Osisko Gold Royalties (OR) has announced plans to split the company, with the royalties staying in OR, while the various interests in exploration and development companies — essential the “incubator model” — would go into a new company, to be called Osisko Development, notes Adrian Day, editor of Global Analyst.

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.

Development will be led by Sean Roosen, currently chairman and CEO of Osisko. It plans a C$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 well-financed, 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 towards 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.

Osisko Gold Royalties 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, it’s a buy.

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