OR Royalties Inc. (OR) Q2 2018 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Osisko Gold Royalties Q2 2018 Results Conference Call. [Operator Instructions]. Please note that this call is being recorded today, August 3, 2018, at 10 a.m. 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.

So we'll be using our PowerPoint that's posted on our website this morning. I'd like to everybody to the second quarter financial results conference call, and thank you all for attending. The PowerPoint has a forward-looking statement page in the front of it that I'd like everybody to refer to as we will be looking -- making some forward statement in this presentation. So as we look forward to the rest of the year in 2018, the second quarter has been a very good quarter for Osisko, with over 20,500 GEOs earned, 89% increase since the second quarter of 2017, cash flows provided by operating activities of $19.7 million compared to $14.1 million last year for the same quarter, adjusted earnings of $3.7 million compared with $7 million for last year, giving us $0.02 per basic share, a repayment of $51.8 million for our revolving credit facility. We also closed a couple of significant deals: a 5% NSR royalty on Victoria's Eagle Project for $98 million and the purchase of $50 million worth of the equity for the company. We also secured a deal with Falco Resources with a senior secured silver stream facility, up to 100% of future silver produced from the Horne property located in Rouyn-Noranda, which currently has a mineable reserve over 6 million ounces gold equivalent. We also declared a quarterly dividend of $0.05 per common share. This is a continuation with our dividend policy, I believe, bringing us to 16 quarters in a row. In terms of where we are for the first half of the year, this brings our deal totals to $330 million, of which $99 million has been deployed in the first half of the year, so very busy year for us thus far. As we look at the gold equivalent ounces produced, we're on track for our guidance. I'm on to Page 4 now. We're looking at 20,000 ounces for this quarter, setting a stage for us to achieve 40,542 ounces for the first half of this year, looking good for our guidance, which is between 77,500 and 82,500 for 2018. Production and guidance at GEO is on Page 5. We expect that the second half of the year should be steady production, with increases for 2019 and '20. Quite a bit of ramp-up underway in different assets that we're involved in, so we're in a pretty good strong growth curve here. If you look at 2017, we had 58,933 ounces. So we're already, for this year, looking at E&P between 77,500 and 82,500, so pretty fast-track growth in the royalty space. Page 6 includes the breakdown on asset-by-asset basis. Canadian Malartic is still leading the charge with 9,000 ounces for the quarter, Éléonore at 1,660 in the gold side. On the silver side, Mantos at just under 1,600 gold equivalent ounces, Sasa coming in stronger than expected at 1,153. On the diamond side, we have Renard delivering about 2,900 ounces gold equivalent ago. And in other, we had Kwale delivering about 600 ounces. So all in all, we remain highly exposed to gold and silver, with 15% of our GEOs this year -- this quarter coming from diamond and only 3% from other metal. All in all, still very good exposure to silver and -- gold and silver. Financial performance, I'm going to hand it over to Elif from here to go and take you through the financial performance for the quarter. Elif Lévesque: Thank you, Sean. So as Sean mentioned, we had very strong growth this year with posting your right adjusted from last year. So if you look at the revenues, our revenues went up by 79% compared to the same period last year to reach $32.9 million. And if you look at the net cash flows for operating activities, they also went up by 40% to reach $19.7 million for the quarter and, this, even after our interest payment of $7.9 million, which covers the periods from November 2017 to June 2018 on the $300 million convertible debentures, which happened actually at the end of June this quarter. And I guess, this also reflects the increase in our cash operating margins and our lower G&A this quarter compared to last year's same period. If you look at the adjusted earnings, they stand at $3.7 million this quarter compared to $7.1 million last year, and the main difference really between the two periods is the higher finance expenses, by $5.3 million, which is mainly for the $300 million convertible debentures and the draw on credit facility. If you look at the results on Page 8, we had very strong operating results. As Sean mentioned, GEOs are 20,506 ounces compared to 10,863 the same period last year. This actually reflects a 59% increase also in the cash margin. And in terms of that percentage right now, we are at 87%, which is still at a very high level and, this, without taking into consideration, the 1% of the cash margin we get from additional of the offtake agreement. If you look at our financial position, cash and cash equivalents stand at $188.6 million. And this is after our debt payments that we've done this quarter, over $50 million; the payments that we've done on our Victoria transaction; and the debentures of $7 million that we closed for Falco. The debt stands at $419.2 million, and this is on a net basis after accretion and unamortized transaction costs. And our investments stood at $336 million, and this reflects the fair market value as of June 30, 2018. So for us I guess, it was very important to show, in terms of the credit facility that you see on Page 10, our capacity, which shows the $450 million that we have on the revolving. And of that, about $100 million right now is drawn so -- which still leaves us with an available $350 million. And I think we're going to continue reducing our debt facility as we generate cash flows from our operations. And if you look at our long-term debt on a gross basis, we've gone from almost $500 million to about $450 million this quarter after our payment. And I think our goal is to continue to reducing our debt position. Going on to Page 11. During the quarter we distributed another $7.8 million in dividends, bringing the total to-date since inception to about $71 million. And we declared another $0.05 per share in dividends yesterday. And with that, back to Sean.

Sure. Thanks, Elif. And in terms of the transactions, we -- the big transaction in the first half of the year has been the Eagle transaction for Victoria Gold for a 5% royalty, which will generate somewhere between 8,000 and 11,000 ounces per year of 100% margin gold for us. The project is under construction. We visited site here in July. It's going well under the heap leach operation and located with road access, about 45 kilometers north of Mayo in the Yukon, a very good jurisdiction. And I think that we have a pretty good feel that things there are moving fast there. Equipment's being delivered, and we think that this project is on track to deliver gold in 2019, somewhere in the second half of the year as we go forward. So this is one that's pretty much in the here now and moving well with a very experienced management and EPCM contractors fully deployed on site. The Horne 5 silver stream on Page 13. We have -- we obviously know this project quite well. It's located in Rouyn-Noranda in Quebec, 6 million ounces of minable reserves at 2.37 grams, looking to build a 15,000-ton-a-day-plus operation here. Feasibility was completed last year and currently in the EIA permitting process with our partners at Glencore. Good-looking numbers in terms of what we're seeing, in terms of upside potential there as well. Some strategic items have moved forward in the project. The sites has been secured, and the school that we had to relocate will be handed over and exchanged some time, probably by the end of September as we move forward. So that project is in good stead, and we think that, that's going to be a long-term asset with quite a long mine life as well located right here in Québec, so quality -- a very quality asset and a good exposure for us. And that deal that we struck there is incremental deployment, so we're not deploying 100% of the capital on day 1. We're doing it on a milestone basis, which I think gives us a significant advantage as we move to these projects. Page 14, the cash flow assets, a strong North American focus. I won't go through them all here. But as we move through the year, a lot of these assets are going to ramp up: Renard, Éléonore, Brucejack and Ambler are all ramp-up assets right now. And we're seeing good progress on all of them. We also have the Gibraltar stream at -- with Taseko over at -- in British Columbia. We also have a few other assets that are smaller pieces that have been moving well. Island Gold has been a strong performer, better than expected without most of the operator. And we see that moving quite well, San Ramon and Mantos matches our top performer in South America at this point in time, and we continue to see all those assets come along. We have long-life assets that are relatively young in their life cycle, so this is a success -- the foundation for success for some time to come. Page 15 is the near and medium-term cash flow assets. Again, we won't go into all of them, but we have a 1% royalty on Hermosa, which just got purchased by South32, in the first process of -- we're signing with South32, so that significantly advances that project. Barkerville Gold published a resource -- a total resource of 3.7 million ounces, with 1.6 million ounces being measured and indicated in the second quarter. So that's moving forward. Victoria, we've already covered. Falco, we've already covered. We also have a 2% royalty on the Upper Beaver project, which was consolidated when Agnico purchased the other 50% of it from our friends at Yamana . Windfall Lake has been a strong performer with some quite strong discovery and ongoing discovery as we look forward to that one. Underground tuff mining is underway there, and we've struck about 1.6 kilometers of ramp down to a vertical depth of just under 200 meters already, so moving forward on that one as well. Some of the other ones, obviously, we know pretty well. Odyssey North and South is that -- the Canadian Mine site. That is moving well, and that's a stage for continued mine life at Canadian Malartic. Page 16. 104 assets in North America, 9 in South America and then up to a total of 136 assets spread out around the rest of the world, with most of our assets being North American-based. So in summary, 137 royalties in total, 5 cornerstone assets, 19 of them in production, paying a dividend rate now of in excess of 1.6%. They all are precious metal-focused in North America and looking forward to hitting our guidance for the year between 77,500 and 82,500. Our equity book stands at $336 million. Our cash on hand is $188.6 million and our available credit at $450 million, bringing our available capital for deployment over $900 million in the assets available for us to work with as we continue to build out this business. We are very happy with the results thus far. This is year 4 for us. We just celebrated our fourth anniversary as a company in June of 2018, so pretty strong progress. And we continue to see lots of opportunity for us. And having done over $330 million already this year, it's already been a big year. So we'll see where we go from here. On that note, I'd like to thank everybody for the call and open it up for questions.

[Operator Instructions]. And your first question comes from the line of Dan Rollins with RBC Capital Markets.

Yes. Sean, I'm just wondered if you -- a couple of questions for me but just on the first one. Can you confirm if in the 2018 guidance on gold equivalent sales/production, how much is in there for Amulsar this year?

I don't believe we included anything in this year.

Okay. Perfect. and then just more bigger picture, now that you've had sort of the Orion package in the fall for a few quarters, and I know it's still pretty early given the long-lived nature of some of those assets, but which assets have been sort of performing better than expected? And which ones have you been a little bit more disappointed in?

I don't think that there's too many surprises for us in the mining industry. We've been around a while. We knew we were purchasing a fairly young portfolio of ramp-up assets, so nothing's really surprised us. Some things have disappointed us and we celebrate what goes well, and we hope for the best for the rest. Sasa's been a good one. Seabee's been good. And Stornoway's been performing relatively strongly for us. So we've had -- there are some issues that started at Stornoway but we're -- it's one of our top performers in terms of gold equivalent ounces for us right now. I think that the evolution at Pretium, as you know, we've always had to wait and see. The company does want to buy that stream back, so we've included that as just cash back. We haven't put that in our long-term forecast at this point in time, but it's been relatively strong last quarter, and we continue to see good progress on the mine development there. So Mantos has been quite strong, and we continue to see good progress on that asset. It's not one that a lot of people know much about. It's previously annual asset, but the Orion team has gone in there and really had very good success at evolving that asset. So we're quite happy with both of those, and we knew 2018 and 2019 were ramp-up years, so we continue to have a patient hand and support where we can. Our goal is always to support these projects. We're experienced miners. And we know that in the mining industry, there's always something to fix. So that's our job, and we're eyes wide open.

Okay, perfect. And then on the opportunity set, what are you seeing out there? Obviously, we've seen share prices pull back here for the precious metal space. Gold's come off, hovering at just over $1,200 now. Are you seeing more opportunities coming through the pipeline? And if so, what's the competition for those opportunities look like, and that's it for me.

I think Victoria's a pretty good indicator of what we're seeing out there. I mean, a fully permitted project in the Yukon where we're able to team up with Caterpillar Finance, Orion and put together a package to get that project fully financed. So that's less money in, kind of best-case scenario, where we like the jurisdiction and a lot of the engineering and permitting issues are taken at hand. So that's been a really good one for us. In an uptick market, that might have been a harder deal. But the reality is there's not that many allocations of capital coming out of the equity space right now. So we're pretty busy, and we're seeing quite good competition mostly from private equity on the project finance side. On the exploration side and development side, there's less competition because there's less people wanting to get involved in exploration assets. So we're picking our partners extremely carefully on exploration, but we are still doing some good shots on the assets that we have a strong belief system in on the exploration side. So you we're seeing quite a bit there. And those are quite smaller bets, so they're not really things that are going to have a short-term effect on us. But they do set the stage for the future, so we're working the short term, medium term and long term. But it's a very good sign to be a royalty and streaming company and to be trying -- we're still driving and trying to focus on the Canadian and North American assets. And we work pretty hard in that piece of business, and that's kind of where we're hanging around right now.

[Operator Instructions]. Your next question comes from the line of Mike Jalonen with Bank of America.

With Falco and the stream there, what will be the next incubator company to -- you might get a stream on? Would that be Windfall or -- just curious.

Well, I don't like making forward statements, but I will go that far. No deal's ever done 'til it's done. But obviously, providing capital to projects that are moving forward that have a near-term opportunity to attain production is goal one. But we're seeing quite a few things that are starting to move. Permits are coming together and we were -- we're going to stay focused, as I say, trying to be dominantly Canadians and trying to be on -- dominantly in brownfield caps where we can, where we understand the game. But I won't give you any specifics today.

Your next question comes from the line of Michael Siperco with Macquarie.

If I'm not mistaken, it looks like the share buyback activity dropped off a little bit in the second quarter. Could you talk a little bit, I guess, about your thoughts on that and maybe more broadly, how you look at the valuation versus your peers versus to the sector? And any commentary that you might have around that?

Yes. This quarter, we elected to really focus on the debt theme -- repay the debt. So that was our priority for this quarter. We'll examine on a quarter-by-quarter basis. It is an ever-changing equity market as we all know. So we're trying to find out what's going on in the equity space, as are a lot of people. But at the end of the day, we run a pretty good business based on cash flow and assets. And we'll deal with equity at the appropriate time, but we're not committed to any particular strategy given the volatility of the markets. If we see an opportunity where we feel that repurchase of shares is the appropriate step, well, we will act. If you -- next year, we'll always have an asset in place with most of the companies we're involved in for special events. Right now, I think we're sizing things up, and we'll see how we go. But for us, we've been able to deploy capital at some good projects, and we were able to pay back our -- $51 million on our revolver. So I think that was a pretty good act for the quarter.

Your next question comes from the line of John Tumazos with John Tumazos Independent Research.

If the gold price stays wild or falls another $100 and lots of good opportunities drop in your lap because the other small companies, gold companies, can't raise money, what are your plans to take advantage of those good opportunities, Sean?

Well, as we said in the call, we have more than $900 million of free board in our company right now for royalty and streaming companies. Providing capital is our business. We try to do it at the bottom of the market, so we're very active right now in terms of identifying opportunities. It's extremely busy times for us, and this is when royalty and streaming companies do their work. So we'll be there to provide capital and to provide support for companies that want to keep moving forward. As we know, these projects are longer term. The day-to-day gold price gets taken into effect. But at the end of the day, tentatively speaking, from permit to -- from discovery to permit, construction, it tends to be about 6 or 7 years now. So we take a slightly longer-term view of the project cycle. And we try to deploy at the right time, so that we earn a return for our shareholders. We had a very good time in 2015, which was our first big year versus the gold royalties. We did the Virginia deal, and we continued to move forward. 2016, the second half, we saw the market strengthened. We didn't get too many deals done, but we were able to build from the success of 2015. And just like the first half of '16, we were able to incubate our fiscal mining part of our gold, Barkerville Gold, Falco Resources. So we continue to stay on our accelerator strategy, John, and to be there not only to provide capital but also to provide technical and financial support to the company to get into the asset. Because we don't really want to just own royalties and streams on things that don't get built. We need these things to go on to production. So that's kind of our focus, is we want to make sure that we're there for the whole cycle. John, I just -- they didn't mention that you were very independent on that sales announcement, so I'll just clear that up for everybody's.

There are no further questions at this time.

All right. Thank you, everybody, and have a good weekend. Thank you for taking time on a Friday to call. I really appreciate that, and give us a call if any other questions come up. We're not on vacation.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.