Earnings Call: Q3 2018

Nov 7, 2018

Good morning, ladies and gentlemen, and welcome to the Osisko Gold Royalties Q3 2018 Results Conference Call. After the presentation, we will conduct a question and answer session. Please note that this call is being recorded today, November 7, 2018, at 10 am Eastern Time. Today on the call, we have Mr. Sean Roosin, Chair of the Board of Directors and Chief Executive Officer of Osisko Gold Royalties Mr. Brian Coats, President and Ms. Elif Le Vaik, Chief Financial Officer and Vice President of Finance. I would now like to turn the meeting over to our host for today's call, Mr. Sean Roussel. Mr. Brian Coats, President and Madame Elif Lebraque, Chef de la Zerreuxantinasseur et Despres d'Art of Finance. Welcome everybody to the Q3 conference call. We're in Zurich today, so we may have a bit of sound quality issues in terms of the calls. But if we don't, we'll refer back to Montreal. As noted today, we have most of the management team with us today. A good quarter, again, within our boundaries of our guidance. 3 months ended September 30, 20,000 GEOs, 9 months ended 60,500 GEOs, so right down the middle of the fairway in terms of what we were expecting. Cash flow continues to come through at $20,000,000 this quarter, dollars 63,600,000 a day. Adjusted earnings are now at $5,700,000 for the Q3, bringing the year's total to 18,300,000 dollars GEO in Q3 was at 20,000 ounces, up from 16,000 16,600 in 2017 for the same quarter. We also reported 87% cash operating margin on our ounces to date with 60,548 ounces reported for the 1st 9 months operating. So we continue to hold our ground on our margins. Page 9 of the PowerPoint presentation that's on the website It gives you a breakdown on a by ounce basis sorry, by line basis. Obviously, Canadian Modics is by far strongest asset at this point in time with 8,930 ounces for the quarter. Eleonore at 2,000 ounces of CV and about 691 and Brucejack reported about 361. All the other assets are in between the 200 to 500 ounce range for the quarter. I think what's a good interest today though is that we're 71% of our royalties are in gold, 18% in silver and 8% in diamond. So definitely on the precious metals side and continue to dominate with gold assets. On to the next slide, sound performance from Canadian Malartic as we talked about, with mine having produced over 527,000 ounces so far in the 1st 9 months of the year, making it Canada's largest gold mine by production and the world's 12th as we sit today with the 1st quartile cost profile. It's also located in Quebec, one of the best systems in the world and continues to have exploration success and development success as they push forward on Barnett, Odyssey and East Malartic zones in the development program there. So continue to see good upside at Canadian Malartic. We're delivering here on growth and continue to be so 2017. We had 58,933 GEOs, with this year our guidance set between 77,582,500 and we're on track to make that happen. Revenues for royalties and streams, up 57% year on year for the 1st 9 months. So it's a pretty good growth cycle we're in right now. And I'm going to let Alyssa take you through the next couple of slides here. Thank you, Sean. So we have seen another steady growth in our revenues from royalties and streams in 2018, like Sean mentioned, at $31,400,000 for the quarter $96,800,000 for year to date, which is a 20% increase for the quarter and a fifty 7% increase for year to date compared to the same period last year. This growth is mainly due to another strong performance from our main asset, which is the Canadian Malartic Royalty and from the assets acquired last year like Mantos, Dasa and Renard Street to name a few. Same growth was also reflected in cash flows from operating activities reaching $20,600,000 for the quarter and $63,600,000 for year to date. The same period last year was affected by transaction costs related to the Orion transaction of $7,800,000 for the quarter and $8,900,000 for the year to date. But even when we exclude the impact of that, we're still looking at 132 percent growth in operating cash flows for the quarter and a 76% growth for year to date. Adjusted earnings, on the other hand, stood at CAD5,700,000 compared to CAD8 1,000,000 for the same quarter last year and $18,300,000 for the current year to date compared to $21,700,000 last year. We have seen an increase in gross profit this year and a considerable reduction in G and A, but the higher finance costs related to the interest expense on the 300 $1,000,000 debenture resulted in the lower adjusted earnings. So going to Page 9 of the deck, the gold price was under pressure during the Q3 of 2018 and pretty much in line with the same period last year for the 9 month period. Regardless, we had another strong quarter in terms of revenues from royalties and streams at 90% cash operating margin of 20 $8,100,000 for the quarter and an 89% cash operating margin of $86,600,000 for year to date period. Offtake interest provided the company with an additional $800,000 for the quarter and $4,100,000 for the year. With that, Sean, back to you. Thank you, Elyse. So we're on to Slide 10 now. Activities for Q3, most recently, the 1.75 percent NSR additional royalty that we purchased on the Cariboo property held by Barkerville Gold in British Columbia, Canada, giving us a total royalty there of 4% according to the new agreement. The company at Barkerville also has the option to ask to sell another 1% under the agreement. 2nd big item was the receipt from Crediting on the Brucejack. They didn't want to repurchase the stream, which is an option. The contract that we purchased from Orion last year, They will pay us we received notice of USD 118.5 million of roughly CAD 153.4 million on December 31, 2018, which will reinforce our treasury and give us some dry powder to continue to transact. We also declared a dividend of $0.05 per common share in the quarter. The record close to the digits of September 28, 2018, paid on October 15, 2018. Subsequent to September 30, we've done an amendment on the Renard stream, and I'll get Joseph to Laplan to take a quick pause at what that means. We also repaid CAD10 1,000,000 in debt, and CAD12.9 million and extended the maturity date by 1 year to November 14, 2022. So that's good progress there. And as we said, we've declared the dividend at $0.05 for next quarter as well to be paid on January 15, 2019. So on the stream repurchase, we've received a notice. This will give us a purchase back in, as I said, on December 31, 2018. Pretient had the option of doing this year on December 31 or in 2019. So they've elected to come early, which is probably good for us in terms of the investment opportunities that we see in the space as of today. Slide 12 goes through the Renard Diamond Stream amendments, and I'm going to ask Joseph O'Laplan to take you through what that means to the Sysco shareholders. Thanks, Sean. So subsequent to quarter end, the Sysco as part of the larger syndicate did enter into an amendment of the Renard stream as part of a larger comprehensive set of financing agreements that was done between Stornoway and its creditors. The total stream amendment was for an additional proceeds to Stornoway of $45,000,000 of which $21,600,000 came from the Sysco. And essentially, the main amendment to the contract was to the transfer pricing structure. So as you recall originally, the stream had a fixed $50 per carat transfer price. After this amendment, we have modified that to $40 a carat or 40%. So it's the lesser of those two amounts. And the other additional thing that we changed is that the stream now applies to all life of mine diamonds from the entire property, whereas previously it applied to life of mine diamonds from only the 5 timber lights that are part of the original mine plan. So, it's an important amendment for us. Ultimately, it better aligns us with Stornoway. We result with immediate increased cash margins on stream and increased cash flow. We had better downside exposure to diamond price and to over recovery of small stones from the mine. And just as a reminder, this comes effective October 2, that was subsequent to quarter end, but it will be reflected in our Q4 results. Page 13 goes through the increase in the royalty on the Cariboo land package in British Columbia. The royalty covers over 2,000 square kilometers, one of the more prolific gold belts in the world. And this is a campsite play with the strike length here of the main structural, 55 polymers. Benefits to Cisco, of course, is we had gained exposure to the plant package, which has been accelerating quickly in terms of knowledge of the project and the potential that we see there. The company published a resource update in the spring with about 1,600,000 ounces at 6 grams and Midrand indicated another 2,000,000 ounces at over 5 grams in the inferred category. So it's moving well. We see intensified drilling there as well as we unlock the geological knowledge that we need to figure this one out, but it's come a long way in a very short time. Page 14, just to summarize our investment thesis. So we have early opportunities, development opportunities and producing opportunities. And what this slide shows you is the time value of money as projects go through the various stages of derisking and evolution. So in terms of early stage things, we've tried to invest about 20%, 25% of our portfolio in this window. Good examples of that would be Windfall Lake when we purchased a $5,000,000 royalty on the company assets about 30 months ago. Terabu, which is the debarkable VGM mine and the Horn V asset that we initiated and we were a catalyst investor to incubate that company in 2012. And carry it forward with us through the evolution. Now these assets have moved through into and a lot of these assets are moving through the development stage, which involves feasibility studies, permitting and construction. And then the 3rd piece that we invest in is existing production opportunities like we did with Gibraltar and the purchase of the Orion mine finance tactics. So those are the three areas where we see our investment strategy playing out. And the latter 2, the development opportunities and producing opportunities represent about 75% of our investments to date, and we're stuck with that rough number. It will fluctuate sometimes, but it seems to work pretty well so far. Page 15 is an example of an early stage successful investment. We bought $5,000,000 worth of equity at Arizona Mining, and we purchased $10,000,000 we purchased a 1% well for $10,000,000 at the same time. This project has moved quickly with a $2,000,000,000 NPV, 100,000,000 tons of 10% zinc and a 20 year mine life production expected to start in 2020 and was acquired by South32 in 2018. The results for us is that we were able to get monetized in that and we had a net gain of $34,000,000 on the equity and the warrants. And we still repaid the royalty, which is a very significant value. So this was a relatively short investment for us with significant returns in the 1,000 of percent. Page 16 shows you our investment portfolio. We are heavily weighted to Canada with 75 percent compared to the peer group. We have been successful in Canada. As you know, our origins are in Quebec, where we had the Canadian market success. We continue with that strategy with a focus on downfield camps in good Canadian mining camp areas and jurisdictions where we think things can move quickly and get to fruition through our wealth and start the cash flow. Summary of the financial position, we have an available credit of $450,000,000 of which $100,000,000 is drawn, so $350,000,000 available there. Cash on hand is $137,000,000 for now, but we will be receiving another $150,000,000 at the end of the year. Long term debt, we've paid down some of it. We're now at $4.19 and our investment portfolio has value of $364,000,000 at the end of the quarter. Shares outstanding for the company right now outstanding 156,000,000 and our dividend is set at $0.05 And we will also take back, as we said, dollars 12,900,000 in debt this quarter and $51,800,000 in Q2. So continue to make progress on that front. Page 18 gives you the escalation of the dividend since we started this company 4.5 years ago with over $78,500,000 return to shareholders in that period. We're currently yielding just under 2%, which gives us one of the highest yield dividends in all the mining categories. Page 19 is the investment opportunity. We're trading at a 70% discount to our peer group of Franco and Randgold right now at 0.97x NAV. So therein lies the opportunity for shareholders at this point. We feel that that gap will close. We had a bit of noise, a couple of ramp ups earlier in 2018. But I think that as we fast forward, most of these things are turning the corner and we should have a lot less to talk about in third party assets as we get further into the piece. In terms of other things we did this year, we've also purchased the 5% royalty on Victoria Gold's Yukon Project Eagle. And I think that's going to be a good asset for us next year. Construction is on target there moving forward as well. On Page 20, we'll give you a few swatches here. I think I've covered most of this in the presentation. But at the end of the year, assuming that our friends have put in, execute their buyback, we would have over $280,000,000 in cash available for future investments in addition to our undrawn credit facility. So lots of ability to get things done, and we continue to work hard to add to our portfolio. On that note, I'd like to open the session up to questions. And please feel free to ask questions either in French or in English. We will answer for it. All right. Well, it looks like we've got everybody covered. If there are any more questions, please feel free to give any of us a call. Our telephone numbers are available on the website, and we'll be glad to take up any questions that didn't make it into this call. So thanks very much, everybody. Merci beaucoup.