Breaking Up Can Be Good for You
Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE, US$12.01) has announced plans to split the company, with the royalties staying in OR while the various interests in exploration and development companies—essentially the "incubator model"—go into a new company, to be called Osisko Development ("Development"). This move is positive for several reasons, and we expect Osisko to be revalued in the market.
Osisko will retain an interest in the developmental companies, both through a large ownership in the new company—88% initially, though that will be sold down—and through royalty interests on projects. In addition to royalties on existing projects, it will have the right of first refusal on all royalties and streams to be offered by Development in the future.
There are benefits for both companies
Development will be led by Sean Roosen, currently chairman and CEO of Osisko. It plans a CA$100 million financing to help put some projects into production, with a goal of becoming a 100,000-ounce producer by 2022, and a mid-tier further out. Development will have a good start; it will be wellfinanced, with experienced and energetic leadership, starting with a resource of almost 5.5 million ounces of gold, and a couple of projects with a clear path to production. Being in a separate company will mean the assets can get the proper attention they deserve and decisions made on what is right for the projects.
For Osisko, the benefits are several. The development assets have been a drag on Osisko's share price, and as a purer royalty company, focused on gold in North America, it should move toward similar multiples as the "big three."
Moreover, the spin-out of the development assets removes the constant concern about Osisko's intentions.
And by temperament, Sean Roosen is far better suited to building mines than he is to running a royalty company. Indeed, he backed into a royalty company by accident.
My last report on Osisko, before the announced spin-off, asked if this was the "Time for Osisko to shine" (Bulletin #756). It dropped as low as $11.48/share after that, but rallied after the spin-off was announced. Frankly, the rally was meager and short lived. Osisko remains undervalued relative to other large royalty companies. Though that discount has been justified because of Osisko's business model, going forward the valuation gap should start to close. In this environment, there is no need to pay up, but under $12/share, it's a buy.
Altius Teams Up with Powerful Partner
Altius Minerals Corp. (ALS:TSX.V, 11.33) announced a joint-venture with Apollo on its renewable-energy subsidiary that could facilitate tremendous growth and eventually perhaps lead to a separate public company.
The deal is with Apollo Infrastructure Funds, a unit of Apollo Global Management, a $7 billion alternative asset company; there is tremendous access to capital as well as a wide network in the industry. Apollo's initial investment of up to $200 million in Great Bay Renewables (GBR) will result in it and Altius will each owning 50% of GBR, which provides funding to renewable projects in exchange for royalties. Apollo will likely undertake "sidecar" equity investments (in which Altius has the option to participate), making GBR more competitive since it can offer sellers larger deals and more flexibility. Altius intends to co-invest where feasible.
From dirty to clean
Altius's CEO Brian Dalton said that GBR "could easily eclipse Altius" and there would be various ways to reduce its size in Altius, including distributing shares to Altius shareholders. Altius has been building its renewables business, particularly after its acquisition of large coal royalties, at one time the large revenue earner for Altius, began generating opposition in certain quarters. It is using the cash flow generated from the coal royalties to invest in renewables, a smart public relations as well as business decision. Already renewables represent a larger allocation inside Altius than coal.
Existing royalties have had a mixed year. With curtailment in production on many of Altius's royalty properties due to COVID restrictions, as well as more particular issues at Voisey's Bay and at the Chapada gold/copper mine, results this year will be down on last year. But this is temporary.
The balance sheet is reasonable, with debt of CA$140 million offset by cash (close to $20 million) and investments including in Labrador Iron Ore Royalty Corp. (LIF.UN:TSX; (about $110 million).
We like Altius for its management, with its disciplined and contrary approach to resources, and like this transaction. The stock jumped from just over $10/share on the news. Given Altius' historic volatility, we would wait for a pullback before adding to positions.
Update on Almaden
Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE, US$0.97) was handed a win in a court case, when the court told the environmental agency Samernat that it had to proceed and rule on Almaden's permit application. It's a complicated story, but in brief, Samernat—headed by an anti-mining chief who has since resigned—halted consideration on Almaden's application a year ago, shortly before a decision was due. The reason given was a separate court case challenging the constitutionality of Mexico's mineral title system.
Meaningfully undervalued relative to its property value
So a decision should be received shortly, and it should be favorable. This is the most important permit remaining for Almaden. Given the economics of the deposit—low capex with quick payback, and an net present value (NPV) at $1,425 gold and $20 silver of $466—and its location in Mexico, still a relatively favorable mining jurisdiction, the gold/silver deposit should appear attractive to many potential suitors. Once permits are received, then potential buyers are more likely to get serious. The skillset of the father-and-son Poliquin team that runs Almaden is exploration, and there is some desire to get back to that.
Separately, the company has resumed exploration activities at Ixtaca, focusing on previously identified potential targets outside the currently defined reserve base.
The company, after another recent financing, has CA$3.5 million in cash, which should take the company well into 2022. It would have to raise capital for a land-use permit which could cost US$2 million all in. After that, the next raise would be for construction financing.
With a total market cap of $116 million, even after the stock has doubled from mid-July largely on the permit news, Almaden remains substantially undervalued relative to the value of its main asset. However, given the recent double and acknowledging a certain fatigue among shareholders—as well as the fact that they do not yet actually have the permit—we are holding rather than buying.
Orogen Is Executing Its New Policy
Orogen Royalties Inc. (OGN:TSX.V, 0.35) has farmed out two properties recently, one from its legacy portfolio and the other, the first deal on the recently acquired Renaissance portfolio. One is on the drill-permitted Trek 31 gold property in British Columbia, a perceived analog to the nearby Blackwater mine; the other the Baby Doe property in Nevada, optioned to Premier Gold Mines Ltd. (PG:TSX). In both cases, there are payments to Orogen, required exploration expenditures, and royalties retained by Orogen.
Premier, for example, in the larger of the two transactions, must spend $10 million on the property to earn 100%, and pay Orogen up to $11 million upon a production decision. There is a 3% royalty, half of which can be repurchased by Premier. In addition, Premier assumes property payments on nearby property, the Mustang Claims, relieving Orogen of annual payments, in return for a smaller royalty.
A win-win transaction
It's a solid agreement that provides both parties what they want. For Orogen, it gets spending on its properties, provides royalties, and reduces expenditures. It is executing the program to generate royalties from its large property portfolio.
Orogen is well financed (with almost CA$12 million in cash), with strong management, both financial and technical, and a deep property portfolio in western Canada and the U.S., as well as Mexico. The stock has more-or-less completed a round from April, up to a higher of $0.58/share and back again. There has been selling by former Renaissance insiders who have been exercising their options and warrants. This selling is likely mostly over, and the stock has moved back up from its low of $0.31/share. It's a buy at this level.
Lara Continues to Deal, Generating Cash and Royalties
Lara Exploration Ltd. (LRA:TSX.V, 0.66)continues to move ahead with several transactions, each of which advances a project and gets Lara a royalty as well as small payments at various stages.
The Bifox phosphate project in northern Chile is waiting on permits and a listing on the Australian Stock Exchange. Lara owns 14% of the shares and a 2% royalty, and is owed reimbursement of $570,000 due at the listing. It has agreed to sell the Fofoca South gold property in northern Brazil for $100,000 cash and a 2% royalty. This activity follows
first production at the Celesta copper project, on which Lara holds a royalty, and is also owed a late fee on which$200,000 of a million has been paid. (See Bulletin #754.)
Meanwhile, partner Hochschild Mining Plc (HOC:LSE) announced it had obtained permits for drilling the Corina project in Peru.
Stock remains inexpensive despite improved value
With multiple projects, a decent balance sheet and various payments expected at various stages, low general and administrative costs, and top management, Lara is one of our favorite juniors. Form a peak of almost $1/share in July, it has slipped to the current price, back to where it was trading at the beginning of May. One respected newsletter writer selling may have had an impact. For us, at this price, it's a strong buy.
The BDC Sector Gets Good News
The Securities and Exchange Commission (SEC) adopted a new rule, easing ownership of closed-end funds by mutual funds. This is positive for the business development companies (BDCs), which are classified as closed-end funds.
Previous rules prevented mutual funds from owning the companies in practice, and also led the S&P, Russell and other indices to remove the companies form the indices. At that time, the stocks fell sharply.
Over time, we would expect the reversal of the rule to be a positive for the stocks, and if they get back into the indices, to provide an immediate boost. We hold two BDCs on our list, Ares Capital Corp. (ARCC:NASDAQ) and Gladstone Investment Corp. (GAIN: NASDAQ).
In addition to companies discussed above, best buys now include Vista Gold Corp. (VGZ:NYSE.MKT; VGZ:TSX, US$1.07); Midland Exploration Inc. (MD:TSX.V, 0.94 x 1.00); and Kingsmen Creatives Ltd. (KMEN:SI, 0.205).
Originally posted on Oct. 18, 2020.
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."[NLINSERT]
1) Adrian Day: I, or members of my immediate household or family, own securities of the following companies mentioned in this article: Altius, Orogen Royalties, Lara Exploration, Ares, Gladstone Investments and Midland Exploration. 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: All. I determined which companies would be included in this article based on my research and understanding of the sector.
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Adrian Day's Global Analyst disclosures: Staff may have positions in securities discussed herein. Adrian Day is also President of Global Strategic Management (GSM), a registered investment advisor, and a separate company from this service. In his capacity as GSM president, Adrian Day may be buying or selling for clients securities recommended herein concurrently, before or after recommendations herein, and may be acting for clients in a manner contrary to recommendations herein. This is not a solicitation for GSM. Views herein are the editor's opinion and not fact. All information is believed to be correct, but its accuracy cannot be guaranteed. The owner and editor are not responsible for errors and omissions. © 2020.