Osisko Gold Royalties Ltd. (OR:TSX 14.93) has decided to divest itself of most of its directly held exploration portfolio, optioning it to newly renamed Osisko Mining (formerly Oban Mining); it will retain rights to earn future royalties. The portfolio came from the acquisition of Virginia, and most of Virginia's highly regarded exploration team will go with it. (Andre Gaumond, former CEO of Virginia, stays with Osisko Gold).
Osisko Gold Royalties (which we'll refer to simply as "Osisko") acquired Virginia primarily for its royalty on the Éléonore Mine, but originally talked of using its exploration projects to generate future royalties. But exploration is not a natural fit for a royalty company, which typically has low risk and low costs as hallmarks.
Renewed focus and lower costs
The move brings certain benefits. Osisko can focus on being a royalty company and likely be rewarded with better valuations; the Virginia exploration projects received very little value inside Osisko. It will reduce overhead for Osisko, making it a leaner royalty company (such as the other major royalty companies). The move rationalizes the exploration projects inside Osisko Mining where they will receive better attention; exploration was never Osisko's focus. This will likely lead to more work earlier, and therefore—looking ahead—revenue-generating royalties for Osisko sooner.
Osisko is a strong sponsor of Osisko Mining, a 14% holder of the stock. It has also acquired significant stakes in other exploration companies, including Barkerville Gold Mines Ltd. (BGM:TSX.V) (33% owner) and Falco Resources Ltd. (FPC:TSX.V) (16%). With these sponsorships and large stakes, it typically acquires rights to future royalties.
Solid performance and lots of cash
Osisko continues to do well, with the three mines on which it holds royalties performing well; Éléonore's ramp up is now on track after some surprises in the ore body. It also holds 51 non-producing royalties, including several royalty options, after a buying spree.
With cash of $439 million, Osisko has the second-strongest net cash position of the royalty companies. It is now looking for a major cash-flowing gold or silver asset, and the cash plus a line of credit of over $200 million puts Osisko is in a strong position to achieve this goal, perhaps by the end of the year (though at that size it will face competition from the big boys in the royalty sector).
In sum, Osisko has high-quality Canadian assets, a strong balance sheet, aggressive management, and a unique approach to the royalty business. It is also relatively inexpensive.
Osisko has underperformed, largely because it is a newer, less-diversified company, though it is catching up fast. It is now the cheapest in the sector (<1.4 x book, for example, compared with 2.2 to 3 times for the others); at this price we call it a buy. The stock is now listed on the New York Exchange—same symbol, OR—and although Toronto still has more volume, it is sufficiently liquid in New York for most investors. Osisko Gold Royalties (OR, NY, 11.49) is a strong buy.
Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is "Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks."
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1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: None. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. Funds controlled by Adrian Day Asset Management hold shares of the following companies mentioned in this article: Osisko Gold Royalties Ltd. I determined which companies would be included in this article based on my research and understanding of the sector.
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