of cash margin from our royalty and 63% on the stream as well as the 1.4% on the off base. And of course, royalty interest being a majority of our interest that we hold reflects for 2018 strong outcome of 89%. Going on to Page 12, kind of the results at a summary level as we previously discussed. I guess I would just like to draw your attention here on the realized gold price in the Canadian dollars. We're standing at C16.49 CAD16.49 per ounce this year, and we have seen over CAD1700 per ounce at the end of 2018 as well as the beginning of 2019. So this is quite a big, I guess, increased level if we look at last year's half. When we just started the business 2014, we were mainly in 14 100 levels to Canadian dollars. So in U. S. Dollars, we may look at it more in line. The Canadian dollars. We have seen increases since we started operations. Page 13 shows the stable and growing dividends that we've been declaring. We have declared another $0.05 per share dividend for this quarter as well. Currently, the amount returned to shareholders stand at $86,300,000 since the inception in 2014. So going on to Page 14, we do finish the year with a very strong balance sheet. And as you have seen, we have used the payments that we received from the buyback of the Brucejack stream to pay down our debt. We have been very disciplined about that in 2018, and we have already started from now paying down our debt using our operating cash flows. That with the group's tax stream to be dry down, we actually reduced this as of January. So the full credit facility remains available at this point. As you know, we announced the normal course issuer bid for $100,000,000 up to $100,000,000 The normal course issuer bid is still active and we are discretionary as well as where we may purchase stock at any given time. We have purchased 1,700,000 shares at an average cost of $11.95 or a total of $20,000,000 under a normal course issuer we had to retake. Page 16 is a bit more detail on the civil program, as you can see some of the photos there. This is a 30,000 tonnes per day deep reach operation being built just north of New York and the Yukon, 64.5 degrees latitude. Just something in context, precipitation at diesel mine site is the gives us 10 years of 100,000 ounces to our royalty. So we're quite keen to see this mine get up and going. And right now our construction is pretty much on track for coal 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 stored away streams. We made stored away balance sheet and we still hold at a clear and concise stream of 9.6% of all the diamonds produced at Renard. What changed in the deal is the way to transfer price structure. We're now transfer price is 40% of achieving the item sale price or a maximum of $40 per carat with no escalation. So it's much easier and cleaner for us to understand. And we make money on each and every diamond that is produced through our stream at that point in time. In Asia, we applied to the length of mine production over the entire diamond property, so we've expanded the footprint increased our cash margins on the stream and we also have better downside protection on any pressure that may come to the various science market itself. And we also capture the exploration upside as well as create the liquidity for storing right here, the optimization work needed at the well site to continue their underground development at the time. So we see that as a pretty good win win on that project, and we look forward to 2019 being a pretty good year where it's going away in terms of getting into some of the better grade zones in the underground and to see the time optimizations planned in the mill process. Parkerville Gold, large play here, over 2,000 square kilometers of mineral rights contained here, historic production in this campus in north of 4,000,000 ounces. And for those of you who follow the story, we really got involved in a significant way 2016. We have a 3rd year 2.25% royalty to 4% during 2018. But we have an option to buy another 1% for $13,000,000 On the project, the benefits just as we go to the course of the merger goes to all the exploration in the plant package. We've seen significant amount of growth results with over 120,000 meters of drilling carried out through the last 2018 very much positive. The line also carried out that mine was generated a little over 21,000 ounces of gold production last year and is fully permitted to continue on with the CCC main mining in 2019 2020 and optics on the development of the resource there, which currently stands at 1,600,000,000 ounces of beer indicated with another inferred resource there of 2,100,000 ounces. Overall resources, if you look at it just from a inferred level sitting at about 3,500,000 ounces there. So more to come, one of the more exciting growth stories out there at this point in time and the increase we're achieving for us on that. In terms of our asset distribution on Page 19, you can see we have over 100 assets in North America, Elianor Bernard, Lamaque, Canadian Malartic being the top producer for us at this point in time. With Island Gold coming on strong, we reported an increase in the quarter last week and 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 Manto Silver Street. We also have a broad up 1% there. Others that are outside of North America would be faster, royalty and fill them. They're continuing to form page 20. It's just sort of a graphic representation of that. We have over 130 royalties right now with streams and French and metal off base included within that number, 103 in North America, 9 in South America and the rest mostly in Europe and Australia. So the simple story on Osisko at this point in time very strong balance sheet between our acquisition line cash on hand and our portfolio of equities. We have more than $1,000,000 available for our customers and we continue to generate cash flow. Page 22, before I summarize, I just want to thank thank you to Mr. Andre Goval, who has served with the Board for a little over 5 years since we acquired Virginia Gold and the Eleonore royalty. Andre has taken its retirement from the Board right now. And outside with the very spirit because it seems that nothing in several jurisdictions as we see. And I look forward to working with Andre as we go forward. Andre, prior to the Eleonore discovery in the James Bay area and really set the stage for discovery and development in a territory that most people have shied away from. Barring Andre and carrying out the successful discovery of Eleonore there and Goldcorp subsequently will be done by setting a beachhead. Through a brand new mining camp that we think will be around for a long time. Well, not the requirement of Perip here, Shirdar, because he has a big initiative. He's assumed the role of Executive Vice President of Strategy and Business Development at AngloGold. Pierre was previously the nominee for the Cancadine Bow on our Board that put in a legal adviser at Rio Dinto. So we're excited to see Pierre in his new role. 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 insight and a long history in TRIMAX and knows our team very well. So wish you luck and hopefully his fortune will be honored as well. Now we're ready for the day. Obviously, the cornfield assets in fiscal being in Saint Bernard and El Indore, and the contributor to the board houses this year of over 80,000 ounces, for 85,000 to 95,000 GEOs for 2019. Dividend GEOs 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. And as we see a lot of opportunity in the current environment, at least for the team for 2019, There seems to be a lot of colonization discussion going on, and we see streaming and well needs as part of the finance package We've incorporated some of those transactions as well as legal to see more project finance come to me. And I think in 2019, we have significant amount of opportunity in front of us through our performance to our shareholders as we move forward. We're celebrating our 5th year of business. We're sitting at about $2,200,000,000 market cap now, an IPO at around $700,000,000 market cap, so it's been pretty good growth all in all. And we are cash flow profitable until we make money every day. So I think where we're seeing right now is just those that's one of the stronger companies in the space and we move forward with our business plan into 2019. And with that, I will open up for any questions that we may have regarding 2018 year Your first question comes from the line of Dan Rollins with RBC Capital Markets. Your line is open. Your line is open. Your line is open. Correct. Sean, I was just wondering if you could provide a little bit of color around the strategy going forward. Obviously, it's difficult here as you start to build the base. And the 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, But you also continue to take equity stakes with that royalty. Is there a thought process of what differentiates between buying an equity stake in the company versus taking an equity stake and then actually clipping that loyalty 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 like, if you want money, we're going to need a royalty and here's some equity as well. Yes. The only equity position I think that we owe where we didn't have a royalty, we actually earned the financing right. So typically, our equity investments are tied to other royalty opportunity or project financing opportunity. But to my knowledge, we've not issued too many equity positions. IDM has become the smaller stock, which we're sort of chip at the stage of an exploration story. But typically, we'll pick our strategy of equity as a means to an end in terms of setting the stage for another project financing royalty streaming opportunity. 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 $50,000,000 in the Victoria, which was tied to a $98,000,000 acquisition of a 5% royalty on the Ivo project. That's good to that. We should put some more equity into Barkerville. We also have a 4% royalty with a great good 5% on that project. So we'll continue to stick to that team then. Then. Our equity, as we say, is part of a package and a way to Okay. So even on these smaller deals we see like the $2,500,000 $3,500,000 here or there, they tend to have a financing linked to them through that equity. We just don't see it when it's press release. That's correct. Yes, we have a motor or some other financing, right? Okay. That's great. And then just, obviously, there's struggle for small single asset companies or 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 leave it and then sort of use that as a growth vehicle and then you can complete it through going down the road? I don't think I'd want to get anything specific on Not specific. Not a specific question. Opportunity on that, yes. Yes. It's 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 and A exposure and to consolidate expertise that help us on getting money into the ground. So the general team, the answer is definitely. We do see advantages there, but my key criteria to all that is access to capital. Our strategy is twofold. We like to be at the very beginning of each nation where we don't go out debt and equity. And then we also like to be in the last finance strategy, which is essentially coming through the value time value curve of the other side, where we're part of a fully financed package. So those are our 2 main drivers. The changing in between there is with the consolidation to be advantage of those outcomes. We would need support. But I would say pretty much 2 first principles about how we are in our current royalty and the equity as we did in Arizona. Okay. And then last one for me. Just on the return of capital to investors, with the share price sort of coming off the lows of late last year, are you still committed to completing the share buyback? And number 2, depending on what your deal flow is, is a potential dividend increase in the cards here for 2019? Well, being a shareholder myself, though, we'd like the dividend. In terms of our use of capital this year, there's a bit of a target rich environment out there. So this decision process to decide whether it was higher 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 on the balance sheet, we'll focus on that. However, if we feel that our stock is better value, We will act as we did last year in terms of purchasing our stock rep. We really invest the best use of shareholders' capital. We're pretty effective last year on the and we're really happy to see the share price rebounded up about 45% or below the last year this year. So 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 might have Cisco should be should be earning in the marketplace. As I said, it will be opportunity driven depending on what we have Your next question about question comes from the line of Kerry Smith with So when you went through your assets and looked at the write down in Eleonore, What was the thought process as it relates to the malls or what's happening over there? And could you just remind me what your book value is on that asset? Yes. As you know, we have 2 interests in the Amalftar project. We have stream and the outtake. And together, they're about $1,000,000 So we pulled it up this in USA. And the whole process was when we did the acquisition, as you know, we still have some time ahead in terms of the construction process. It was about easier. And I guess the thing is right now, what we were really waiting on was that was happening with the government over there. Went through elections again in December. And now actually, really, the public person in terms of the PM was elected. And so far, what we're seeing is that the 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 we've elected a third party consulting company just to go through their impact again overall. And we see that program should probably take about 2 to 3 months. And we're hoping that with the new veterans in place, SIM will take up a little bit of normal speed. But of course, that's going to be a project that we're going to be following very closely 2019. Just for my earnings, it was 115,000,000 dollars not 150,000,000. I'm sorry, 115,000,000, Sean. Okay. Thank you. Thought it was 150. I appreciate that. Thanks very much. Chance to ask a question now. Please give us a call at your leisure. We are happy to answer your questions at this point.