OR Royalties Inc. (OR) Q1 2017 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen, and welcome to the Osisko Gold Royalties Q1 2017 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, May 5, 2017 at 11.00 Eastern Time. Today on the call we have Mr. Sean Roosen, Chair of the Board of Directors and Chief Executive Officer of Osisko Gold Royalties and Mr. Bryan Coates, President 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. [Foreign Language] Sean Roosen [Foreign Language] Welcome everybody to the first quarter report for Osisko Gold Royalties. We’ll be using a PowerPoint located on our website this morning, please review the cautionary statements as forward-looking statements that we will be making during the presentation today. And I’d like to proceed on Page 3 with an overview of Q1 of 2017 for Osisko Gold Royalties. We reported 10,418 ounces gold equivalent a 9% increase for the first quarter over Q1 of 2016. Quarterly revenues at $17.1 million, 10% increase over 10% increase over 2016, a net cash flow provided by operating activities of $12 million, a 22% increase from 2016 Q1. Cash and cash equivalents of $423.6 million as of March 31st, closing $33 million investment with Osisko mining $44.3 million at silver stream on the Gibraltar property was also achieved in Q1. We also declared a dividend of $0.04 per common share, paid on April 17, 2017 to make this I believe our 10th dividend in a row. And we did that on a close of business March 31, as of March 31, 2017. Subsequent to March 31, we’ve had the acquisition of additional common shares of Barkerville Gold Mines, an associate of Osisko for $28.1 million, some of which was invested previously as well, and increase our holding to 35.2% of that company. We also added 8.75% NSR on the Cariboo gold project owned by Barkerville Gold for cash consideration of $12.5 million, which now gives us a total royalty of 2.25% on that project. On May 4, 2017, the declaration of quarterly dividend of $0.04 a share, payable in July 2017 to shareholders on the record date of June 30, 2017 as well. On page four, gold equivalent ounces or GEOs as we said is gone to 10,418 ounces for the quarter and guidance for this year is 43,300 to 46,100 gold ounce equivalent for the year of 2017, that would be 9% increase in GEOs for Q1. On to page five, again reflecting our net cash from operating activities, 22% increase to $12 million for the first quarter and also a 10% increase in revenues to $17.1 million over our Q1 2016 revenues of $15.6 million. So, all in all, we’re continuing to move forward all of our metrics. Page six has a summary of everything that we've been doing. We had goal of 9,980 ounces, 438 ounces of silver and a realized gold price of CAD1,620 for the quarter and $1,228 for the quarterly average gold price was $1,219, per ounce. So, we did manage to outperform the average gold price in Q1 for our sales. Our revenues again at $17 million plus and the net earnings at $4 million for net earnings per share of basic $0.04 per share. On to page seven, cash and cash equivalents of $423.6 million, $46 million in debt in the form of a convertible note and a total asset based out of $1.42 billion moving forward quite nicely and shareholder equity is now at $1.2 billion. We have $620 million of cash and available credit as well as, an equity investment portfolio of $341 million, giving us assets and cash that debt available of just about $960 million. So, pretty good progress considering we’re in our 34 month of business. Stable dividend as you can see on page eight. We've increased the dividend in Q4 of 2015, it would maintain the dividend payable at $0.04 per share since then Osisko has paid $35.1 million in dividends to shareholders in the past 10 quarters. Page nine a bit of a summary of our producing assets Gibraltar in British Columbia, Éléonore and Canadian Malartic here in Quebec, as well as, Vezza and Island Gold located in western Ontario. Growth assets, a bit of a summary here. We have royalties on Windfall, Coulon, Pandora, Lamaque, Marban, and also land package in Guerrero. We have 1% royalty on Hermosa, which is the Arizona mining’s new discovery, a big discovery in Arizona and also the royalty of 2.25% on the Cariboo project owned by Barkerville. On page 10, a bit of a breakdown of where we get our revenues from. Currently we're getting about 31,000 ounces from Canadian Malartic, being our cornerstone asset, Éléonore is our second largest contributor of 6,800, 7,000 ounces, then Island Gold, Gibraltar and Others as you can see on the list. So, and to on the Page 12, now I will go through a little bit of an overview of some of our key assets. Obviously, Canadian Malartic, we have a top line 5% NSR on the Canadian Malartic mine and currently 7.1 million ounces in reserves there, one of the largest in North America and I believe Canadian Malartic is now the 18th or 19th biggest gold mine in the world and certainly one of the biggest ones in Canada. We're looking for production in Q1 and had 142,000, which was 7,483 ounces earned by Osisko Gold Royalties. Guidance of the mine is mine now for 2017 should be around 600,000 ounces, 2018 going to 650, and 2019 we’re looking for 640,000 ounce there, which would give us the equivalent ounces moving from 30,000 ounces to 32,000 ounces throughout that equivalent period. A proven and probable reserves that are showing to 7.1 million ounces are all within the Barnat and Canadian Malartic. And subsequently there's been a discovery on the property that’s been developing since the spring of 2014, which has now been firmed to see the Odyssey discovery. So it’s had another 1.43 million ounces or about 20 million ton trading 2.15 grams between north and south Odyssey zones. As if 34 holes have been drilled into that, so that’s encouraging and we do have a royalty on both of those zones. So, congratulations to Canadian Malartic mine team for their efforts and their discovery on this. On to Éléonore, we’d like to congratulate Goldcorp and the Éléonore operating team for the 2016 joint John T. Ryan safety awards, an outstanding accomplishment for a new mine. We have a 2% royalty growing 3.5% NSR on this project, currently collected about 2.25%. And as the production increases through 3 million ounces, we would eventually see our royalty increase from its current level to a total of 3.5% after 3 million ounces of consolidated production. Production for the first quarter was 78,000 ounces, 1,500 ounces through Osisko, and guidance for the year is set 315,000 ounces, which would give us about 6.8 to 7,000 ounces of zero NSR gold. On to page 15, are moving to asset acquisition, the Gibraltar stream with Osisko as the operator. They’ve had great results and the mine has really come along well and its one of the largest exist in Canada of 85,000 tons a day. So, they’re quite happy to be partner with Osisko, their rig operator and we're looking forward to good things to come from that. And for this year, we’re looking at silver production of about 200,000 ounces for now for 2017 and that should be relatively stable any way till about 2030 and then we would hope to see an increase of about 350,000 ounces a year for that. So, this is a very long life asset, located in Canada with a mature operating program in place. Some other royalties on page 16 that are in production right now. We have a royalty on Richmont and we want to congratulate the Richmont team on the new discovery that was announced today. It looks like they've had some pretty good luck at the drill bits there and we wish them continued success with that discovery. Production for 2016 with 83,000 ounces a year at this mine and we're looking for somewhere between 87,000 and 93,000 ounces for this year, which would give us fairly good ounces of about 1,500 ounces for the year and we’ve received 416 gold ounce equivalent for Q1 in 2017 from the Island Mine. We also received 351 ounces from our investment with Vezza and they continue to make great progress as they reactivate the Nottaway mine. We have a 5% royalty plus 40% NPI on that project as well. Page 17 a bit of a summary of our other royalties, we've gone in three years from 4 royalties to over 50 royalties in our portfolio and we continue to add through that royalties to the program and we're happy to add our first stream to the program this year as well as, at the Gibraltar asset. I won't go through them all, but as you can see down located in Quebec and Canadian dominance with one current asset in U.S. Page 18 one of the things that’s really important to the way that we look at the world in our strategy, we think that most wealth is created at the drill bit and that’s also during the lowest five place to get a royalty, was at the very beginning of the project. There are 870,000 meters drilling planned on ground that discovered by our royalties for 2017, which is on the back of 800,000 meters that was drilled on our land in 2016. So, we have great leverage to discovery and to the gold price with a lot of optionality in our optionality. That sometime is not reflected and the true value of the company for those of you to invest in the company, you should keep in mind the amount of exposure that we do have to upside that very little cost to us. Page 19, a bit of a summary of how we're looking at our accelerator model. In the case, we’ve given you a couple of examples Osisko Mining and Falco Resources on this page. We purchased 1% royalty on the windfall project and on all the other project in Osisko Mining in April 2016 for $9.8 million investment. Our current equity position has an unrealized balanced value of $81 million. So if we were just to sell our equity position and maintain our royalty, we would receive $71.9 million to purchase that royalty, so that’s what we’re trying to achieve with our model. Falco Resources, we bought a royalty there for $10 million. We have an unrealized gain of $7.5 million in our equity position there of which – a lot of it was purchase through flow through which we can use to protect our royalty revenue. So the real net cost of that royalty as we stand today would be about $2.5 million. So, again, our model is working quite well, Barkerville as well. We currently repurchased the royalty there for a total of – at this point in time $37 million. We have an unrealized gain on our acquisition in excess of what’s shown here with $17.5 million unrealized gains. So our net cost on this royalty, which is now at 2.25% would have been closer to $20 million. Arizona Mining, a great discovery, [indiscernible] discovery in Arizona with $10 million to our royalty. We have an unrealized gain on our equity position in that a $13.3 million, so if we would have [indiscernible] we would have been paid $3 million to net royalty. So, we think we’re creating significant value for shareholders through this model and I think that now that we’ve been able to demonstrate potency and the effectiveness of this approach that we hopefully would be reflected into the share prices we get further into the piece. Page 21, also our equity book. We do make equity investments usually the most of our equity investments are done in the context of earning a right to the royalty or a stream or royalty and a stream combined in the deal. So we’ve deployed a total of $209 million of which $48.3 million was flow through. And that flow through can be used to deducting our taxable revenues from our existing cash flow from royalties. So, now we will not pay taxes probably until 2019 and with this model we have an unrealized gain right now in excess of $140 million. So, the total value of the portfolio as we said at March 31, $341 million from an investment base of 209. The value also that we accessed in royalties through the equity investments, we had realized gain of $17.2 million and we purchased royalties for $62 million, that now have a significantly higher value than what we paid for them. So again, the equity plus the royalty and/or extreme has created significant value for our shareholders. Page 22, corporate summary, I won’t go through all of it. But we now have a market cap of $1.5 billion, which is 3x from where we started in June 2014. We have $12 million in operated cash flow for Q1 2017. We have cash available for investments in excess of $423 million plus an available credit line for another $200 million to $623 million available and our equity book sitting at $341 million. So combined liquid and investments in excess of $900 million outside of our royalty portfolio. Quarterly dividend again, we paid $35 million, hence we started the company out in dividends and our top shareholders are listed here and we’d like to thank our friends at Caisse De épôt, Van Eck, Montrusco, Blackrock, First Eagle, PSP, EdgePoint and T. Rowe and M&G Investments for their continued support of Osisko Gold Royalties and we look forward to catching up with them as we head Spain for the Bank of America Merrill Lynch conference, that’s held annually, which we will participating in. I don’t have anything else for you today, so I’d like to thank everybody and open it up for questions.

[Operator Instructions] Your first question comes from the line of John Tumazos from John Tumazos Company. Your line is open.

All right, we’ll come back to John, I assume we have a technical problem.

Your next question comes from the line of Mike Jalonen with Bank of America. Please go ahead.

Hi, Sean, everyone here. Just I had a question on Osisko Mining and Falco with Windfall and Horne obviously, it looks like it’s pretty priceless [ph] discoveries and I keep thinking of [indiscernible] of obviously former executive chair at, you go and say that on running river he thinks the stream there is wind for royal gold and new gold. So, I’m just wondering what the thought process is, like you guys are well positioned I would assume for streams on these assets if these two companies are looking for that. So, I’m just wondering, what you're thinking?

Absolutely. We believe that both streaming and royalty as a source of capital for project development has its place in particular in earlier stage projects and we look forward to working with those companies as we get to the private financing level. In certain cases, we have existing agreements in which we have the right to negotiate a stream and at the appropriate time we will review preceding to do that. Most of the time we would like to do that once we’re at the feasibility level. So that’s kind of their match line through point for that, but, of course they have their responsibilities, to [indiscernible] those opportunities and make sure that they get the best deal for their shareholders as well. So, we look at those opportunities and we think that we're going to be able to create this pretty good wealth not only from that, but also the equity position that have increased in value, puts us in pretty good stead to make money in the short-term and set the stage for the medium term to address further in these projects as they move closer to development of those. We are intent on that. One of the most important aspects of the incubator model is that we’re already creating organic opportunities for Osisko Gold Royalties reported for their capital. Once the pipeline continues to fill out, we see it as sort of a continuous process, where these things are moving through their normal project cycle time. And once we get two or three years further in we should have a fairly cost of organic growth within our streaming and royalty portfolio.

Okay and I don't cover either of these socks, which one would be further ahead, is it Falco maybe and they appear to have more like pre fees or PEA out would that be the first one or is too hard to tell right now.

We would expect to Falco have a feasibility study at sometime in the third quarter this year. They have 7.2 million ounces of measured and indicated in their in resource model right now and it was a publicized [ph] study on their website. And as being the CEO there with the start of previously our Chief Operating Officer and we built Canadian Malartic [indiscernible] is making great progress and should deliver high quality of final feasibility study in Q3.

Thank you.

Your next question is from Dan Rollins with RBC Capital Markets. Please go ahead.

Sean, I was wondering if you might just be able to comment on what you’re seeing as there on the deal pipeline with respect to the size of projects or royalties that are out there, is there a number of packages. And are you actually looking at other development stage projects right now and if you are what type of equality you are seeing out beyond what you already have in your existing through Windfall and the Horne?

Yeah, I think we've seen a bit of a slowdown on the mature polymetallic mines that were putting that into streams and last year and the year before. We have seen an increase in project financing and I think that’s traditionally where royalties of streaming business has been done. So, I think we're back to a more traditional market for royalty and streaming. With the success in the capital that came into the space in the second half of 2016 earlier this year, we are seeing quite a few projects moving forward. We expect to see quite a big, we’ve green lighted, so we’re pretty accurate. I can tell you that nobody on the team has had any time off. We have several term sheets that are circulating any given day. So, it is busy, there are opportunities perhaps, not to the same level as there was in 2015 and 2016, as again with a polymetallics, but there is an awful lot going on in terms of moving things forward.

Okay. And then subsequently to that, it looks like right now you're being at about 30% of your operating cash flow in dividends, you're sitting on a lot of cash, if the bigger deals aren't out there. Where do you see the dividend progressing over the next one to two years? Are you comfortable with the $0.04 range or do you think, you have the capacity to start to move it higher here as the free cash flow really strips to pick up with the new addition this year?

Yeah, I think that as we see cash flow kind of available, we want to increase our dividend. The appropriate time to do that, I'm not going to pronounce today, but from the board of director’s level and shareholders that I've talked to, they have encouraged us to do that. We believe that to be a good use of our cash as we go forward as well. So we will want to continue to take our holding asset base that are reflected as a dividend payer.

Okay. And then just one final question for me. When the original, the spinout came in 2014, you had the Guerrero properties, they’re still there. And since then you've also picked up Coulon. I’m just wondering, you could give a little bit of color on sort of what the exit strategy is on those two assets right now potential timing around an exit on those?

Yeah, we’ve had several opportunities to look at different scenarios, by which we would do that. As you know last year we work to do a lot of structural stuff with the Virginia asset base that we acquired when we merged with Virginia. A lot of the James Bay assets we did a deal with the Osisko mining and that team is now operating, not only the James Bay asset, but operating the Windfall project as well. So, that was done last year as well as the listing on New York Stock Exchange for the 2017. We are looking at Coulon our investment there, and also our investment in Guerrero to find an optimal scenario to give capital as projects move forward. So we will be doing something with them hopefully this calendar year subject to the opportunity being convincing us is the right way to go, but we will be working on it.

Great. Thanks very much and good luck for the rest of the year.

All right. Thanks very much Dan.

Your next question is from John Tumazos with John Tumazos Very Independent Research. Please go ahead.

Among the different suites of properties that you’ve invested in or have exposures to, which one or two or three do you think are closer to coming into production? Or do you think Windfall will beat Horne or Barkerville, which do you think are first in the queue?

Well, Barkerville is actually going into small scale production as we speak. But if you are looking for probably 20,000 or 30,000 ounces a year to start there and we're driving an underground isle as we speak and we have remobilized the QR and Mill. But the big prize embark those to drill [indiscernible]. As you know Windfall Lake is still not being in discoveries. So, I think that we’re working hard to frame up a resource there to set the stage for the feasibility in the Permian. John and Luke have move forward with the acquisition of the [indiscernible] so that's probably a simpler projects in the near term because it'll be ramp access and you know not too big of a mill. The ---- project is a much bigger scale project looking for 15,000 kind of the underground mine and 15,000 kind of polymetallic triple circuit mill. So, it will take a little bit longer, but it is the high quality asset with over 91 million tons. But 2.5 gram gold equivalent and a significant amount of upside, but that project has a 17 year mine life based on the current resource with another basically, potential for another 5 years to 10 years in the inferred resources assuming it can be converted. So, that would be the way I would see it going and in terms of Barkerville, they’ve had a discovery there near the Shaft zone, so they’ll be drilling out that this summer. After we see, how that frames up, we can decide what the timeline for a second stage project at Barkerville might be. But right now Windfall Lake is fracing quite well, team issued the permitting process sometime around the end of the year. Once we get resource our work done.

Am I right to focus on those three year or are there a couple of more, are there varying near the same status? Odyssey I guess we treat is part of Canadian Malartics as it goes through the same mill?

Odyssey is covered on the same deal that we had when sold Canadian Malartics for the joint venture. The other ones that we obviously is from a royalty standpoint. Richmont is in production now and doing quite well. We also have a royalty on the Integra ground at Sigma and they are driving towards production as well. So, we don’t know exactly when they’re going to be in production, but they’re underground and they’re moving well right now. So, they could be contributors to us as we move forward. Vezza is a smaller thing, and so remnant pillar mining on the go right now, which is starting to contribute this year and could be quite helpful to us as we get into the year. And they’re looking like they’re going to have a pretty good year for us. So, those are going to adding into production for these 2017/2018 as well. So, those are kind of primary ones, John.

Thank you very much.

All right. Thank you very much everybody. There seems to be no further questions and I thank everybody for their time and hopefully we’ll get some good growth markets and we’ll see everybody over in Spain at the BAML Conference.

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