Osisko Gold Royalties Ltd (NYSE:OR) Q2 2023 Earnings Call Transcript

Osisko Gold Royalties Ltd (NYSE:OR) Q2 2023 Earnings Call Transcript August 10, 2023

Operator: Good morning, ladies and gentlemen, and welcome to the Osisko Gold Royalties Q2 2023 Results Conference Call. After the presentation, we will conduct a question-and-answer session. [Operator Instructions] Please note that this call is being recorded today, August 10, 2023 at 10:00 am Eastern Time. Today, on the call, we have Mr. Paul Martin, Interim Chief Executive Officer; Mr. Frédéric Ruel, Chief Financial Officer and Vice President, Finance and Mr. Iain Farmer, Vice President of Corporate Development. I would now like to turn the conference over to our host today, Mr. Paul Martin. [Foreign Language]

Paul Martin: Good morning, everybody. And thanks for being with us. I’m Paul Martin, the interim CEO of Osisko Gold Royalties. I’ll run through the presentation and then we’ll open up the line for questions. And I have Fred and Ian in the room for, anything that I can’t answer. For the participants on the line, you can submit your questions in advance through the webpage. The presentation is available on the website as well as through the webcast. And as stated, I am the interim CEO having committed to assist the Board in leading the Company during the transition period. I have also made the commitment to remain in the CEO chair until the Board has completed its process and announced a permanent successor. Please note, there are forward-looking statements in this presentation and that all amounts are in Canadian dollars unless otherwise noted.

We’re pleased with the performance in the second quarter, both from a GEOs earned perspective and from a transactional basis. 24,645 GEOs earned in the second quarter, a nearly 11% increase over the comparative quarter, with 47,756 GEOs for the first half, which is nearly a 15% increase over the comparative period, puts Osisko in a good position from an annual guidance perspective. Gross cash margins of 93% were maintained in the quarter and for the year-to-date. The Company had $70 million in cash at the end of the quarter and declared and paid its quarterly dividend of $0.06 per share during the quarter after increasing it by 9% from $0.055. Increases in revenues and operating cash flows followed the increased performance in GEOs earned and represents a 35% increase quarter-over-quarter, and on an annualized basis represents operating cash flows of approximately $200 million.

Net earnings of $0.10 per basic common share were essentially flat compared to the prior quarter due to non-cash items. Adjusted earnings of $0.18 per basic common share showed an improvement over the prior quarter of $0.14 per share. The Company now has 23 producing assets, up 2 from the prior quarter, including the first reporting of GEOs from the CSA silver stream in Q2, which has an effective date of February 1, 2023. Our GEOs earned come predominantly from Canada and were derived 90% from precious metals, 62% from gold and 28% from silver. I’ll make some comments on some of the specific mine performances before speaking about our flagship operation. Several operations have been impacted from the numerous forest fires across Northern Canada and where we likely will see some downside impact in the third quarter.

At Victoria’s Eagle Mine, it continues to outperform expectations in 2023, a key bright spot for Osisko. A strong start to the year in Q1 2023 with Victoria having confirmed the viability of year-round stacking and heap leaching followed by record production in the second quarter. However, as a result of the local forest fires and recent evacuation of the site, Victoria feels it prudent to guide the lower end of the 2023 annual guidance of 160,000 to 180,000 ounces. The strong performance at Eagle has helped offset some of the modest disappointment at Capstone’s Mantos Blancos operation where milling rates continue to lag Phase 1 expansion design levels. We took a conservative approach with Mantos on our guidance and we’ll continue to monitor the performance in the second half of the year.

Capstone noted with their recent quarterly results, the design rates are expected to be achieved in the fourth quarter. At the Éléonore mine, it was impacted in the second quarter where we had a temporary suspension for a couple of weeks due to the proximity of the forest fires and which we expect will impact the mine’s Q3 production and obviously our share of GEO deliveries, although Newmont has not changed the annual production guidance for the asset. Given Newmont’s merger with Newcrest, we’ll continue to actively watch where Éléonore fits into the combined entity’s hierarchy of mines. At Renard, it was also affected in the second quarter due to forest fires and with a loss of approximately a week’s worth of production. We’d like to commend all of our operators, including Stornoway for their actions during this to ensure the safety of the workforce and in the successful restarting of operations.

Further at Renard, we expect Q3 sales to be impacted from this interruption as well as from a continued softness in the diamond price, which has carried over from the first half of the year. Now, over to our flagship asset, the Malartic Complex, which had once again a solid and predictable quarter, and remains the Company’s most significant contributor to GEO’s earned. This asset since inception has contributed over $0.5 billion in cash flow to the Company. And as many on this call know, Agnico Eagle recently provided an update study covering the underground extension of the operation through to 2042 at a steady state of 500,000 to 600,000 ounces per year. The vast majority of this extension falls on our 5% royalty claim block. The study incorporated only 57% of the existing resources, and the extension significantly increases Malartic’s value as a shared asset to Osisko.

The Company has maintained its guidance for 2023 and will provide further update in its Q3 release. And as you will have seen from the press release, the Company has declared its third quarter dividend at $0.06 per common share. On the transaction front, I’ll speak to the two newest transactions and then come back to CSA. At Gibraltar, with the acquisition by Taseko of Sojitz’s 12.5% interest, we were able to amend the existing silver stream and increase it by 12.5% to 87.5% for just over $10 million, on an asset, which is well known to us. Further to this, the step-down delivery threshold was extended, resulting in an additional 1.5 million ounces of silver to Osisko towards the tail end of the mine. And just after the quarter end, we also closed the Hot Chili, 1% copper and 3% gold NSR royalties on the very exciting Costa Fuego deposit in Chile.

This asset ranks highly amongst the best undeveloped copper projects in the world. And when combining the royalty funding with the release of a positive PEA generated a significant positive movement Hot Chili’s share price. Let’s go to the more significant CSA transaction. On June 16th through the Company’s Bermudian subsidiary, the company announced the closing of the CSA silver and copper stream following Metals Acquisition Limited’s acquisition of the Australian based CSA mine from Glencore. For full details of the acquisition, please see our press release dated June 16th on the website. It includes a silver stream representing a 100% of the payable metal and a copper royalty, which ranges between 3% and 4.875% until 33,000 metric tons are produced, and then 2.25% thereafter.

The copper stream will become effective in mid-2024 on the anniversary of the June 15, 2023 transaction closing. Combined, these two royalties were purchased for US$150 million, and Osisko further invested us $40 million in equity into the company. The purchase price was paid with US$60 million in cash and drew US$130 million from our revolving credit facility. The Company maintains a ROFR for up to seven years on any project the company advances, provided Osisko Bermuda holds 5% of the issued and outstanding common shares of the company. We’re following the new operator’s impact on this operation and believe we will not be disappointed with the team led by Mick McMullen in their efforts on improving the operation’s overall performance beyond that achieved by the prior owners, Glencore.

On the balance sheet, I will reconfirm that these are all reported in Canadian dollars. And after factoring in the CSA transaction, we have net debt of $250 million, placing us in a strong position relative to our peers and which is well below $200 million in U.S. dollar terms. The revolver has $230 million in available capacity before considering the uncommitted revolver accordion, and the covenant performance is exceptionally strong. On our investments held on the balance sheet, we will continue to balance the need for incremental funding against our perception of what fair value is for these various positions. As previously noted, Osisko now has 23 performing assets and a significant portion as noted by the hatch line, are either in expansion, extension, or ramp-up, helping to underpin our near term growth profile.

Osisko continues to distinguish itself from its peers due to the depth of its exploration and development assets, which exceeds 180 properties and which is heavily weighted to being located in North America. Please be advised that we’re planning to organize an Investor Day, likely in October, where we’ll have our corporate development and technical teams present to dig more in depth on the exploration and development portfolio, and if we can arrange it, hear from some of our key counterparties. Let’s talk about one of those now. Patriot Battery Metals released its maiden inferred resource at CV5, totaling 140 million tons, grading 1.42% lithium oxide, immediately making it the largest lithium resource in the Americas. Concurrently, they announced a strategic investment into the company for Canadian $109 million for a major industry player and hard rock lithium connoisseur Albemarle.

Recall that Osisko holds a 2% NSR on lithium, covering approximately 90% of the CV5 resource, as well as 1.5% to 3.5% royalty on precious metals. Worth highlighting is the Patriot analyst consensus values Corvette or the CV5 resource anywhere from between US$1.5 billion to US$2.5 billion, depending on the future lithium price assumption. This will be an exciting asset to watch as a future supplier of this key material in support of the world’s push towards electrification. In closing, Osisko remains extremely well positioned to continue its growth path and targeting a 35% increase in GEOs earned as shown in its five-year outlook to 2027. Further to this, positive catalysts continued to unfold across the asset base, as indicated in our optionality arrow to the right.

That will further add to OR’s growth towards the end of this decade and beyond. A couple of examples include Kinterra’s recent $30 million investment in the Highland Copper’s White Pine North Project with the new JV now looking to advance the project through to feasibility. And with the funds received, allowing Highland to also push forward at Copperwood. And the upcoming final feasibility study and FID from South32 Hermosa expected to in the second half of this year. And on that asset, while much of the focus has been on the company’s recent write down due to a higher than previously expected CapEx number, Osisko’s business model insulates itself from this issue and we have no doubt that our partner will continue to push forward with this material project.

Finally and when factoring all this in, while also considering Osisko’s current relative valuation as touched upon in the final slide in this deck, which is in the appendix, it is my opinion that Osisko remains the go-to royalty company in the mid-tier royalty space. Operator, we’ll now open up the line for questions as well as questions posted on the webcast. And please note if we don’t get to all of them before the end of this call, we will respond shortly afterwards.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from Ralph Profiti with Eight Capital.

Ralph Profiti: I wanted to ask a question starting off with CSA and sort of the methodology on how you are thinking about attaching a valuation to the stream and the equity position as well, sort of the total investment context. And in this, in your eyes, is this really just sort of an optimization story on the part of the new operator or are you thinking there’s optionality for step changes in throughput production or exploration?

Paul Martin: I think what we see is that that was probably an underappreciated asset in the Glencore portfolio. And knowing what Mick has done in the past, we see significant improvement to come through on it. And with the addition of our backstop copper royalty, this is one we’re very excited about.

Ralph Profiti: Got you. Thanks for that context. And just a second question on liquidity currently sitting in terms of availability of $500 million, if you include the accordion, can you put that in the context of sort of the market portfolio of transaction opportunities out there in the pipeline that is potentially sort of sizes of $50 million to $100 million or some transactions a little bit higher than that. I’m just trying to get a sense of liquidity versus opportunities.

Paul Martin: Yes, that’s a fair question. I think even without the accordion we’re sitting in — we have a strong liquidity with respect to what we’re seeing in the marketplace right now, is how I would answer that.

Operator: Your next question comes from John Tumazos with John Tumazos Very Independent Research. Please go ahead.

John Tumazos: I have a detailed question first. I apologize if I didn’t read everything. I got the note 5 and 10. What was the $19.9 million credit loss, which loan to which company? And could you just say what the $6.7 million impairment was related to?

Paul Martin: Yes, sure. John, those are both very fair questions. So the first one, there was a — we had three items, I would say in the accounts for the quarter, one being, a gain on the Osisko Mining joint venture transaction. So, we did reflect a gain of almost $20 million in respect of that. That’s a non-cash item, obviously. We did have a reduction in our accounts receivable or loan receivable from Renard. This was a balance that was created from the past restructuring at the operation where we deferred our GEOs, and that those amounts were set up as a debt payable. Given the decrease in the diamond prices, we felt it prudent to trim that number, which is essentially what we’ve done in the quarter. Obviously, if diamond prices return, that full value returns to us. And then, the asset impairment was a very small project where the operator has come up dry and has essentially walked from the project. So, we’ve written that down to zero.

John Tumazos: What was the name of the project?

Paul Martin: It was called Hidden Valley.

John Tumazos: In PNG?

Paul Martin: Yes.

John Tumazos: Second question, 15%, 20% of the asset base are the stock holdings of affiliated companies, ODC, Osisko Mining, et cetera. Those don’t generate the current return that the royalty streaming assets do. And I would imagine over time you’d rather apply that capital to generate the income. Is it a reasonable expectation that circa 2026 when the projects of ODC and Osisko Mining are in production, that would be a target time to monetize those stock holdings?