Earnings Call: Q1 2018

May 4, 2018

Good morning, ladies and gentlemen, and welcome to the Osisko Gold Royalties Q1 2018 Results Conference Call. After the presentation, we will conduct a question and answer session. Please note that this call is being recorded today, May 4, 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 Rouson. Welcome everybody to the Q1 conference call for financial results for the Q1 of 2018. We're going to be following a PowerPoint that's found on our website called Q1 results. There is a disclaimer page on the front of this PowerPoint. We will be seeing forward looking statements, and I would refer you to that statement to further disclaimer if required. So we want to start the call today a little bit different than usual. Given that our friends from Barkerville have published their main resource yesterday, the best question of the day will be receiving a pair of Barkerville gold uplinks. So on to the main event. For the Q1 of the year, we had 20,000 ounces of GEOs, gold equivalent ounces, which fits in with our annual guidance of 77,000 to 82,000 ounces of GEOs. Cash operating margins were at 91%, the highest in the precious metal sector. And we generated DKK 29,500,000 in additional cash operating, and we also had from our offtake agreements of $2,400,000 delivered. Record cash flows from operating at CAD 23,300,000, a 94% increase over Q1 2017. We also executed the investment of CAD148 1,000,000 of Victoria Gold Eagle project in the Yukon, dollars 98,000,000 of that purchased a 5% royalty, which will deliver 10,000 ounces per year of gold plus. So very significant add to our asset base and a Canadian asset fully permitted under construction as we speak. We were also able to convert the Matilda gold offset to a royalty of 1.65 percent into a stream, sorry. And we modified about CAD 25.6 $1,000,000 of equities, realizing a realized gain of $15,500,000 And one of the things that I do want to highlight today is that from the investment in our accelerator companies since we started in 2014, we have harvested over $70,000,000 of realized gains and our equity book still remains at just under $400,000,000 So with that, both expert returns and a very, very much appreciated increase in value in our within the asset base of our accelerator companies. We've also earned several royalties through our accelerator model that has about a $90,000,000 cost base and probably has a market value in excess of $200,000,000 as we sit today. So the Accelerator model has really outperformed most of our traditional royalty and streaming opportunities, and we'll be going to further highlight that as we get further through the operating year 2018 as to how the average returns are working on that model. We also repaid $32,000,000 on our revolving credit facility in April. We distributed $7,800,000 to our shareholders through our 15th royalties sorry, our 14th consecutive dividend payment. And right now, we set a 1.6% yield, which is near the top of all companies in the gold mining space. We repurchased 1,600,000 shares at $12.65 And we continue to be believers in our own stock. And if the market devalues our stock, we are buyers of our own stock. And we believe strongly that we are in a very low valuation period. So on the theme of buy low and sell high, I would encourage everybody on the call today to have a serious review of the underpinning value within Osisko Gold Royalties and maybe share our view on the value gap that exists in the marketplace today. Moving on to Page 4, we've gone from 10,000 ounces in Q1 2017 to 20,000 ounces in Q1 2018, 100% increase year on year. Our guidance right now is for 77,000 to 82,000 ounces for the year of gold equivalent ounces, and it's giving us one of the strongest growth profile in the precious metal royalty and streaming space. Page 5, you can see the evolution. We started out our 1st full year of business with 2015 at 3,000 ounces. We finished this year at just a tick 159,000 ounces and we're 7,782,000 ounces for 2018. Page 6 basically gives you a breakdown of how our assets work. Obviously, we have some very big assets here, Canadian Malartic, by far one of the most valuable assets in the royalty space in the world. And Canadian Malartic continues to strengthen with adding resources and reserves whilst in the Odyssey area in East Malartic pit. So we see it as a growing asset, and it continues to get stronger and stronger. Tain Malartic is now ranked the 12th largest gold mine in the world, the largest gold mine by production in Canada. Last year, it was 17th, and it's moved up the ranks by 5 this year. Eleonore, Seabee, Moosejack, Island Gold, Veza and the combination of other producing assets has taken us from the 30,000 ounces to 59,000 ounces, most equivalent. As you can see, our split, we are 69% gold, 16% silver and we have 11% in diamonds and just 4% in other minerals. So dominantly gold and silver business as we talk about how we fit into the royalty and streams space. Cash on hand and net cash flow from operating activities, for this year, we had CAD 23,300,000 and adjusted earnings, we had CAD 8,900,000 for the quarter. On Page 8, I'm going to hand it over to Elif Voila Levesque, our CFO, and she's going to take you through the Q1 results from the financials. Thank you, Sean. Like Sean mentioned, we had a very strong quarter and the results mainly reflect the impact of the addition of the Orion portfolio and increase in the cash margin. We did see a 94% increase compared to the same quarter last year ending at 23.3 percent net cash flow from operating activity and that really reflects an increase in cash margin. And if we do look at the adjusted earnings, we do actually see the impact of the increase in gross profit, partially offset by higher finance costs and also higher due to the reduced G and A. And in terms of the GEOs, you will see again, we have almost doubled compared to the same period last year. And the revenue is also seeing the increase with the effect of the Orion portfolio. Our cash operating margin stands at 91%, looking at royalties and streams compared to the CAD17 1,000,000 same period last year. For the year, we're probably looking at more of an average of 87%. In addition to the cash operating margin from the world business teams, we also get a 2.6 percent of the margin from the offtake. If you look at those agreements more on a financial settlement equivalent basis and they do add a little bit on top of what we would see from our royalty stream. So the net R and A during the quarter stand at CNY 2,300,000 compared to a CNY 4,100,000,000 last year for the same period. Looking at our financial position on Page 9. Cash to cash equivalents were at $333,000,000 for the year quarter ending March 31, 2018. And if we look at April 30, we're at ZAR 205,000,000, which reflects the payment of ZAR 32 1,000,000 on our debt facility and the payment of ZAR 99 1,000,000 on Victoria's deal. So our debt also shows a reduction of DKK 32,000,000 when looking at April 30 numbers. So our credit facility right now stands at about DKK 117,000,000 and investments at DKK 351 DKK351 million as of the end of March 31 and DKK32 million as of April 30 with the addition of the investment made and Victoria as well. Thanks, Elyse. So obviously, balance sheet is in great shape. We have quite a bit of liquidity, quite a bit of firepower on our balance sheet. So we are able to continue on and look for valuable transactions in 2018, and we are in a position to execute if we see fit on investment that looks like it meets our criteria. On Page 10, we are on our 15th consecutive quarter of returning capital to shareholders. We believe that this brings a level of discipline to how we run our business. We're very proud to be one of the companies that paid a dividend in the Q2 of existence from the start of this company in June 2014. One of our priorities was to be a top end dividend payer within the space, and we're currently yielding 1.6% to the market, which is within the top 5 companies in the space in terms of dividend yield. So not only do we have good underpinning asset value, we are also paying everybody to stay with us in a very aggressive fashion compared to the rest of the space. Page 11, I want to go through the acquisition that we executed with Victoria Gold, our new partner. We currently own 50.5 percent of the company, and we have a 5% top line royalty on the asset. It's an asset that is fully permitted and currently under construction. John McConnell and his team are highly capable people. They've built lots of mines in the North before. I met Mr. McConnell when I worked at Nano Civic back in the 80s, and he was the mine manager then, which was on Baffin Island. Couldn't be a better team to operate in the Yukon than John McConnell and his crew. We financed the company for a $748,000,000 up a $500,000,000 overall project financing. So the project is 100% financed now. And it's located 85 kilometers south north of Mayo, which is a well known mining district. It's a drive to site, not a fly in, fly out, has reserves of 123,000,000 tonnes at 0.67 grams for a total resource of 2,700,000 ounces. We see significant upside in the geological environment in which the deposit is found. There are several historic high grade deposits in the area. And now that we have a beachhead in the area, we think that this is a camp style play and that we're going to be here for a good time, a long time and make a lot of money in this camp. And we look forward to developing it. We think the Yukon is the premium jurisdiction in the world right now to invest in, in terms of regulation, in terms of being mining friendly and in terms of geological potential, this is the best of the best. Looking for 10,000 ounces a year average gold GEO production for us, which would make it one of the cornerstone assets within the Osisko family of assets. It's a very simple project. It's essentially a crusher and a heap leach and yellow dump trucks. So not particularly challenging on the technical side, but lots to do in terms of upside. On to Page 12, a real review of our geopolitical risk management system. We've stayed dominantly Canadian dominantly in North America and in premium jurisdictions in South America. As you can see, most of our key assets, Renard, Eleonore, Knabillard, Brucejack, Baldown, Parral Island Gold, Gibraltar, CB, Veza are all Canadian assets. And in South America, we're essentially the biggest asset we have there is Mantos and again another premium jurisdiction. Other assets that we own right now is that the quality of Matilda and Amsler in Armenia, but all in all, pretty much a dominantly same jurisdiction asset base. Page 13 shows our near and medium term cash flow assets that we're seeing right now. As we talked about, GIGO is under construction now. And I'm very happy to announce today that Barkerville poured 44 kilos of gold last week, and we will be receiving our 1st gold shipment from an accelerator company. So the accelerator model has gone from inception to execution to production, and we are now receiving gold from 1 of the accelerator companies. Again, we have a 2.25 percent 2.25 percent royalty on that. So we are actually have gone much faster than I thought we would in the accelerator model, and then Barkerville is now in small scale production and shipping gold to Osisko Gold royalties from the Cariboo mine site. We also have earned a 1% royalty on Hermosa, which Richard Wark and his team have done a most excellent job of advancing in Arizona, one of the best discoveries in the world and currently sinking ramps. So that 1% royalty that we purchased 2 years ago has gone up in value significantly as they derisk that project. We've also seen great progress from Osisko Mining at Windfall. We have a pending resource coming out at Windfall. Last year, we had 24 drills starting at Windfall, and it was probably one of the most intense exploration campaigns in the world, if not the most intense. So we're going to see the product of that exploration result coming out later in the month. Other assets that are performing for us, Pandora with Aneco Eagle, Lamaque with El Dorado, Marban that's held within the Cisco Mining and obviously, the one the only Canadian bar that continues to deliver with new discoveries at Odyssey North and South at East Malartia. We also earned a royalty of an 18.5% gold stream and a 75% silver stream on the Back forty project owned by Aquila in Michigan. So we have a lot of growth assets that are already paid for. So as those assets move through the value chain, no further investment required for Sysco Gold Royalties, but we will be the benefactor of all that investment and all that production. Summary slide on Page 14. As we sit here, we're about to celebrate our 4th year in business in June. We started this company into an IPO after the sale of Canadian wire during June 17, 2014. We now have 130 royalties and streams, 5 cornerstone assets, 20 assets in cash flow, paying a sector leading 1.6% dividend, precious metal focused, Canada focused, 20,000 GEOs delivered in Q1 of 2018. This is a company and a business that money 24 hours a day, 7 days a week, 3 65 days a year. And we have a growth pattern to go from 8,000 ounces now to over 150,000 ounces in 2023 without any additional investments. The balance sheet is in great shape, over $380,000,000 in our equity investments, which we're seeing a lot of derisking going on in terms of resources being delivered as Barkerville delivered 1,600,000 ounces, as indicated yesterday, and 2,200,000 ounces of inferred resources and a major resource in the Kiribati District. And we have many more things to come in the near term in terms of the accelerator companies as they build up over $200,000,000 in cash over $250,000,000 in undrawn debt and credit facilities. So we're in great shape going into 2018. A lot of the foundation work was done last year. We executed the acquisition of the Orion portfolio for $1,100,000,000 begins the largest royalty and streaming transaction since the IPO of Franco Nevada in 2010. And we continue blaze trails and create new business models within the royalty and streaming business. We are looking forward to a very innovative year. We have a lot of good things in the pipeline, and we're contributing to cash flow. And we're seeing a strength and a maturity within our accelerator model, transitioning from concept into reality with the addition of resources and production within that group of companies. On that note, I will open it up to any questions early on for today. And I thank everybody for taking the time. I know this has been a busy couple of days for reporting, So I appreciate everybody's effort in terms of participating in today's call. And I'll now take any questions that anybody might have. Would have. Your first question comes from the line of Kerry Smith with Haywood Securities. Sean, just one thing one question kind of on a more strategic level. With the competition is pretty fierce for the sort of plain vanilla royalties in the gold and silver space. Is there much opportunity for you to find royalties or create royalties in, say, the cobalt, lithium, graphite space or kind of esoteric minor metals, but it just seems like the competition is pretty stiff for the precious metal streams. I just wonder what the deal flow might be like in those other specialty metals. Good question, Terry. Obviously, we're the first ones to print a deal on a royalty, 5% top line royalty in Victoria this year. So competition be what it may, we've been in front. In terms of alternative metals, we look at them from a strategic base quite often. We haven't executed anything in that space to date, but we are active and aware of it. And as you will know, a lot of the crew that works for Osisko Gold Royalties came from Cambior. They built Niobec, and they have a fairly good view on specialty metals. So we're aware and capable of operating within that space. And we'll take them as they come, but we have not anything yet, but that doesn't mean that it won't happen in the future. Okay. And just a second question. Can you remind me the timing how the screen and the offtake? Just remind me the timing on that, if it's going to happen So the Pareteum offtake, they have there are several conditions on the offtake that are important to remember. They can't execute the offtake until December 31, 2018, at which point they would be paying us USD 116,000,000. Looking at there, they have to retire all of the debt held by Orion. So until the debt deal is done, they can't execute the buyback. Then there's a second date, December 31, 2019, at which point in time, they pay us in excess of USD 130,000,000. Same conditions apply. 2 things noteworthy. We also own an offtake agreement. So our 50% of the gold is produced by the mine that we market. We have a 6 day look back window on those gold purchases. And if you look at our offtake win, we had about $2,400,000 of gains in the offtake agreement. A lot of that came from the Pareteum offtake. Another note on the Pareteum buyback is that should the company be sold before those buybacks are executed, we would split a I think it's just over 13% of the gross sale value of the company between ourselves and the other offtake agreement. So we have many ways to get returns on Fredium between here and now. If those offtakes do not get executed and the company does not get sold, we would start to receive our stream in 2020. Point half, we can fill you in on more detail on that. If anybody wants to send in a note, we're all the information is public, But we'll give you a summary of how the deal works if that helps. But we think that Pareteum, it's always been a question of the stability of the resource. We think that Pareteum is going to have a quarter by quarter sort of up and down because of the way the ore body works. But on the overall basis, this is a world class asset. It's going to perform. And whether the buyback gets executed or not, we're strong believers in the Pretia project. We think that there's lots of upside in the Valley of the Kings and in the Golden Triangle in general. And we think that this is a very beginning of the redevelopment of the Golden Triangle. So we're quite keen on the asset and quite keen on the overall camp play there. Okay. That's great. I appreciate it. Thank you. Your next question about Prashanth Castillo comes from the line of Carey MacRury with Canaccord Genuity. You mentioned 150,000 ounces by 2023. I'm just wondering if you can give a bit of color on which assets do you see coming into production to drive that? Sure. Obviously, we have in the chute right now, we have the ramp up at Ansellor that's scheduled to happen in the Q4 this year as they finish their construction. We have Bredium. We have Back forty in there and we have Eagle, which is under construction as we we speak. So all these projects are fully financed and underway for the most part. And we expect to see those assets in the food chain between now and 2023. And then secondly on Victoria, we've seen a lot of the transactions that involve streams. I'm just wondering was there something particular about why it used the NSR model there rather than a stream? I think each company has their preferred model. For us, royalties are more tax efficient, and we prefer them for the simplicity. And I think from a management standpoint, the royalty is quite straightforward. And it's a Yukon asset. So most of these deals are tailored around the jurisdictional regulations that makes the most advantage. So in terms of where it sits for us, it's 100% margin goal. So it's obviously very good for us. And for the company, it's the most efficient way to get the capital they require to build this asset. And we partnered up with Caterpillar Finance, Orion and ourselves, deliver a full package of $500,000,000 here. So that I think that in terms of how you look at project financing, at the end of the day, it's about the asset and all of the financing is related to the asset. And this was the combination that worked the best for this situation. Your next question about Prashanth Castilla comes from the line of Dan Rollins with RBC Capital Markets. Your line is open. Yes. Thanks very much. Sean, just on that last question, when you speak about Brucejack, are you including the stream? Or are you assuming that's been bought back and it's just the offtake in that $150,000,000 sort of number? If you look at our presentation, Dan, we've always shown it assuming that the Brucejack buyback has occurred, which represents about 20,000 ounces a year by the time we get to 2023. If it doesn't happen, then we would add 20,000 ounces to our assumptions. Okay, perfect. And then just with respect to the deal flow going forward, if we look at more precious metal focused opportunities, what do you see out there in the pipeline? I guess 3 to 6 months ago would have been more development stage opportunities. Obviously, you've pulled the trigger on Victoria there. But do you see the pipeline still pretty good right now? Or are you starting to see a bit of a wane in the opportunities? Well, obviously, the performance of current equity markets has set the stage for royalty and streaming. I don't think anybody is going to achieve much project financing through equity offerings at this point in time. As you would be well aware, Dan, the amount of equity deals that have been executed in 2018 is close to 0. So the only thing that's getting done right now, I believe, are equity associated with streamer royalty deals, debt deals and supplier take back loans is really the only source of financing for development projects right now. So we see it very much as a development market until the equity markets open back up. But we know that there's probably 100 companies that need to do equity deals right now and haven't been able to get any traction on equity at the office. So we focused on combining with our partners to do full financing offers where we're providing everything that we need to do. We're seeing an awful lot of discussion about M and A that often requires the injection of cash in the transaction to make it work. So we see both M and A and project financing being the business of 2018, and I don't think there's any shortage of opportunity. If I had a dollar for every call that I got to be in an equity deal this quarter, I'd probably be golfing with you, Dan. Well, I don't really golf as well, so unfortunately. There's no golfers in this office either, so. And then just with the message of partners and the full financing package, before the royalty stream would have been there with equity, with the debt component, equity component is not there. Do you see yourselves working with Caterpillar in the future, potentially Orion in the future and maybe other parties to offer this full fledged financing package? And how would you compare your ability to do that relative to your peers right now? I think we're in pretty good shape, Dan. Our attritional relationship with SDSQ, KFCFO, CPPIB And obviously, Orion is now a big shareholder with Cisco. And we've had good partners in terms of everything we've done with BlackRock Fidelity, M and G, Tocqueville, especially, has been a great supporter. And then also Franklin out of California. So we think that on a debt provisional basis, we have several partners we can work with. We want to be part of a full solution because there's no use in having a royalty on a partially financed project. You need 100% financing for the royalty to have value. And as you know, we also we like to partner up with groups that need some technical support, and our technical team is still very much intact and very active to the accelerator companies. We've been able to preserve all of our technical capacity. We've started leading the charge over at Falco, but we have mine building. And we operated the largest exploration program in the world last year with 41 rigs turning. So we have quite a bit of depth on the bench in terms of drill outs and exploration transitional to develop a stage project. As you saw, we just drilled out Barkerville, and we are currently windfall has been drilled out, and we're getting ready to announce the resource there. We delivered the feasibility study on Falco. So we're active on a lot of fronts, and we've kept our technical integrity alive. And I think that we're a catalyst investor that debt lenders and people that maybe not as practical as us like to have in the mix for project financing. So that's where we see our niche is that we can be a lead on a project financing. We can provide technical oversight for the group as the lead financer in these things. And for this company that we're investing in, it gives them some peer review and some depth on the bench for any technical services that they may as a single asset company not have available to them. So I think we're pretty happy with how our business is set up then. It's taken a little bit while for the market to adjust to it, but I don't think there's any doubt at this point time that the potency of our model is coming to bear, especially in a downtick market like we're in right now. Perfect. That's very informative. Appreciate that. Enjoy the weekend. All right. Thank you, Dan. And I believe we're over to Mr. Mike Jalonen. Yes. Your next question is from the line of Mike Jalonen with Bank of America. Go ahead please. Your line is open. Thanks, Sean. I'm just on the 5th tee here at Oakville Golf Club, so I'll make it quick. I think you're supposed to join me, but Brian's here instead. But just a lot of my questions were answered, but actually one that's kind of struck me on Page 12, 13, your geographic diversification, obviously, you have a couple of assets, a few in South America, 1 in Armenia, but you're obviously very North American centric. Is there any thought process to going afar? And like some of your like Franco is quite into Australia now. So just and Wheaton is into LatAm along with Franco. Just wondering what your thought process is there. Well, Mike, as you know, we know we've had quite a bit of success in Canada. And I think that we through our accelerator companies have generated significant opportunity within Canada. Our accelerator companies collectively control over 10,000 square kilometers of mineral licenses in Canada. So that's where we start. Every investment outside of that is really about the operator. I don't I'm not too concerned about the jurisdiction, but if we're with the right partner who understands and can manage that jurisdiction, we're quite willing to go with them. And in terms of other major or mid tier companies that are operating in those jurisdictions, we're quite willing to participate financially as long as the corporate has the integrity for the jurisdiction that they're in. So we'll be looking more on that. But as you know, we just did another Canadian deal in Q1. We led the charge, and we don't think there's been another significant royalty deal done so far this year. So we're 1st out of the gate again. We did the biggest deal in the sector last year, and we got a good start on 2018 and again with Canadian assets. So we'll stay on the Canadian theme, but say once we leave Canada, it's really about the operator. Okay. Maybe just one follow-up. How many more companies would you add to your accelerator lineup there? I think you have around 10, if I'm counting right. What's the optimum number? Because you said you're getting a call every day now. I think where we are, Mike, is that as long as we see value and we can contribute. And we don't do these incubator accelerator companies unless we have market participation alongside of us. So we'll follow a bit the market what they want us to do. As you saw, we created the Sysco Medal last year to participate in the zinc plays. We are we've also added Vero Alamos in Mexico to our portfolio, and now we've added Victoria where we don't fit the 0.5%. As long as there are good companies with good management teams with good ideas, we're going to be there all day, every day. And I don't think there's a limit to how many we would do, but there is a limit to how much our equity book would be. I don't think that we want to see our equity book expand much further in terms of dollar value than what it is now. So what I would say to you is that we're probably at a sell something to buy something stage within our equity book at this point. And we want to recirculate that cash. So just to reiterate, if you look at our equity book right now, we have 3.8 $1,000,000 invested. But in the last 3 years, we've already have realized gains of $70,000,000 And the royalties that we earned in that, we invested $90,000,000 in sidecar royalties because generally speaking, the only time we own an equity is if we've got a royalty or streaming opportunity. And the value of that $90,000,000 investment into royalties and streams that we've earned on the way into this is well in excess of $200,000,000 So the way we look at it, Mike, is that our accelerator model is almost paid for itself already. We see in our minds, we see about $100,000,000 to $200,000,000 of return from the accelerator model, the way we think about it, that we've already earned, which is far superior to any royalty and streaming project that's been out there. So it's been a potent part of the business. And now there's a lot of these accelerator companies are moving from concept to resource on the PA feasibility, we see the gel of the value in that. And I think you'll see throughout 2018 the potency of the accelerator companies. And the capital at risk, the way I think about it, by taking away the value of the royalties and the value of the realized gain and the current equity book, we don't have that money capital at risk to execute this strategy. Shareholders need to understand how close this thing has been. We've been very fortunate in terms of our equity return. Not many people have realized $70,000,000 gain on a $300,000,000 equity book in the last 3 years. We've been able to do that, and those are tangible assets. I can tell you the numbers because we've sold the stock and we've harvested the position. So that's where we are. 2018 will be a lot of explaining to people how many what the significant returns have been on the accelerator and incubator model for us. And we think that we have a lot less cash exposed in the accelerator model than the market is actually perceiving right now. So that's one of our main themes as we go forward into the rest of 2018. Okay. Well, thanks for that answer. And maybe you should be on the golf course this weekend because I see you got an Eagle in the Yukon, so congrats. Thank you. Well, it's better than a Beagle, which is an eagle too under. I assume a beagle too over. All right. That's our last question for today. Thank you, everybody, for calling in today, and we will be working on the company again here today. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.