Osisko Gold: Royalty Powerhouse?

08/18/2015 8:00 am EST


Adrian Day

Chairman and CEO, Adrian Day Asset Management

This gold streaming company has the potential to be the next gold royalty powerhouse in the making, suggests resource sector expert Adrian Day, money manager and editor of Global Analyst.

Osisko Gold Royalties (TSX: OR) has the goal of building a portfolio of royalties from its foundation of two of the best gold royalties in the world.

These are attractive royalties (5% net smelter return in one case) on two relatively new, low-cost, long-life mines in Quebec, one of the safest jurisdictions in the world.

But it is pursuing a different approach from the two largest royalty companies, Franco Nevada (FNV) and Royal Gold (RGLD).

It is challenging to buy significant royalties at attractive prices when competing against these two well-financed behemoths.

So Osisko is going about it a different way, both by generating royalties through its own exploration programs and by investing in juniors seeking to create royalties from them.

This is a longer-term approach than buying a paying royalty, but one that, though a little more risky, will pay off in the long run with arguably potentially more upside.

A current example is the four-way merger underway revolving around Oban Mines, an Osisko-backed exploration company. Through Oban, Osisko has exposure to some of Canada’s most active exploration camps.

The two mines on which Osisko has existing royalties are Canadian Malartic, one of Canada’s largest mines, and Elleonore, which reached commercial production in April with an official opening just last month.

Revenue from these two royalties is expected to grow from $54 million dollars next year (when Eleonore is fully paying) to $69 million by 2018 (even at today’s gold price).

The company has a strong balance sheet with $320 million in cash, as well as credit lines putting it in a strong position for an acquisition.

During the course of this year, Osisko has invested nearly $100 million into Labrador Iron Ore Royalty; that generated $1.6 million in the latest quarter.

Roosen, Osisko’s CEO, has said that, though the focus is precious metals, it would invest outside the gold sector in long-life mines with solid cash flow and this investment fits that profile.

All in all, Osisko has a solid balance sheet, two powerful main assets, strong management, and a goal to create more revenue-generating royalties.

Its approach is more long-term and a little more risky than buying royalties but also one that has greater potential.

With the drop in the gold price, the share price has dropped under $14, where we see it as a strong buy for long-term patient investors.

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