Earnings Call Transcript - OR Q3 2023

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the Osisko Gold Royalties Q3, 2023 Results Conference Call. Please note, this call is being recorded today, November 9, 2023, at 10:00 a.m. Eastern Time. Today on the call, we have Mr. Paul Martin, Interim Chief Executive Officer, Mr. Frederic Ruel, Chief Financial Officer and Vice President, Finance, and Mr. Iain Farmer, Vice President, Corporate Development. I would now like to turn the meeting over to your host for today's call, Mr. Paul Martin.

Paul Martin, Interim CEO

Thank you very much, operator, and good morning, everybody, and thanks for joining our call. This presentation is available on the website as well as through the webcast. Firstly, I'd like to address the organizational changes and then proceed to the quarterly results. Last night, Osisko announced that Mr. Sean Roosen has stepped down as Chair of the Board, continuing as a member of the Board. In conjunction, it was also announced that Mr. Norm MacDonald will be taking on the role of Chair. In addition to the changes made at the Board level, Osisko's CEO Search Special Committee has concluded its search for a full-time President and CEO and as you have all seen, Jason Attew will be assuming the position once he completes the necessary transition from his current leadership role at Liberty Gold, but no later than January 2, 2024. First of all, speaking on behalf of the Board and all of our employees, I would like to express a huge amount of gratitude that we acknowledge Sean today for his vision, drive, and emotional capital that he has invested in the company for nearly a decade, including the spin-out creation of Osisko Gold Royalties back in 2014. Over this period of time, he has put everything he had into this company. Sean has described himself as a multidirectional thinker who looks to challenge the norms and is not comfortable sitting on his hands. From the creation of Osisko Gold royalties with its 5% NSR royalty on the Canadian Malartic mine, arguably the sector's crown jewel precious metals royalty asset, all the way to where the company is today with 23 producing royalties and streams and over 180 assets. There are few in this industry who have the conviction, the perspective, and I would say, quite frankly, the guts to do what Sean has done and continues to do. He should be applauded for all of these qualities. And let's not forget, he remains one of the top mine developers in this country and CEO of Osisko Development, where we are the largest shareholder and where they are focused on the Cariboo development asset, where we hold a 5% royalty. I would also like to personally thank Sean for his full support over the past few months during my time as interim CEO. Secondly, Norm MacDonald will be taking the role of Chair following his appointment to the Board at the last AGM. I've known Norm for a long time, going back to his days as a natural resources portfolio manager at Invesco. Norm brings a fresh set of eyes and is an experienced and committed individual who has extensive connections within the mining industry. I know he will be a strong leader of the Board going forward and a great partner to the incoming President and CEO. This serves as a natural segue to the other major piece of news from last night's release, the appointment of Jason Attew as the new President and CEO of Osisko Gold Royalties. In my opinion, Jason will make a fantastic addition to the group here at Osisko. It's very easy for me to speak about Jason, as I have both a business and personal connection with him, which takes me back to my days at Detour Gold. From 2009 onwards, he was our lead investment banker for seven years and was instrumental in garnering the bank's support and financing the project, which today is now the biggest operating gold mine in Canada. I watched Jason back then as he made a bold decision to leave the bank and move to Gold Corp. first as VP of Corporate Development, and then including the CFO position until Gold Corp was acquired by Newmont in 2019. From there, he took on the President and CEO role at Gold Standard Ventures, which was subsequently acquired in 2022, and then most recently took on a second President and CEO role with Liberty Gold. All in all, I would call it a perfect mix of transactional experience along with leadership roles at both large and small mining companies along the way. Osisko Gold Royalties will be in strong hands going forward with the combination of Jason and the individuals that already make up what I believe is a very strong and capable management team. Like those on the call, I will be watching with keen interest. Now, I'll move to the Q3 release. Please note that there are forward-looking statements in this presentation, and actual results may differ. All amounts are in Canadian dollars unless otherwise noted. On the highlights for the quarter, we're satisfied with our overall performance in Q3 both from a GEOs earned perspective and from a transactional basis. 23,292 GEOs were earned in Q3, comparable to the third quarter in 2022. With just over 71,000 GEOs earned in the first nine months of 2023, Osisko is now trending towards the lower end of its previously published guidance of 95,000 to 105,000 GEOs for the year. We're expecting an improved fourth quarter in some of our key assets to finish the year, which will be partially offset by the shutdown at the Renard diamond mine. Achieving a final number towards the lower end would represent an approximate 6% year-over-year growth. We had record revenues of just over $62 million and maintained our year-to-date cash margins of 93%. The company had just under $71 million in cash at the end of the quarter and net debt of $245 million. With respect to our ongoing commitment to return capital to shareholders, the company declared and paid its quarterly dividend of $0.06 per share in Q3. On the recently closed transaction front, in a subsequent event to the quarter, Osisko announced last week the acquisition of the Namdini NSR royalty, demonstrating our ability to uncover and source accretive precious metals transactions. We're delighted to add Namdini as an asset that will make a meaningful contribution to Osisko's near-term growth. On the financial performance, the increase in record quarterly revenues largely followed the fact that while GEOs from the recently closed CSA Silver Stream transaction were booked in the second quarter, revenues from sales were received in the third quarter, resulting in a new quarterly high watermark of just over $62 million. We have a decrease in cash flows from continuing operations in Q3 compared to the comparative quarter in 2022, despite being positively impacted by higher cash margins but due to increased interest charges and higher G&A costs, which included severance charges. As for the net loss in the quarter of $0.11 per basic common share, I think it's best to focus on the quarterly performance rather than the change against the comparative quarter. The major contributors for the loss were charges to the carrying value of the Renard stream and loans. These balances totaled just over $32 million before tax recoveries. The result is that the carrying value of this asset has now effectively been written off, subject to an immaterial amount related to the potential remaining diamond sales. Additionally, the quarter included charges for severances and accelerated stock-based compensation totaling approximately $6.5 million related to the departure of the President and CEO and the termination of the executive role for the former Chair. Adjusted earnings of $0.12 per basic common share were marginally below the comparative quarter in 2022. Moving on to our royalties and streams, during the third quarter, the company had 23 producing assets, including ongoing contributions from Osisko's newest cornerstone asset, the Silver Stream on the CSA mine located in New South Wales. Recall that the associated and larger copper stream will kick in for Osisko in June 2024. Our GEOs earned come predominantly from Canada, and we derived over 90% of our GEOs from precious metals, being 66% gold and 24% silver. I will add some comments on specific mines before discussing a couple of other assets in greater detail. Victoria Gold's Eagle mine continues to perform well in 2023, a key bright spot for Osisko. Despite a two-week wildfire evacuation during the third quarter, the mine is still in great shape to attain its 2023 annual guidance of 160,000 to 180,000 ounces. The strong performance at Eagle has helped offset some ongoing modest disappointment in Capstone's Mantos Blancos operation, where milling rates continue to lag Phase 1 expansion design levels. Capstone is now pointing to early 2024 for resolution of the plant issues once the delivery and installation of the new handling and pumping infrastructure relating to tailings water management are completed, at which time Mantos Blancos is expected to consistently deliver nameplate throughput rates. The only newer mine was impacted as operations were temporarily suspended for approximately six weeks from early June to mid-July due to the proximity of forest fires, which affected the mine's Q3 production and RGO deliveries. With the mine now back up and running safely, Osisko is expecting a rebound from the operation in the final quarter. And almost like a broken record, the Canadian Malartic complex had yet another impressive and predictable quarter and remains the company's most significant contributor to GEOs earned. Furthermore, in terms of the underground progress at Odyssey made during the quarter, Agnico Eagle completed and commissioned the pace backfill plant, which should see underground mining rates improve to complement the majority of the current ore being sourced from the Barnat open pit. On the good news front, Metals Acquisition Limited had a solid quarter with record ore throughput under its ownership during the month of July. Drill results from CSA released during the period also continue to impress with some notable hits, including over 50 meters at 8.9% copper and 36 grams per tonne silver and just under 21 meters at 14.4% copper and 61 grams per tonne silver. We continue to follow the new operator's impact on the operation, and we've been impressed so far by their ability to unlock value. Now let's talk a bit more about Stornoway and the Renard mine. Most of you would have noticed that on October 27, there was an announcement from Stornoway Diamonds that the mine operations were being suspended immediately. The decision was made largely due to the recent precipitous fall in rough diamond prices, which have shown no sign of improvement in recent weeks. The high-profile news of India halting imports of rough diamonds has also exacerbated the trend of falling prices. On the same date, Stornoway also announced that it is in the early stages of a CCAA process, which will include soliciting investment and a potential sale. While Osisko's October 11 preliminary GEO delivery press release highlighted that we did not expect Renard to contribute any GEOs in the fourth quarter, based on subsequent negotiations, we will now see some contribution from Renard during the final three months of the year. However, any amounts will depend heavily on the rough diamond prices achieved and will be significantly lower than what was originally budgeted. At this stage, given all the moving parts and potential outcomes, it is too early to discuss what things will look like at Renard beyond the fourth quarter. However, Osisko will keep the market updated on how best to think about this asset when it produces its 2024 guidance and new five-year outlook in mid-February of next year. Now to Namdini. On Monday, October 30, Osisko announced it had acquired a 1% NSR royalty on the Namdini gold project in Ghana for USD $35 million plus applicable taxes and levies. The mine is being developed and operated by Cardinal Namdini Limited, the majority of which is owned by Shandong Gold. Mine construction is well underway, with Shandong recently on record stating that first gold from the operation is expected in late 2024. Namdini will be a significant gold producer compared to other global primary gold mines currently under construction with an average of 287,000 ounces per year over an initial 15-year mine life. Osisko is excited to add its footprint in Ghana, a country with strong democratic institutions and recognized as one of the most prolific and well-established gold mining jurisdictions globally. The Namdini transaction also highlights that there has been no slowing down at Osisko with respect to our corporate development activities, and the company remains focused on adding accretive precious metals acquisitions that can and will move the needle for the company in the near term. I'm proud of the team for getting this exciting deal across the finish line during my short tenure as interim CEO. For the purpose of this specific presentation, we've included Renard now rounding out our portfolio of 23 producing assets. As highlighted in the past, I would point to those producing mines that are boxed by the hatch lines as they are all either an expansion, extension, or ramp-up, helping to underpin our near-term growth profile and we expect Namdini to add to this specific group of assets by the end of 2024. Along with our high precious metals exposure and exposure to low-cost producing mines, Osisko distinguishes itself from its peers due to the depth of its exploration and development assets, which exceed 180 properties and are heavily weighted toward what Osisko defines as Tier 1 mining jurisdictions, which includes Canada, the United States, and Australia. Recent global events have further underscored our belief that maintaining a high exposure to Tier 1 and well-established mining jurisdictions is more important now than ever. Switching gears a little, I would like to quickly touch on the balance sheet. At the quarter end, we had net debt of $245 million, placing us in a sound financial position and one that we look to strengthen. As previously stated, the covenant performance is exceptionally strong on the facility with cash margins at 93%. On our equity investments held on the balance sheet, we will continue to balance our own need for incremental funding against our perception of what fair value is for the various positions held. In closing, Osisko remains well-positioned to continue its growth path. Additionally, positive catalysts continue to unfold across the asset base, as indicated in our optionality bar, which further adds to Osisko's growth trajectory towards the end of the decade and beyond. Examples include the upcoming final feasibility study for Hermosa from South32, now expected to be released to the market in the first quarter of 2024, ongoing construction milestones at both TZ and Namdini, as these two projects progress towards first production in late 2024, and the results from the Marimaca copper feasibility study likely also coming in 2024 with the recent appointment of Asanko Chile to lead the engineering efforts. Having spent several months in the seat working with the team here, I wanted to make two closing statements as this will be my last quarterly call. Having familiarized myself with the assets and considering Osisko's current relative valuation versus our peers, it's my opinion, now more than ever, that Osisko should remain investors' go-to royalty company in the mid-tier royalty space as the focus on the company returns to the quality of its underlying assets. Secondly, I have nothing but praise for the team at Osisko. This is a high-performing, committed group of professionals, and they have made my short transition here a breeze, and they'll be ready to have Jason up and running quickly. Finally, I'd like to provide a friendly reminder that we will soon be hosting our in-person Analyst and Investor Day in Toronto on November 14, where we will have our corporate development and technical teams present to provide a more in-depth presentation on Osisko's producing development and exploration portfolio of assets. Furthermore, those in attendance can expect to receive asset updates directly from some of our key operators. For those who can't make it in person, a recording of the event will be posted on Osisko's website shortly after the session. So 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 or the webcast, we'll make sure to respond offline to those who don't make it. Operator, I'll hand it over to you.

Operator, Operator

Thank you. Your first question comes from Ralph Profiti from Eight Capital. Please go ahead.

Ralph Profiti, Analyst

Thanks, Operator. Good morning, everybody! First off, Paul, I just want to thank you for your efforts in stewardship over these past many months, and it's encouraging to see such definitive clarity on leadership and governance going forward.

Paul Martin, Interim CEO

Thank you.

Ralph Profiti, Analyst

Paul, if I were to think about Q4 results and hitting the low end, it still implies quarter-over-quarter an uptick in GEO ounces produced. You mentioned Eagle and Eleonore as perhaps having some Q4 cadence. Just wondering, are there any other assets in the portfolio where you're anticipating quarter-over-quarter strength in a material way?

Paul Martin, Interim CEO

Well, in discussion with the team, Ralph, I certainly have been told that Malartic tends to finish the year strong. That has the biggest variable for us. Maybe on a more insignificant area, there's potentially 1,000 GEOs from Renard, but that is unpredictable and we'll wait and see whether those diamond sales materialize.

Ralph Profiti, Analyst

Okay. Helpful. If I can ask a follow-up on Namdini. Was that other 50% of the 2% NSR not for sale? Or should we consider this as a measured and deliberate step investment as it pertains to capital allocation?

Paul Martin, Interim CEO

Yes. That's a fair question, Ralph. These royalties were owned by the community, and only half of it was available. That's why we were able to secure the 1%.

Operator, Operator

There are no further questions over the phone at this time. We do have one question from Adrian Day from Adrian Day Asset Management. Please go ahead.

Adrian Day, Analyst

Yes. Good morning, and again, thank you, Paul for your efforts. I just wanted a quick question on Renard. In the past, you made an equity investment and worked with it, and that worked out well. But are you thinking of putting any more money into the mine?

Paul Martin, Interim CEO

I think, Adrian, that's pretty clear at the moment. We were supportive of the CCAA process, and that is not our intention.

Adrian Day, Analyst

Okay. Thank you.

Operator, Operator

And there are no further questions over the phone at this time. I will turn the call back over to Paul.

Paul Martin, Interim CEO

Okay. Thanks, everybody. I know it's a busy morning with a number of releases out. We appreciate you participating. If there are any follow-up questions, you know where to find us, and we're happy to engage. With that, have a great day, everyone.

Operator, Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines. Thank you.