OR Royalties Inc. (OR) Q3 2018 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Osisko Gold Royalties' Q3 2018 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 7, 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; Mr. Bryan Coates, President; and Ms. Elif Lévesque, Chief Financial Officer and Vice President of Finance. I would now like to turn the meeting over to our host for today's call, Mr. Sean Roosen.

Welcome everybody to the Q3 conference call. We are in Zurich today, so we may have a bit of a sound quality issues, in terms of the call, but if we don't, we'll refer back to Montreal. As noticed today, we have most of the management team with us today. A good quarter, again, within our boundaries of our guidance. Three months ended September 30, 20,000 GEOs, nine months ended 60,500 GEOs. So right down the middle of the fairway in terms of what we were expecting. Cash flow continues to come through at $20 million this quarter, $63.6 million to date. Adjusted earnings are now at $5.7 million for the Q3 bringing the years total to $18.3 million. GEO in Q3 was at 20,000 ounces up from 16,600 in 2017 for the same quarter. We also reported 87% cash operating margin on our ounces to date were 60,548 ounces reported for the first nine months operating. So we continue to hold our ground on our margins. Page 9 of the PowerPoint presentation that's on the website, gives you a breakdown on a bottom line basis. Obviously, Canadian Malartic seems to just kind of - is by far the strongest asset at this point in time with 8,930 ounces for the quarter. Éléonore at 2,000 ounces, CB at about 691 and Brucejack reported about 361. All the other assets are in between the 200 to 500 ounce range for the quarter. I think that's a good interest today though that 71% of our royalties are in gold, 18% in silver, and 8% in diamonds. So definitely on the precious metal side and continue to dominate with gold assets. Onto the next slide. Strong performance from Canadian Malartic as we talked about with mine having produced over 527,000 ounces so far in the first nine months of the year. Making Canada's largest gold mine by production and the world's 12th as we sit today with the first quartile cost profile. It's also located in Quebec, one of the best jurisdictions in the world and continues to have exploration success and development success as they push forward on Barnat, Odyssey and East Malartic zones in the development program there, so we continue to see good upside at Canadian Malartic. We are delivering here on growth and continued to do so 2017, we had 58,933 GEOs. With this year our guidance set between 77,500, 82,500 and we're on track to make that happen. Revenues from royalties and streams up 57% year-on-year for the first nine months, so it's a pretty good growth cycle we're in right now. And I'm going to let Elif take you through the next couple of slides here. Elif Lévesque: Thank you, Sean. So we have seen another steady growth in our revenues from royalties and streams in 2018, like Sean mentioned at $31.4 million for the quarter and $96.8 million per year-to-date, which is 20% increase for the quarter and 57% increase for year-to-date compared to the same period last year. This growth was mainly due to another strong performance from our main assets which is the Canadian Malartic royalty and from the assets acquired last year, like Mantos, Sasa and Renard stream to name a few. Our stream growth was also reflected in cash flow from operating activities, reaching $20.6 million for the quarter and $63.6 million for year-to-date. The same period last year was affected by transaction costs related to the Orion transaction of $7.8 million for the quarter and $8.9 million for the year-to-date. But even when we exclude the impact of that we are still looking at 132% growth in operating cash flow for the quarter and 76% growth per year-to-date. Adjusted earnings on the other hand stood at $5.7 million compared to $8 million for the same quarter last year and $18.3 million for the current year-to-date compared to $21.7 million last year. We have seen an increase in gross profit this year and a considerable reduction in G&A, but the higher finance costs related to the interest expense on the $300 million debenture results in the lower adjusted earnings. So going to Page 9 of the deck, the gold price was under pressure during the third quarter of 2018 and pretty much in line with the same period last year for the nine-month period. Regardless, we have another strong quarter in terms of revenues from royalties and streams at 90% cash operating margin of $28.1 million for the quarter, and 89% cash operating margin of $86.6 million per year-to-date period. Offtake interest provided the Company with an additional $0.8 million for the quarter and $4.1 million for the year. With that, Sean back to you.

Thank you, Elif. So we're on Slide 10 now like Activities for Q3, most recently that 1.75% NSR, additional royalty that we purchased on the Cariboo property held by Barkerville Gold in British Columbia, Canada. Giving us a total royalty there of 4%, according to the new agreement. The Company had at Barkerville also has the option to ask to sell another 1% under the agreement. Second big item was the receipt from Pretium on the Brucejack that they want to repurchase the stream, which is an option on the contracts that we purchased from Orion last year. They will pay us - we received notice - we will receive US$118.5 million at roughly C$153.4 million on December 31, 2018, which will reinforce our treasury and give us some dry powder continuing to transact. We also declared a dividend of $0.05 per common share in the quarter. The record close to the business of September 28, 2018, paid on October 15, 2018. Subsequent to September 30, we've done an amendment on the Renard Stream, and I'll get Joseph de la Plante to take a quick pass at what that means. We also repaid US$10 million in debt and C$12.9 million and extending the maturity date by one-year to November 14, 2022. So that's good progress there. And we said we've declared the dividend at $0.05 for next quarter as well to be paid on January 15, 2019. So on the stream repurchase, we've received the notice. This will give us a purchase back in - as I said, on December 31, 2018. Pretium had the option of doing this year on December 31 or in 2019, so these elected to come early, which is probably good for us in terms of the investment opportunities that we see in the space as of today. Slide 12 goes through, the Renard Diamond Stream Amendment, so I'm going to ask Joseph de la Plante to take you through what that means to Osisko shareholders.

Thanks Sean. So subsequent to quarter end at Osisko as part of the largest syndicate, did enter into an amendment of the Renard Stream as part of a larger comprehensive set of financing agreements that was done between Stornoway and its creditors. The total stream amendment was - for an additional proceeds to Stornoway at $45 million of which $21.6 million came from a Osisko. And essentially the main amendment to the contract was to the transfer pricing structure. So as you recall originally the stream had to $50 per carat transfer price. After this amendment, we have modified that to $40 a carat or 40%. So it's the lesser of those two amounts. And the other additional thing that we change is that the stream now applies to all life-of-mine diamonds from the entire property, whereas previously it applied to life-of-mine diamonds from only the 5 kimberlites never part of the original mine plant. So it's an important amendment for us. Ultimately, this better aligns us with Stornoway. We resolve with immediate increase cash margins on the stream and increase cash flow. We have better downside exposure to diamond price and to over recovery as small stones from the mine. And as a reminder this comes effective October 2, so with subsequent to quarter end, but it will be reflected in our Q4 results.

Page 13 goes through the increase in royalty on the Cariboo land package in British Columbia. The royalty covers over 2,000 square kilometers, one of the more prolific gold belts in the world, and this is a capsized play with the strike length here of the main structural 25 kilometers. Benefits to Osisko of course we gained exposure to this land package, which has been accelerated quickly, in terms of knowledge of the project and the potential that we see there. Company published a resource update in the spring with about 1.6 million ounces at six grams in a measured indicated another 2 million ounces that over five grams in the inferred category. So it's moving well. We see intensified drilling there as well as we unlocked the geological knowledge that we need to figure this one out, but it's come along the way in a very short time. Page 14, just to summarize our investment thesis. So we have early opportunities, development opportunities, and producing opportunities, and what this slide shows you as the time value of money as projects go through the various stages of de-risking and evolution. So in terms of early stage things, we've tried to invest about 20%, 25% of our portfolio in this window. A good example of that would be Windfall Lake when we purchased to $5 million royalty on the company assets about 30 months ago. Cariboo, which is the marketable BGM mine and their Horne 5 asset that that we initiated and we were catalyst investor to incubate that company in 2012. And we carried it for with us through the evolution. Now these assets have moved through into - a lot of these assets are moving through into the development stage, which involves feasibility studies, a permitting and construction. And then the third piece that we invest in is existing production opportunities like we did with Gibraltar and the purchase of Orion mining finance package. So those are the three areas where we see our investment strategy playing out and the ladder to the development opportunities and producing opportunities represent about 75% of our investments to-date, and we stuck with that rough number. It will fluctuate sometimes, but seems to work pretty well so far. Page 15, as an example of an early stage successful investment, we had bought $5 million worth of the equity, Arizona mining and we purchased 1% royalty for $10 million at the same time. This project has moved quickly with $2 billion NPV, 100 million tons or 10% zinc and 20-year mine life production expected to start in 2020 and was acquired by South32 in 2018. The results for us is that we were able to get monetize in that and we had a net gain of $34 million on the equity and the warrants and we still retain the royalty, which is a very significant value. So this was a relatively short investment for us with significant returns in the thousands of percent. Page 16 shows you our investment portfolio. We are heavily weighted to Canada with 75% and compared to the peer group, we have been successful in Canada. As you know, our origins are in Quebec where we had the Canadian Malartic success and we've continued with that strategy with a focus on Brownfield camps in good Canadian mining camp areas and jurisdictions where we think things can move quickly and get to fruition so royalties start to cash flow. Summary of the financial position and we have an available credit of $450 million of which $100 million is drawn. So $350 million available there. Cash on hand of $137 million for now, but we will be receiving another $150 million at the end of the year. Long-term debt, we've paid down some of it. We're now at $419 million and our investment portfolio at value of $364 million at the end of the quarter. Shares outstanding for the company right now standing at $156 million and our dividend is set at $0.05 and we've also paid back, as we said $12.9 million in debt this quarter to $51.8 million in Q2. So continue to make progress on that front. Page 18 gives you the escalation of the dividends since we started this company 4.5 years ago with over $78.5 million returned to shareholders in that period. We are currently yielding just under 2%, which gives us one of the highest yield dividends in all the mining categories. Page 19 is the investment opportunity. We're trading at a 70% discount to our peer group of Franco and Royal Gold right now at 0.97x NAV, so therein lies the opportunity for shareholders at this point. We feel that that gap will close. We had a bit of noise and a couple of ramp ups earlier in 2018. But I think as we fast forward, most of these things are turning the corner and we should have a lot less to talk about in third-party assets as we get further into the piece. In terms of other things we did this year, we've also purchased the 5% royalty on Victoria Gold's, Yukon Project Eagle, and I think that's going to be a good asset for us next year. Our construction is on target there and moving forward as well. On Page 20, we are giving you a bit of - a few slices here. I think I've covered most of it in the presentation. But at the end of the year assuming that our friends at podium execute their buyback, we would have over $280 million in cash available for future investments in addition to our undrawn credit facilities. So lots of ability to get things done and we continue to work hard to add to our portfolio. On that note, I'd like to open the session up to questions and please feel free to ask questions either in French or in English. We will answer both.

[Operator Instructions]

All right. Well, it looks like we've got everybody covered. If there are any more questions, please feel free to give any of us a call. Our telephone numbers are available on the website and we'll be glad to take up any questions that didn't make it into this call. So thanks very much everybody.

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