Earnings Call: Q2 2018

Aug 3, 2018

Good morning, ladies and gentlemen, and welcome to the Osisko Gold Royalties Q2 2018 Results Conference Call. After the presentation, we will conduct a question and answer session. Please note that this call is being recorded today, August 3, 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 and Mr. Brian Coats, President of Osisko Gold Royalties. I would now like to turn the meeting over to our host for today's call, Mr. Sean Roussien. Mr. Sean Rosen, President, Considine, Mr. President, Mr. Brian Coats, President, So we'll be using our PowerPoint that's listed on our website this morning, I'd like to welcome everybody to the Q2 financial results conference call. And thank you all for attending. The PowerPoint has a forward looking statements page at the front of it that I'd like everybody to refer to as we will be looking at having some forward stated in this presentation. So as we look forward to the rest of the year 2018, The Q2 has been a very good quarter for Osisko, with over 20,500 GEOs earned, 89% increase since the Q2 of 2017. Cash flows provided by operating activities at CAD19.7 million compared to $14,100,000 last year for the same quarter. Adjusted earnings of $3,700,000 compared with CAD7 million for last year, giving us CAD0.02 percent of basic share. A repayment of CAD51.8 million for our revolving credit facility. We also closed a couple of significant deals, 5% of Sarawoga, Victoria's Eagle project for CAD98 1,000,000 and the purchase of CAD50 1,000,000 worth of the equity for the company. We also secured a deal with Softco Resources with a senior secured Cereal Restream facility, up to 100% of the future silver produced from the Horn property located in Ruan Noranda, which currently has a mineable reserve of over 6,000,000 ounces globally. We also declared a quarterly dividend of $0.05 per common share. This is a continuation with our dividend policy, I believe, bringing up to 16 quarters in a row. In terms of where we are for the first half of the year, this brings our deal total to CAD330 1,000,000 of which CAD99 1,000,000 has been deployed in the first half of the year. So very busy year for us thus far. As we look at the gold equivalent ounces produced, we're on track for our guidance. I'm on to Page 4 now. We're looking at 20,000 ounces for this quarter, setting the stage for us to achieve 40,542 ounces in the first half of this year, looking good for our guidance, which is between 77,582,500 for 2018. Production and guidance at G and L and GEO is on Page 5. We expect that in the second half of the year should be steady production with increases through 2019 2020. Quite a bit of ramp up underway in different assets that we're involved in. So we're in a pretty good strong growth curve here. If you look at 2017, we had 58,900,000 2,000. So we're already for this year, putting a DNB between 77500 and 8200. So pretty fast track growth in the royalties phase. Page 6 includes a breakdown on asset by asset basis. Canadian Barrick is still leading the charge with 9,000 ounces for the quarter, Eleonore at 1660 in the gold side. On the silver side, Manto is at just under $1600 gold equivalent ounces, that's coming in stronger than expected at $11.53 On the diamond side, we have Bernard delivered about 2,900 ounces gold equivalent. And in other, we had Qualina delivered about 600 ounces. So all in all, we remain highly exposed to gold and silver, about 15% of our GEOs this year coming out of this quarter coming from diamond and only 3% from other metal. So all in all, still very good exposure to silver and gold and silver. Financial performance, I'm going to hand it over to Lily from here to go and take you through the financial performance for the quarter. Thank you, Shyam. So as Shyam mentioned, we had a very strong growth this year reflecting the Orion transaction from last year. So if you look at the revenues, our revenues went up by 79 percent versus the same period last year to reach $32,900,000 And if you look at the net cash flows and operating activities, they also went up by 40% to reach $19,700,000 for the quarter and this even after our interest payment of $7,900,000 which covers the period from November 2017 to June 2018, all the CNY300 1,000,000 convertible debentures we actually at the end of June this quarter. And I guess that this also reflects the increase in our cash operating margins and our lower G and A this quarter compared to last year's same period. If you look at the adjusted earnings, they stand at $3,700,000 this quarter compared to $7,100,000 last year. And the main difference really during the two periods is the higher finance expenses by $5,300,000 which is mainly for the $300,000,000 convertible ventures and non credit facilities. If you look at the results on Page 8, we had very strong operating results. As This actually reflects a 59% increase also with the cash margin. And in terms of the percentage right now, we are at 87%, which is still at a very high level and this will now take into consideration the 1% of the cash margin we get from additional media offtake agreements. If you look at our financial position, cash and cash equivalents stand at $188,600,000 and this is after our debt payments that we've done this quarter over $50,000,000 the payments that we've done on our Victoria transaction and the debentures of $7,000,000 that we closed for Falco. The debt stands at $4,190,200,000 and this is on a net basis after accretion and unamortized transaction costs and our investments stood at $336,000,000 and this reflects the fair market value as of June 30, 2018. So for us, I guess, it was very important to show in terms of credit facilities. You can see on Page 10, our capacity, which shows the $450,000,000 that we have on revolving. And of that, about $100,000,000 right now is dropped, but we still leaves us with an available $350,000,000 And I think we're going to continue reducing our debt facility as we generate cash flow from our operations. And if you look at our long term debt on a gross basis, we've gone from almost CAD500 1,000,000 to about CAD450 1,000,000 this quarter after our payment. And I think our goal is to continue to be reducing our debt position. Going on to Page 11. During the quarter, we distributed another $7,800,000 in dividends, bringing the total to date in conception to about $71,000,000 and we declared an CAD0.05 per share in dividend yesterday. And with that, Batya, Jean. Sure. Thanks, Elif. And in terms of the transactions, we the big transaction in the first half of the year has been the Eagle transaction from Victoria Gold for 5% royalty, which will generate somewhere between 8,000,000 to 11,000 ounces per year of 100% margin goal for us. The project is under construction. We visited site here in July. It's going well. It is a heap leach operation and located with road access about 45 kilometers north of Mayo in the Yukon, a very good jurisdiction. And I think that we have a pretty good feel that things are moving fast there, equipment's being delivered. And we think that this project is on track to deliver gold in 2019, somewhere in the second half of the year as we go forward. So this is one that is pretty much in the here and now and moving well with very experienced management and EPCM contractors fully deployed on-site. The Horn 5 Silverstream on Page 13. We have we obviously know this project quite well. It's located in Rouen and Ronde in Quebec, 6,000,000 ounces of mineable reserves at 2.37 grams. Looking to build a 15,000 tonne a day plus underground operation here. Feasibility was completed last year and currently in the IA and permitting process with our partners at Glencore. Good looking numbers in terms of what we're seeing in terms of upside potential there as well. Some strategic items have moved forward in the project. The site has been secured and the school that we had to relocate will be handed over and exchanged sometime probably by the end of September. As we move forward, so that project is in good stead. We think that that's going to be a long term asset with quite a long mine life as well located right here in Quebec. So a very quality asset and a good exposure for us. And the deal that we struck there is incremental deployment. So we're not deploying 100% of the capital on day 1. We're doing it on a milestone basis, which I think is gives us a significant advantage as we move through these projects. Page 14, cash flow asset, strong North American focus. I won't go through them all here, but as we move through the year, a lot of these assets are in ramp up. Bernard, Eleonore, Bruce, Jack and Ensler are all ramp up assets right now, and we're seeing good progress on bottom. We also have the Gibraltar stream at Pesico over in British Columbia. We also have a few other assets that are smaller pieces that have been moving well. Island Gold has been a strong performer, better than expected with Alamosa as the operator, and we see that moving quite well. Central Moma and Mentos, Mentos are a tough performer in South America at this point in time. And we continue to see all of the assets come along. We have long life assets that are relatively young in their life cycle. So this is a success foundation for success for some time to come. Page 15, the near and medium term cash flow assets. Again, we won't go into all of them, but we have a 1% royalty on Hermosa, which just got purchased by 7:30 in the 1st process of selling the 7:32. So that significantly advances that project. Barkerville Gold published a resource of a total resource of 3,700,000 ounces with 1,600,000 ounces that was being measured and indicated in the Q2. So that's moving forward. Victoria, we've already covered. Tulsa, we've already covered. We also have a 2% wild beef on the Upper Beaver project, which was consolidated when AgaNico purchased the other 50 percent of it from our friends at EMA. Windfall Lake has been a strong performer with quite a strong discovery and ongoing discovery as we look forward to that one. Underground test mining is underway there, and we've stuck about 1.6 kilometers of ramp down to a vertical depth of just under 200 meters already. So moving forward on that one as well. Some of the other ones, obviously, we operate well. Honestly, north and south is at the Canadian Malartic mine site. That is moving well and that's a stage for continued mine life on Canadian Malartic. Page 16, 100 and 4 assets in North America, 9 in South America and then up to a total of 136 assets spread out around the rest of the world, but most of our assets being North American based. So in summary, 137 royalties in total, 5 cornerstone assets, 19 of them in production, paying a dividend right now in excess of 1.6%, predominantly precious metals focus in North America and looking forward to hitting our guidance for the year between 77,500 and 82,500. Our equity book stands at $336,000,000 for cash on hand of $188,600,000 and our available credit at $450,000,000 bringing our available capital for deployment over $900,000,000 in assets available for us to work with as we continue to build out this business. We are very happy with the results thus far this is year 4 for us. We just celebrated our 4th anniversary as a company in June of 2018. So pretty strong progress and we continue to see lots of opportunity for us. And having done over $330,000,000 already this year, the company has been a big year. So we'll see where we go from here. On that note, I'd like to thank everybody for the call and open it up to questions. And your first question from Premier from the line of Dan Rollins with RBC Capital Markets. Go ahead. Your line is open, but you need to wrap. Yes. Thanks very much. Sean, I just wondering if you a couple of questions for me, but just on the first one. Can you confirm if in the 2018 guidance on gold equivalent salesproduction, how much is in there for Amylser this year? I don't really include anything in this year. Okay, perfect. And then just more bigger picture, now that you've had sort of the Orion package in the folds for a few quarters, and I know it's still pretty early given the long life nature of some of those assets. But which assets have sort of been performing better than expected? And which ones have you been a little bit more disappointed in? Well, I don't think that there's too many surprises for us in the mining industry. We've been around a while. We knew we were purchasing a fairly young portfolio of grandpa's assets. So nothing really surprised us. Some things have disappointed us. And we celebrate what goes well and we hope for the best for the rest. SASA has been a good one. CV has been good. And Stornoway has been performing relatively strongly for us. So we've had a there's some issues to sort out at Stornoway, but we're it's one of our top performers in terms of gold equivalent ounces for us right now. I think that the evolution of Fredium, as you know, we always had that as a latency. The company doesn't want to buy that stream back. So we've included that as just cash back. We haven't put that in our long term forecast at this point in time, but they've been relatively strong last quarter, and we continue to see good progress on the mine development there. So Manticos has been quite strong and we continue to see good progress on that asset. It's not one that a lot of people know much about. It was previously an angle asset, but the Orion team has gone in there and really had very good success at evolving that asset. So we're quite happy with both of those. And we did too in 2018 2019 were ramp up years. So we continue to have a patient hand and support where we can. Our goal is always to support these projects. We're experienced miners and we know that in the mining industry there's always something to fix. So that's our job and we're wide open. Okay, perfect. And then on the opportunity set, what are you seeing out there? Obviously, we've seen share price pull back here for the precious metal space, gold's come off hovering just over $1200 now. Are you seeing more opportunities coming through the pipeline? And if so, what's the competition for those opportunities look like? And that's it for me. Thanks. I think Victoria is a pretty good indicator of the stuff that we're seeing out there. I mean fully permitted project in the Yukon, we were able to team up with cash flow finance Orion and put together a package to get that project fully financed. So that's less money in kind of best case scenario, where we like the jurisdiction and a lot of the engineering and permitting issues are taken in hand. So that's been a really good one for us. And in an uptick market that might have been a harder deal. But the reality is there's not that many allocations of capital coming out of the equity space right now. So we're pretty busy and we're seeing quite good competition mostly from private equity on the project finance side. On the exploration side and development side, there's less competition because there's less people wanting to get involved in exploration assets. So we're picking our partners extremely carefully on exploration, while we are still doing some chip shots on assets that we have a belief system in on the exploration side. So we're seeing quite a bit there. I know they're smaller bets, so they're not they're not really things that they're going to have a short term effect on us, but they do set the stage for the future. So we're working the short term, medium term and long term, but it's a very good time to be a royalty and streaming company and to be trying we're still probably trying to focus on the Canadian and North American assets. And we work pretty hard at that piece of business. And that's kind of where we're hanging out right now. Great. Thanks. Enjoy the long Your next question about question comes from the line of Mike Jalonen with Bank of America. The win with Falco and the stream there, what would be the next incubator company to you might get a stream? Would that be windfall? Just curious. Like I don't like making forward statements, but I won't go that far. No deal is ever done until it's done. But obviously, providing capital to projects that are moving forward that have a near term opportunity to attain production is goal 1. But we're seeing quite a few things out there starting to move. Permits are coming together. And we're going to stay focused, as I say, trying to be nominally Canadian and nominally in brownfield camps where we can, where we understand the game. But I won't give you any specifics today. Okay. Thank you. Your next question by Prashanth Castillo comes from the line of Michael Sypico with Macquarie. Go ahead. Your line is open. Thanks. If I'm not mistaken, it looks like the share buyback activity dropped off a little bit in the second quarter. Could you talk a little bit, I guess, about your thoughts on that? And maybe more broadly, how you look at the valuation versus your peers versus the sector? And any commentary you might have around that? Yes. This quarter, we elected to really focus on the debt payment through a big repayment debt. So that was our priority for this quarter. We'll have it on a quarter by quarter basis. It is an ever changing equity market as we all know. So we're trying to size up what's going on in the equity space as are a lot of people. But at the end of the day, we run a pretty good business based on cash flow and assets, and we'll deal with equity at the appropriate time. But we're not not committed to any particular strategy given the volatility of the market. If we see an opportunity where we feel that repurchase of shares is the appropriate step, well, we will act. If you think our history, we always have an estimate place or close to the companies we're involved in for special events. Right now, I think we're sizing things up and we'll see how we go. But for us, we've been able to deploy capital and move the projects and we were able to pay back our $51,000,000 on our revolver. So I think that was a pretty good act for the quarter. Your next question by question comes from the line of John Tumazos with John Tumazos Independent Research. Go ahead. Your line is open. Congratulations and good morning. Thank you. If the gold price stays lousy or falls another $100 and lots of good opportunities drop in your lap because the other small companies, gold companies can't raise money, what are your plans to take advantage of those good opportunities, Sean? Well, as we said in the call, we have more than $900,000,000 of 3 board in our company right now For in streaming companies providing capital to our business, we try to do it at the bottom of the market. So we're very active right now in terms of identifying opportunities. It's extremely busy times for us and this is when we're all the extremely companies do their work. So we'll be there to provide capital and to provide support for companies that want to keep moving forward. As we know, these projects are longer term. The day to day gold price gets taken into effect. But at the end of the day, typically speaking, from permit to from discovery to permit and construction tends to be about 6 or 7 years now. So we take a slightly longer term view of the project cycle, and we try to deploy at the right time so that we earn a return for our shareholders. We had a very good time in 2015, which was our first big year for Cisco Gold Royalties. We did the Virginia deal, and we continue to move forward. 2016, the second half, we saw market strengthened. We didn't get too many deals done, but we were able to build from the success of 20 15 and apparent effect first half of twenty sixteen. We were able to incubate with Cisco Mining, Barkerville Gold, Fulfill Resources. So we continue to stay on our accelerator strategy, John, and to be there not only to provide capital, but also to provide technical and financial support to the company to get into the asset because we don't really want to just build royalties and streams on things that don't get built. We need these things to go into production. So that's our kind of our focus as we want to make sure that we're there for the whole cycle. John, I just I did mention that you're very independent on that balance announcement. So I'll just clear that up for everybody. Thank you, Sean. Sean. There are no further questions at this time. All right. Thank you, everybody, and have a good weekend. Thanks for taking time on a Friday to call. I really appreciate that. And give us a call if any other questions come up. We're not on vacation. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.