Agnico Eagle Mines (NYSE:AEM) and Yamana Gold (NYSE:AUY) recently updated their reserve estimates for their recently acquired Canadian Malartic Project. The two companies had to reevaluate the reserves considering changes in the gold price, the fact that some of the gold had already been mined, and the fact that the mine's effective cost of production would be significantly higher due to the fact that part of the Osisko acquisition was that former Osisko shareholders would get stock in a new company - Osisko Gold Royalties (OTC:OKSKF) - which owns a 5% NSR royalty on the property. While this is news that impacts all three companies, it is most pertinent to Osisko Gold Royalties, which I suggested investors to purchase in June.
The results of the reserve report were relatively in line with expectations. Due to the above changes the two owners of the mine had to increase their cutoff grade from 0.33 gpt. to 0.35 gpt. which was a slight negative. However, the project still has 9 million ounces of gold reserves at 1.06 gpt., which at 600,000 ounces of production per year gives it a 15 year mine life.
(Source: Agnico Eagle's press release)
Since Osisko Gold Royalties owns a 5% NSR royalty on the property it has attributable production of 30,000 ounces per year, worth about $39 million pre-tax or $28.5 million after taxes. This is slightly lower than my $29 million prediction as the gold price has fallen slightly.
Ultimately Osisko Gold Royalties is still a young company, and while it is good to see that the 5% NSR royalty doesn't significantly impact the Canadian Malartic Project, we still don't know the direction that the company is going to go. It has made one deal - an investment in a nanocap miner NioGold (OTCQX:NOXGF) - although this hardly moves the needle for a $680 million company. This is why I maintain that the stock is still speculative until we can see the direction it is going to head in. Investors looking for a royalty company in the gold space should stick with the more traditional names - Franco Nevada (NYSE:FNV) and Royal Gold (NASDAQ:RGLD), but Osisko Gold Royalties has a lot of cash, steady cash-flow, and exploration property, and if these assets are managed well they can generate significant returns for shareholders.
Disclosure: The author is long RGLD. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.