OR Royalties Inc. (OR) Q2 2019 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to the Osisko Gold Royalties Q2 2019 Results Conference Call. [Operator Instructions] Please note that this conference is being recorded today, August 1, 2019, at 10:00 a.m. Eastern Time. Today on the call, we have Mr. Sean Roosen, Chair of the Board of Directors and CEO of Osisko Gold Royalties; Mr. Bryan Coates, President; and Ms. Elif Lévesque, Chief Financial Officer and VP of Finance. I would now like to turn the meeting over to our host for today's call, Mr. Sean Roosen.

Welcome to the second quarter results presentation for Osisko Gold Royalties today. We have a presentation on our website marked Q2 2019 in the Investment sector, under Presentations, that we'll be following this morning. Within that presentation, we have there a forward-looking statement disclaimer. Please be advised, we will be making a few statements. I'm attending the Sprott investment conference -- natural resource investment conference here in Vancouver this morning, so I'll be handing it over to the Montreal team with Bryan Coates, Elif Lévesque and Joseph de la Plante and André Le Bel to go through the deck with you. However, I want to thank our friends from Orion Capital of New York. We most recently repurchased some of the positions within the Orion portfolio of Osisko stock. And our friend, Oskar Lewnowski, who has been a board member with the company, in 2017 has resigned. And I wanted to thank Oskar and the Orion team for the great support with the company. Throughout that period, during assimilation in 2017, we acquired their royalty and stream portfolio at the time. And they continue to be strong supporters of the company with over 6% of the stock. And we thank the Orion team for getting this done in the quarter. And the team in Montreal is going to take you through the deck and talk a little bit of -- more about that as we get into it. Thank you very much. And now I'll be on for all the questions at the end as well. Thank you. Brian, over to you.

Thanks, Sean. Good morning, everyone. The key event for us in our second quarter was obviously the reduction of the Orion shareholding to 6.2%. On June 25, we announced a secondary offering by Orion of 9 million shares and also a transaction where we swapped a portion of our equity book in return for 12.4 million shares that were acquired by Osisko and canceled. So overall, we've reduced the basic common shares outstanding by -- to -- by 8% without affecting our cash flow generating assets. We also will be realizing savings of $2.5 million of dividends per annum as we maintain our dividend payout and we return dividend payout. To date, we have returned $320 million to our shareholders through to -- through dividends of $101.2 million and share buybacks totaling $219.6 million. So our buyback cost was $13.66 -- $13.67. The other aspect in the quarter that's very interesting for us is the rise in the gold market. We're very pleased to see the increase both in the U.S. and Canadian accounts. We believe that we're just getting into a very good gold market. Gold follows the quarter at about $1,400. And we believe that we're very well positioned to capture value through our royalty or growing royalty portfolio as well as our investment in our associates. So this gold price, we believe, will continue to be strong given that we believe the U.S. dollar will weaken and the high debt levels, and if you add a little bit of geopolitical tension, it has all good ingredients to reach record highs again. For the second quarter, our highlights were we produced -- or we received 19,651 GEOs. Our revenues from royalties and streams are at 13 -- $33.8 million, $131 million if we include the offtakes. Our net cash flow from operating activity was at $21.4 million. We incurred a net loss of $6.5 million or $0.04 per share, and Elif will go through -- but mainly, our net loss was basically generated from noncash costs, and she'll go through them. Our adjusted earnings were $8.2 million or $0.05 per share. During the quarter, we closed the first tranche of the share repurchase with Orion for $103.2 million. And subsequent to the year -- to quarter-end, we sold or we completed the sale or the exchange of Victoria shares and canceled another 5 million common shares. Our Board yesterday declared a $0.05 dividend. That will be our 21st dividend. For shareholders on record September 30, the dividend will be paid on October 15. All right. During the quarter, we also participated in the Renard restructuring, and we continue to be focused on that. So again, if we look at our comparisons, 19-point -- -- 19,651 GEOs compared to 20,506 GEOs last year. Our cash margin was 90% versus the 87% last year. We maintain our guidance based on the operator's forecast. So our guidance is maintained at between 85,000 to 95,000 GEOs for 2019. On Slide 8, you have the -- our portfolio of royalties that were with -- by asset that generated our GEOs. Again, Canadian Malartic, flagship asset, basically had one of their best quarters. I think it's the second best quarter they've had. And we continue to benefit from that outstanding asset. When we look at our growth, again, we continue -- we feel that we have one of the best growth profiles within the royalty sector. Looking at a growth to 85,000 to 95,000 ounces for 2019 with 88% cash margin. We're very excited that we're going to get a new royalty, but we should be receiving gold from our new royalties asset that we did in 2018, which is the Eagle Project. We have a 5% NSR on the project. The construction is 95% completed. Roughly 1.3 million tonnes were mined. And basically, the team up there is going through the commissioning and the start-up. Ore has been going to the leach pad, and we certainly hope to see the first, but then we estimate -- they estimate, I should say, that they will be pouring gold in September 2019. So overall, we're very excited about this. It has been a good construction. And we congratulate the Eagle Project team and encourage them to have a very successful ramp-up. Unfortunately, during the quarter, we've been busy on working on some of our asset -- portfolio of assets that have some issues. At Renard, we're working with various financial partners to support the company in pursuing a restructuring transaction. And at Almusar, we continue to maintain positive dialogue with the government around the eventual restart of the project. And the financial stakeholders, partners in the project continue to provide their ongoing support to the company. With the rising gold prices, we really feel that -- as our -- some of our portfolio of royalties and streams will be coming on stream as there's new mine development. And on Page 12 of the presentation, we highlight a number of opportunities which we think will be coming forward over 2020 and 2021 and up to 2025. We're very excited about Eagle coming in. We've got great things happening on Windfall. Very encouraged there. And we believe that the Odyssey project will also be generating some great royalties for our company in the near term. Quick work on our accelerator companies. At Osisko Mining, we -- the team there has been very successful, undergoing 1 million meter drilling program, probably one of the largest in the country -- certainly one of largest in the country. They've had identified some new discoveries. We expect to see a feasibility study in 2020. And they just raised over $40 million, of which $30 million was flow-through. So very exciting there and as we continue to monitor the drill results and seeing that resource base increasing. At Barkerville, where we own 32%, we got an updated underground resource, and we continue to carry out exploration work to delineate further reserves and try to discover new deposits. At Falco, where we own just under 20%, we're -- we've got a feasibility study on one of the most exciting deposits. It's advanced. We've got ongoing dialogue with the stakeholders, including government and Glencore. And we're certainly -- we're working very hard at advancing this project so we can deliver the EIA as well as going to public hearings. Osisko Metals, where we have a 10.6% ownership, is seeing some exciting things and have very positive results in our base metals, particularly at the Pine Point Project in Canada's North. Recently, they've raised $10 million, so they're well funded. Overall, our accelerator company has a combined market cap of $1.3 billion, $1.4 billion. Turning it over to Elif. Elif Lévesque: Thank you, Bryan. So we had a strong quarter in terms of our operating metrics. The GEOs were slightly lower compared to the same period last year, but the 4% shortfall was more than compensated with higher cash margins, mainly from a strong gold price. So we had 21% higher gross profit and 39% higher operating income. We're continuing to review our G&A and business development expenses and efforts to reduce them further, including the conversion of our deferred and restricted share units, settlement in equity instead of cash, which will reduce the volatility considerably; and reduction of our Board size as well. The higher cash margins have also had a positive impact of the operating cash flow, generating $21.4 million compared to $19.7 million. Our earnings were impacted by some noncash items during the quarter, mainly related to the disposition of Highland Copper as part of the share repurchase transaction with Orion and also some noncash share of loss of associates of $8.8 million during the quarter. As a reminder, we report our associates under the equity method, which are mainly exploration companies, and report our percentage of their losses, which was affected by some impairments for this quarter. So if you look at the next 2 pages, the first one gives kind of a breakdown of the different types of instruments that we have, royalty, streams and offtake. And you will see that we had a strong quarter representing 89.8% cash margin compared to an 87.3% cash margin the same period last year, mainly a result of a higher, I guess, revenues from royalties. And if you look at Page 17, in terms of our per share metrics, as the Orion transaction was closed at the end of June, we're not really seeing the positive impact just yet, but we will be starting the third quarter of 2019 seeing the positive impacts of that. So we should hopefully see some increase in terms of our per share net earnings and per share cash flow. Page 18, our financial position. So currently, we still stand pretty strong firepower of over $800 million if you look at our cash, our investments and our available credit facility of $450 million.

Thanks, Elif. We'd just like to take a moment here to just reflect on 5 years of operation that we started our business in June 2014 with 4 royalties and a market cap of $500 million. Today, we all have over 135 royalties, streams and metal offtake agreements. Our market cap is at $2.2 billion. We've done 2 major acquisitions, acquiring Victoria and acquiring the Orion portfolio and their clients, acquiring the Virginia mine and the Éléonore royalty and also the Orion portfolio of streams, royalties and offtake agreements. We've distributed over $100 million in dividends, and we bought back for $219 million of shares. We've raised $1 billion in permanent and temporary capital while creating also the accelerator business. And we highlighted that, that business today has a market cap of approximately $1.3 billion, $1.4 billion. So in doing that, we really established ourselves as one of the largest explorer and developer in Canada and being well positioned to capture the rising gold price that we have. So in summary, we believe that we're the peer-leading -- by investing in this Osisko, you're getting a peer-leading exposure to Canadian assets. During the quarter, we, again, received 19,651 ounces of GEOs. Our guidance is being maintained: 85,000 to 95,000 GEOs for 2019. We continued to deliver our quarterly dividend. So the dividend yield was about 1.3%. We've got a strong balance sheet to lift up [Orion] (ph), ready to fund our continued growth program. And we've been returning value to our shareholders through buybacks as well as dividends. So $320 million has been delivered back to our shareholders. As of June 30, we have investments of $282 million, and we have cash resources of $84 million, so well positioned to continue growing the business. With that, Sean, I'd like to pass it back to you.

Thank you very much, Bryan. And then at this point in time, we'll open up the call for questions.

[Operator Instructions] Your first question comes from Cosmos Chiu from CIBC.

Maybe my first question is on the guidance here. Your guidance, you've kept it at 85,000 to 95,000 ounces. You've done about 39,000 ounces in the first half. Clearly, your second half has to be stronger. What is that dependent on? Is that Eagle? Lamaque? Are there any other ones that I might be missing?

So Cosmos...

Go ahead, Byran.

So Cosmos, thanks for the question. Cosmos, we're counting Canadian Malartic, Éléonore having a strong second semester. As well the Eagle coming on stream, we believe that, that will be a driving force for our growth.

And then on Eagle, any concerns about -- it is Indiana heap leach. And so based on leach kinetics and delivery and -- any concerns that if there's any setbacks at Eagle, that could impact your ability to get to your -- even your 85,000 ounces?

Well, Cosmos, as you know, we are in the mining business. I think we're in pretty good shape at Eagle. But as you said, we are going to start to run the leach circuit here pretty soon. So we're starting out in the near-surface oxide zone, which is the easiest zone. And the material that's going on the pad right now looks very good. So we're quite hopeful that things are -- the wind is behind us on this project, and we continue to build forward on that. I don't know if you've had a chance to get up there, but things are in extremely good shape at Eagle right now. It's been one of the better mine builds we've seen.

Great. And maybe switching gears a little bit here, based on the histogram that you put in your presentation, Renard, the diamond asset is a significant part of your income -- of your cash flow. And clearly, in Q2, diamond prices were not great, at least the realized price at the mine, USD 76 per carat. I'm just wondering about your point of view in terms of diamond prices. And I don't know if you could share with us, like, internally, how do you look at it? What kind of diamond price do you put in your models?

I'll let Brian and the guys answer that one. They've been on the Stornoway file significantly. But I'll just add a general comment that -- we all expect that the diamond prices would have some pressure on them in 2019 and '20 and then should start to see a supply/demand market developing as projects come off-line, like Argyle and some of the other De Beers assets. So Bryan, over to you.

Sure. Thanks, Sean. I mean the whole -- Sean just highlighted the whole dynamic. It had been suffering from very tough conditions. And in return, our mine at Stornoway has its challenge. So we're working with them from an internal planning process where we're currently reviewing the diamond prices and trying to see how that affects our plan going forward. We were into the $90, $95 per carat as part of our planning process. So I certainly hope that we can have some improvements into the operations of the mine as well as the market recovers.

Yes. I guess, as you said, with Renard, based on the quality of the diamonds coming out, based on the size and everything else, it's really twofold. The general market could come up and as the quality of the diamonds coming out of the mine itself improves as well, that could be an improvement on two fronts.

Yes, exactly.

Yes. And then the -- certainly, the big deal in Q2 was Osisko Gold Royalties monetizing some of the portfolio investments or divesting some of the portfolio investments. With what happened in Q2 and the monetization of Victoria Gold shares and some of the other ones here, looking ahead, should we look at your incubator accelerator model any differently? How should we look at it?

Well, I think, Cosmos, we've talked about the accelerator model now for 5 years. It was conceptual in nature when we brought it to the market. Both Orion and Arizona would have -- will be an example of the accelerator equity model having gone full circle where the equity was monetized. And we've continued on as carrier -- holders of the royalties, in this case, what has been an open market monetization that was with our partners at Orion. And I think that when we clearly stated what we wanted to do with this incubation and accelerator process in the beginning, this was part of it. So I think it goes to a proof-of-concept that we've been successful, both in holding equity, royalties and streams and then the occasional situation, more complicated project finance structures. I think that as we see project financing evolve and stream evolve, our accelerator model will become a fairly standard part of the industry that was conceptual 5 years ago.

Yes, for sure. Maybe one last question here focusing on Canada Malartic. As you mentioned, while the growth areas is Odyssey and the NSR you have on Odyssey, my understanding is that it's actually a few separate parts to it: There's your Odyssey South. There's a different part for Odyssey North. I also believe that you have the royalty on East Malartic. Could you maybe piece it together for me in terms of -- based on your understanding, when those ones are coming in? Which ones are going to come in first? And which one could potentially benefit OR first?

I think, Cosmos, it's not appropriate for us to get too far into the detail of that structure as we're not the authors of the Odyssey development program. It's being run by the joint venture. We're quite keen to see the Odyssey project go forward. It's a very significant underground resource. We drilled into it when we -- in the spring of 2014. It's evolved significantly since then and represents a significant increase in the resource at the Canadian Malartic site and property. We have two pieces to Odyssey: North and South. And maybe, Joe, do you want to step in and provide a little more color?

Yes, essentially, there's -- as Sean mentioned, there's three zones there: East Malartic, Odyssey North and Odyssey South. The interesting thing is that a lot of the mineralization falls under our existing 5% NSR royalty, mostly within East Malartic area. I don't think there's a current finalized plan in terms of how they want to develop all of it. But there seems to be the potential for an operation from 0 to, call it, 600 meters that could perhaps strap down into both Odyssey and East Malartic with a lot of that material being on our ground or we have our higher royalty. So I think that can give you some guidance there in terms of how we're thinking about it, but we won't know until the operator's make a final determination on in terms of the plan.

Your next question comes from Kerry Smith from Haywood Securities.

Sean, do you have an internal expectation for ounces of production on Eagle this year?

Well, I think we've been pretty conservative. We've -- we look for a minimum amount of ounces. And I'm not going to put a big number out there at this point in time, and we'll let the company come to guidance once they get the pad loaded and start the process. But they should be starting the initial gold production this year and then as pad gets more stabilized into next year. But it is a ramp-up. The next 18 months is ramp-up for this project. And obviously, the leach kinetics will stabilize better, and temperature management will be easier once we have more rocks on the pad. But I think we'll get some initial production going this year. And I said, the material that's going on the pad right now looks very good as in terms of leachability, and hopefully, that carries through in the gold production.

Okay. And maybe Bryan can answer this question. Do you have a sense for the timing on the Renard restructuring?

Well, it's an ongoing process. I would expect we will get something through in the third quarter.

Okay. So completed in -- completed this year then at worst case, Bryan. Is that fair?

Absolutely. That would be what I've been hearing from the company.

Okay. And one last question. Do you know whether the Mantos Blancos expansion has been approved by the Board? I'm just trying to -- it's hard to find information. But do you know what the status is of that?

Kerry, this is Joseph here. They have finished the study. They are currently putting together the financing cash. And we understand that's going well and, once that is in place, would likely get the go-ahead from the company and the Board to proceed with expansion.

Okay. So again, maybe by year-end, it might -- that might be formally approved then. Would that be reasonable?

Yes.

Okay. And do you know how long the construction is for that expansion?

I think we're looking at roughly 18 months.

We have no further questions. I turn the call back over to the presenters.

Thanks, everybody, and I appreciate the support throughout the quarter. We've had a quite a bit a busy quarter with balance sheet and the treasury. And we'll start, of course, to take advantage of these rising gold markets. And just by way of tone from the conference here in Vancouver being run by Rick Rule and the Sprott group, it's very good to see quite a bit of energy coming back into the space as we're here. So I wish everybody a good summer and, hopefully, make some money as we head for Denver in September. Thanks very much, everybody.

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