Osisko Gold Royalties Ltd (NYSE:OR) Q1 2024 Earnings Call Transcript

Osisko Gold Royalties Ltd (NYSE:OR) Q1 2024 Earnings Call Transcript May 9, 2024

Osisko Gold Royalties Ltd isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen, and welcome to the Osisko Gold Royalties Q1 2024 Results Conference Call. After the presentation, we will conduct the question-and-answer session. [Operator Instructions] Please note that this call is being recorded today May 9, 2024 at 10:00 AM Eastern Time. Today on the call we have Mr. Jason Attew, President and Chief Executive Officer; Mr. Frederic Ruel, Chief Financial Officer & Vice President of Finance; Heather Taylor, Vice President Sustainability & Communications; and Mr. Iain Farmer, Vice President, Corporate Development. I would now like to turn the meeting over to our host for today’s call, Mr. Jason Attew. [Foreign Language]

Jason Attew: Good morning everybody, and thanks for being on today’s call. I’m Jason Attew, President and CEO of Osisko Gold Royalties. Procedurally, I along with Heather Taylor will run you through the presentation and then will subsequently open up the line for questions. For those participating online via the webcast, you can submit your questions in advance through the webcast platform. Today’s presentation will also be available and downloadable online through our corporate website. Please note, there are forward-looking statements in this presentation in which actual results may differ. Also please note, the basis of the presentation will be in Canadian dollars unless otherwise noted. I’m joined on the call this morning by Frederic Ruel, the company’s VP of Finance and Chief Financial Officer and Heather Taylor, Vice President, Sustainability Communications, amongst the others as indicated on Slide 3.

On Slide 4, when looking at Osisko’s first three months of 2024, we are off to a predictable start as it relates to gold equivalent ounces earned, cash margin, cash flow as well as overall debt reduction. Osisko earned 22,259 GEOs in the first quarter of 2024, which puts us on track to achieve our previously published full year 2024 guidance of between 82,000 to 92,000 gold equivalent ounces. Revenues for the period were strong in Q1 at CAD60.8 million. Even though gold and silver prices in Q1 were robust with average realized prices of US$2,073 and US$2,378 respectively, the precious metals complex only saw a real appreciation after our last sales concluded for the quarter. In other words, today’s spot gold price is approximately CAD250 higher than our realized price over Q1.

In addition, Osisko’s cash margins were 97% in the quarter. This is just shy of the company’s record quarterly cash margin of 98% booked in the third quarter of 2017. Osisko ended the first quarter with CAD70.6 million in cash and net debt of just over CAD8 million after the company continued to pay down its revolving credit facility during the period. So far in Q2, the company has repaid an additional CAD18.6 million on the facility, further increasing our financial flexibility in order to be able to transact a new accretive opportunity as they present themselves. With respect to our ongoing commitment to return capital to shareholders, the company declared and paid its quarterly dividend of CAD0.06 per share in Q1, marking its 36th consecutive dividend with over CAD279 million returned to shareholders to date from these distributions.

Subsequent to the quarter, Osisko’s Board of Directors approved an 8% increase to the base quarterly dividend of CAD0.65 per common share payable on July 15, 2024 to shareholders of record as of close of business on June 28, 2024. This is a testament to the tremendous confidence we have in the consistency and the predictability of the cash flows underpinning our business. With respect to our opportunity set, the company’s pipeline continues to remain robust with our corporate development team busier than they have ever been. We remain optimistic that we’ll get at least one or possibly two meaningful transactions across the line this year. Finally, as some of you know, on April 10th, Osisko published its 4th edition of its sustainability report, growing responsively.

And I’d like to bring on Heather Taylor to talk about this key achievement in more detail. Heather?

Heather Taylor: Thanks, Jason, and thank you to everyone who’s taken the time to join us today. Subsequent to the quarter, we published the fourth edition of our sustainability report growing responsibly as Jason mentioned. It’s guided by the highest standards set by CRI, IASB and IFRS climate related disclosures. This publication marks another year of substantial progress made with respect to our governance, environmental and social initiatives. I invite you to explore our achievements in greater detail in the report, which is posted on our website. Starting with governance, this past year has seen our Osisko make significant strides. We’ve enhanced the leadership of our Board by appointing an independent Chair, reinforcing our commitment to robust oversight and accountability.

We’ve also maintained our commitment to diversity with women continuing to make up over 30% of our board members. The integration of my now not so new role as Vice President of Sustainability and Communications ensures that we have a dedicated individual focusing on our ESG initiatives and continuing to drive these forward. On the environmental side, supporting our Osisko’s mandate to align capital allocation with ESG principles, we formalized our investment due diligence process by developing an ESG screening and monitoring tool. The tool is aligned with industry leading practices and allows us to assess the ESG performance of potential assets and mining partners across multiple topics prior to investing and subsequent monitoring post capital deployment.

In our commitment to address climate related challenges, we conducted scenario analysis to gauge the exposure of key assets to climate related risks and opportunities. This analysis helps inform the development of an inaugural climate change strategy for the 2024 to 2027 timeframe. We also enhanced our transparency in reporting Scope 3 emissions and have entirely offset the company’s 2023 office based emissions with the purchase of high quality carbon credit. Lastly, on the social front, we have deepened our commitment to our employees and the communities we impact. We implemented comprehensive training, focused on diversity, equity and inclusion, health and safety and human rights. Additionally, our teams have actively participated in volunteering events that support and uplift our local communities.

We deployed over CAD325,000 towards community donations aligned with our newly formalized community investment guidelines. Our efforts have been recognized externally with Osisko receiving AA rating from MSCI and high rankings from Sustainalytics including top rated regional and industry badges. These achievements, we should be immensely proud of. These accomplishments reflect our strong performance relative to precious metals peers and underscore our dedication to leading ESG practices. As we look to the future, our commitment remains firm. We will continue to integrate ESG principles across the organization and into our purpose strategy, ensuring that our actions benefit not only our shareholders, but also the broader communities and environment in which we conduct business.

With that, I’ll pass it back to Jason.

Jason Attew: Thanks, Heather. We’ll now pivot to the company’s financial performance for Q1. Quarterly revenues effectively tracked higher year-over-year commodity prices when comparing to Q1 2023, which was also partially offset by less gold equivalent ounces versus the same period last year. The decrease in Q1 2024 is due to the stoppage of operations of Renard Diamond Mine at the end of 2023. Net earnings of CAD0.08 per basic common share for the period representing a modest decline versus the first quarter of 2023. However, this delta largely reflects a noncash share of loss of associates, more specifically, the fiscal development and to a lesser extent a modest noncash foreign exchange loss during the period. Most importantly though, Q1 2024 saw a year-over-year improvement to both cash flow per share as well as quarterly adjusted earnings of CAD0.16 per basic common share.

During the first quarter of 2024, the company had 19 producing assets. Our GEOs earned come predominantly from Canada, and we derive over 95% of our gold equivalent ounces from precious metals, gold just under 71% and silver at 25% with the remainder coming from other metals. As I noted previously, the recent shutdown of Renard diamonds will no longer be a contributor to Osisko’s GEO’s earnings going forward, putting the company in position to effectively be 100% precious metal until some of the company’s base metal exposure begins to expand with the 1st material contributions coming from the CSA copper stream and the effective date of that copper stream is June 15th this year. Some comments on specific mine performances during the quarter before speaking about a couple of the more material assets in greater detail.

The Canadian Malartic had yet another impressive start to the year with the Eagle booking record quarterly production from the mine. The asset remains the Osisko’s most important contributor to our GEOs earned by a solid, solid margin. Performance from Osisko Gold’s Eagle Mine during the first quarter of 2024 fell somewhat short of above its expectations. Victoria noted, however, the gold production in Q1 2024 was lower year-over-year due to lower grades related to mine sequencing of the Eagle ore body, the timing of placing stacked tons under leach and lower planned stacking rates in Q4 2023. Despite the slower start, the company still expects to achieve 2024 gold production guidance of 165,000 to 185,000 ounces, with summer and fall season typically being the mine’s strongest operating periods.

Performance from Capstone’s Mantos Blancos operation or milling rates continue to lag Phase 1 expansion sign levels and was effectively flat versus the prior period in Q4 2023. Osisko will continue to monitor Mantos’ performance through 2024. We remain optimistic that Capstone continues to point to a mid-2024 resolution of the plant issues following the deliveries in June 2024 installation of new pumping infrastructure related to the fine tailings and water management. As things go well from there, Capstone is able to consistently achieve its Mantos throughput capacity of 20,000 tons per day and Osisko will reap the benefits of this achievement in its 2025 year, with Mantos Blancos representing the biggest driver of the Osisko’s step change and gold equivalent ounce growth in 2025 versus 2024.

As I mentioned earlier, the number of currently producing assets in our portfolio stands at ’19. We anticipate this number to increase by two production assets in the second half as we expect both Namdini and Tocantinzinho projects to be pouring gold before the end of the year, in addition to the start of the CSA copper stream. Moving to the next slide. While we have spoken this slide an enumerate number of times, I think it remains as relevant today as ever. As our company continues to distinguish itself from the rest of its relevant peers in the subsector as it relates to jurisdictional exposure, Osisko is the leader when it comes to both net asset value and gold equivalent ounces earned from what Osisko defines as Tier 1 mining jurisdictions, which include Canada, United States and Australia.

Of note, that if we were to add Chile to that list country, we would be by over 95%. In terms of Canadian Malartic, the mine realized record quarterly gold production driven by higher tonnage and gold grades, thanks to contributions from the Odyssey underground. More specifically, ramp development continues to exceed target, reaching the first production levels of East Gouldie in February 2024 and at a depth of 765 meters at the end of March. Shaft sinking improved during the quarter with an average sinking rate of 2.4 meters per day. The temporary loading pocket previously planned at level 102 will now be built at level 64, which is expected to provide hoisting capacity by mid-2025. Six months earlier than previously planned and will provide added development and production flexibility.

We were obviously also delighted to hear our operating partner continues to make reference to plans around a potential second shaft of the Odyssey underground. A story to stay tuned to. Within the next slide on CSA, just a few weeks ago, our operating partners at Metals Acquisition Corp announced an updated mineral reserve and resource statement based on drilling completed at CSA only up to the end of August 2023. Highlights included a 67% increase in mine life to 11 years, in other words to the end of 2034 based on mineral reserves only compared to a six-year reserve mine life outlined previously. The updated mineral reserves only extends 95 meters vertically below the current decline position and metals acquisition focused continue to drill beyond the August 2023 cutoff date.

So we clearly expect that there is more to come from this team in relative near-term. Recall that the CSA copper mine has been producing for almost 60 years with very limited exploration away from the known deposits and there is clear potential to further optimize metal acquisition for April of 2024 life of mine production plant. Exploration in the top 850 meters of the deposit is just starting and initial results highlight strong potential to open additional mining projects. Moving to the next slide, Island Magino. In late March 2024, Alamos announced the friendly acquisition of Argonaut Gold and its Magino gold mine and mill located immediately adjacent to Island Gold. This transaction is expected to close in Q3 2024. The previously planned Phase 3 mill expansion construction work at Island will no longer be required following the announced acquisition of the 10,000 ton per day Magino mill, which is located approximately 2 kilometers from the Island Gold Shaft.

The larger mill and tailwinds infrastructure at Magino will now accommodate the rapidly growing mineral reserves and rope resource base at Island Gold. The expanded and accelerated mine plan is also anticipated to transition a greater proportion of production towards Osisko 2% and 3% NSR royalty boundaries earlier in the mine plan as opposed to the mineral inventory covered by Osisko’s 1.38% NSR royalty. In addition, a small fraction of the eastern limits of the Magino pit is covered by a 3% NSR royalty, with production expected later this decade. The underground exploration potential previously highlighted by Argonaut Gold on this claim is located less than 300 meters from the existing Island Gold underground infrastructure. Moving to our guidance and growth.

After the first quarter and as previously noted, the company remains on solid footing with respect to being able to achieve its previously published 2024 GEO delivery guidance, especially with three material contributors expected to deliver new gold equivalent ounces to Osisko in the second half of 2024 being the CSA Copper Stream, Tocantinzinho and Namdini. While this year’s guidance number was always going to represent a modest step down versus last year’s, it is worth reminding everyone that Renard no longer in the picture, cash margins have increased. And given the write downs that have already taken place in the asset, tax pools have been created, the fiscal is not expecting to be cash taxable in Canada for 2024. Unsurprisingly, at this point in time, the company’s five-year outlook for 2028 published in mid-February remains unchanged, as we remain very confident that both the expansion and our development assets will fuel the 30% plus purely in growth with no continued capital or any capital calls required.

Moving to our catalyst slide. Underpinning this updated growth profile is a long list of near-term catalysts that we provided on Slides 14 and 15. We’ve already discussed many of these already on previous slides on this presentation, so no need for me to add anything further to today. That said, I would still suggest you take the time to go through this impressive list yourself. And if you have any questions or would like to discuss further any of the remaining line items highlighted on these two pages, I encourage you to reach out to my colleagues here at Osisko for more information. Turning to the balance sheet. Finally, we’ll end the formal part of the presentation on Slide 16, which outlines the current state of Osisko’s balance sheet. At quarter end, we had a total debt of just over CAD150 million and net debt of only approximately CAD80 million.

As we stated previously, the covenant performance was exceptionally strong with a 97% cash margin experienced in the first quarter of 2024 expected to continue throughout the year. As noted previously on this call and noted as a subsequent event, event in our MD&A, we’ve now also repaid an additional CAD18.6 million against our revolver credit facility, further strengthening our financial position, which by the way, frankly extended the facility for another four years. In addition, if commodity prices, specifically gold and silver sit above US$2,300 and US$2,700 respectively, sorry, US$2,500, respectively, we forecast to end up in a net cash position at the beginning of fourth quarter of 2024 with no significant deals are closed by that time.

This is important as Osisko doesn’t expect to sit in its hands in 2024. And our much improved balance sheet provides the company with financial capacity and flexibility to continue its strategy of disciplined allocation in the pursuit of high quality accretive precious metal streams and royalties that will bolster the company’s current near-term geo deliveries and cash flow that should accrue to our shareholders’ benefit. And with that, I’d like to thank everyone for listening today. We’ll now open up the line for questions as well as questions posted on the webcast. If we don’t get to all the questions on the line, we will make sure to respond offline to those that we don’t cover on this webcast. Operator?

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Q&A Session

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

Ralph Profiti: Jason, thanks for taking my question. I have two of them, please. Firstly, the degree which you can, was all doing too much, you mentioned one to two transactions hopefully be able to close this year. Can we get sort of a broad range of the sizes of that you’re looking at? And maybe more importantly, whether or not these are sort of competitive processes or are you leveraging existing or new relationships where we would consider these opportunities more exclusive?

Jason Attew: Thank you, Ralph. Very good question. And obviously, we’d love to give you more information on the opportunity set that we have at all because there’s a lot of confidentiality associated with. With respect to the opportunity set and the size of the ticket or the size of the transaction, again, it varies obviously due to the transactions that we’re looking at whether it’s royalties or streams as well. It certainly varies in terms of the transaction. There’s not a lot of detail that I can give you. However, what I would say is, again the team is very much focused and have the team very focused on a smaller number of high conviction tests that again we’re hopeful that we can get one or two transactions announced spotlights by the end of the year.

And transaction size, you can think of anywhere between US$50 million up to US$300 million. That’s what we’re essentially looking at. In terms of the competition, it is still a very, very competitive process, competitive environment as I think you can appreciate. We’ve got a lot of peers as well as the private equity groups that participate in those processes. We do have some very strong relationships though and so we are also moving forward with a number of bilateral transactions that are outside of any sort of process. But any more detail that we can provide you, Ralph, obviously, we’ve been reaching confidentiality. We’re very excited to hopefully, again, be able to announce one or two of these by year-end and then you can analyze this in terms of what the overall returns are because we’ll be incredibly disciplined to ensure that either accretive deals and accretion will accrete to our shareholders.

Ralph Profiti: Yes, certainly. I appreciate that, but very helpful comments. And then secondly, I wanted to break down the incremental benefit at Island Gold with Magino? And just can we quantify sort of bringing forward not only the actual production by not having to bring it that mil but all you encroachment on the more advantages to the 3% NSR. If you’re running at sort of 5,000 ounces gold equivalent, just wondering if you can quantify and say, over the guidance period whether or not we’re going to see any incremental GEOs from that?

Jason Attew: Well, I’ll thank you, Ralph. I’ll start and ask guy to provide some his expertise around the technical nature of the asset. I would say his first comment is the transaction has not closed as of yet. And obviously, the best source of information when it does close is with respect to the Alamos team. Obviously, the proximity of the two assets has been something that’s been contemplated for some time. What we’re obviously excited is obviously you have an operator that’s moving into this taking over an asset and specifically it’s all about mill optimization as I think you know that’s got a deep set of experience in terms of both operational acumen, but very deep balance sheet as well. So again, we’re quite excited about the transaction. We do think that it’s going to be beneficial for our royalties both at the Island Gold as well as the Gino over time. But I’ll ask Iain to comment if he has anything further.

Iain Farmer: Yes. Sure. If you look at the most recent disclosure by Alamos, you’ll see just naturally where the mines, the center of gravity of the mining is going towards the edges of where they’ve been recently and that in general, you can see that as going towards the 2% and 3%. The Magino acquisition or potential acquisition doesn’t really change any part of that plan. The thing that it does do is derisk some of the construction that was required. The mill expansion, tailing facilities. And so that’s if the acquisition goes through then those items are derisked. And then the other portion is below that pit and you’d have to go back a couple of years to see some of the Argonaut disclosure on underground drilling that were really quite spectacular intersections.

And those were not necessarily orphaned, but a lot less accessible except for now in the hands of Alamos. It’s a lot easier for them to drift over and further test those and see if their economic and make sense to bring into the life of mine plan earlier. But that’s yes, it’s hard to quantify what that could look like.

Operator: Your next question comes from Kerry Smith with Haywood Securities.

Kerry Smith : Jason, I have just two questions. Firstly, what is your sort of targeted debt level that you’d like to run with for the company? You keep paying it down pretty aggressively and now you’re generating CAD45 million to CAD50 million a quarter of cash flow. So the debt’s pretty modest in that context. I’m just wondering if you have a target number there.

Jason Attew: And your second question, Kerry?

Kerry Smith : And my second question is, how is the agreement structured on the Alamos Royalty in terms of how you actually figure out what your payable ounces will be from the island tonnage? Because the recoveries from Magino will be considerably lower than the recoveries they’ll get from the Island or just by virtue of the grade. I’m just wondering how you monitor that.

Jason Attew: Thank you, Kerry. With respect to the leverage level, you’re absolutely on point being a real focus, and the whole of Osisko executive team to continue to pay down our facility. You heard what I had to say that they’re out with respect to the opportunities that we do think that there’s possibility for which we can be deploying this year US$300 million, US$400 million. And so the way we think through things in terms of the net debt to EBITDA level, I would suggest that we can do producing assets and it really again depends on the type of transaction that is done. Because if you’re doing a transaction that gives you immediate cash flow, it’s obviously that better. But in general rule of thumb, Kerry, we don’t want to be for any long period of time beyond a net debt to EBITDA ratio of 2x.

We could go through it and obviously we’ve got lots of covenants. There’s lots of room within the covenants of our facility to do that. But generally speaking, we’ll look them with the management team. We think it’s certainly at these commodity prices 2x net debt to EBITDA would effectively then we’d be back into as we have been over the last 12 to 18 months just repaying that facility down to the cash flow and repaying it back through another method. I’ll turn the question with respect to Island and tonnage, Island Gold and tonnage to Iain, if you can answer it a lot better than I can.