Osisko: Golden Royalties

07/02/2015 7:00 am EST

Focus: COMMODITIES

Kuen (Scott) Chan

Editor, Investing Daily's Real World Investing

A gold royalty company can weather headwinds in the gold market and benefit from those headwinds by acquiring royalty interests in struggling miners at bargain prices, explains, Kuen Chan, The Complete Investor.

With gold still struggling, Tocqueville Gold (TGLDX)—a longtime favorite precious metals fund—hasn’t been rushing to bolster its holdings in gold miners.

That makes it notable that in the most recent reported quarter, it did add to one—and only one—of its 10 biggest holdings: Osisko Gold Royalties ((TSX: OR) (OP: OKSKF)).

As a mining royalty company, Osisko receives 5% of the net smelter return (NSR)—revenue minus transportation, insurance, refining, and smelting costs—from Canadian Malartic, Canada’s largest gold mine.

The mine produced more than 535,000 ounces of gold last year, with 560,000 ounces projected for this year.

Osisko also receives, thanks to its merger with Virginia Mine, a sliding 2.2% to 3.5% NSR royalty from Canada’s Éléonore mine, expected to produce 600,000 ounces per year by 2018.

Other assets include royalty interests in 15 Canadian and Mexican projects in various stages of exploration and development and minority equity stakes in several junior miners.

We previously recommended Osisko Mining (OSKFF), a gold miner acquired in 2014 by Agnico-Eagle (AEM) and Yamana Gold (AUY).

As part of that transaction, Osisko Gold Royalties was spun off as a separate company last June. Earlier this year it merged with Virginia Mine to create the company in its current form.

Osisko’s low-priced equity purchases in junior miners essentially constitute de facto call options on gold while making Osisko the company those miners would likely turn to first if they needed to sell a royalty.

And if any of the juniors got taken over by a bigger miner, Osisko—as a shareholder—would benefit from the share price appreciation.

The company has no debt, roughly $350 million in cash and investments, access to a revolving $100 million credit facility, and low operating expenses, since it doesn’t actually operate any mines.

This leaves Osisko well positioned to make additional low-cost acquisitions. Once gold recovers, as we anticipate it will, these stakes should soar in value.

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