OR Royalties Inc (OR) 2016 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Osisko Gold Royalties Q4 and year-end 2016 results conference call. (Operator Instructions). Please note that this call is being recorded today, March 16, 2017, at 11 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. (French language spoken).

Merci beaucoup, Operator (French language spoken). Welcome, everybody. We will be using a PowerPoint that's found on our website titled 2016 Q4 and year-end results and I'd ask you to have a look at the forward-looking statements, as we will be making some forward-looking statements in this presentation.

To begin, we will start on page three of the PowerPoint. On 2016, a very big year for Osisko Gold Royalties as we moved forward as the fourth largest precious metal royalty company in the world with record gold equivalent ounces earned at 38,270 ounces, up 25% from 2015. Record revenues at CAD62.7 million, plus 38% from 2015, and net cash flows at CAD53.4 million, compared to CAD28.9 million for 2015. So on all metrics, moving ahead well. Well prepared for 2017. We ended the year with CAD499.2 million for December 31, 2016.

We added significant assets to the Company throughout the 2016 period, both due to two royalties and some of our other investments. The significant ones in North America were the Windfall royalty, owned and operated by Osisko Mining; the Horne 5 royalty, operated by Falco Resources; and the Cariboo royalty, operated by BJM; and Hermosa, operated by Arizona Mining. So, pretty good progress on the royalty front.

We were also able to achieve a listing on the New York Stock Exchange in 2016, and as of this quarter, we paid our tenth dividend.

2017 has been off to a good start with the addition of the silver stream from Taseko Mines, the deal that we closed about two weeks ago. This immediately increases the cash flow from our profile at Osisko with over 200,000 ounces of silver for the next 14 years, including 2017, with an average of 350,000 ounces a year for the remainder of the 23-year reserve life, so a significant asset add in the first quarter.

As a note, we received our first delivery of silver on March 15, which was for all of January and part of February, so we are up and running on our silver stream. This is our third big asset in cash flow to the Company.

Onto page four, production and guidance. 2015, we were above 30,000 ounces gold equivalent. 2016, we were at 38,270 ounces. And our guidance for 2017, we are looking to achieve somewhere between 43,300 and 46,100 ounces, so, again, an increase of 13% to 20% year in, year out from 2016 to 2017, so we are seeing organic growth in our existing assets. That does not assume any new assets being added to the Company that may come in 2017.

Onto page five, net cash flow from operating activities from CAD28.9 million in 2015 up to CAD53.4 million this year, so very good acceleration in our net cash flows. Record revenues of CAD62.7 million, as opposed to CAD45 million last year. And net earnings sitting at CAD42.1 million, from CAD28 million in 2015. So on all metrics, the Company is moving forward in a very steady fashion right now.

A little overlook at the balance sheet, the cash and equivalents has increased. In 2015, we were sitting at about CAD258 million and now sitting at just a tick under CAD500 million. Cash and equivalents are in pretty good shape. We have a debt of CAD45 million, which is in our convertible, but total assets in the Company now sitting at CAD1.4 billion, with equity sitting at CAD1.2 billion.

Strong cash position going forward, with over CAD700 million of cash and our revolver available to us and CAD221 million in investments in liquid assets.

2016 saw us complete several financings. CAD172 million (technical difficulty) CAD50 million convertible with Investissement Quebec, for a total of CAD222.6 million raised in 2016.

Expanding the portfolio of Canadian development-stage royalties, we entered into an agreement with Barkerville Gold to acquire 1.5% of the Cariboo gold project in consideration for CAD25 million. We also added a 1% royalty at the Arizona Mining Hermosa project for CAD10 million. And we also added a convertible royalty, debt financing royalty to the investment that we had in Falco Resources to earn us a 1% royalty on the Horne 5 project.

We also purchased -- exercised our purchase right for the 1% royalty on Windfall Lake, which is currently probably Canada's largest exploration program with over 16 drills turning and an $8 million drilling budget this year, so a very significant add to our royalty base as we see a successful discovery at Windfall Lake continue to evolve. That said, we now have a 1.5% total operating royalty on that asset. So, I think that's -- it's going to be a great asset for us as we move forward.

2016, we listed on the New York Stock Exchange, in July. We continue to see development of our market in New York as we see volume increase in the US. We started at about 10% of our daily volume was in New York. We are now sitting around 25%. So we expect to see that continue to grow and it will be a focus as we work through our 2017 investor relations program and initiatives.

We had the earn-in on the Osisko Mining projects, where we had the assets that we acquired during the Virginia acquisition, which we transferred in exchange for royalty considerations and investment considerations to Osisko Mining. And we generated proceeds of $129.2 million on the sale of other investments, with the bulk of that being from our sale of our lift position, which we had earned between capital gains and dividends over CAD17 million profit on that investment alone.

I'm very happy and proud to report that we declared our tenth dividend and we've paid over CAD30.8 million in dividends since we started the Company in June 2014.

Page 10 shows the attributable breakdown of ounces. Obviously, the bulk of our ounces coming from Canadian Malartic, which continues to be Canada's largest producer of gold, with a topline royalty of 5%, generating in excess of 30,000 ounces from that asset. Recent to it to Eleonore is continuing to ramp up. We are expecting somewhere between 6,800 and 7,000 ounces, based on the guidance from our partners at Goldcorp.

And we also have Island Gold, which has been contributing as well. CAD1,400 to CAD1,600 from Richmont's Island Gold project in western Ontario and 2,600 to 3,000 ounces gold equivalent from the Gibraltar stream at Taseko Mines. And with our small investment in Vesna and some other smaller assets making up another 2,000 to 3,000 ounces for our guidance, so all of it being Canadian-based assets. So, we are in pretty good shape here.

Page 11 just goes to show a bit of our distribution of where are our assets. I think we've covered most of this ground, but obviously a big Canadian focus. With the exception of Highland Copper and Hermosa, all of our assets are essentially located in Canada. We also still retain our ground position in Guerrero State with over 9,600 square kilometers of exploration ground there. We still own 100% -- or 85% of our Coulon polymetallic project located in northern Quebec.

So in addition to that, we have several other assets that are in development, including any Integra Lamaque assets, Marban, Windfall, Horne 5, the Upper Beaver project, and also the Hammond Reef project as well.

So on an individual asset basis, we looked at Canadian Malartic. Obviously, big success there with the addition of the Odyssey zone adding another 1.4 million ounces of measured and indicated. The current mine plan has 7.1 million ounces in it, with current production for 2017 guidance sitting at 600,000 ounces, and then in 2018 looking for 650,000; in 2019, 640,000 ounces. So it is Canada's by mine single largest producer of gold in the near term.

And we continue to enjoy the continuing success through our partners. Yamana and Agnico have done a great job of keeping the mine moving forward. And with the addition of Odyssey, they've added some significant measured and indicated ounces to it. So outside of the mill and mine plan, there is now about 3 million plus ounces measured and indicated material to look at as possible additions to that mine plan as that project evolves.

Page 14 is a bit of an overview on Odyssey again, 1.43 million ounces of measured and indicated there from 155 holes of drilling. It was completed in 2016. A great success on both the South Stone and the North Stone, and grades there running about 2.4 grams on average -- sorry, 2.15 grams, which is actually significantly higher than the gold X grade and almost double the grade of the Canadian market pit. So there's potential to see increased throughput or increased ounce production if they are able to blend that higher grade material in the mine plan.

On Eleonore, we have a sliding royalty from 2% (technical difficulty) and 5%. Currently, we're getting about 2.25% royalty based on current gold prices, over 4.57 million ounces in the current mine plan, significantly more ounces outside of -- in the measured and indicated and inferred categories, so we see upside there. This is a big growth asset and we hope to see that grow to significant production.

Currently -- the production for 2016 was 278,000 ounces, netting us about 5,500 ounces, and guidance for this year is 315,000 ounces, which would net us somewhere between 6,800 and 7,000 ounces. So, a good increase as we watch that mine continue to evolve and to ramp up.

The most recent asset we've added is the Gibraltar stream, 100% attributable payable silver. Taseko is the 75% owner of that asset, located in the Cariboo district, about 90 kilometers from Barkerville's assets. A 23-year mine life, so it's an exceptional mine life, and we have 100% of the Taseko share of the payable silver for the first 5.9 million ounces of production and 35% payable silver thereafter at an offtake cost of CAD2.75 per ounce. Fixed silver payability of 90%.

Silver production for 2017 to 2030 is set to look at about 200,000 ounces, and then after that about 350,000 ounces from 231 to 239 (sic - see Presentation, slide 16 - "2031 to 2039+.") The good news, of course, is that the stream is effective as of January 1, so we've received our first shipment of silver as of March 15, and we are continuing to look forward to the increased success that Taseko has had in terms of getting their cost structure in place and moving forward with one of the largest open-pit mines in all of Canada at this point in time.

In terms of our accelerator model, we've been quite successful, I think, in terms of adding our accelerator model as part of our business plan, Osisko Mining being our preeminent success at this point in time. We've invested about CAD9.8 million to purchase the royalty, 1% royalty, and we have an unrealized gain on the investment of about CAD20.2 million. So we have a positive -- we own the royalty outright and we have a positive gain of over CAD10.4 million over and above the original cost of the royalty.

Falco Resources, we bought the royalty there for about CAD10 million, unrealized gain of about CAD7.1 million, so net cost of the royalty about CAD2.9 million thus far. Barkerville, CAD25 million for the royalty. Unrealized gain of about CAD5 million on that asset. So, again, as we see that asset develop, we expect the net cost of that royalty to us to continue to go our way.

Arizona Mining, exceptional outcome there with the CAD10 million royalty purchase, CAD16.6 million of unrealized gains on our share position there for a net cost of royalty of CAD6.6 million gain to us. So that's -- when our royalty accelerator model is working well, this is what we expect to see.

Page 19 is an overview of our equity portfolio. We have a total investment of about CAD155 million, of which CAD35.5 million was done to float the acquisition of flow-through shares, which we can use to protect our tax pools and defer taxes on our existing royalty revenues, so quite an important benefit on those royalty -- on those flow-through share investments.

The market value at December 31, 2016, was sitting at CAD205 million, and then March 13, we were sitting at CAD255 million, for an unrealized gain of over CAD100 million in the equity portfolio at this point in time. We also had a realized gain of CAD15.9 million on equities last year, outside of dividends. And we have a book value of the royalties that we acquired through that process of CAD62 million. So this has been a pretty exceptional outcome, we believe, in terms of increasing net assets to the Company and also keeping our AUM in good shape as we roll over some of those investments and redeploy them once again coming into flow-through shares to continue to build and protect our tax flows.

Again, a summary of the Company, over 50 royalties and one stream at this point in time. Two of the preeminent assets in this space, the Canadian Malartic royalty is considered the second most valuable in the world and Eleonore the sixth most valuable, so great cornerstone assets there. And with the addition of the 10th Taseko silver stream, we've added another great cash flowing asset on long-lived asset. Over CAD700 million available for investment between cash and available credit and paying a dividend yield of about 1.1% in our current dividend policy.

We are gold focused. I believe we've demonstrated a significant track record of success as we built the Company over the last 30 months and 38,270 ounces of zero-cost gold equivalent ounces from our Canadian assets of 2016. And, again, now looking for 43,300 to 46,100 ounces of gold equivalent ounces for 2017.

There are some items in the appendix for further details. There was a press release issued earlier today. And I'd like to thank everybody for listening, and now we would open the presentation up for Q&A. So, Operator, if you could initiate the Q&A process, please. Thank you.

(Operator Instructions). Don Blyth, Paradigm Capital.

Congratulations on a great year, guys. I have more of a broad question on strategy. You guys have telegraphed that you would like to add a third producing royalty of similar quality to your flagship's Canadian Malartic and Eleonore. You've certainly got the cash to do so. Do you really believe there are opportunities out there to do this? Or is the market starting to move more towards the line of the incubator model as the development projects move closer to production?

We'll have to see how the rest of the year plays out. Obviously, we saw a bit of an increase in access to capital through equity markets in the second half of 2016, but as we look forward, we look at the gold price play action in Q1. We see some opportunities there, but I think we're focused on making sure that we don't miss any of the development asset opportunities that may be generated with the increased enthusiasm on gold projects. But that said and done, the cost of capital on streams is still very comparable to the equity market, so we think there is work to be done.

Great. Thanks, guys.

(Operator Instructions). Adrian Day, Adrian Day Asset Management.

My question kind of follows on from the last one. Sean, I was wondering. How do you (technical difficulty) sort of one large cash flowing royalty and stream versus buying three or four smaller ones, as you've just done with Taseko? What do you see as the advantage of one big one?

Well, obviously, if we get exposure to an exceptional world-class asset with long mine life, we would not want to miss that opportunity. But at the end of the day, big mines are found with small mines, so our belief is that small mines usually have the potential to become big mines if we are in the right jurisdiction, the right plumbing system.

So, we are pretty diligent about smaller projects, and deals of sort of CAD50 million to CAD100 million size are well within our wheelhouse. But we would certainly enjoy the opportunity to do CAD500 million to CAD1 billion deals if we see them around.

Okay, great. Thank you.

Mark Mihaljevic, RBC Capital Markets.

Just a couple quick ones for me. First off, do you have an update on that land package you have in Guerrero, whether there's been any movement on potentially monetizing that?

We've had several approaches. There is -- there's been quite a few proposals. We'll probably make a decision sometime over the next three to six months.

We haven't -- last year was pretty busy with other things and we didn't see there was that much exploration -- international exploration on the go. This year, we are seeing more interest in that. And obviously with the resolution of the Los Filos deal at Goldcorp and some of the evolution in the Guerrero camp, that's kind of what we were waiting for. So we'll see where that goes, but we would obviously retain royalty rights on it if we were to put an end to another asset group, but we haven't made any final decisions as of yet.

That's great. And then, just one little modeling question. Can you just give a breakdown of the tax pools you still have in Canada and what type of cash taxes you'd expect to or when you do start to expect -- expect to start paying cash taxes?

Certainly. We're not -- Elif Levesque, our CFO, is with us this morning, so I'll ask Elif to give you an overview.

So we have currently tax pools about a total of CAD100 million, which is mainly CEs and CDs, and we have some additional, about CAD50 million, in terms of share issue expenses, so let's say CAD100 million for CE and CDs. And right now, if we don't do anything else, I guess we would be expecting to be taxable in 2018, payable in 2019.

Okay, perfect. Thank you.

But this is an ongoing strategy for us, so we'll be working on it.

Kerry Smith, Haywood Securities.

Sean, just on the Guerrero land package, it's really large. Is there a big holding cost to hold that ground?

Not at present. It's less than CAD0.5 million at present, but as we move closer to initiating exploration, the land package costs will go up in holding costs, but right now it's relatively low.

Okay. Good, thanks.

Carey MacRury, TD Securities.

I'm just wondering if you could provide some guidance on what you're expecting for 2017 for G&A and business development.

It's an ongoing piece and we haven't put out any guidance on it as of yet. But if you look at what we did last year, cash cost G&A separated from equity-based compensation was somewhere between somewhere around CAD15 million, and then the actual cost of the equity position around -- it would probably put us in the CAD20 million, CAD22 million, depending on share price, as we move forward. So we did see a reduction in direct cash costs, but as some of the RSUs and option packages come forward, we will have to consider them in our G&A.

Great, thank you.

Michael Siperco, Macquarie.

A couple of quick ones. Maybe, given that you did sign your first stream deal in the quarter and the ongoing CRA issues that some of your peers are seeing, can you give us your thoughts on how you're thinking about the future structure of these deals? Should we expect to see anything offshore or is it just a case-by-case basis?

For us, it's case by case. Obviously, our chosen path forward has been by investing through flow-through to continue to protect our cash flows. And we are able to roll those investments over, so it's been a pretty successful strategy for us, especially if we've been able to buy flow-through in companies where the assets are moving up the value chain, as we have to date. So that's our current strategy and we'll see where we get to.

I'd also add, Michael, that we have always -- we have told you that we are continuing to review international structures, and most of our deals so far have been focused in Canada. We are looking to establish the platforms that would allow us to compete internationally, structure internationally, and we're working toward that and ensuring that the structure also works well.

Perfect, thank you. It makes sense. And then one other for me, just on the dividend. In 2016, by my math, anyway, you paid out about 25% of operating cash flow. Can you talk a little bit, I guess in the context of the balance sheet, which is a little stronger now with the sale of the [list] investment and the cash that you are generating going forward, how you think about the dividend?

I think we want to stay in that 20%, 25% payout range regularly. We want to make sure that we're growing our cash flow assets in accordance with our dividend expectations, and we don't ever want to find ourselves in a position where we can't maintain it, so we've taken a very prudent but steady approach to it, and that's going to be our methodology on a go-forward basis. We want to be a steady Eddie on the dividend scheme.

So that's a range that we should be looking at, sort of similar payout ratio to what we've seen in 2016.

That's correct.

Okay. Great. Thank you very much.

Thanks, Mike. All right, we have no further questions, so I'd like to thank everybody for participating in the call today and we certainly look forward to catching up with everybody as we get into more of the marketing session for April and May, and I think that we've set the stage for a pretty good year in 2017 and we hope that you will join us as we participate in this gold rally.

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