Osisko Gold Royalties: Another Solid Year With Strong Growth On Deck (NYSE:OR)

While the S&P 500 (SPY) has added to its Q4 gains, the Gold Miners Index (GDX) has given up the bulk of them, down ~11% year-to-date in what’s typically its best month of the year from a seasonality standpoint. This can be attributed to underwhelming guidance from some companies and mediocre production results and a ~6% correction in the gold price that has contributed to sector-wide selling pressure. While this correction is certainly disappointing for those holding underperforming producers on a year-to-date basis like Evolution Mining (OTCPK:CAHPF), Fortuna (FSM) and First Majestic Silver (AG), Osisko Gold Royalties (NYSE:OR) has been a sanctuary in the storm, significantly outperforming GDX year-to-date.

This relative strength is despite Osisko Gold Royalties’ FY2023 results coming in a little softer than hoped (albeit out of the company’s control as it doesn’t operate these mines and the gold silver/ratio can affect GEO calculations). The outperformance may be attributed to its impressive growth profile looking out to 2027 combined with its less volatile margins, benefiting from a vastly superior business/model compared to producers. In this update we’ll dig into the Q4/FY2023 results, recent developments, and why Osisko Gold Royalties (“Osisko”) continues to be one of the sector’s better buy-the-dip candidates.

All figures are in United States Dollars at a CAD/USD 0.78/1.0 exchange rate unless they have a C$ in front of the figure.

Q4 & FY2023 Production

Osisko released its Q4 results earlier this month, reporting that it earned ~23,300 gold-equivalent ounces [GEOs], a ~7% decline from the year-ago period. The lower output can be attributed to a lower contribution from the Renard Mine (diamond stream) which temporarily suspended operations at the end of October, placing itself under the protection of the Companies’ Creditors Arrangement Act [CCAA] in a period of lower diamond prices. Additionally, Island Gold was up against difficult comps in the year-ago period with elevated grades last year, with production sharply in Q4 2023 vs. Q4 2022. Unfortunately, this offset contribution from the CSA Mine in Australia with this silver stream now closed (copper stream will kick in next year), and what’s typically one of the strongest quarters of the year for many of its partners.

On a positive note, the higher gold price offset some of this weakness, with Osisko reporting quarterly revenue from royalties/streams of C$65.2 million [US$50.9 million] at a record quarterly cash margin of 94%. This translated to cash margins of C$61.2 million [US$47.7 million], and helped to push annual revenue to a record C$247.3 million [US$192.9 million] with a record cash margin of C$230.7 million [US$179.9 million]. Not only was this a significant beat vs. FY2022 levels on cash margin (+14% year-over-year) because of an average realized gold price of $1,971/oz in Q4 and $1,944/oz for the year, but it was achieved production being below plan for its partners with a much slower than planned ramp up at Mantos Blancos, a weaker year at Renard, lower grades at Island Gold, and a disruption to operations at Eagle. Plus, this was accomplished with relatively low silver prices ($23.35/oz), affecting its silver revenue at larger assets like CSA and Mantos Blancos.

On a positive note, Osisko should have a better 2024 on deck. This is because the company may have a headwind from the Renard diamond stream, but it can look forward to a full year of silver stream contribution from the CSA Mine (~430,000 payable ounces), copper deliveries beginning in H2 from the CSA Mine (3% on ~46,000 tonnes of copper at a cost of just 4% of spot or ~$5 million in revenue for H2), and what’s hopefully a better year for Capstone Copper (OTCPK:CSCCF) which has struggled to maintain the planned 20,000 tonne per day throughput rate at Mantos Blancos where Osisko has a large silver stream. Finally, Osisko will benefit from initial contributions from Tocantinzinho, where commercial production is expected in H2, increased production at Island Gold, a higher silver stream rate at Gibraltar, and what should be a stronger year at Eagle with ~190,000 ounces of gold on this massive 5% royalty.

To summarize, while GEOs earned may have come in below expectations, this is largely out of Osisko’s control (weaker silver/gold ratio, partners operating assets, Renard negative surprise), but this was still a record year with further records on deck in 2024 and 2025.

Recent Developments

Moving over to recent developments, it will be a busy year for Osisko’s portfolio and the company should be able to expect even higher drilled meters. This is because Agnico Eagle (AEM) now has full ownership of Canadian Malartic and continues to drill aggressively here to prove up new ounces to fill the mill post-2027, the company is likely to continue moderate levels of drilling at Upper Beaver/Upper Canada/Amalgamated Kirkland (Kirkland Lake Camp with Osisko having a 2% royalty on most of land package) if this could be a future feed source for its Abitibi Camp mills. Meanwhile, Alamos Gold (AGI) is stepping up drilling at Island Gold after continued exploration success both regionally and near-mine. Finally, Osisko Gold Royalties’ investors will hopefully get greater visibility into what Upper Beaver could ultimately look like from a production date and contribution standpoint with a much-awaited internal study expected in H1-2024 to outline how Wasamac/Upper Beaver can take advantage of excess capacity at the Malartic Mill later this decade.

For those unfamiliar with Upper Beaver, this is an impressive asset whose exploration success hasn’t been discussed as much only because it’s in the portfolio of a giant like Agnico and not yet in operation. However, this is an impressive project with a relatively high-grade reserve of ~1.4 million ounces of gold at 5.43 grams per tonne of gold (plus ~20,000 tonnes of copper), with an additional inferred resource of ~1.4 million ounces of gold at 5.07 grams per tonne of gold (plus indicated resource of ~0.4 million ounces at 3.45 grams per tonne of gold), and 22,000+ tonnes of copper. Highlight intercepts from this asset in Q4 2021 delivered several above-average grade hits like 14.3 meters at 15.5 grams per tonne of gold and 0.16% copper (West Porphyry), and 18.2 meters at 8.7 grams per tonne of gold and 0.81% copper in the deep conversion program, and Agnico stated in 2022 that the 2022 drill campaign succeeded in its plans to fill in gaps in the Footwall Zone and convert inferred ounces in the Porphyry/Footwall zones down to 1,600 meters, with this “expected to have a positive impact on the technical evaluation/updated mineral reserve/resource estimate in 2023 (now pushed to 2024).”

As for the potential here, Agnico Eagle has noted in past updates that it is looking at transporting ~5,000 tonnes per day to the Canadian Malartic Mill by 2030. This should translate to production levels upwards of 200,000 ounces per year even using conservative assumptions on grade and recoveries (Agnico Eagle has stated 150,000 to 200,000 ounces of gold per year but tends to be conservative), with additional upside from copper. Hence, I would expect this to translate to upwards of 4,000 GEOs per year once in production for Osisko or ~$8.0 million in annual revenue, and the company would benefit from an additional ~$600,000 in revenue from Upper Beaver alone as it’s able to double-dip on the per tonne royalty of US$0.31 from any ore coming outside of Malartic to the mill (up to a 65,000 tonne per day limit). Notably, Agnico has also stated that it could look at also processing ore (hauled by rail) from other properties in the region (Upper Canada and Anoki-Mcbean), with a combined resource of ~3.3 million ounces grading upwards of 3.5 grams per tonne of gold on average at these two assets in the Kirkland Lake Camp.

As for Canadian Malartic which is a top-2 asset for Agnico Eagle by scale now that it’s been consolidated, the resource at Odyssey Underground (Osisko holds a 3-5% NSR on Odyssey, and 5% on Malartic Ground), it remains open at depth, and there looks to be additional upside onto 5% royalty ground with the East Gouldie Extension, suggesting that this mine life likely extends well into the 2050s with exploration upside. However, the additional opportunity is that Osisko holds a royalty on most of the land at Canadian Malartic and there will be over 40,000 tonnes per day of excess capacity post-2027, and still ~30,000 tonnes per day even if Wasamac/Upper Beaver can contribute a combined 10,000 tonnes. Hence, with this being a ~900,000 ounce operation using only half of its mill capacity and Agnico’s top priority is finding gold on Malartic ground or at Camflo to fill its mill post-2027 vs. setting up toll-milling deals or potentially acquiring neighbors in close proximity to its mill, there looks to be 1.0 million ounce potential here post-2031 and Osisko has a 5% royalty on most of the ground right next to the mill, suggesting further upside on top of Upper Beaver, a likely future feed source.

Finally, it’s worth noting that even if Agnico Eagle chooses to opt for ounces off of 5% ground at Canadian Malartic or can’t find sufficient feed in direct proximity to the mill, Osisko will benefit from a consistent ~$1.1 million in revenue on its per tonne royalty for all material sourced off Canadian Malartic ground. And in a best-case scenario with a full mill at ~61,000 tonnes per day vs. ~19,000 tonnes per day underground, this would equal an additional ~$4.7 million per year on top of the ~$50 million in revenue from Odyssey and ~$8 million in revenue from Upper Beaver (if green-lighted). And I would argue that this revenue deserves a premium valuation given that it’s coming from what will be a top-10 mine by scale globally in a top-ranked jurisdiction owned by the sector’s most aggressive driller in Agnico Eagle.

As for the bigger opportunity outside of these two assets, I ultimately see the potential for Osisko to grow into a 180,000+ GEO per annum producer in 2030 if key assets can get across the finish line, and upwards of 200,000 GEOs if the company can add at least 5,000 GEOs per annum in future contribution along the way which certainly looks doable given the current environment and Osisko’s strong and growing liquidity position (~$480 million with accordion option). Multiple assets that will contribute to Osisko’s growth include full production from CSA, Corvette, Windfall, Cariboo, Upper Beaver, Namdini, WKP, Island Gold Expansion, Mantos Blancos Expansion, and several base metals assets of varying scale like Cascabel, Casino, White Pine/Copperwood, Pine Point, Hermosa, Antakori, Marimaca and Costa Fuego.

The last development worth noting is that Osisko sold its stake in Osisko Mining (OTCPK:OBNNF) for proceeds of $103 million which it used to pay down more of its debt, ending Q3 with just ~$97 million in net debt vs. ~$186 million to finish Q3. I think this was a fine move as the market has not given Osisko any value for its equity investments, but it provides immediate savings from an interest expense standpoint and increases its liquidity position to take advantage of any deals that might come across the plate. Plus, Osisko already has massive upside to Osisko Mining through its 2.0% – 3.0% NSR on the future 300,000+ ounce mine and discovery optionality regionally, so I don’t see any need to have additional exposure with a large equity stake especially when the alternative is guaranteed savings by putting these proceeds towards debt repayment.

Valuation

Based on ~185 million shares and a share price of US$14.00, Osisko trades at a market cap of ~$2.59 billion and an enterprise value of ~$2.69 billion. This makes it one of the top-5 names by capitalization in the royalty/streaming space, but the stock continues to trade at a fraction of the average market cap of ~$16.0 billion among the big three. And while this is largely tied to its much smaller production profile (~100,000 GEOs per annum), Osisko has the most impressive portfolio outside of the big three, with real potential to get to 200,000 GEOs per annum by 2030 with growth that’s bought and paid for plus new deals given the favorable environment for acquiring new royalties. A portfolio of this scale based in Tier-1 ranked jurisdictions with long-life uncapped royalties could easily command a valuation of 1.70x – 1.80x P/NAV. Hence, with OR trading at just 1.03x P/NAV based on an estimated net asset value of ~$2.53 billion, I see significant near-term (conservative fair multiple: 1.30x or US$17.80 today), and long-term upside in the stock, especially if it can continue to grow its NAV in a disciplined manner as it has since 2020.

The final point worth noting is that while all royalty/streaming companies may have the same benefit of considerable meters being drilled on their properties each year, Osisko is unique because it has multiple royalties held by one of the most aggressive drillers sector-wide with Agnico Eagle at the Canadian Malartic Complex, Kirkland Lake Camp (including Upper Beaver), Hammond Reef, Akasaba West, and a few other non-core royalties. This contributes to significant drilling across its portfolio relative to peers, with an average of ~1.15 million meters drilled in 2021 and 2022 on Osisko properties by its operating partners vs. other similar-sized company with just over half the drilling at ~630,000 meters.

And while not every meter drilled is equal (not all land is as prospective), this growing number of meters drilled offers considerable optionality to make new discoveries on top of the commodity price upside that all companies benefit from. However, with no cost to Osisko or other royalty/streamers, investing in these companies is highly desirable, as we saw for the royalty holder on Timok. In fact, Timok has turned out to be a monster that Zijin Mining (OTCPK:ZIJMF) plans to spend up to $4.0 billion on for an expansion, and this is a royalty that will generate $100+ million in cumulative cash flow even after being chopped down vs. a price paid for the royalty of just $160,000. Hence, for investors looking for double-sided optionality (commodity price/discovery) at no cost to them (vs. producers that must spend to drill these meters), Osisko and royalty/streamers as a whole offer incredible reward/risk if bought during sector-wide corrections, with occasional surprises like Corvette (*).

Osisko’s Corvette royalty is an asset that didn’t get any air-time previously with limited drilling, but a massive lithium discovery has been made since that looks like it could contribute ~$20 million in cash flow per annum for Osisko starting in 2030, and potentially more if a major swoops in and builds a larger project at the onset.

Pierre Lassonde says it best on optionality and the power of royalties vs. streams:

“Here’s the thing — why the Franco business model is so incredibly powerful and very few people understand this. None of our competitors do. They don’t understand what we have when we create a royalty. I’m not talking about a stream; I’m talking about a royalty — like the Goldstrike royalty or the Detour royalty. We get a free perpetual option on the discoveries made on the land by the operators, and we get a free perpetual option on the price of gold. Think about this: if someone hands you a free perpetual option on 6 million acres of land, and you don’t have to put up a penny, don’t you think that at some point, you’re going to get lucky? That’s what it is. We have put together a land package by purchasing and creating royalties where we end up with a free perpetual option. It’s the optionality value of the land, the value of the operator spending money on our land, and the optionality to higher gold prices. And that is worth so much money.”

– Pierre Lassonde

Summary

Osisko Gold Royalties had another record year in Q3 and while guidance came up shy of estimates, we should significant growth in annual GEOs over the next few years. This is because Alamos is working to more than double its production profile at Island Gold, Mantos Blancos continues to work towards its 20k TPD Expansion, the CSA Mine will provide a full year of contribution in 2024, and we should see multiple new assets come online in the next 6-30 months, including Namdini (~3,600 GEOs), Windfall (~6,500 GEOs), and Tocantinzinho (~1,300 GEOs). Meanwhile, multiple assets remain in the wings and are likely to start production by 2028 like Cariboo, Costa Fuego, and potentially Hermosa. And when combined with ~$500 million in liquidity and an environment that favors selling royalties/streams vs. equity for developers/producers because of lower share prices, Osisko should be able to pick up a few new royalties to further complement its portfolio, boosting its NAV per share.

Meanwhile, the outlook for gold price upside has rarely been better, with gold working on one of the largest breakouts among any asset classes in years, and breakouts of this magnitude (if confirmed), which typically fuel multi-year uptrends. In fact, the last major cup-style breakout in gold occurred from 1996 to 2005, with gold marching higher for another six years and more than doubling in the period. And while this doesn’t mean we have to see a repeat, the attractive technical setup certainly suggests some allocation mining companies makes sense, with Osisko providing a vehicle to benefit from this upside and a resurgence in drilling activity among smaller producers sector-wide with the protection from a margin standpoint if the metal continues to tread water. In summary, I continue to see OR as a top-10 way to get exposure to the gold price, and I would view any sharp pullbacks as buying opportunities.