Osisko Gold Royalties Ltd

TSX:OR

Earnings Call Analysis

Osisko Undergoes Leadership Changes, Reports Mixed Results

Osisko's leadership transitioned, with Sean Roosen stepping down as Chair and Jason Attew appointed as CEO by 2024. Q3 earnings revealed record revenues of over $62M, but net debt stood at $245M, and the company reported a net loss of $0.11 per share and adjusted earnings of $0.12 per share. The GEOs forecast is near the lower end of guidance at 95,000-105,000. The Renard mine's operations were suspended, impacting Q3 results, but the Namdini acquisition promises future growth. Despite challenges, Osisko remains committed to Tier 1 mining jurisdictions and the quality of its assets.

Osisko Gold Royalties Q3 2023: Leadership Changes and Performance Highlights

Osisko Gold Royalties has shared its Q3 2023 results, and alongside the financials, notable changes in leadership were announced. Sean Roosen stepped down as the Chair of the Board but will remain a Board member, with Norm MacDonald succeeding him as Chair. After a diligent search, Jason Attew was announced as the new President and CEO, to take office by January 2, 2024. Attew brings a vast transactional experience and leadership presence from various roles in the mining industry, expected to usher Osisko into a new phase of growth.

Q3 Financial Overview: Stable Performance with Growth Trajectory

In terms of production, Osisko reported 23,292 Gold Equivalent Ounces (GEOs) earned in Q3, aligning with last year's figures for the same quarter, with an expected annual production at the lower end of the 95,000 to 105,000 GEOs range. This points to an approximate 6% year-over-year growth. The strong performance is attributed to solid earnings from key assets, balanced by the shutdown at Renard diamond mine. Financially, Osisko saw record revenues topping $62 million and preserved high cash margins at 93%, with a quarter-end cash position of nearly $71 million and a net debt of $245 million. Investors can also find reassurance in the regular dividend payment, noting the company's stable return strategy.

Operational Updates: Asset Contributions and Setbacks

Operational highlights include Osisko's 23 producing assets, with GEOs primarily sourced from Canada and 90% derived from precious metals. The Eagle mine at Victoria Gold continues to be one of the bright spots, while the Mantos Blancos operation underperforms expectations. The Canadian Malartic complex remains the major contributor to GEOs earned. Unfortunately, the Renard diamond mine poses a challenge due to its immediate suspension triggered by a substantial decline in rough diamond prices.

Future Growth Prospects: Namdini Acquisition and Asset Outlook

Osisko's growth prospects are bolstered by the recent acquisition of a 1% Net Smelter Return (NSR) royalty on the Namdini gold project in Ghana for USD 35 million, expecting significant contributions by late 2024. The construction progress at Namdini and other key future assets fortifies Osisko's near-term growth projection. The company maintains its commitment to sourcing accretive precious metals acquisitions.

Balance Sheet and Shareholder Value Considerations

At quarter end, Osisko's net debt stood at $245 million. Despite this, the company has a robust and sound financial position, highlighted by strong covenant performance. Management is attentive to maintaining financial strength while ensuring that value is extracted from its equity investments. Closing remarks reemphasized Osisko's positioning as a leading mid-tier royalty company, with an emphasis on the quality of its assets and a high-performing team prepared to support the incoming CEO. With upcoming Analyst and Investor Day, the company expects to give further insights into its portfolio.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the Osisko Gold Royalties Q3 2023 Results Conference Call. [Operator Instructions] Please note, this call is being recorded today, November 9, 2023, at 10:00 a.m. Eastern Time. Today on the call, we have Mr. Paul Martin, Interim Chief Executive Officer; Mr. Frederic Ruel, Chief Financial Officer and Vice President, Finance; and Mr. Iain Farmer, Vice President, Corporate Development. I would now like to turn the meeting over to your host for today's call, Mr. Paul Martin.

[Paul Martin, executive]

Thank you very much, operator, and good morning, everybody, and thanks for joining our call. This presentation is available on the website as well as through the webcast. And firstly, I'd like to address the organizational changes and then proceed to the quarterly results. Last night, Osisko announced that Mr. Sean Roosen has stepped down as Chair of the Board, continuing as a member of the Board. In conjunction, it was also announced that Mr. Norm MacDonald will be taking on the role of Chair. In addition to the changes made at the Board level, Osisko's CEO Search Special Committee has concluded its search for a full-time President and CEO and as you have all seen, Jason Attew will be assuming the position once he completes the necessary transition from his current leadership role at Liberty Gold, but no later than January 2, 2024.

First of all, speaking on behalf of the Board and all of our employees is with a huge amount of gratitude that we acknowledge Sean today for his vision, drive and emotional capital that he has invested in the company for nearly a decade, including the spin-out creation of Osisko Gold Royalties back in 2014. And over this period of time, he has put everything he had into this company and Sean has exactly as he would self-describe himself, a multidirectional thinker he looks -- who looks to challenge the norms and is not comfortable sitting on his hands. From the creation of the Osisko Gold royalties with its 5% NSR royalty on the Canadian Malartic mine, arguably the sector's crown jewel precious metals royalty asset all the way to where we -- the company is today with 23 producing royalties and streams and over 180 assets. There are a few in this industry who have the conviction, the perspective and I would say, quite frankly, the guts to do what Sean has done and continues to do. And he should be applauded for all of these qualities.

And let's not forget, he remains as one of the top mine developers in this country and CEO of Osisko Development, where we are the largest shareholder and where they are focused on the Cariboo development asset where we hold a 5% royalty. And I personally would also like to thank Sean for his full support over the past few months during my time as interim CEO. Secondly, Norm MacDonald will be taking the role of Chair following his appointment to the Board at the last AGM. I've known Norm for a long time going back to his days as a natural resources portfolio manager at Invesco. Norm brings a fresh set of eyes and is an experienced and committed individual who has extensive connections within the mining industry. I know he will be a strong leader of the Board going forward and a great partner to the incoming President and CEO.

So this serves a natural segue to the other major piece of news from last night's release. The appointment of Jason Attew as the new President and CEO of Osisko Gold Royalties. And in my opinion, Jason will make a fantastic addition to the group here at Osisko. And it's very easy for me to speak about, Jason, as I have both a business and personal connection with them which takes back to my days at Detour Gold. From 2009 onwards, he was our lead investment banker for 7 years and was instrumental in garnering the bank support and financing the project, which today is now the biggest operating gold mine in Canada. I watched Jason back then as he made a bold decision to leave the bank and move to Gold Corp. First as VP, Corporate Development, and then including the CFO position until Gold Corp was acquired by Newmont in 2019.

From there, he took on the President and CEO role at Gold Standard Ventures, which was subsequently acquired in 2022 and then most recently took on a second President and CEO role with Liberty Gold. All in all, what I would call a perfect mix of transactional experience along with leadership roles at both large and small mining companies along the way. The Osisko Gold royalties will be in strong hands going forward with the combination of Jason and the individuals that already make up what I believe is a very strong and capable management team. So like those on the call, I will be watching with a keen interest.

And now I'll move to the Q3 release. So please note that there are forward-looking statements in this presentation, and actual results may differ. All amounts are in Canadian dollars, unless otherwise noted. So on the highlights for the quarter. We're satisfied with our overall performance in Q3 both from a GEOs earned perspective and from a transactional basis. 23,292 GEOs earned in Q3 comparable to the third quarter in 2022. With just over 71,000 GEOs earned in the first 9 months of 2023, Osisko is now trending towards the lower end of its previously published guidance of 95,000 to 105,000 GEOs for the year. We're expecting an improved fourth quarter in some of our key assets to finish the year, which will be offset partially by the shutdown at the Renard diamond mine. Achieving a final number towards the lower end would represent an approximate 6% year-over-year growth.

We had record revenues of just over $62 million and maintenance of our year-to-date cash margins of 93%. The company had just under $71 million in cash at the end of the quarter and net debt of $245 million. With respect to our ongoing commitment to return capital to shareholders, the company declared and paid its quarterly dividend of $0.06 per share in Q3. And on the recently closed transaction front in a subsequent event to the quarter, Osisko announced last week the acquisition of the Namdini NSR royalty demonstrating our ability to uncover and source accretive precious metals transactions. We're delighted to add Namdini as an asset that will make a meaningful contribution to Osisko's near-term growth.

On the financial performance, the increase in record quarterly revenues largely followed the fact that while GEOs from the recently closed CSA Silver Stream transaction, were booked in the second quarter. Revenues from sales were received in the third quarter, resulting in a new quarterly high watermark of just over $62 million. We have a decrease in cash flows from continuing operations in Q3 as compared to the comparative quarter in 2022, despite being impacted positively by higher cash margins but due to increased interest charges and higher G&A costs, which included severance charges. As for the net loss in the quarter of $0.11 per basic common share, I think it's best to focus on the quarterly performance rather than the change against the comparative quarter. And the major contributors for the loss were charges to the carrying value of the Renard stream and loans. These balances totaled just over $32 million before tax recoveries. The result is the carrying value of this asset has now effectively been written off, subject to an immaterial amount related to the potential remaining diamond sales.

In addition, the quarter included charges for severances and accelerated stock-based compensation totaling approximately $6.5 million related to the departure of the President and CEO and the termination of the executive role for the former Chair. Adjusted earnings of $0.12 per basic common share were marginally below the comparative quarter in 2022. So moving on to our royalties and streams. During the third quarter, the company had 23 producing assets, including ongoing contributions from Osisko's newest cornerstone asset, the Silver Stream on the CSA mine located in New South Wales. And recall, the associated and larger copper stream will kick in for Osisko in June 2024. Our GEOs earned come predominantly from Canada, and we derived over 90% of our GEOs from precious metals, being gold at 66% and silver at 24%.

And I'll add some comments on some of our specific mines before speaking about a couple of other assets in greater detail. Victoria Gold's Eagle mine continues to perform well in 2023, a key bright spot for Osisko. Despite a 2-week wildfire evacuation during the third quarter, the mine is still in great shape to attain its 2023 annual guidance of 160,000 to 180,000 ounces. The strong performance at Eagle has helped offset some of the ongoing modest disappointment in Capstone's Mantos Blancos operation, where milling rates continue to lag Phase 1 expansion design levels. Capstone is now pointing to early 2024 for resolution of the plant issues once the delivery and installation of the new handling and pumping infrastructure relating to tailings water management are completed and at which time Mantos Blancos is expected to consistently deliver nameplate throughput rates.

The only newer mine was impacted as operations were temporarily suspended for approximately 6 weeks from early June to mid-July due to the proximity of forest fires which impacted the mine's Q3 production and RGO deliveries. With the mine now back up and running safely as Osisko is expecting a rebound from the operation in the final quarter. And almost like a broken record, the Canadian Malartic complex had yet another impressive and predictable quarter and remains the company's most significant contributor to GEOs earned. And further there, in terms of the underground progress at Odyssey made during the quarter, Agnico Eagle completed and commissioned the pace backfill plant, which should see underground mining rates improve to complement the majority of the current ore being sourced from the Barnat open pit. Also on the good news front, Metals Acquisition Limited had a solid quarter with record ore throughput under its ownership during the month of July.

Drill results from CSA released during the period also continue to impress with some notable hits, including over 50 meters at 8.9% copper and 36 grams per tonne silver and just under 21 meters at 14.4% copper and 61 grams per tonne silver. We continue to follow the new operator's impact on the operation, and we've been impressed so far by their ability to unlock value. So let's talk a bit more about Stornoway and the Renard mine which most of you would have noticed that on October 27, there was an announcement from Stornoway Diamonds that the mine operations were being suspended immediately. The decision was made in large part due to the recent precipitous fall in rough diamond prices, which have shown no sign of improvement in the recent weeks. The high-profile news of India halting imports of rough diamonds has also exacerbated the recent trend of falling prices.

And on the same date, Stornoway also announced that it is in the early stages of a CCAA process, which will include soliciting investment and a potential sale. While Osisko's October 11 preliminary GEO delivery press release highlighted at the time that we did not expect Renard to contribute any GEOs in the fourth quarter. Based on subsequent negotiations, we will now see some contribution from Renard during the final 3 months of the year. However, any amounts will depend heavily on rough diamond prices to be achieved and will be significantly lower than what was originally budgeted. At this stage, given all the moving parts and potential outcomes, it is too early to discuss what things will look like at Renard beyond the fourth quarter. But Osisko will keep the market updated on how best to think about this asset when it produces its 2024 guidance and new 5-year outlook in mid-February of next year.

Now to Namdini. On Monday, October 30, the Osisko announced it had acquired a 1% NSR royalty on the Namdini gold project in Ghana for USD 35 million plus applicable taxes and levies. The mine is being developed and will be operated by Cardinal Namdini Limited, the majority of which is owned by Shandong Gold. Mine construction is well underway with Shandong recently on record stating that first gold from the operation is expected in late 2024. And as shown on the graph on Slide -- on the slide, Namdini will be a significant gold producer as compared to other global primary gold mines currently under construction with an average of 287,000 ounces per year over an initial 15-year mine life.

Osisko is excited to add its footprint in Ghana, a country with strong democratic institutions and recognized as one of the most prolific and well-established gold mining jurisdictions globally. The Namdini transaction also highlights that there has been no slowing down at Osisko with respect to our corporate development activities and the company remains focused on adding accretive precious metals acquisitions, that can and will move the needle for the company in the near term. And I'm proud of the team for getting this exciting deal across the finish line during my short tenure as interim CEO. For the purpose of this specific presentation, we've included Renard now rounding out our portfolio of 23 producing assets.

And as has been highlighted in the past, I would point to those producing mines that are boxed by the hatch lines as they are all either an expansion, extension or ramp up, helping to underpin our near-term growth profile and we expect Namdini to add to this specific group of assets by the end of 2024. And along with our high precious metals exposure and exposure to low-cost producing mines, Osisko continues to distinguish itself from its peers due to the depth of its exploration and development assets, which exceeds 180 properties and is heavily weighted to what Osisko defines as Tier 1 mining jurisdictions, which includes Canada, the United States and Australia. Recent global events have all served to underpin our belief that maintaining a high exposure to Tier 1 and well-established mining jurisdictions is more important now than ever.

So switching gears a little bit. I'd like to quickly touch on the balance sheet. At the quarter end, we had net debt of $245 million, placing us in a sound financial position and one that we look to strengthen. As we stated previously, the covenant performance is exceptionally strong on the facility with cash margins of 93%. And on our equity investments held on the balance sheet, we will continue to balance our own need for incremental funding against our perception of what fair value is for the various positions held.

So in closing, Osisko remains well positioned to continue its growth path. Further to this, positive catalysts continue to unfold across the asset base, as indicated in our optionality bar. Assets that will further add to OR's growth towards the end of the decade and beyond. And a couple of examples include the upcoming final feasibility study for Hermosa first sub 30 -- from South32 at Hermosa, now expected to be released to the market in the first quarter of 2024. Ongoing construction milestones at both TZ and Namdini, as these 2 projects work their way towards first production in late 2024. and the results from the Marimaca copper feasibility study likely also coming in 2024 with the recent appointment of Asanko Chile to lead the engineering efforts.

So having now spent several months in the seat working with the team here, I wanted to make 2 closing statements as this will be my last quarterly call. Having gotten familiar with the assets and when also considering Osisko's current relative valuation versus our peers, as highlighted on the final slide in this deck -- in the appendix, it's my opinion, more so than ever, that Osisko should remain investors go to royalty company in the mid-tier royalty space as the focus on the company returns to the quality of its underlying assets. And secondly, I have nothing but praise to say about the team at Osisko. This is a high-performing committed group of professionals, and they have made my short transition here a breeze and they'll be ready to have Jason up and running very quickly.

And finally, I'd like to provide a friendly reminder that we will soon be hosting our in-person Analyst and Investor Day in Toronto on November 14 where we will have our corporate development and technical teams present to provide a more in-depth presentation on Osisko's producing development and exploration portfolio of assets. Furthermore, those in attendance can expect to receive asset updates directly from some of our key operators. And for those that can't make it in person, a recording of the event will be posted on the Osisko's website shortly after the session. So we'll now open up the line for questions as well as questions posted on the webcast. And if we don't get to all the questions on the line or the webcast, we'll make sure to respond offline to those who don't make it. Operator, I'll hand it over to you.

[Operator]

[Operator Instructions] Your first question comes from Ralph Profiti from Eight Capital.

[Ralph Profiti, analyst]

First off, Paul, I just want to thank you for your efforts in stewardship over these past many months, and it's encouraging to see such definitive clarity on leadership and governance going forward.

[Paul Martin, executive]

Thank you.

[Ralph Profiti, analyst]

Paul, if I were to think about Q4 results and hitting the low end, it still implies quarter-over-quarter an uptick in GEO ounces produced. And you mentioned Eagle and Eleonore as perhaps having some Q4 cadence. Just wondering, are there any other assets in the portfolio where you're anticipating quarter-over-quarter strength in a material way?

[Paul Martin, executive]

Well, in discussion with the team, Ralph, I certainly have been told that Malartic tends to finish the year strong. And obviously, that has the biggest variable on us. Maybe on a more insignificant area, perhaps there's 1,000 GEOs from Renard potentially coming, but that is a little unpredictable and we'll wait and see where those diamond sales -- whether they materialize or not.

[Ralph Profiti, analyst]

Okay. Helpful. If I can ask a follow-up on Namdini. Was that other 50% of the 2% NSR not for sale? Or should we consider this as sort of a measured and deliberate step investment as it pertains to capital allocation.

[Paul Martin, executive]

Yes. That's a fair question, Ralph. This is -- these royalties were owned by the community would be the expression and only half of it was available. So that's why we were able to secure the 1%.

[Operator]

[Operator Instructions] There are no further questions over the phone at this time -- we do have one question from Adrian Day from Adrian Day Asset Management.

[Adrian Day, analyst]

Yes. And again, thank you, Paul for your efforts. I just wanted a quick question on Renard. In the past, you made an equity investment and worked with it and that worked out well. But are you thinking of putting any more money into the mine?

[Paul Martin, executive]

I think, Adrian, that's pretty clear at the moment. We were supportive of the CCAA process, and that is not our intention.

[Operator]

And there are no further questions over the phone at this time. I will turn the call back over to Paul.

[Paul Martin, executive]

Okay. Thanks, everybody. I know it's a busy morning with a number of releases out. So we appreciate you participating. If there are any follow-up questions, you know where to find us, and we're happy to engage. With that, have a great day, everyone.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines. Thank you.