Osisko Gold Royalties (NYSE:OR) is a hybrid business model with 75 percent of its business coming from traditional royalties and streams, while the other 25 percent of the production comes from its accelerator model, where it focuses on getting gold mines into production. See screenshot below:
(Second-Quarter 2020 Earnings Presentation; Source here)
So, while Osisko Gold Royalties does contain some of the advantages that a pure royalty and streaming company has, I do want to stress that this isn’t a pure royalty and streaming company such as Sandstorm Gold (NYSE:SAND) or Wheaton Precious Metals (NYSE:WPM).
In terms of the company’s valuation, it’s trading at an enterprise value to revenue ratio of 8.81, a price-to-book ratio of 1.71, price-to-sales ratio of 10.03, and price-to-cash-flow ratio of 33.92. When compared to its peers, Osisko Gold Royalties is trading at relatively cheap valuations. Royal Gold has the second cheapest enterprise value to revenue ratio and the second cheapest price-to-sales ratio at 17.12 and 17.17 respectively. Sandstorm Gold has the second cheapest price-to-book ratio of 2.87. However, on a cash flow basis, Sandstorm Gold and Royal Gold are both trading at lower cash flow multiples, as Sandstorm Gold is trading at a price-to-cash-flow ratio of 29.73 and Royal Gold is trading at a price to cash flow ratio of 25.11. I choose to add both the enterprise value to revenue and the price to sales ratios as a main point of emphasis when evaluating royalty-based companies, due to the low capex nature of royalty and streaming business, which makes revenue ratios more appropriate when valuing this type of business. Also, if you look at OR’s corporate presentation below, you can see that it’s trading at a significantly lower price to net asset value multiple when compared to its peers in the royalty and streaming sector.
(August 2020 corporate presentation; Source here)
Not only that, but also when compared to the average North American major mining company, Osisko Gold Royalties is also trading at a lower price to net asset valuation, as well.
In terms of assets, Osisko owns 135 royalties, streams, and precious metals offtakes and has cash flows from 16 producing assets according to its latest quarterly presentation. Its flagship asset is its Canadian Malartic mine, which makes up roughly 40 percent of its production. See screenshot below: (Q2 2020 earnings presentation; Source here)
Canadian Malartic is Canada’s largest gold mine, which is owned by Yamana Gold (NYSE:AUY) and Agnico Eagle Mines (NYSE:AEM). According to Yamana’s most recent corporate presentation in September 2020, this asset has the potential to exceed 10 million ounces of mineral resources and has the potential to achieve multi-hundred-thousand-ounce production rates for decades. See screenshot below:(Yamana Gold September 2020 Corporate Presentation)
In terms of growth from its non-producing or cash-generating assets in the previous quarter, commercial production from Victoria Gold has been declared, and Osisko has a 5% top-line royalty on that project, which is estimated to produce roughly 200,000 ounces a year. Osisko also hinted in its quarter two conference call that a transaction could be on the way as it thinks some could happen at this price level, but even if nothing occurs, it is quite happy with where it is as a company at the moment. The company also has over $900 million in finance capabilities if it does desire a new transaction or acquisition.
Other assets that are expected to contribute to Osisko’s production in the future are its Windfall, Hermosa, and its Horne 5 royalty projects. See screenshot below: (Corporate Presentation August 2020; Source here)
Its Windfall project has roughly 5 million ounces of gold with an average grade of 6.7 grams per tonne, and production is expected to begin between quarter two and quarter three in the year 2022. Its Hermosa project is mainly a polymetallic project as stated above, and Osisko owns a one percent net smelter royalty with its primary commodity being lead, zinc, and silver. Its Horne 5 project contains 6 million gold equivalent ounces (GEO) as stated in the screenshot above, and 26.3 million ounces of payable silver according to the project feasibility study. In this project, Osisko Gold Royalties owns a 90 to 100 percent silver stream.
Its last asset in its growth portfolio that intrigues me is its Cariboo Gold mine. This asset has a resource estimate of 4.4 million ounces, a 100 percent owned mine, and is estimated to produce roughly 185,000 ounces of gold per year with an all-in sustaining cost of roughly $912.00 per ounce. See screenshot below: (August 2020 Corporate Presentation, source here)
In terms of the company’s financials, in quarter two of 2020, Osisko reported net income of $13.048 million, which generated an earnings per share of $0.08. I was happy to see this, because if you look at its past performances, in quarter one of 2020, it generated a net loss of $13.318 million, and if you look at the annual report for 2019, it generated a net loss of $234.195 million for 2019. I personally believe that the main reason that Osisko Gold Royalties is trading at a much lower valuation than its peers is due to the fact it has been unable to generate positive net earnings on a consistent basis. The main reason it has been unable to generate positive net earnings is due to the fact that in 2019 it had to write down roughly $234.576 million in assets, and in quarter one of 2020, the company had to write down another $26.3 million in assets. I am personally happy with its quarter two results, as it had no impairment charges on its income statement. However, one quarter does not make a trend. If Osisko Gold Royalties is to achieve the re-rating it talks about in its August 2020 corporate presentation, it will first have to prove to the market that these write-downs will be contained in the future, and that positive net earnings will be achieved on a consistent basis. Quarter two of 2020 was a good start.
In terms of balance sheet, it has a total assets to total liabilities ratio of 4.06, which is healthy in my opinion, and it has a current ratio of 3.19. In terms of cash flow, in quarter two of 2020, Osisko generated a negative cash flow of $13.006 million. I calculated this by taking operating cash flow and subtracting the acquisition of royalty streams and interest, as well as subtracting the mining assets and plant equipment. I decided to innovate the formula, because in the mining business, mines have to be replaced once they are mined, and the royalty and streaming business isn’t much different, as these royalties and streams will also have to be replaced in the future. However, what is also unique in this type of business is that royalties can be bought back as Knick Exploration did in 2017. So, I would also count proceeds on the sale of royalty and streams with operating cash flow when calculating free cash flow for a royalty and streaming business. Due to this business model, to get a better idea of cash flow, one can’t just look at one quarter due to possible large acquisitions that can prohibit a company from generating positive free cash flow during the other quarters, so I also had to look at previous quarters to get a better understanding of its cash flow.
For quarter one of 2020, Osisko Gold Royalties generated $1.446 million in free cash flow, and for 2019, it generated $72.791 million in free cash flow. From a cash flow prospective, I believe that it is generating healthy amounts of free cash flow, and that quarter two was an anomaly.
The risks of investing in this company are that this is no longer a pure royalty and streaming company, and 25 percent of this company is now an accelerator model, which means it is trying to bring mines into production. As I said in previous articles, here, here, and here, a lot can go wrong when bringing a mine into production; cost overruns and capital shortage are not uncommon in the mining business. This can lead to more write-downs and much lower earnings in the future. As stated above, Osisko has had many write-downs in the past, and with this acceleration model, more write-downs can occur in the future, leaving it to trade at cheap valuations for a long time. Another risk one has to be vigilant about is that, as stated above, Osisko Gold Royalties is looking at a potential acquisition, and considering its past history, that acquisition could lead to some material write-downs in the future.
In conclusion, what I like about this company is its growth, its cheap valuation, its assets, and its re-rating potential. The risks associated with this company are its acceleration model where mining is 25 percent of its business model, and its history of numerous write-downs, which could occur in the future due to its acceleration model and past history.
Disclosure: I am/we are long WPM, OR, SAND. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Lastly, I want to make it clear that this article was written for informational purposes only and should not be construed as investment advice. I am not a financial advisor. This is only my thoughts about a specific stock. If you have any interest in investing in this stock, then please talk to an investment professional, and do your own research before making any decisions about buying or selling any stock I write or have written about.