OR Royalties Inc. (OR) Q3 2016 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the Osisko Gold Royalties Q3 2016 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, November 10, 2016 at 11.00 Eastern Standard Time. Today on the call we have Mr. Sean Roosen, Chair of the Board of Directors and Chief Executive Officer of Osisko Gold Royalties; Mr. Bryan Coates, President of Osisko Gold Royalties; and Mr. Andre Gaumond, Director of Osisko Gold Royalties. I would now like to turn the meeting over to our host for today's call, Mr. Sean Roosen, Chair of the Board of Directors and Chief Executive Officer of Osisko Gold Royalties.

So welcome to the third quarter call. We will be following the PowerPoint that's on our Web-site and we will be going on a page by page basis through that, and hopefully will be able to provide you with some insight on things that have come through in this quarter. On that PowerPoint, there is a cautionary forward-looking statement. I would ask you to take that into consideration as we will be making some forward-looking statements within this presentation. To begin with, on Page 1, the bullion that we received indirect has increased. We do receive gold bullion and silver bullion indirect to our account. We've had a 21% increase quarter over quarter from 2015 to 2016 with 9,902 ounces of gold received and silver, and about just over 10,000 gold ounces equivalent if we include some of our cash yielding royalties. Guidance for this year sits at 34,500 to 37,200. Till year to date we have received 28,793 ounces. So we believe we are on track to achieve our guidance for the year. On to the next slide, as you can see, net cash flow from operating activities versus 2015 have gone from C$12.6 million to C$15 million, a 19% increase, with revenues having increased 50% from C$11.7 million to C$17.6 million. So, all in all, everything working in the right direction here. In terms of our bullion sales, on the next page, the highest gold price ever achieved in Canadian dollars on September 6, 2011 was C$1,877. Our last quarter, we sold gold at C$1,743. So I think that having Canadian assets has proven that it's a great hedge against a stronger dollar price, and we have seen exceptional margins in our space. And also because we are Canadian-based, our G&A is in Canadian dollars. So on a relative basis, the lower Canadian dollar has given us a higher gold price and a reduced G&A compared to some of the U.S. dollar-based operations. On the next page, you can see our increase in the net cash flows from operating activities. We had C$15 million in Q3, continuing to climb up with our Q2 having been just slightly higher at C$15.9 million. In terms of our gold production on the three months ended September 30, we had gold production of 9,902 ounces, silver production of 9,200 ounces, the realized gold price as we said of C$1,743, revenues just about C$17.5 million, dividend income at about C$1.572 million essentially mostly from our [list] [ph] asset, and net cash flow from operations a tick under C$15 million for net earnings a little bit over C$17.5 million at C$17.675 million. Earnings per share is up quarter on quarter, from quarter of 2015 to this year, is now at C$0.17 compared to C$0.10 in 2015. Some big moves that we are doing on the restructuring and re-profiling of the Company, on the next page, we were invited to join the New York Stock Exchange and we carried out our official listing ceremony on July 6, 2016. We have included a nice picture of the front of the stock exchange with our Company name and logo on the front of it. I think that this sets the stage for us to look at increased liquidity south of the border and also ticks off one of the boxes that we had in that our competitors for the most part have a U.S. listing. Now we are listed on the big board in the U.S. We will be making a push to continue to expand our liquidity there, both on an institutional and a retail basis. So that is one of the to-do items for the next 12 months, is to continue to focus on the marketing to take advantage of that platform. We are focused on our royalty and streaming business. In terms of what we've done, we did an earn-in agreement between Osisko Royalties and Osisko Mining regarding the Virginia assets that we acquired when we merged with Virginia in 2015, which essentially covers the James Bay properties of over 4,400 square kilometres and has been developed through the Virginia team over many years. Very strategic asset base that was out there in terms of taking it from our balance sheet onto the Osisko Mining platform. We retain a 1.5% to 3.5% sliding royalty and it gives us a great exposure on some of the best greenfield opportunities in Canada. It simplifies the Osisko Royalties' business model in that we no longer have direct exploration activities on those projects. Within Osisko Royalties, we do still retain the bulk of the ownership at Coulon, which has been funded this year by our partners for the most part, and we will see what we do with that asset, but this was a major restructuring for us. It reduced our G&A by about C$5 million per year. 28 employees from receptionist to CEO have moved over to that platform. And I think that as we had promised to the marketplace, we would continue to separate church and state, for lack of a better term, on our royalty business, as we went through the first two years of evolution. So, we are on track with what we said we would do in terms of structuring the Company to look more traditional in terms of a royalty company. In terms of how we carry out our business, the opportunities that we see in front of us, we have a precious metal streams and royalties evaluation process where we participate with companies who are looking to convert debt or raise traditional project financing through the use of streams and/or royalties. We are also active in the acquisition financing. There are several assets that are for sale where streams and royalties are part of the acquisition financing. We also work on balance sheet optimization where we are looking for assets and companies that maybe don't receive proper valuation in their current form, and then we can be like the value of those assets through our purchase of package of royalties and/or streams that may be existing within an environment that they don't get the same valuation as they do under the umbrella of a royalty company. What's unique to us as well as the accelerator model, and this is to really try and duplicate the success that got us to where we are, the simple math is we look at the Osisko royalty, which is one of the best royalties in the world. We created that royalty by having discovered the Canadian Malartic deposit, built the mine and then subsequently sold it on, and then the spin-co, we created the royalty of 5% top line royalty. In the case of Virginia, Virginia was sold prior to the Eleonore project to Goldcorp for C$500 million and then we purchased the royalty and property package for C$550 million earlier this year, and that royalty is now one of the six most important royalty worldwide in the precious metal space. So we looked at those models. We are shareholders on the front end at maybe more than C$3 billion empirical profits in the case of Canadian Malartic and C$1 billion of profits on the Eleonore assets, and then we were able to create Osisko Royalties which is now a C$1.5 billion company. So, through our accelerator model, we are investing in development companies and trying to set the stage to repeat that success that we've had in the past, which has made so much money for our shareholders. In terms of where we are right now, the Company is in great shape. We have a very strong balance sheet with over C$600 million available in cash and credit, C$390 million of cash equivalents, convertible debt of C$45.6 million, total assets of just under C$1.4 billion with equity sitting at about C$1.2 billion. We are also well positioned with our strategic partners, the Caisse depot and FTQ, and CPP occasionally when we look at deals where we want to be able to provide more than one financing option. We are able to participate especially in project financing with our partners to offer a much broader solution in those cases, making us more competitive in this space. Again on Page 13, back to quality of asset base, Canadian Malartic is currently ranked the third most valuable royalty in the sector, with Eleonore being right at number six. So we have two of the top six royalties as cornerstones of this Company, which are now in our 27th month of operation. So I think we've made pretty good progress in terms of how we proceeded. Our market cap has more than tripled since we started. We started at just over C$500 million, and today I believe we are trading about C$1.5 billion market cap and we have significantly increased our assets under management. Canadian Malartic, obviously our cornerstone asset, currently at 7.72 million ounces and growing. We retain a 5% royalty on the company on the assets, not only on Canadian Malartic but all the surrounding lands. And then we also have a C$0.40 per tonne milled royalty which would be given in 2021 for any ore that may be processed at the Canadian Malartic mill for which we do not own royalty. Production for 2015, it was Canada's largest producers at 572,000 ounces. Year-to-date production at Canadian Malartic is 445,000 ounces with over 152,000 ounces in Q3 alone. Our guidance for 2016 at Canadian Malartic is between 560,000 and 580,000 ounces and increasing as we go through in 2017 to 2018 getting into the 600,000 plus ounces range as the mine continues to evolve to the east and open up into the Barnet Zone as well. Our collective expectations for ounces this year is between 28,000 and 29,000 ounces of zero class royalty with gold delivered to us in pure bullion. There has also been some significant success of exploration on the Odyssey North and South zones to the east of the Canadian Malartic mill which we believe presents an ongoing growth opportunity to create perhaps a higher grade input which will help create additional annual production and also add to the life of mine significantly. And we believe there is significant upside in the deeper levels of the property and we think that this is going to be an asset that continues to grow for a long time to come. Over 113 holes were executed in this program. Currently there is a budget of about C$13.5 million for 2016 and we have a 3% royalty on the Odyssey North and a 5% on the Odyssey South zone. So we are in a great shape to take advantage of that continued success. Eleonore continues to ramp up. Currently the top 650 metres represents 4.57 million ounces of gold reserves. We have a 2% royalty on the first 3 million ounces of gold production, increasing by 0.25%. So, total 3.5% for every 1 million ounce produced thereafter. Plus there is an adjustment for 10% if gold is above US$500 an ounce, which obviously it currently is. So, everything is lined up. 2015 production at Eleonore was 268,000 ounces. Year-to-date Eleonore is about 208,000 ounces. Guidance was set at 250,000 to 280,000 ounces. Our attributable ounces from Eleonore at this point in time are about 5.5 million to 6.2 million ounces, and we expect to see that stay on track. Some of the other value creations that we've had throughout the year; we have earned a royalty of 1% on the Horne 5 project, currently 7.1 million ounces of gold equivalent, located at Rouyn-Noranda. There's an exceptional evolution on that asset with the PEA having been cleared and destined for a final feasibility study to be produced in the second half or in the end of first half of 2017. So that's quite a big royalty. There is also 1.8 million ounces of inferred there and there is quite a bit of upside both at depth and on lateral extensions. And the Falco Horne 5 controls also controls 740 square kilometres of brownfield in and around Rouyn-Noranda which we think has huge upside as well, and then we'd be looking forward to see the exploration to pick up there. The Odyssey zone we already touched on. Hermosa, located in Arizona, exceptional exploration discovery, currently 31 million tonnes at a tick under 11% zinc equivalent with another 82 million tonnes around 11% in the inferred category. This has been one of the fastest growing exploration story there. We retain the 1% royalty and we own an equity position in the company as well. One of the most exciting exploration stories in Canada at this point in time is Windfall Lake. We own a 1.5%, have a right to 1.5% royalty there, and it was held up by our Co-Founder, John Burzynski. We are the biggest shareholder of Osisko Mining as well and we currently have 150,000 metres of drilling on the go there. And for those who have tracked the story, it's been quite an exceptional evolution of that story. It's starting to fast track and it looks like it's going to be a pretty high quality project by the time this drilling is finished and the resource has been framed up. We also retain a royalty on Marban, which is about 1.4 million ounces, 1.5 million ounces measured and indicated, located about 13 kilometres away from Canadian Malartic. The 20,000 metre drill program in 2016 and a PEA study underway to look at the optionality of what to do with that deposit as it is proximal to both the Canadian Malartic mill, the Goldex mill and within the activity, so there's quite a few options for that project to go forward and we think that it's going to add some good value both to our portfolio and to Osisko Mining's portfolio. We also purchased a royalty of 1.7% to 2.55% on Richmont's Island Gold project, with over 172,000 metre drill program there, PEA underway to go to 1,100 tonnes a day, and the gold production is currently scheduled for 75,000 to 80,000 ounces for the year. So, all in all, on to the next slide on Page 18 gives you a bit of a summary of some of the organic growth opportunities that we have. We have over 800,000 metres of drilling in 2016 that are executed or planned for across the different assets that we hold royalties on. So we think that as long as the drill bit is continuing to turn, the optionality in our existing portfolio continues to be enhanced and hopefully converted to tangible value. We had talked about our accelerator model at the beginning and what we have shown here is a couple of examples, on Page 19. In the cage of Falco Resources, we made an equity investment in this company of about C$3.7 million and a royalty investment of C$10 million, turning to 1% royalty. And we also have the ability to apply a royalty as a prepayment against a gold or silver stream at the project financing. This is a company that has gone up in value significantly as well with having started with no ounces in 2012 when it was IPOed to currently holding 7.1 million ounces of measured and indicated and an overall resource envelope in excess of that with another 1.8 million ounces of inferred that hopefully will convert at some point in time. Falco's market value has gone up from around C$25 million to about C$200 million, and recently achieved financing and a market validation from third-party investors having put in another C$32 million, where strategic investors hopefully will put in another C$10 million to C$20 million. So we believe that that asset is well on their way to unlocking value and making our royalty significant. In the Osisko Mining case, John Burzynski, our Co-Founder of Osisko Royalties, has taken the role of CEO. I have stayed on as Chairman. And the team, Andre's team from Virginia has joined the ranks at Osisko Mining. Currently the number one project there is the Windfall Lake project for which we have 1.5% royalty, and we continue to see that grow. But also the Osisko Mining portfolio extends into Ontario and currently has footprint on resources just shy of 6 million ounces company-wide with some of the best brownfield and greenfield opportunities in Quebec and Ontario in its portfolio. So, over the course of our accelerator model, and we began this when we started Osisko Royalties in 2014, we came forward, we had an equity portfolio that was worth about C$35 million, and we brought forward some of the transactions. We currently have about C$148 million invested in equities, of which about C$30 million was invested in tax efficient flow through so that we could offset those investments against our royalty income. And current market value on this now sits at about C$262 million. So we have an unrealized gain on our book of about C$114 million at the third quarter end. So, all in all, all of these investments have been made with the purpose of creating either royalty and/or streaming opportunity. We do not invest our capital in situations unless we think that at the end of the day we are going to earn another royalty or streaming opportunity. So that's been the strategic view of our investments and we've been quite successful with a lot of those investments having gone up significantly in sync with the bull market that we saw in 2016, particularly for gold holding assets. The goal for the next 12 months, as you know we raised money in the first quarter of 2016 that would allow us to be positioned to make investments up to US$500 million without having any conditional issues surrounding that bid. So I think it allows us to participate in the royalty and streaming opportunities that most of the market sees as balance sheet conversions of either debt being converted through the sale of assets or through the creation of royalties and/or streams. We think there is significant opportunity in front of us over the next 6 to 12 months, perhaps 18 months. We have kept our powder somewhat dry as we waited for some of these bigger opportunities to evolve and mature. So, we are active and very active on this file and it's our goal to hopefully add another cornerstone cash flow asset here in the next 6 to 12 months. So that's our strongest way forward and we continue to develop our accelerator model, which is somewhat unique to us, and we think that we have generated some opportunities that are unique to our skill set and to our team's abilities, and also in some cases where we already had a starter position from our previous life. Page 22, we have increased our royalty portfolio from five when we started to over 50 royalties now, some of this through the acquisition of our package from Teck and also we did create quite a few royalties through our accelerator model as we went through and forward here. I won't go into them in detail. But they are, of note, generally speaking Canadian centric with the exception of Hermosa. We do still retain the 9,600 square kilometre land package in Mexico and we are looking to find a solution to how we are going to proceed with that. So that concludes our overview of the quarter. Our goals for the year are to continue to look for our cash flow cornerstone asset increase and also to take advantage of our accelerator model, and to try and generate some unique opportunities with a Canadian centric focus. In terms of changes to the management, as you may have seen, Andre Gaumond is on the call with us. Andre has taken a retirement from the active management side of our business with the completion of the transition into Osisko Mining of the asset base, but he remains on our Board as an active member in identifying and evaluating possible royalty and streaming opportunities when they do happen. John Burzynski and Robert Wares have also moved from Osisko Royalties to Osisko Mining. John and Bob Wares have taken the role there to make sure that it continues to grow. It's been an exceptional growth going from an C$8 million company as Oban to C$450 million market cap as of this year. So, consolidation of many assets and continued success at the drill bit at Windfall have been hallmarks of this year. Also Frederic Ruel has moved in and has been appointed as Vice President and Corporate Controller for Osisko Gold Royalties. And Vincent Metcalfe has moved to Vice President of Investor Relations at Osisko Royalties and Paul Archer is to replace Robert Wares as Chief Geologist at Osisko Royalties and our QP now that Bob has taken the role at Osisko Mining. So that concludes the overview of things today and I did want to invite my friend and my business partner and the co-Board member of Osisko, Andre Gaumond, to say a few words now.

I've been blessed with my career to have worked and partnered with very competent and dedicated people. I feel very lucky. I have been very lucky to have been at the right place and at the right moment to discover fabulous deposit, had the privilege to be supported by outstanding and loyal shareholders with whom I developed friendship and supported by the Quebec government as well as association. I also felt always welcome in the most remote areas in Northern Quebec by many First Nations within which now I have many, many friends. So, what can I say except the fact that altogether I consider myself a very, very lucky man, and I thank obviously the entire mining industry for having given me the opportunity to make a difference in the mining sector and especially in Northern Quebec, and I feel blessed and fortunate and very privileged.

Thank you very much, Andre. It's been a pleasure having been through the Virginia transition with you and I think that your team and the quality of work that you created and consistency of working in top areas will continue on with Osisko Mining, and we look forward to seeing you in many occasions and we will be warning the moose that you have more time for hunting. So I think that the moose should be very scared at this point in time, but we're quite happy and we thank you very much for all the contribution to get us to where we are today, Andre. With that, operator, I think we can open it up to Q&A.

[Operator Instructions] Your first question comes from the line of Mark Mihaljevic of RBC Capital Markets. Please go ahead.

Quick question for me, I guess you guys outlined a number of avenues where you see opportunities in this space and how you see the ability to grow the business. I was just wondering what you see as the current opportunity set and which of the four buckets that you outlined do you think has the best potential of being realized as the next cornerstone asset that you referred to?

We look at the space right now, several of the larger polymetallic companies are capable of issuing precious metal streams on base metal assets in terms of shoring up their balance sheet. So we think that there is somewhere between C$2 billion to C$4 billion possible in that sector. So that's our immediate focus. As well, all these balance sheet transitions are underway as to be able to act in that space, which is kind of a unique time I believe. Once all these balance sheet structural issues have been resolved, it may well be very difficult to see producing assets that we'll be putting streams on. So I think we have to focus on here now, which is precious metal streams on polymetallic assets while this is on the go.

I guess a bit of a follow-up to that. Have you hurt to see any other companies pull back on that front, given obviously copper now up through $2.50, zinc prices again very strong year to date, so has that had an impact?

I think that there's obviously, there's asset dispositions that are underway, there's various processes on the go, but I think if you look across the space, there is about a commitment between management and Board to have about $10 billion to $15 billion of debt reduction in the space. So we are seeing those processes evolve. Some of them are fairly complex processes involving larger assets. So they do take time but they are happening.

Okay, perfect. That's it for me. Thanks guys.

Your next question comes from the line of John Tumazos of John Tumazos Very Independent Research. Please go ahead.

The Osisko Gold Royalties share price seem to be penalized over the last year or two due to some of the exploration development and investment opportunities that were long term oriented to the drill bit and development. And now that you restructure to put some of those in Oban and reorganize the Company, you seem to be penalized without them. What is your strategy to help the market appreciate all the good things you are doing?

John, as you said, we are not happy with our current share performance, price performance. We have gone long ways to restructuring the Company and we continue to finish that process, and with the listing on the New York Stock Exchange, we will be looking to focus on increased volume, which we think will lead to increased share ownership within the Company. So that is our number one focus right now, is to try and get the U.S. retail and institutional penetration through marketing and hopefully through straight up pure performance on our balance sheet, and as we see some of these opportunities that came through our accelerator process, it would be more tangible and understandable to the marketplace. It's our job to try and communicate and demonstrate that what we are doing is hopefully going to generate superior returns. So, as we get further into this piece, John, we will be coming to you and everybody else, that we think will help us with the distribution and increase the opportunities for volume as we evolve into the U.S. market a bit more. So that's the number one goal. And then obviously overall is to run a good business and make sure that our profile is where we would like it to be.

Thank you.

[Operator Instructions] Your next question comes from the line of Michael Siperco of Macquarie. Please go ahead.

Just on the back of this move in base metals, and I'll note too that your investment in Labrador Iron Ore Royalty is up above C$16 again, I thought maybe it was a good time for an update on Coulon and what's going on there, if you have any updates to give there?

Andre, would you like to handle Coulon?

We are doing a lot of internal studies about the functioning, we'd not say a PEA but we are looking at different things, doing some metallurgical work and we are drilling actually the extension of some of the lenses. So there is lots of work on different fronts on Coulon. It's the largest undeveloped copper-zinc-silver resource in Quebec. Of course as you saw that price of zinc has performed extremely well, the copper is now performing much better. So altogether, it's a project that we need to evaluate commercially and that's what we're doing internally.

Very good. Does your thinking, Sean, change at all with a little bit more of a lift to the base metal space here and some of the projects and royalties that you already have in the portfolio?

I think that obviously base metals, like gold in 2015, is maybe looks like it's finding bottom and coming back a bit. So we've set our pace internally to take advantage of both bad markets and good markets. So, I think with our accelerator model we have the ability to take advantage of some of these better markets in terms of seeing more money go into those projects and hopefully generate more value in our royalty package there. And in terms of the general base metals, obviously Coulon is to be the biggest kicker in our position at Highland Copper in Michigan as well as our position at Arizona Mining with the Hermosa deposit. So we have I think a small but potent exposure to the upside there.

Great. And maybe just one last question for me, the amount dedicated to acquisition of investments ticked up a little bit in the quarter. Can you talk about what was in that C$40 million number or so?

As you saw, we did participate in some flow-through investment, most recently on the Falco side, and we did increase some on the Osisko Mining side. But I will tell you that all of our investments on the portfolio have been made in a strategic proportion to achieve either royalty and/or streaming opportunities. So we continue on with good discipline in what we are trying to achieve in a very simple goal of creating another Canadian Malartic or Eleonore style royalty but at a much lower cost than the traditional ones that are being auctioned off in the tank processes right now. So, when we are doing that piece of business, we are looking to earn a superior return to the overall royalty and streaming space.

Very good. Thanks very much. That's it for me.

There are no further questions at this time. I will turn the call back over to the presenters.

Thank you very much, everybody. Hopefully, we can help you with any modelling issues that you may have. I know that we've been working on the acceptance of the incubator accelerator model within the market space and we look forward to any feedback that you could give us in terms of making sure that we have transmitted all the information that will help you look at the opportunity here. We are currently trading about 1.4x to 1.5x NAV. So there is a gap here for shareholders to take advantage of, as we hope to close that valuation gap as we move forward into Q4 and into Q1 of next year. I thank everybody for participating today.

This concludes today's conference call. You may now disconnect.