Osisko Gold Royalties Ltd. (NYSE:OR) Q2 2016 Earnings Conference Call August 4, 2016 4:30 PM ET
Sean Roosen - CEO
Dan Rollins - RBC Capital Market
Good morning ladies and gentlemen, and welcome to the Osisko Gold Royalties' Second Quarter 2016 Results Conference Call. After the presentation, we will conduct a question-and-answer session. [Operator Instructions] Please note that this call is being recorded today, August 4, 2016 at 16:30 Eastern Standard Time.
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]
I'm going to be referring to a Power Point that's located on our website. That is titled 2016 Q2 results.
We raised in the first 24 months over the existence of Osisko Gold Royalties, $500 million in capital. We secured $200 million of available credit has not been drawn down. We've successfully established are given a royalty model which involves the investment and evolution of development and exploration companies through both equity and wealthy purchases.
We've continue to have success in our equity portfolios which is now growing to a total value $171.8 million representing $66.9 million of unrealized gains at June 30, 2016. So pretty successful portion of our program. We deployed $212 million of capital into new investments and we grew out of the portfolio to a total of 52 royalties and three royalty options. We've also been able to declare 8 dividend as of this quarter, and the total of $26.6 million of dividends as of this quarter. So a lot of our objectives have been met and in some cases we would exceed them.
On the page five; we've seen our cash -- net cash flow growth from $6.5 million in Q2 of 2015 to $15 million for the second quarter of 2016 and representing a 133% increase in our cash flow. Revenues also increased from $10.2 million to $15.8 million, representing a 54% increase in gross revenue.
In terms of our goal deliveries and reception, one thing to make note of is that we receive 100% royalty gold, i.e. that is zero cost gold to us. So it's quite a bit more important; [ph] just a normal stream and we've seen our gold received for Q2 at 9,488 ounces, up from 6,887 in 2015. Also for the year 2016, year-to-date we've received 18,000 -- 891 ounces and we're on-schedule to meet our guidance of somewhere between 34,500 and 37,200 for total ounces received and plan to receive for 2016.
Onto Page 7 of our point; realized gold price has been in our favor, obviously increasing as the U.S. dollar, Canadian dollar has laid out, as well as the increase in the U.S. dollar base price gold price. For the last quarter 2016 we had a realized gold price in Canadian dollars of 1,631. And Q1 ran around 1,636, up significantly from 2015 where we averaged around 1,490 Canadian an ounce. So if you look the max lending fixing in Canadian dollars, we had 1,888 an ounce for September 6, 2011. So all in all, the Canadian dollars that we have seen remarkably benefits as we see this gold rally continue, and the Canadian dollars are working on our as well.
On Page 8, summary of our investments in equities, our investment portfolio, total cash in of $104.9 million; and as of June 30, represented by CAD171.8 million, for an unrealized gain of CAD67 million as of the end of the second quarter. We've continue to execute our incubator model in terms of requiring royalties, both through it by having an equity and the direct royalty component allowing us to have near term returns on equity while we wait for development projects. I think we've given you example of this on Page 9.
We've purchased 1.5% royalty in 2016 for a total cost of CAD25 million and we had invested CAD15.4 million flow through financing. If we look the cost, the value of our unrealized portion of the asset right now, we're up about CAD15.4 million. So the cost of the royalty rate now is actually back to about CAD9.6 million. So that's our incubator model when it works right, and then we think that it's been a good tool for us and if we look at the Eurozone mining transaction from Q1, we've purchased the royalty for CAD10 million and we have an unrealized gain on the equity portion of CAD14.8 million. So we're actually up CAD4.8 million over and above the cost of the royalty.
So we believe that that is giving fruition to our shareholders and gives us of a little bit of a different model in terms of how we approach generating royalties and/or streams. Q2 results for the three months ended June 30, 2016 which was -- would have been our 24 months of operation. Gold production at 9,487 [ph]. While 9,488 ounces, the breakdown on a per project basis here, obviously Canadian market being the bulk of that at 7,200 -- and Éléonore at 1,500 or just about 1,600. Silver production, we received around 7,900 ounces and realize gold price again was CAD1,631 revenues for the quarter was just to check on your 60 million and 50 million -- CAD50,790,000 for net cash flow of CAD15 million. So earnings per share is at $0.15, up from $0.04 as of June 30, 2015. So significant increase there as well.
Overall, the balance sheet on Page 11. We have CAD200 million of undrawn death has not been drawn. We currently have cash and cash equivalents for CAD424 million. We have a convertible debt of CAD45.3 million, our total assets now at CAD1.354 billion with equity at CAD1.16 billion. Total cash and available credit if we were to pull everything would be CAD625 million available for deployment, making one of the healthier companies in the space in terms of the ability to deploy capital.
Page 12, distribution of current -- producing royalties, obviously, Canadian Malartic are 5%, our cornerstone asset Gold Corp Iron Ore Royalty -- starting at 2%, sliding to 3.5% and then and our next big investment would be the investment in Iron Ore Corporation of Canada which has a faster growth of 8.7% on the IOC assets located in Labrador. The Nine Way [ph] asset, the smaller project, Island Gold asset which is operated by Richmont, we have a 1.7% to 5% MSR on that. Again, these are all royalty ounces, and not screening ounces so they quite fully in terms of their net return and their ability to continue to deliver similar margins throughout the life of the projects.
On Éléonore, things are moving forward, currently reserve sitting at 7.70 million ounces, top line royalty at 5% plus a $0.04 after seven years, these projects get processed in that bill. Currently online to be counted as largest single asset gold producer for the year; 590,000 ounces and the guidance -- 560,000 to 580,000 ounces of guidance for this year and production was in 2015 was at 572,000 ounces. Q2 production was 145,000 ounces, so keeping quite good pace, and online to continue to look like Canada's number one producer in terms of gold mine.
Meanwhile, offices of success at drill bed, the Barnett extension is underway and the permitting for that which will help some throughput. The permit there is in the final process with the back process and we expect to see project permitting should happen sometime near the end of this year, early next year. And that will allow our feet from the Barnett which contains higher grades, so that could add to production here in the near term to create some organic growth with our existing asset base. There is also the announcement of the Odyssey north and south success by the exploration programs carried out by the joint venture -- Neymark [ph] joint venture operated by both Agniko and Yamana. To the math on Page 15 you will see the Odyssey north and the Odyssey South zones significant drillers throughout the project there and it continues to look like it's going to add both mine life and overall ounces to the project at higher grades than the currently exploited market. So we're seeing some organic growth on that.
Summary on Page 16, 57 -- we're total 53,000 meters has been completed showing similarities in terms of mining and exploitation for bulk mining underground, similar to what Agniko was operating at GoldX. And Odyssey north has been traced from a depth of 600 meters to 1,300 meters close surface along a strike of approximately 1.5 kilometers, so sizable block on its underground targets, just the kind of thing we like to see.
Honestly, sales have been connected over a 0.5 kilometer straight length between 200 and 500 meters below surface so relatively shallow and accessible as well. Currently, the partners have a commitment about $5.5 million or 35,000 meters to be added to the original budget of $8 million. We're told $13.5 million budget for 2016. Our initial inferred resource estimate for Odyssey expect the end of 2016. Cisco holds a 5% royalty on Odyssey South and 3% on Odyssey North zone.
Continuing on to Éléonore, continue to ramp up that project, we're currently at 2% royalty position and we will be increasing by 25% 3 million ounces produced after the first 3 million ounces, so we have organic growth in that royalty as that mine matures and ramps up as well. 2015 production was at 268,000 ounces for the year, currently the Q2 production was at 74,000 ounces guidance for this year at 250,000 to 280,000 ounces which will translate to about 5.5% to 6.2 thousand ounces of net zero cost for Cisco, and gold royalties coming to us from that.
Tajiki gives you a bit of an oversight on the other producing royalties we have, the Island Gold operated by Richmont in Western Ontario, it's a minus property since 2007, recently announced a PE updates on the deep resource has seen about 200% increase in reserve development there and production for 2015 was at 55,000 ounces for the year and continue to grow 142,000 meters -- phase 2 drilling campaign is underway for this year and we expect to see significant resource and reserve conversions as that projects matures. Our 0.7% pass-through royalty that we received via dividend on equity investments that we've made in the Labrador Iron Ore Corporation, continued to deliver. It is one of the biggest royalties out there, just 7% top line royalty on the IOC assets and they also own a 15% equity interest in IOC and they receive $0.10 commission on all iron ore. So we received roughly 0.7% royalty, that is a long life assets hat's been operating from 1954 with mine plan currently plus 25 years. I'll have to go with current iron ore prices.
The small project that we have an investment, not in anyways currently ramping up, we've received 150 ounces of gold from that project and we expect that continue to ramp up.
Page 19, a summary of our other real royalties on the new growth assets. As you can see very Canadian centric with only one project in the year -- more sulfides in Arizona. Quite a great -- big discovery there by Arizona Mining where we a hold 1% royalty. The caribou district operated by Barker Bill and BC. And then back to Quebec we have a 1% royalty on Corn Mine [ph], 0.5% royalty on the windfall project, 2% on Pandora, 1.7% on Lamac, operated by Integra for the 8.427, and then Odyssey, and north and south as previously and then Windfall Lake a 2% royalty that we hold on the previously, Quinton Ground that we acquired as fiscal year that would pass on to the joint venture through the sale of our Cisco mine. sure it's true the sale of a sister of mine.
Page 20, bit of a summary, I won't go through at all here but all these projects, Allen Gold is being introduction, Windfall Lake has been delivering significant exploration success and in field drilling to increase focus on that resource. And Fed resource announced that it -- of $40 million one 37 million tonnes and the great 1.24, look here at what their tea is making. Some GoldX has well so, on infrastructure with open point, good recoveries, so it's a good looking project right now that we're very happy to see it's been mobbing forward at quite a good rate.
Good success on Falco resources, more than five project DA was completed in Q2. 666 million, 667 million of NPV with a 16% internal rate of return based on the U.S. 1,250 dollars gold, this is a good project; one of the largest undeveloped resources left in Canada. And our project is summarized here; it continues to be delivering significant results on the Taylor deposit, plant for 125,000 in 2016 and again top performer on the equity line for us as well to key toms and success if that project has evolved quite quickly.
Page 22 is basically a summary of reserves and resources. I won't go into it right now but again, just a summary for 22 months, it's been quite active and we've seen quite a bit of increase in almost all metrics in terms of the evolving projects that we already work on and the projects that we've been able to invest in over the last two years. On that note, we did 133% increase in our operating cash flow, and we have declared our eight dividend on this project so I think they are well on-track to meet our objectives and continue to grow into our role -- in the royalty space.
And from a strategy session, you may have seen that we've also -- O'Bannon was renamed of Cisco Mining Group and we continue to evolve our platform in terms of how Cisco gold royalties and our best-co companies operate at how we use our technical team financial team to help unlock value for shareholders in both companies that evolve into our plan to can to grow above the royalty business and the investment companies that we've invested in the last 24 months.
On that note, I think everybody has been calling in and open the lineup for questions.
Your first question considering from Dan Rollins from RBC Capital Market. Please go ahead with your question.
I got, I hadn’t mute there. I'm won just wondering -- confronts on an Air New around there just the first two years just wanted to talk about what you're seeing from the pipeline opportunity. You did start-off your comments by talking about the funds that you have raised and that you have most of those funds still on the balance sheet. And then I known you did the last second to raise it was sort of to get a seat at the table with some of the bigger chunkier deals. Do you see the opportunity out there on those big chunky deals right now or do you see at the earlier stage opportunities more creative right now?
Obviously there is a couple of deals wrenched in the space, recently we are involved in a lot of processes right now Dan, and hopefully we'll continue to work on those. And they've evolved and there is a significant amount of balance sheet debt conversion going on in this space that creates probably more opportunity than the usual one, and as we've said before, we are just participant at those tables, we did raise funds as you said in Q1 which allows us to bid upto a $500 million project without having to come back to market or be subject to conditions. So that's where we want to be that's where we are.
And hopefully will come back to you with some form of success on those bigger projects as we get into it. We are seeing in the pipeline -- on the project development size as more projects are starting to consider production decisions. So we're being involved in those and we're also seeing some deal flow in terms of the asset disposal processes that are going on where people are using royalty extreme participants to be part of the acquisition financing processes. So again we're -- we're seeing a lots of work going on and hopefully we'll be back to market with something as these processes unfold.
And then, with respect to the Horn Five, when do you think you would be in a position to have something negotiated with Falco on that transaction -- I know there is bit of a window where you can negotiate a deal but when do you think realistically you would have something pen to paper?
Are you referring to the royalty or you're -- as you know, the PA study came out, there is discussions with our partners at Glencore to evolve and try and feasibility study out by the first half of next year. So in the context of that feasibility and heading into permitting, that is when we when we would forsee that happening. Once we get a feasibility in hand, we're in the permitting process; we will be pushing hard to line up the project financing to help Falco achieve success there with our partners going forward.
And maybe if you could just touch base -- I know as we roll into early '17, I believe the agreement you had with -- on the Virginia exploration properties, I do believe expires. Where do stand with starting to monetize on the exploration portfolio that you did bring in with the Virginia acquisition?
You're quite right, Dan, we have a three-year commitment there. Our evolution here in Quebec, we continue to refine and take advantage of the talent pool that we have with our teams here. There is quite a bit of value here in Quebec on those assets. We're not quite ready to finalize our plans on that portion of our asset base at present but we are working to get that back to them with a refinement on how we're going to proceed there. Obviously our intent is to create a very sustainable business on the James Bay assets and continue to take advantage of the hard work that Andrew [ph], Paul Archer and the team; Virginia team put in there anyhow to make sure that they have continued support to hopefully create the same success as they've had in the past, discovery of Éléonore. And there is nobody else out there really has that knowledge base or the land package to continue. So we see that as a significant asset within the company and we want to make sure that we get the best we can before shareholders.
Thanks very much.
Your next question comes from the line of Kara Hassan [ph] from Hayward Securities. Please go ahead.
Thank you, and afternoon gentleman. Just a quick question on the equity -- I mean you demonstrated in the presentation some of the examples were -- you've had significant increases in your equity value and previously have talked about ways that you could monetize that component of your portfolio. How are you feeling given where we are in the precious metals environment and some of the wins you've had in our portfolio on how you approach that over the next year?
I think for the most part -- the equity positions that we hold are strategic in nature. We continue to believe that those assets have growth in them, and we see occasions where we sell out when we say there is some profit to be taken but the goal of the portfolio originally was to be strategic but we are opportunistic as well. So in some cases we have monetized positions and we've been able to demonstrate that. In terms of what you'll see in the quarterly reports we did have about $4.3 million of gains through the sale of equities for the quarter. So we like that portion of our portfolio, we have an unrealized gain of about $67 million overall, and we continue to think that. The due diligence work that we do in our Cisco gold royalties life also allows us to be reasonably good steward of equity investments which we do when we feel we have all of our ducks in a row in terms of seeing a potential wealthier streaming opportunity. So we think that that's a very good portion of our business, and a good catalyst to perhaps get us into situations where we can earn royalty sooner rather than later in the process, and are hopefully at a better valuation than the bank run processes. So that continues to be strategic to us and our equity portfolio is a catalyst in that process.
Okay. And just on the G&A side, obviously bit higher this quarter with share based comp but outside of that when should we expect to see that G&A reduce as you sort of push some of those cost down to the portfolio company?
I think by the end of this year we'll have a fair amount of restructuring in place. As you know, we've entered into agreements in Q1 and Q2 to allocate some of our technical and administrative people into projects -- that portion of the business; I'm very satisfied with the progress we're making there. We had given that guidance in the market that we needed a couple of years to get going. And I think that the activities that we were able to achieve in Q1 and Q2, where we had but $5 million or $6 million of G&A that will be offset to our investors as we provided services and people to make those happen. So we are on-track and I've been very happy with the process that we're in, and as the ability to have our people go and help unlock value in those companies.
Your next question comes from the line John Shvadnik [ph] from DataBanc Capital Markets. Please go ahead.
Hi, thanks and just one more. Just wondering what your ideal capital structure would debt you might take on in final state?
We want to maintain our profile in the space; we've got a previous dividend yield now. So we want to maintain that capacity to -- to very least BC maintain our dividend profile if not be able to increase it. In terms of debt, we've not been historically -- we haven't run higher levels of debt in companies that we're involved in right now and I don't see why I would change. So I think that we would probably keep our debt levels in the sort of the $200 million to $300 million range, it would be the max to be comfortable with who we're deploying into something sizeable. They are $200 million to $500 million but we want to make sure that we have a sustainable business and that we can weather all commodity prices.
Fair enough, that's great. That's all for me, thanks.
Your next question comes from the line of Cosmos Shue [ph] from CIBC. Please go ahead.
Hi Sean, and thanks for hosting this quarter. Just one quick question for me, can you remind me once again of the tax status of the company. Are you paying cash taxes or did you pay any taxes in Q2? I'm just seeing the entire tax expense has added to calculate cash flow.
Yes, through our back pools and our investment into flow-through investments, we have not paid cash taxes today.
Okay. And Sean, when would you expect to pay cash taxes?
Well, you know it depends on how it played out but right now we wouldn't pay anything in 2016 and we'll be looking to reorganize for 2017 and address the issues that come out of that.
Okay, great, thanks. That's all.
There are no further questions at this time. I turn the call back over to the presenters.
Thank you. I know some people didn't get their questions but we are running out of schedule time, but thank everybody and we'll look forward to seeing you either at one of the Investment Conferences or at the next quarterly call.
This concludes today's conference call. You may now disconnect.
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