Osisko Gold – Highest exposure to gold not paying off

Osisko Gold Royalties is a precious metal royalty company focusing on a North American portfolio of over 144 royalties, streams, and precious metal offtakes as well as 38 royalty options. It engages in the business of acquiring and managing precious metals and other royalties, streams, and similar interests in Canada and worldwide. The company also has an interest in Osisko Mining (14.5%) and Osisko Metals (17.4%).

Osisko holds 17 producing assets including the net smelter return royalty on the Canadian Malartic gold mine and the royalty on the Eleonore gold mine located in James Bay, Quebec. The company also has a strong portfolio of royalty assets in development and promising exploration projects in Quebec and North America. It has a large presence in Canada’s most prolific mining camps with decades of future exploration potential.

Osisko derives ~80% of its revenues from North America, ~10% from South America, and the balance 10% from Australia, Africa, and Europe. About 50% of the company’s revenue is derived from royalties, ~20% from streams, and ~30% from offtakes. The royalty and stream payments are based on production levels. Revenues generated from precious metals and diamonds represented 94% and 4%, respectively, of total revenues.

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Investment Data

 


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Revenue Growth & Market Exposure

The company’s portfolio is anchored by a 5% NSR royalty on the Canadian Malartic Mine, which is the largest gold mine in Canada, and Eagle Gold. Osisko also holds a 5% NSR royalty on the East Gouldie and Odyssey South deposits, a 3% NSR royalty on the Odyssey North deposit, and a 3-5% NSR on the East Malartic deposit.

Canadian Malartic and Eleonore are two of the most valuable royalty assets in the sector, having long mine lives and offering strong potential for growth. Osisko has a low geopolitical risk profile and 75% of its business comes from traditional royalties and streams. In addition, the company continues to invest in equities of exploration, development, and royalty companies.

The company came into existence in 2014 and has developed strong expertise in exploration, engineering, construction & financing. Its market capitalization value has increased to more than $2 billion from $500 million back in 2014. In November 2020, Osisko completed the spin-out transaction of its mining assets and certain equity investments to Osisko Development that will engage in the exploration, evaluation, and development of mining projects in Canada and in Mexico.

It added 5% NSR on Cariboo Camp and 15% stream on the San Antonio project which is a high-grade Mexican asset. Osisko Development will target near-term gold production of over 75,000 ounces per year.

The gold company is growing its asset base, both organically and through accretive acquisitions. Osisko has royalties or stream on 25,000 km2 in some of the most prominent Candian mines. Some of its growth assets include Cariboo, San Antonia, Windfall, Horne 5, Hermosa, and Pine Point.

The company has a successful track record of strong technical capabilities, which assists in creating its own pipeline of organic growth opportunities. Osisko expects its annual gold equivalent production to double over the next three years to more than 140,000 ounces.

Dividends

Osisko Gold has returned more than $370 million to its shareholders in dividends and share buybacks since its inception in 2014. The company sports a modest 1.35% dividend yield but a high payout ratio. Its last dividend increase was 25% in 2017 and it has a dividend CAGR of 9% in the last five years. Osisko’s EPS have, however, registered a negative growth rate (-21% 5-year CAGR) in the past which is a matter of concern. 

It offers its shareholders a unique combination of core royalty business stability and acceleration business competitive advantage. It provides a higher exposure to gold prices and a better risk/return profile supported by high quality, long-life precious metals assets in good locations.

The company has 150 royalties, streams, and precious metals offtakes and earns diversified cash flow from 17 producing assets primarily gold mines. All its assets are significantly resource-rich with solid future production prospects. The company has a strong balance sheet and the ability to deploy capital.

It does not have high capital cost requirements and enjoys high asset and cash flow diversification. High gold weightage and cash margins and partnership with high-quality operators should support future dividend growth.

A diversified portfolio of quality royalty assets, experienced operators and mining jurisdictions, production growth, and a strong development pipeline of assets are a few of Osisko’s compelling competitive advantages.

Osisko Gold (OR) historical Yield

Competition

The mineral exploration business is competitive in all phases. Osisko Gold competes with the likes of Royal Gold, Franco Nevada, Wheaton Precious Metals, and Sandstorm. As the company has exposure to an accelerator model, its mining operations might involve significant risks and huge expenditures to develop metallurgical processes and to construct mining and processing facilities. This can lead to write-downs and lower future earnings.

Bottom Line

Gold is considered a safe haven for investors at times of uncertainty like the present one and the price of the yellow metal has been rising this year. With the coronavirus pandemic showing no signs of slowing down, gold will continue to be an attractive investment opportunity for investors.

Given that a majority of Osisko’s revenues are derived from gold, the rally in gold prices bodes well for the company. The company is also well-positioned to leverage its streaming expertise towards new sectors, decarbonization projects, and achieving potential synergies with mining partners. The restructuring of Osisko Development further solidifies Osisko Gold’s identity as a pure-play royalty company. 

If gold stock is not your cup of tea but you still want exposure to this shiny rock, you can always buy Gold ETFs investing in bullion or stocks or both.

Osisko Gold (OR) historical PE

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DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.