Osisko Gold Royalties
Symbol: OR (TSX) | MCap: C$1.39 billion |
Industry: Basic Materials – Gold Mining | Long-term liabilities: C$144 million |
Project: Royalty – Canadian Malartic, Elenore | SO: 106,178,826 |
Recommendation: Buy | Price: C$13.07 (as of 23-March-2016) |
Overview
The company was created in its present form as a result of a business combination of Osisko Gold Royalties and Virginia Mines in November 2014. Osisko Gold Royalties was spun-off in June 2014 when Agnico Eagle and Yamana Gold acquired Osisko Mining Corporation, whose flagship asset was the Canadian Malartic mine located in Malartic, Quebec in Canada. Virginia Mines was spun-off its predecessor company when it sold its flagship Elenore mine to Goldcorp in 2005. Both Osisko and Virginia retained a royalty on the asset sold, as well as other exploration projects. The business combination thus instantly created an intermediate gold royalty company holding a royalty interest in two big gold mines in Canada – Elenore and Canadian Malartic.
The Story
Canadian Malartic Royalty
The company owns a 5% Net Smelter Return royalty on this asset, which means it is entitled to 5% of the net revenue from gold sales. The mine is expected to produce 560,000-580,000 ounces of gold in 2016, 590,000 – 600,000 ounces in 2017 and 610,000 ounces in 2018.
The mine operators are also actively exploring the property, adding discovery potential which could extend the life of mine.
Elenore Royalty
The company holds a sliding scale 2-3.5% royalty on the Elenore mine. Gold production for 2016 is expected to be between 250,000 and 280,000 ounces.
Other Assets
The company also has 48 other royalties in development and exploration stage properties mostly in Quebec and Ontario, two among the safest mining jurisdictions in the world. In addition, they have taken an ownership interest in several junior gold miners and hold royalty interests in two other producing mines. The company is also actively exploring its properties in the James Bay area. This is the same team responsible for creating the Elenore and Canadian Malartic mine, so the management commands a premium.
Valuation
Asset | Value (in mil C$) | Value per share (in C$) |
Canadian Malartic | 395 | 3.72 |
Elenore | 259 | 2.43 |
Working Capital, net | 249 | 2.34 |
Long-term liability | (144) | (1.35) |
Other Assets | 631 | 5.93 |
Market Cap | 1390 | 13.07 |
C$7.14, or 54% of the share price, represents the value the company has on hand. The other C$5.93 is the value attributed to all the other royalty interests, equity stake and exploration activity. We are entering the speculative realm in answering the question – is this price worth paying for everything else the company has to offer? My answer is yes, based on the following factors:
The past success of the management team is an indicator that the company is in good hands and its activities (exploration, royalty acquisitions and share ownership in junior gold miners) are value accretive
The NAV of the Canadian Malartic and Elenore royalty will increase in a rising gold price environment since OR gets a cut of the revenues. It will also rise as the life of the mines is extended via exploration and conversion of resources to reserves
As per National Bank Financial, the Canadian Malartic royalty is on par with the Goldstrike royalty owned by Franco-Nevada, the premier gold royalty company. The Goldstrike royalty has proven to be one of the best deals executed by Franco-Nevada, and the Canadian Malartic royalty is right alongside it
The CAD is down 30% against the USD. In case the US dollar bull market breaks down, we also stand to profit via a foreign exchange gain. It was not too long ago that the CAD was on par with the USD, and a resumption of the commodity bull market will lead the CAD higher
There are a lot of unknowns which cannot be answered until more properties in which they hold a stake enter production. Valuing a royalty company is an art and not a science, considering they have powerful optionality to the upside which does not lend itself to traditional valuation. By buying now, you have a chance to buy into the next big gold royalty company before it becomes one. You are paying for growth and will lose capital if the company fails to deliver on that growth. I rate the company a speculative Buy at current prices.
Target Price: N/A. It depends on a lot of unknowns, but the market will definitely place a premium on these shares when gold prices start heading higher, which is why the stock rates a buy. Adjust your position size accordingly.
Disclosure: I am a shareholder since July 2015.