Osisko Gold Royalties: Too Early To Call

Summary

• Osisko Gold Royalties posted a revenue of US$38.66 million in the fourth quarter of 2019, down 55.7% from the same quarter a year ago and down 53.1% sequentially.
• Osisko Gold Royalties produced 20,479 GEOs in the fourth quarter of 2019, up 2.4% from 4Q'18 and up 13% sequentially.
• OR is an excellent trading tool, but it is perhaps time to keep a long-term position on any weakness at or below $8.
• Looking for a helping hand in the market? Members of The Gold And Oil Corner get exclusive ideas and guidance to navigate any climate. Get started today »

Courtesy: Mining Journal

Investment Thesis

Montreal-based Osisko Gold Royalties (NYSE:OR) has been performing quite well since early 2019, but this positive performance ended abruptly at the end of September.

The company has been very aggressive in its search for expansion and built the right growth profile, which seems appealing to long-term investors. But, expanding in new projects is risky and can turn to a painful loss.

On the bright side of the coin, the company owns an extensive asset portfolio concentrated in North America, offering extra safety and clarity. The company's streaming and royalties business is based mainly on gold, which represented 67.62% of the total output in 2019.

Note: Osisko Gold Royalties owns about 103 assets in North America (e.g., Éléonore, Renard, Lamaque, and Canadian Malartic mines being the top producers, with Island Gold soon), and now over 135 royalty stream and offtake assets.

Another positive element when it comes to the balance sheet is that the debt load has been reduced quite significantly in 2018 and could go lower in 2020, owing to the gold price reaching new records.

Finally, the company is paying a dividend of about ~$US 0.20 per share or a yield of 1.73%.

Sean Roosen, the CEO, said in the conference call:

2019, big year for Osisko and lots of things going on within the portfolio and at the management level. Q4 started as a pretty good end of the year with over 20,000 GEOs earned in the fourth quarter and for a total of 78,006 GEOs earned into the 2019 period, which has actually met our guidance for 2019.

Osisko Gold Royalties: A Highly Diversified Portfolio with Focus on North America

According to the last presentation, Canadian gold assets represent 75% of the total assets owned by the company. It is a crucial element when it comes to a long-term perspective because these assets are located in one of the safest jurisdictions in the world. The Canadian Malartic mine was the most significant contributor in 2019, with 33,048 GEOs.

Source: OR Previous Presentation

Osisko Gold Royalties: Financial And Production In 4Q 2019 (in US$)

Note: Values can differ a little due to the conversion from CAD$ to US$. Osisko Gold Royalties indicates results in CAD$ with an exchange rate [CAD$ vs. US$] of 0.75758 in Q4'19. It is what I applied to the table below.

Osisko Gold Royalties	2Q'18	3Q'18	4Q'18	1Q'19	2Q'19	3Q'19	4Q'19
Total Revenues in US$ Million	106.75	85.46	87.31	75.76	98.38	82.51	38.66
Net Income in US$ Million	0.4	4.2	-86.21	-20.0	-4.9	-34.69	-117.56
EBITDA US$ Million	16.6	20.6	-101.7	-13.1	8.8	-30.6	-118.66
EPS diluted in US$/share	0.00	0.03	-0.73	-0.13	-0.03	-0.24	-0.79
Operating cash flow in US$ Million	15.2	15.5	14.05	18.62	16.0	21.4	13.03
Capital Expenditure in US$ Million	38.0	25.9	36.25	21.04	0	32.86	9.27
Free Cash Flow in US$ Million	-22.9	-10.1	-22.2	-2.4	16.0	-11.5	3.76
Total Cash US$ Million	146.88	112.61	131.9	91.47	74.57	112.96	97.67
Long-term Debt in US$ Million	324.7	321.1	267.1	244.0	243.7	262.6	264.4
Dividend per share in US$	0.038	0.038	0.038	0.038	0.037	0.038	0.038
Shares outstanding (diluted) in Million	156.3	156.263	156.335	155.059	154.988	144.446	150.35
GEOs	2Q'18	3Q'18	4Q'18	1Q'19	2Q'19	3Q'19	4Q'19
Estimated Production gold equivalent Oz Eq.	20,506	20,006	20,005	19,753	19,651	18,123	20,479
Gold price realized	1,306	1,212	1,240	1,300	1,309	1,472	1,481
Silver price realized	-	-	14.54	-	-	-	17.32

Click to enlarge

Source: Company release and Morningstar

Trends And Charts: Revenues, Earnings Details, Free Cash Flow, Debt, And Production Details (in US$)

1 - Revenues were US$ 38.66 million in 4Q'19

Osisko Gold Royalties posted a revenue of US$38.66 million in the fourth quarter of 2019, down 55.7% from the same quarter a year ago and down 53.1% sequentially.

Net cash flow from the operating activities was at US$13.033 million or $0.09 per share, and adjusted earnings were US$7.8 million or $0.05 per share.

• Closed the acquisition of Barkerville Gold Mines Ltd. (“Barkerville”), owner of the Cariboo gold project, and created the North Spirit Discovery Group;
• Completed a credit bid transaction for Stornoway Diamond Corporation (“Stornoway“) alongside other secured creditors, allowing Osisko to maintain its 9.6% diamond stream on the Renard mine. Osisko became a 35.1% shareholder of the company now holding the Renard diamond mine, which will continue to operate in the normal course;

A quick recap on impairments:

• In December, Lydian International, the owner of the Amulsar project, announced an impairment this year. Osisko evaluated assets to its recoverable value of US$22.3 million, resulting in a non-cash impairment charge of US$51.3 million on the Amulsar stream and offtake for the fourth quarter of 2019.
• in February 2020, Newmont (NEM) the operator of the Eléonore mine, announced undated mineral resource and resources cutting the total amount by approximately 50%, which resulted in a non-cash impairment of $27.2 million and $20 million net of income taxes, bringing the recoverable value of the Éléonore royalty to $101.3 million.
• A non-cash impairment was applied to a project acquired with Virginia Mines acquisition in 2016.

From Presentation

2 - Free cash flow was a loss of US$ 3.8 million in 4Q'19

The generic free cash flow is the cash from operating activity minus CapEx. It is an excellent financial component to consider when deciding an investing strategy. I always incorporate this element in my analysis on Seeking Alpha.

Free Cash Flow for the fourth quarter of 2019 was a profit of US$3.76 million. 2019 free cash flow was a profit of US$6.68 million.

3 - Net Debt is US$166.7 million in 4Q'19

Net debt is $US166.7 million as of December 31, 2019. Below are the details:

Source: OR Presentation (partial) Warning: Values indicated in the presentation in CAD$

Note: On September 19, 2019, Osisko announced that it had increased its credit facility.

4 - Production in gold equivalent ounce and details

Osisko Gold Royalties produced 20,479 GEOs in the fourth quarter of 2019, up 2.4% from 4Q'18 and up 13% sequentially. Below is the repartition per metal in 2019. The production has been low this quarter.

Gold price increased this quarter to $1,481 per oz, and silver was $17.32 per ounce. It gives a 91% operating margin to the company.

5 - Guidance 2020

The company expects an increase in GEO Production of 9% in 2020 compared to 2019, which is a positive owing that the gold price is now approaching $1,700 per ounce.

Source: Osisko 4Q'2019 Presentation

Conclusion and Technical Analysis

Osisko Gold Royalties posted record GEO production this quarter. However, the company indicated a substantial non-cash impairment that was surprising. The stock has suffered a massive selloff with the acquisition of the Bakerville Gold mine starting in September 2019.

Then, the weak diamond market at Renard and the sale of the Brucejack offtake were the main issues that pushed the company to revise down the 2019 guidance.

The combination of those factors triggered a "correction." Despite the gold price increase, now reaching a multi-year high, the stock was not able to regain strength and has languished since then in the $8s range.

If we assume a robust gold price long term, it is essential to view this correction as an opportunity to accumulate OR at a fair price. Production in 2020 is expected to increase by 9%, and revenues will improve significantly.

However, while I believe gold prices are bullish long term and may continue to be firmly in the $1,600-1,700 range, I am not sure that the stock will benefit from this situation. The recent trading is showing that the gold miners and streamers are more sensitive to the economy than the gold bullion. Thus, it is vital to keep that in mind when trading or investing in OR:

Technical Analysis (short term)

OR experienced a support breakout of its ascending channel pattern at the end of February and dropped to nearly $8.00, which is now line support. The new trend that I see is a descending channel pattern with line support at $8.00 and line resistance at $9.60.

My recommendation is to buy at or below $8.00 and take profit at or above $9.60.

Caution: gold streamers are not necessarily a pure proxy for gold. Even if the gold price is increasing steadily with the coronavirus effect, gold miners and streamers may eventually move more like equity and get sold off as other stocks. We have experienced this divergence recently, and it may happen again.

Author's note: If you find value in this article and would like to encourage such continued efforts, please click the "Like" button below as a vote of support. Thanks!

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

I trade short term the stock occasionally

Comments

[ericve]

Bought at 5,28, cant be wrong that. I think it was the final drop, all the weak hands out yesterday

[Fun Trading]

@ericve

We will see... This market is totally unpredictable.

[Norman Bates at Disneyland]

FT,

There are dips and there are routs. There is also opportunist buying and there is throwing valuable money away. Many 'regular' stocks are recovering today but miners remain in a deep dark and seemingly endless hole, with (continued) falls of over 10% on some stocks as I write - GOLD at $15.90 (ooops - now $15.70...), PAAS at $14.80, KGC at $3.65, SAND at $4, even beloved KL at $23 etc etc. The fall in smaller more speculative PM stocks is obscene.

I can understand the initial dip as investors were forced to liquidate for cash etc. However that reason has passed. Of course gold is falling too, but the continued fall in miners seems to go beyond that - now it just seems that everyone hates PM miners, irrespective of how profitable they are. Also it was pointless buying miners over the past year - they are all much cheaper now!!! I think a lot of PM investors are very worried and very frustrated indeed - this was not in the instructions manual.

I would love to say we live and learn, but I am not learning anything.

[Fun Trading]

@Norman Bates at Disneyland

Good comment and I totally agree. I do not quite comprehend why gold miners are selling off as we speak, however, while I am not buying much oil stocks now beside RDS.B, BP, I am accumulating the gold miners for obvious reason. They are making free cash flow and a lot of it with potentially record revenues for the first quarter of 2020. Hence, my accumulation...

[Norman Bates at Disneyland]

FT,

I am also buying more in bits but the problem, as for most people, is liquidity - eventually it stops. I am tempted to sell the Monet. Like a freshly washed woollen jumper, I am being pulled in many directions ATM - buy dividend earners (but will dividends be cut?); or buy virtually zero-yielding heavily-falling speculative gold stocks; or buy old favourites RDS and BP at throw-away prices: or buy nothing, ignore the markets, turn off the computer and instead go on a very cheap cruise holiday to Italy?

Anyway, again a vindication of your advice to trade some of your PM stocks - many LT holders back to zero ATM...

[User 38801156]

less than $6 today. I will top up more at $5.5 to AVG down

[Fun Trading]

@HuTChikFuk

It is time to accumulate...

[jnkennard]

Thanks for your thoughts. I’ve Been long here for way too long, but a good trading stock if you are paying attention. Curious to know your thoughts on MMX.

[Fun Trading]

@jnkennard

You are very welcome. Unfortunately, I do not follow Maverick enough to give you an educated opinion.

Best regards,