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Osisko Gold Royalties - Q3 Spoiled By The Diamond Market Issues

About: Osisko Gold Royalties Ltd (OR), Includes: BGMZF, FPRGF, PVG, SWYDF, VITFF
by: Peter Arendas

The volume of attributable gold equivalent production declined to 18,123 toz.

The 2019 production guidance was revised due to the weak diamond prices.

Operating cash flow reached a new record high, at $23.6 million.

Impairment charges worth $55.4 million were recorded, resulting in a net loss of $34.7 million.

Some more information about the Barkerville Gold Mines acquisition and future plans were provided.

Osisko Gold Royalties (OR) didn't please its shareholders with the Q3 2019 financial results (all numbers were converted from CAD to USD). The company reported lower attributable gold equivalent production, lower revenues, and higher losses. The main problem is the weak diamond prices and subsequent issues with the Renard mine diamond stream.

In Q3, Osisko's attributable gold equivalent production declined to 18,123 toz or by 7.8% compared to Q3 and by 8.3% compared to Q1. The main issue is the falling diamond price. Osisko owns a 9.6% royalty on diamond production from the Renard mine operated by Stornoway Diamond Corporation (OTCPK:SWYDF). The diamond stream used to generate over 10,000 toz of gold equivalent per year. However, as the diamond prices keep on falling and the gold price increased, the volume of gold equivalent ounces generated by this stream declined notably. In Q3, it was only 2,027 toz of gold equivalent. When Osisko was preparing its 2019 production guidance, it used a diamond price of $95/ct. In the revised guidance, the diamond price of only $76/ct is used.

Source: Own processing, using data of Osisko Gold Royalties

Q3 revenues declined by almost 18%. At first glance, this may look really bad. However, the decline was related especially to the revenues from offtake agreements. Osisko sold the Brucejack mine offtake agreement back to Pretium Resources (PVG) for $41.3 million. As a result, the offtake-related revenues will decline by $75-80 million per quarter. However, the profit margin from these revenues was only around 1%, which means that the impacts on the profitability of the company will be small.

Source: Own processing, using data of Osisko Gold Royalties

The good news is that Osisko generated an operating cash flow of $23.6 million, which is a very nice improvement over the $16 million generated in Q2. In Q3, Osisko set a new record high. On the other hand, the positive operating cash flow wasn't reflected by the net income. Osisko recorded a loss of $34.7 million and an EPS of -$0.24. This loss was caused by impairment charges worth $55.4 million. The biggest portion of the impairment charge ($35.7 million) was related to the aforementioned Renard diamond stream. The remainder was related to the Amulsar gold and silver stream and gold offtake agreement and the investment in Falco Resources (OTCPK:FPRGF). Net income adjusted for the impairment charges equals $13 million.

Source: Own processing, using data of Seeking Alpha and Osisko Gold Royalties

During Q3, Osisko's cash position improved notably. Not only due to the positive cash flow but also due to the sale of the Brucejack mine offtake agreement. Osisko's volume of cash, cash equivalents and short-term investments increased to $112.9 million. Although the total debt increased too to $270.2 million, net debt decreased to $157.3 million.

Source: Own processing, using data of Seeking Alpha and Osisko Gold Royalties

Osisko was pretty busy in Q3. It sold the Brucejack mine offtake agreement. It expanded its credit facility from C$350 million to C$400 million. It enhanced its Mantos Blancos silver stream. Victoria Gold's (OTCPK:VITFF) Eagle Gold mine poured first gold and the 5% NSR should generate approximately 10,000 toz gold per year for Osisko.

Moreover, Osisko closed the acquisition of Barkerville Gold (OTCPK:BGMZF). Barkerville Gold is interesting for its Cariboo gold project. It contains indicated resources of 2.27 million toz gold at a gold grade of 5.6 g/t and inferred resources of 1.91 million toz gold at a gold grade of 5.0 g/t. A PEA published in August envisages annual gold production of 185,000 toz gold at an AISC of $796/toz. The initial CAPEX is estimated only at $235 million, including a contingency of $23 million. It is also important to note that Barkerville holds a huge land package with great exploration potential. The acquisition of Barkerville may turn out to be very profitable in the future. But the market reaction on the transaction has been pretty negative so far, as it seems like a disruption to the classical streaming model. However, it seems like Osisko doesn't want to develop the mine on its own, and it wants to find a partner or maybe several partners. Sean Roosen, Osisko's CEO, stated during the earnings call:

In the context to the Barkerville acquisition, we created the North Spirit Discovery Group -- the mandate of North Spirit Discovery Group is to channel financing from private -- standard private equity and third-party private equity partners to allow for joint ventures and to look at also other trading and selling assets or royalties and stream, as we believe this is the natural evolution of our accelerated model and will set the stage for us to help simplify our equity and also our royalty portfolio and as we move forward, we will be looking to raise some partnership equity to North Spirit Discovery Group in the new year as we get more settled post the transaction.

Another important event occurred later after the end of Q3. Due to weak diamond prices, Stornoway Diamond Corporation had to undergo restructuring. Osisko will be able to keep its 9.6% stream, but over the next 12 months, it will have to reinvest the proceeds from the stream. Moreover, Osisko became a 35.1% shareholder in a newly created company that controls almost 100% of Stornoway's assets now. At the current diamond prices, Osisko won't be able to reap any substantial benefits from the restructuring. However, this may change rapidly if diamond prices start to recover.

Source: Osisko Gold Royalties

As diamond prices keep on falling, Osisko decided to revise its 2019 production guidance (table above). The original guidance projected that Osisko will receive 85,000-95,000 toz of gold equivalent in 2019. However, the new one estimates that it will be only 78,000 toz of gold equivalent. The decline is caused by weak diamond prices and by the sale of the Brucejack mine offtake agreement. However, due to improved gold and silver prices, the cash margin shouldn't be affected too much; it should decline only by 4%.

Although the decline in revenues and a net loss may look scary, Osisko's Q3 wasn't as bad as it would seem at a first glance. Unfortunately, the earnings release coincided with a significant gold price decline. Moreover, the negative sentiment related to the Barkerville acquisition still hasn't been forgotten. As a result, Osisko's share price declined below $8.5 and only a quick gold price recovery may save it from testing the support at $7.5 and maybe even at $7.

What I like about Osisko Gold Royalties' Q3:

  • Operating cash flow climbed to a new record high.
  • Production from Eagle Gold mine should be able to more than compensate the Renard diamond mine issue.
  • Cash position improved and net debt declined.
  • Barkerville Gold acquisition offers exciting long-term opportunities.

What I don't like about Osisko Gold Royalties' Q3:

  • Attributable gold equivalent production declined.
  • Weak diamond prices and related Renard stream issues continue.
  • Barkerville mine acquisition wasn't communicated well, and Osisko's share price suffered significantly.

Disclosure: I am/we are long VITFF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.