OR Royalties Inc (OR) 2017 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Osisko Gold Royalties Second Quarter 2017 Earnings Release Conference Call. (Operator Instructions) Please note that this call is being recorded today, August 4, 2017, at 11 a.m. Eastern Daylight 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. (foreign language)

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Forward-looking statements are noted there, and welcome to the conference call for the second quarter of Osisko Gold Royalties financial update. We'll be discussing quite a few items today. I will be accompanied by Bryan Coates and Elif back in Montréal. And we have quite a few things that have happened in the first half of 2017, particularly in Q2.

With the start on June 5, we announced the acquisition of the portfolio from Orion of 74 royalty streams in precious metal assets. We had record quarterly gold production in GEO earned of 10,863 gold equivalent ounces, a 12% increase over our Q2 numbers from 2016. Record quarterly revenue of CAD 18.4 million, a 16% increase compared to Q2 of 2016.

Net cash flows provided by operating activities of $14.1 million compared to $15.9 million in the previous year due to our high level activities and administrative charges involved in transactional preparation.

Adjusted earnings of $7.1 million or $0.07 per basic share compared with $6.6 million in 2016. We also did the acquisition of the common shares of Barkerville for an additional $38.9 million, which increased Osisko's holding in Barkerville to 33.4%. We also acquired a 0.75% additional royalty on the Cariboo Gold Project offering by Barkerville for cash consideration of $12.5 million, which increased our NSR royalty held by Osisko to a total of 2.25%. We also declared a quarterly dividend of 0.04 -- $0.04 per common share in accordance with our commitment to shareholders to continue to be a good dividend payer.

Subsequent to June 30, quite active as well. August 3, 2017, declaration of 12th quarterly dividend, increased to -- from $0.04 to $0.05 per common share, representing a 25% increase over the last quarter in terms of dividends paid to unitholders.

On July 31, Osisko closed the acquisitions of the precious metals portfolio of assets from Orion, so a transformational transaction where you get into more details of what that means to the company as we move forward. And at this point in the call, I'm going to hand it over to Bryan and Elif in Montréal to take you through the financial results for the quarter in more detail. Bryan, over to you. Thanks.

Thank you very much, Sean, and good morning, everyone. If we go on our gold equivalent production, we saw record growth again, record production, 10.8 -- 10,863 ounces. For the year, we're guiding between 55,300 and 65,700 ounces. We'd like to highlight to you the fact that this represents a 5-month contribution from our newly acquired Orion assets. Although the deal is effective on the production on June 1, the 2 months production of June and July will go against our acquisition price. So on the guidance, what we're suggesting to you is between 55,300 and 65,000 ounces.

Again, we have been building the business, and we're seeing that. We've got a 16% increase in revenues to $18.4 million. On the net cash flow, a key component of what we're looking at, we've gone down to $14.1 million. And that's really due to working capital adjustments. The operating cash flow before working capital is higher than the previous period. So again, showing the strength of the operations.

On the Q2 results, we had strong gold production from the Island Gold and Canadian Malartic assets. On the silver, we exceeded production from the corresponding period as a result of the Gibraltar stream. Slightly higher realized gold price in the Canadian dollars. And you see the revenues and the net cash flow. Our net earnings, $11 million or $0.10 per share. So we're quite pleased with that.

We're also really pleased to have declared an increase of 25% in our dividend, moving it to $0.05 per quarter. This will be the 12th quarterly dividend that will be paid for shareholders of record at September 30.

On the pro forma balance sheet, obviously, a lot has changed following the transaction -- the closing of transaction for the acquisition of the Orion portfolio, where we got cash -- approximate cash balance of $100 million today. Our debt has gone up to $195 million. Our investment portfolio has a value of about $450 million. And we've increased following the issuance of the shares to Orion and the Caisse and the Fonds de earlier this week to 156 million shares, so still in a very good financial position. Our ability to transact continues as we look for new opportunities.

If we go back on our strategy, we have always told you that we're building a portfolio of royalty. The transaction with Orion really complements our portfolio that we've had initially and later acquired with the Virginia transaction investment in Teck and naturally the Gibraltar transaction that we had earlier this year. We really -- the portfolio hasn't changed very much from its focus. It's basically North American-focused, precious metal-focused. And we have -- in the acquisition of the Orion transaction, we have a number of development projects that are now coming to fruition. And we see the growth in our cash flow. So the forecasted GEOs for 2018, we anticipate to be about 100,000 ounces and moving to 140,000 ounces by 2023. From what we understand, we've got the industry-leading cash flow growth. And again, our focus is really North America, and we're quite excited.

On Page 10, you could see now. Our footprint of quality cash -- our footprint of our royalties that are mainly focused in the Americas. Again, a very growing portfolio, over 130 royalties that we -- royalty assets and streams that we have.

The other aspect is that we see some additional cash flow coming in through the near term, and you see that on Slide 11. A number of them will come from our accelerator incubator model where we see Barkerville with a 2.25 NSR on Cariboo, Falco and also the exciting Windfall Lake Discovery that is progressing, where we have 1.5% royalty and a number of assets that have also been -- are subject to advanced exploration and development. So we're looking at this as being a great contributor as we move forward.

We'd really like to go back and maybe just cover again the highlights that we have done over the past 3 years. I think it's -- we've worked extremely hard at building our portfolio and establishing ourselves as a very strong player in the royalty sector, but also in the Canadian mining industry. We started off in June, basically with Canadian Malartic 5% NSR, Canadian Malartic, which is Canada's largest gold mine. It's 17th largest in the world. So that has been a great asset for us. And we added a few other royalties that are our nonproducing properties. We have cash of $157 million, an equity portfolio of $15 million and a market cap of about $500 million.

Today, we have cornerstone assets with Canadian Malartic, Éléonore that was acquired with the Virginia transaction in early 2015. We've got the Renard stream, Québec's newest mine that is in the ramp-up. We've got silver stream from Mantos Blancos -- from Mantos in Chile as well as a position on Brucejack, which is now in the ramp-up phase, and we're very excited about that. We have over 11 cash flow-producing assets, and we have great potential on our growth assets. Cash position of $100 million. And we have an equity portfolio at today's value is $450 million. And our market cap is $2.5 billion. If we take our market cap as well as the market cap of our associated companies being Osisko Mining, Falco, Osisko Metals and Barkerville, our market cap is close to $4 billion within the group. So we're quite excited about the growth that we have.

And if you look, we've raised over $750 million. We secured credit facility of $200 million. We've done over $2 billion worth of transactions within the group. And we've increased our portfolio of 4 royalties to 131 royalty streams and offtake. And we've also created, I think, a very strong growth profile by -- through our associated companies that are continuing in being very aggressive on the exploration and development front. I think we're probably the largest explorer. I know we're the largest explorer in Québec and in Canada and, I think, a premier position in the world. Also, I think the important part, we're quite pleased of having Orion as one of our cornerstone investors but also the financial partnerships that we have with Caisse and Fonds. Caisse has over 12.7% (sic) [12.1%] of our outstanding shares and Fonds has also 5.5% of our outstanding shares. So I think with those financial partners, we can see also the capacity to do additional deals as we move forward.

So Sean, with that, I think that covers. I don't know if there's any other comments you would like to add before we go to the questions.

No, I think we're probably pretty good. We take the rest of it up in the Q&A session, Bryan.

Thank you.

(Operator Instructions) (foreign language) Your first question comes from the line of Carey MacRury from TD Securities.

I'm just wondering if you could tell us how many GEOs would have been earned in the June-July period from the Orion assets.

So we're actually still working on this information, as you know. Until closing, it was Orion actually that was receiving that a bit of information. We have made an adjustment to our purchase price on closing July 31, but that actually includes some working capital that we acquired as well including some cash. So we will probably be in shape to report on that for -- with our third quarter reporting.

Okay. And then just in terms of depreciation related to the Orion assets for the rest of the year, any guidance you can provide on that or we should expect?

Depreciation in terms of different assets? Accounting depreciation?

No, just in terms of the impact that the Orion assets will bring in terms of total depreciation expense.

That again, I guess, we'll have to work in terms of the operating activities. As you know, it's going to be on the news of production basis based on the producing assets currently that we acquired from Orion.

(Operator Instructions) (foreign language) Your next question comes the line of Dan Rollins from RBC Capital.

I know you recently pulled off a very large transaction here. But I was just wondering if you might be able to get some color on how you're seeing the opportunity out there in the market evolving here for future royalties and streams. Obviously, we've seen heyday in the last, I think, 2 to 3 years with a lot of big acquisitions coming into market. Obviously, those companies are much more financial -- better financial strength. This thing -- what type of opportunities are you seeing up there, sort of on size? Are they more on producing assets? Or are we now -- are you now seeing more opportunities on development stage outside of your existing incubator model?

Dan, thanks for the question. But as we've discussed in the past, there was a bit of a unique market in place when polymetallic companies were putting in their precious metal streams to convert debt and also liquidating assets. That business, as you have stated, was probably fairly unique to the period. We're more -- back more to traditional streaming and royalty business, where we're looking at project development, project expansion and earlier stuff that's coming at us. But also there is some M&A. So there's -- and in terms of acquisitions, I see that being more active, where royalty and the streaming business is part of the acquisition financing package. So that's where we see the future. There are some sizable things that we can see going. Obviously, for us in this environment, the opportunity for our accelerator policy worked well, where we're seeing major amount of dollars coming back into exploration development assets. The spice in the soup for us right now is the accelerator model. We have over 870,000 meters of drilling that's ongoing on our exploration -- on lands that we already have royalties on that we don't have to put any more funding in. So we have a pretty good chance to see resource and reserve conversion and a lot of them as you seen. We got 400,000 meters of drilling program at Windfall Lake, 130,000 at Barkerville. There's drilled conversion going on at Malartic with the Odyssey program that's drilling out right now. So we're seeing organic growth, the stuff that we've already paid for as well as our accelerator opportunity and then the other traditional businesses of acquisition, expansion and development.

Great. And just one last question. Obviously 3 years in now since the company was created. You still have that large Guerrero land package. Any movement on starting to divest that or maybe attaching some future royalties on those lands?

Yes. Three things are moving very nicely. And Guerrero, as you know, Gold Corp has done the divestiture of Los Filos. We've seen the Ana Paula project moving up the food chain. Torex has had significant success with their operations. As we've said, we are kind of waiting for all the pieces to come together. So we are active on that file. We have several proposals that we're evaluating. It hasn't been a big rush for us, because it's relatively low cost keeping an inventory. We want to wait for the right time. That the right time is coming close this year or early next year, and we'll probably -- we should have something for you on that.

Okay. And then -- I guess, actually one more question, sorry. Longer term, obviously, there's some potential opportunities out there for you now, but is there a level of dividend payout from your cash flow you were targeting as a company?

Sorry, it was breaking up a bit, Dan. Could you repeat? Or Bryan, you want to...

So I'm just wondering if you have sort of -- longer term, if there's a target sort of percentage of cash flow that you'd like to return to investors as a dividend going forward?

I can take that, Sean, because I think Sean's line is breaking up. Dan, we've always said, the dividend, the first part that we wanted was to have a very stable dividend that was sustainable. As we bring in the assets from Orion and they start generating the cash flow and stable cash flow, we certainly will be looking at dividend payout. We've always said that we are shareholders, and we recognize the shareholders. And we want to return as much as we can while keeping some money to make further investments. So you can see that our dividend profile should increase over the next few years.

Your next question comes from the line of Mike Jalonen from Bank of America.

Sean and Bryan, just, I guess, following up on Dan's question. You have, as you know, royalties Upper Beaver, the Kirkland Lake Camp. And it seems that one of the owners of those properties is a seller now, Yamana. So I'm just wondering if you'd be a happy participant to provide financing for someone to buy it for return for stream. I assume, this might be on your radar screen, just wondering?

Yes, I don't think it would be appropriate for us to speak about any of those processes that maybe ongoing, Mike, unfortunately, whether we're in or we're out is not something that we would talk about. Obviously, we know the projects well. And we would hope that those lands get the benefit of significant investments. We'd love to see those royalties come to fruition. So of course, I wouldn't make comment on anybody's process or transactions that may or may not be on the go.

Okay. And maybe a second question. Obviously, you've closed the Orion deal. And when companies are making acquisitions, they are a lot circumspect to talk about the assets until the deal closes. So maybe you could talk about things get really you excited about this asset base, and just maybe things you haven't talked about before that now you feel more comfortable talking about?

Well, I think if you look at the Tier 1 producing assets between the Renard, that's Stornoway, Mantos which is a long-standing producer and the excitement around the Pretium project depending on how that comes to be. But most importantly which is into, I believe, the fifth and sixth diamond sale and then starting to manage the ramp-up in terms of the breakage issue there. We see that as a great time to have gotten into the diamond business. So we're pretty excited to be there. And we see a real supply demand story in the diamond space coming to fruition somewhere between 2019 and 2021. So we're happy to have that as 12% of our potential revenue. And in terms of Mantos, the project has been doing great. They've -- they got pretty good cost base control right now. It's a long-life asset, so we see that as having some potential upside there. And as you know, Pretium is now moving into the first year of production. They have quite -- about 185,000 tons or more of stockpile to work into, and they're getting control of the underground, so we'll see how that story works. As you know, there's a couple of windows of time there when there's a potential buy back on that. So we'll work on that. And then the next tier of assets that are sort of more mature, I'll let Bryan and Joe or Vince take a crack at that from Montréal. But there's quite a bit of development stuff that should be coming into fruition here in the near term with some awfully big lottery tickets that we didn't, so -- that we didn't pay too much for. So we have quite a bit of upside in this portfolio. And Bryan, you want to take a swing...

Sure, Sean. Obviously, we're looking at the strong contribution of Amulsar when it comes on stream. About 40, we think will be providing us some good returns on the offtakes on that and Sasa. So we, obviously, will be talking more about these assets as we go forward. We're also pretty excited about some of the land positions that we've acquired or on royalties on that. We can think of Spring Valley as being exciting. It's got the right real estate address, and we think there's surprises that should come out of some of those assets there.

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

So just back to the accelerator model, the incubator model for a second. Obviously, you've done quite well so far. My question is do you see any kind of limit to your capacity to grow your portfolio on that front, either I guess obviously financial or in terms of management focus? Or is it just a function of the opportunities that you see in front of you?

I think we set up a pretty balanced pipeline approach to taking all of our teams and moving projects through the various stages that take advantage of our technical team. But the amount of projects that line up on the same cycle at the same time, they tend to spread out a bit over permitting periods and engineering. So I think we're in pretty good control. Obviously, we've got 3 major projects on the go between Windfall Lake, Horne 5 and the Cariboo projects, that they're sort of the Tier 1 accelerator companies. Tier 2 stuff is moving along, so it's coming up the ranks. Things like Nighthawk and Unigold and all of those where we've taken position to where we're sort of watching these companies evolve. We're -- we think we might be a participant in the future of those things. So we see it as a pretty sustainable, Mike, pipeline. And we're always looking for the next-generation of companies that are further down and recycling our cash from one level to the next, as we collect -- especially we collect and project our tax pools, buying, investing in flow through. So we have to rotate through those positions to make that tax pool protection system work, and we continue to do that. We've been trading in and out of things throughout the last 3 years, and we'll continue to do so. And when we find things that we really like, we will take a more serious investment into them and hopefully bring them into the accelerator model in an evolutionary way from here to production.

So if I'm hearing you right, if I can paraphrase, you're pretty happy with what you have, but if something pops out at you, you still have the capacity to make a move in that direction. Is that fair?

Yes, that's fair. And we will be aggressive where we see opportunities.

There are no further questions at this time. I'll turn the call back over to Mr. Roosen.

Thank you very much, everybody, for calling in. This is a contract transaction that we've just executed with 74 assets. It also sets the stage for some opportunities in the international side for us. So the non-tangibles, the takeaway from this is the expansion to the international side of the business, the evolving relationships that we have within the sector and the growth assets that we didn't talk about that are more exploration assets that are going through, where we see -- where we've already are earned a right and we have to see if we can help get those opportunities further along the development chain. So on that note, thank you everybody and enjoy what's left of the summer and most of you people will probably be attending the Denver Gold Show. So I look forward to catching up with you there if we don't hear from you before. Thank you very much. (foreign language)

This concludes today's conference call. You may now disconnect. (foreign language)