Osisko Gold Royalties
- TSE: OR
- Shares Outstanding: 165.65M
- Share price A$11.47 (24.08.2020)
- Market Cap: A$1.901B
Interview with Sean Roosen, CEO of Osisko Gold Royalties (TSX, NYSE: OR)
On the surface, this looks like a large conventional royalty company, but scratch away a little and one will realise this royalty story is a lot more complex than one might have realised. Osisko Gold Royalties is a precious metals-focussed royalty company but it also has a private equity component. A bold move aimed at investing their royalty level returns into a component of the market which could provide 20% returns. But it’s potentially higher risk. The market has been somewhat confused by this, but it is a plan for accelerated growth, and Roosen was keen to clear things up. He also thinks he has the best royalty company in the world and what people to know it.
Osisko Gold Royalties pays out 1.5% dividend to shareholders, which is all well and good, but when can investors hope to see more of this value represented in the share price?
- 2:59 – Company Overview and History
- 6:34 – Complex, Competition, Communication: Developing the Business Plan
- 9:18 – Shareholder Breakdown: Are They Happy?
- 13:43 – A Different Royalty Company: A Look at Private Equity
- 20:44 – Leveling Up: Growth and Profit
- 24:20 – Any Pressure on the Financial Side?
- 30:25 – Discussing the Change in Management
- 32:15 – Taking Advantage of the Bull Market: Problems Going Forward
- 34:26 – Company Positioning and Exit Plan
- 37:33 – The Model Going Forwards and the Team to Execute it
- 40:23 – Views on Competitors and Their Valuations
- 41:50 – Why Choose to Invest in Osisko: The Next 12mths
CLICK HERE to watch the full interview.
Matthew Gordon: Sean, how are you doing, sir?
Sean Roosen: I am living well in the COVID-19 retreat here at the Lakehouse in Muskoka.
Matthew Gordon: Ah, sounds tough already – Lake house. Have you got yourself a boat up there as well? Are you enjoying yourself?
Sean Roosen: Several of them actually, but I’m a vintage guy so they are all old wooden boats from the 1940s and 50s.
Matthew Gordon: What have you got, like schooners? What do you use up there?
Sean Roosen: No, here in in Ontario we have an old wooden mahogany boats, so I’ve got a few of those. My pride and joy is a 38 footer – that’s sitting out in front of the dock right now. So after this, I will go drive it around very slowly, looking good and going slow.
Matthew Gordon: Nice. Are you into a Riva? Do you like a Riva?
Sean Roosen: There are a few Rivas on the Lake, but I tend to be a, I’m more of a nationalist. I tend to only buy Canadian boats.
Matthew Gordon: That gives us a taste of what’s to come. Why don’t you give us a one-minute overview of Osisko Royalties and then we’ll pick it up from there?
Sean Roosen: So Osisko Gold Royalties is the product of Osisko One, which was that a company that I created with my private equity group, Eurasia Holdings. We founded Osisko one in 2003. We bought the Canadian Malartic mine in 2004 for USD$80,888. We invested USD$1.2Bn in that project. It sits between Goldex that belongs to Agnico and you and the Loron mine that belongs to Agnico in the Abitibi in Quebec. And we started drilling there. We put 1.2M metres of drilling in phase one, and we built Canada’s largest producing Gold mine. And we produce about 700,000oz of Gold. And it’s one of the top, most important Gold mines in the world. We sold that to Agnico and Yamana in 2014 for USD$4.3Bn. And we started out as Osisko Gold Royalties, which is only asset asset was a 5% top-line Royalty on the Canadian Malartic mine, which gives us about 35,000oz of zero-cost, 100% margin Gold, which was the founding asset to the company.
Subsequently to 2014, we did an acquisition-based strategy which was to acquire and grow and gross up the Royalty portfolio. We now have 137 assets, 16 producing assets. So, from 4 non-producing and one producing to 137 with 16 producing. And the company IPO at about USD$490M market cap currently sits about USD$2.5Bn.
And the main strategy of Osisko Gold Royalties was to do what we did before, which was to take our senior group of engineers and geologists and incubate projects, taking a Royalty and Stream and what we call our accelerator process, and to build an organically growing portfolio from basically from home cooking, from projects that we generated ourselves. So quite a bit different in terms of strategy from the existing, ‘buy things on the open market, overpay for them.’ So we targeted more like private equity returns in our portfolio of accelerator group companies. And we generated seven sidecar companies, to that the most successful having been, obviously, Osisko Mining with the Windfall project in Northern Quebec, which in 2016 had an USD$8M market cap and no projects. And we did an acquisition strategy with that company, which we backed by Royalty & streaming financings, which is now trading USD$1.4Bn. And we paid very little for one of the more significant Royalties on that Windfall deposit, sitting at 2.5% now.
We have continued to grow our portfolio. We are a hybrid, we are a little different than the other Royalty companies, and we tend to target much higher returns. We’re dominantly brownfield Canadian specialists. We have worked internationally. We have about 3,500 due diligence files from our previous careers. We bring that to bear for our shareholders. And we drive a much higher return business than the traditional Royalty model.
Matthew Gordon: We have spoken to quite a few Royalty companies recently. We’re trying to work out that North American model and obviously big onus on precious metals, which is great at the moment: Gold is up. You would admit yourself, the company has been doing quite well since Gold started picking up last August, September. But you have got a lot of moving parts now. You have reached that size where it is complex. You have got to find new ways of competing. You have also got to find new ways of communicating to shareholders what it is that the plan is. If you don’t mind, can we talk a little bit about what the plan is? Because day one, it would have been very different from where you are now. You’ve got lots of options, you’ve got lots of deals on the table. So how does this thing move forward?
Sean Roosen: So, our incubation was a spinout from the sale of Canada’s largest Gold mine and the 10th largest Gold mine in the world. We came out with a cornerstone asset that’s unlike anything any of the other start-up Royalty companies had. When we started out for lack of a better metaphor, on third base. We really drove on our skillset, which was to incubate our own opportunities and take Royalties early on. We have a really simple AUM allocation process where we dedicate 25% of our investments and 75 of our accelerator model and 75% to traditional Royalty investments where we participate in bank run and corporate M&A backings and that a strategy. So, our corporate strategy has really been around the fact that we can create a higher return level on the Royalties that we generate ourselves.
And we’ve done sold several times now and the most successful being Arizona Mining, where we were very earlier to the stage, it was an asset that we knew and understood. We took a 1% Royalty for USD$10M at the very beginning, and we own 5.7% to 6% of the equity. We sold the equity when the South 32 took us out for profit of USD$34M, which more than paid for the USD$10M that we paid for the Royalty. And the Royalty is now worth USD$80M. Our returns are in the thousands: 4,000% to 5,000% range on those kinds of deals when we do them. But it requires that we’re a little bit more knowledgeable, a little more tactical. And we carry a little bit of a heavier technical team than some of the other groups, but 1 or 2 of those deals a year tend to more than offset our increased G&A.
In terms of how we fit in, we are the fourth largest precious metal Royalty company in the world right now. Last year we made USD$146M in gross revenue with a 91% gross margin. We are dominantly Royalties, and we’re normally Royalties on Gold mines. They are pure Gold mines as opposed to offtakes on Copper mines. And we’re dominantly exposed to Canadian assets.
Matthew Gordon: You have just done your annual 2020 shareholder meeting. You are predominantly institutional, but 25%, which is described as retail and unknown institutional, so there’s not much, is there much liquidity in the stock? I know it is traded a lot, but the shares don’t seem to move too much. Do you think shareholders are happy at the moment?
Sean Roosen: We run a different business model so some of the groups that have been ascribing the peer Royalty model have run higher multiples on their NAV basis. We do face a challenge in terms of the diversity that we have within our business strategy. But I’ve been doing this a long time; I started as an underground miner in 1985. I’ve seen most of the mines in the world and I worked 16-years as an international ex-pat. We focus on high quality assets. We are focussed on premium strategies, and we try not to get caught up in these bank run strategies that are more flavoured, visual as opposed to true value-building. We’ll stay the course.
We built a really good portfolio of North American assets. We think that political risk matters; having spent 13-years in West Africa, been through four hostage takings, two civil wars and multiple other security issues, it’s a real thing for us. So, we are dominantly focused on places where we think we can actually operate these mines and in the incubation process we have had exceptional success. In the last six years, our group of companies and the subset was responsible for the more than 50% of all the exploration drilling in Canada, led the charge by Osisko mining, which has drilled 1.3M metres, and our shareholders did not pay for that. But we hold Royalties on almost 30,000 square kms of lands in brownfield camps in Canada. And I like to think about it like real estate: it’s there’s waterfront and there’s downtown core. They don’t make new waterfronts. They don’t, they make new downtown core. We’ve stuck to premium real estate. And we think that in the medium to long-term, our strategy pays off. It has been a little bit complicated to explain the shareholders in the near-term, but that our product, for those who do the work, it is a slightly more sophisticated project than to go-to-bid, pay 1.5 x NAV. If you’re paying USD$1.50 for USD$1 worth of revenue I don’t know that that game lasts forever. We’ve been very much a primary basic investor.
Matthew Gordon: I asked you the question: do you think they are happy? You didn’t say, yes. You gave me, you tried to elaborate –
Sean Roosen: The people who understand it like the strategy. They are very happy. Yes.
Matthew Gordon: Do you think the institutional guys like it and understand it, and they are in it for the long term?
Sean Roosen: Well, our main shareholders are the Caisse de depot du Quebec & Investissement Quebec and FTQ, and then some of the traditional players like Tocqueville – they get it and they understand it. Obviously communication to get a premium on the company is my challenge. And Sandeep Singh, we’ve had a management change in the company in 2019. Sandeep is the new president, and have revamped, reenergized everybody as we came into it. We’re in that position right now where there is a value gap in the market for shareholders, they are looking for a Royalty company to come into.
We do face the lowest multiple with the highest quality of assets out of all the Royalty companies that are out there. It’s a bargain opportunity. If you do the work and you can understand it, and we’re more than happy to talk to you and take you through it, but it’s a big solid, what I would call it North American terms, and F-150 a portfolio: it’s very straight forward. It’s not complicated at the asset level. We don’t have a lot of exotic things in there. What has been exotic has been discounted already such as Lydian or our investment in Renard, Quebec’s largest diamond mine, everything else is basically in there for free. And if you could just believe in the fundamentals, the Canadian Malartic asset, obviously being our cornerstone project, and Agnico having just announced 7Moz in the underground of which we have a 5% Royalty on. We continue to have premium assets. That’s the opportunity for shareholders.
Matthew Gordon: You’re not conventional Royalty company per se; you have this private equity approach to some of your investing. Because you then get the private equity type of return. I come from private equity, if it was anything under 20%, I wasn’t really interested. You get significantly more than you’d expect from the Royalty, but higher risk – you’ve got to know what you’re investing into at that point. Is that fair point?
Sean Roosen: Yes. I mean, we tend to like to eat our own cooking. So, , in the case of a Barkerville, which has been one the more controversial acquisitions that we did last year. It’s an asset where we put our own management team in. Chris Lodder is part of the Osisko platform. He became a CEO. We executed 500,000 metres of drilling under his supervision. I was chairman. When we pulled that out into the asset base, because we felt that that there was a big value gap there for our shareholders so we looked at it more like a private equity investment and said, there’s a good chance that we’ll have a 20%+ return on this asset so we’ll pull that in because the market hasn’t recognised it. We’re in the process right now of financing that project to the next level, but it’s a 2,300 square km land package. It’s a mining camp, not just a project, with multiple mines. And the vision for that one is that we end up with 5 to 10 mines with a central processing facility. Osisko Royalty shareholders may end up with a Royalty that’s somewhat competitive to the Canadian Malartic Royalty, which is probably considered to be the best Royalty in the world, delivering about 35,000oz a year of zero-cost Gold. There are streams that are bigger, but there are very few Royalties that are bigger than that.
So, our goal has been to look and, , not to get caught with the rats and mice, and lots of people are taking pieces and parts of things and paying for them with stock. We have just stuck to primary business and try to be more disciplined in our asset acquisitions, focused on when we see something big, we want to bear down on it. And we want to split that for our shareholders’ benefit and to be greedy on their behalf in terms of quality assets.
Matthew Gordon: I’m just trying to really deconstruct and simplify this. So, 16 producing assets, 16 near-term producing assets following up at some point. So that’s the conventional component, the private equity thing – I get that you’re going big when you do go, but you can understand why people are looking at you, if you started off as a Royalty company, it’s in the title of the company, why they might be confused or might not do the homework to try and understand what it is that you do. Your background is private equity so therefore, you’ve got an actual penchant for that, but the market doesn’t necessarily see that. What is it that attracts you to it? Is it this long-term or medium term, large, private equity-type returns that you think will smooth the curves? Or why do it at all? Why not spin it out? Why not do that elsewhere?
Sean Rossen: We are in the process. When we did the acquisition of Barkerville, we announced the North Spirit Discovery group, which is intended to be a traditional private equity group. We’re in the process right now. When we bought that Barkerville asset, we had 5Moz of Gold in the ground, but we think that there’s potential there for significantly more. It’s an 83km-long mineralised trend. We really thought this was a company-maker asset.
We have been in the process of looking for an asset, a partner on that. And, , Osisko Gold Royalties would benefit from being an owner in the private equity group at the GP level as well as retaining a 5% Royalty on all of those potential projects, , with the starter asset being the current resource which we announced a PEA on last fall.
And we think that as we’ve altered this, it should happen, and the strange thing that is going to happen, of course, is we bought the asset at USD$1,300 Gold, and Gold has broken loose since we bought it. We have had multiple partners coming in, but time has been our friend as we looked at all these potential partners to come into it. So, obviously, we’re trying to choose our fight date properly in terms of bringing in that investment partner into this story. And you’ll see us get that done before the end of the year. We had a little bit of delay, obviously due to COVID-9, as one does, but I’m pretty excited about the value that has been created. There it is in the permitting track. It’s 18-months out from permitting and or public hearings have been held. IBAs are near completion. There’s a lot of risk-off stuff that’s happening to that project that could be a serious drive to confirm our accelerator model for the Osisko Royalties shareholders that we’ve done it again. They have seen us do it before, obviously, Windfall Lake being the biggest success having taken that from an USD$8M company, raised USD$700M of flow-through money to go drill, and creating one of the highest-grade discoveries in the world right now at 5Moz, 8.9g/t.
We’ve been down this track before and we think that we can deliver on it. But it does make shareholders somewhat nervous while we’re doing it. ‘ve been trying to mitigate the risk for shareholders in the traditional Royalty model. And obviously, this has rattled the establishment of Royalty companies, because they are all about not having too much risk on their balance sheets. But we’ve generated significantly higher returns and we’ve been able to grow faster than any other Royalty company in the space over the last five years.
Matthew Gordon: So who’s going to run that?
Sean Roosen: We have Luc Lessard who was the mine builder for Canbior and he built our Canadian Malartic mine. He has built 11 mines in the past. So he’s on the engineering side, framed up by Francoise Bertrand and a bunch of other guys that worked with us on mine builds in the past. We do have a history amongst the group, we’ve built 14 mines. We have quite a bit of depth on the bench when it comes to the chief operating officer on down. From the financial side, we’ve got a Sandeep Singh who is taking over as president for Osisko Gold Royalties. He is one of the more exceptional M&A bankers, and started his own firm called Maxit. He came out of Dundee and BMO and was an advisor to us. So he’s running a lot of the day to day Royalty business and I’ve been focused on trying to make sure that we have the proper engineering and financial backing for that. But we’ll have a market presence. We have John Burzynski, who is running Osisko mining right now. He is in the repertoire of Bob Wares. We were all co-founders, of Osisko One. So we have a lot of credible senior CEO-level people within the group, and we tend to hunt as a pack.
Matthew Gordon: You tell me there about growth and you’re the best; you’ve got the best growth numbers, and that’s fantastic. And you gave me examples of the success stories, but mining’s a tough industry. Things don’t always go right. How do you give sight to the market of when you start making money? I get 1.5% dividends – fantastic, best paying in the sector, but what do companies of your size do to grow and be profitable? What do you have to invest in to go to the next level, to become the USD$USD$10Bn company, not the USD$2Bn company? Because it seems you’re at the moment in a holding period. Where does the inflection point come?
Sean Roosen: Well, from us, it comes from the evolution of our development projects turning into mines. And, if we continue to build out all the projects that are in our development and growth portfolio, we go from 80,000oz pa of geos to about 150,000oz to 200,000oz just on what’s already in the company. If Osisko Gold Royalties don’t make another single investment we would double in size in our Royalty portfolio. Predominantly it’s on premium Canadian assets where we benefit because if there’s an exploration, dollar that is going to be spent in the world, it will go into a Canadian project because we have the flow-through share program here, and we have low cost exploration. We have a lot of land on which we can work, and our drill costs are about a third of what they are in Mexico, Peru, or a fifth of what they are in Africa.
So we have the ability to generate significant wealth from the existing portfolio. And then obviously, we have the ability to grow and we have the benefit of context in that it’s a senior management team that is mostly driven technically and complemented by some of the best financial people that have walked the space in recent time. So, I’ve been trying to build the perfect scenario and to wait for the Oracle of Omaha’s fat pitch. that if we do take a swing at something it’s for good reason. We’re trying to bat +400 as we come into the cycle, obviously we’re in a peak Gold market so asset acquisition becomes very competitive. The good news for us is we’ve already completed most of our acquisition strategy. So now comes the cycle when those mines get built and there is access to capital.
We’re pretty well-versed. It’s going to take us another 18 to 24-months to the daylight of lot of the value that’s there, but most of our projects are developing. And then Victoria Gold is a great example: that was a I would call that a 400 pitch that came out as everybody else hated the project. We led the charge on the financing. We put up USD$100M for a 5% Royalty on the top line and subsequently USD$70M in equity, partnered with our friends, from Orion Finance, and is currently the largest Gold mine ever built. In the history of the Yukon, it is the largest Gold mine commissioning in Canada right now. Heap leach at 64.5 degrees latitude, just off the Arctic circle. And we’re looking at the core of that being our net growth asset going to 10,000oz pa.
Matthew Gordon: What you’re saying is, our acquisition program is almost finished. We’re going to sit back, breathe, take stock, take a look at what we’re actually doing at the moment and try and create value going forward. We’re not going to keep spending it. Because if I look at your finances –
Sean Roosen: I don’t really like the word ‘try’. I said, ‘we are’, because we’re not that group that tries, we do.
Matthew Gordon: You are going to take stock and you’re going to do this. Send me the tee shirt. But if I look at your finances, you have got USD$423M of debt as of March. I don’t know what it stands out today. You’ve got a big credit facility, which you’ve drawn down USD$92M of. Talk to me about the finances and what you’re going to do. Do you need to clean things up? Because you are telling me there’s a lot of money coming down the line.
Sean Roosen: Yes. We have a net income of over USD$100M pa right now. We did draw down USD$50M from our facility during COVID-19 when we didn’t know which way the world was going. Subsequent to that, Investment Quebec, the government came back with an USD$85M private placement at a 10% premium to market. So, a great shareholder. And Quebec is the most proactive mining government in the world; they are the only ones that actually will write a cheque, the government cheque, to be equity partners with you. So we have a home court advantage of being what I believe is the best mining jurisdiction in the world with the most supportive government, and they own collectively, 22% of our company. So, we are unique in that we do have a huge shareholder that backs the play, and they participate with us in different deals. Caisse Depot du Quebec has a right to participate up to 20% in certain deals, depending on the condition directly with us, which sometimes they do. We cast a much larger shadow than we do. And we’ve also been able to work debt through directly through the pension plans at lower costs than some of the other groups. So we can bring both equity, debt and the Royalty money to the table. And we’re just in the process of maturing that as we go through it in a couple of next steps. But the reality is we’ve been able to position ourselves and was all about getting those core real estate positions. There was more drilling on our Royalty lands last year collectively than there was almost in the rest of the world, because Canada was drilling and everybody else was shut down. So that’s a big advantage for shareholders, is that every time the drill bit turns on one of our Royalty lands, and we don’t pay for it, it’s upside for us, but we’ve had significant discoveries.
Matthew Gordon: Do you or the board feel any pressure financially? Because I know you just got Investissement Quebec to put that money in as equity. Is that what’s driving the confidence here? I’m just trying to get back to why aren’t investors some investors, behind you with this vision that you have if you’ve got the financial ability to help you deliver these things?
Sean Roosen: We’re actually net-debt zero. If you look at our cash position, plus our equity book, sorry, equity books, that’s around USD$300M. Our cash position is slightly over USD$200M, and our net-debt position is there’s USD$350M in convertibles, of which 300 is due in 2022 so it’s not exactly next door. And then the rest of it’s on our acquisition line, which we’re in the process of using for acquisitions. We’re pretty comfortable with our balance sheet. We try to run a net-debt zero basis balance sheet. So that’s where we sit right now.
Obviously, one of the big equity positions as Osisko Mining. It sits over USD$140M, USD$160M on a market to market basis. So that’s why we’re pretty relaxed about where we are. The way that we put the debt on our balance sheet was we did a USD$1.1Bn acquisition from Orion for a Royalty portfolio in 2017. That that didn’t occur because of anything except building NAV. We got NAV when we did that debt exchange, and we built our Geos is up to 80,000oz pa. So, it’s a pretty good ratio when you look at it symmetrically in terms of the balance of things. And we try to maintain that close to positive zero-net debt. We will pay back debt as time goes by, we’ve paid down USD$350M of dividends in share buy backs in 2019. We bought back 8% of our stock from Orion with the share exchange of our equity book for USD$174M. We’ve been pretty proactive on our balance sheet management.
Matthew Gordon: Okay. But for –
Sean Roosen: I’m an old country, boy, I don’t like debt.
Matthew Gordon: Yes, I know, but for a USD$2.5Bn company, net zeros, is that where you want to be?
Sean Roosen: So listen: it depends on why we’re putting debt on, right? So, I’m willing to put debt on if we have producing assets that we’re acquiring. I’m not really too keen to put debt on in terms of medium, to long-term opportunities, but for near-term opportunities, that’s what acquisition lines are for. And traditionally most of the Royalty companies do use our acquisition line and convert to debt because it’s a tax efficient way to do things. The other thing that I would say is that we have this huge tactic that we’re on shore predominantly. But through the Canadian flow-through share basis, the reason that we run such a big equity book is that when we purchase those equities, we can use that tax protection that comes with flow-through shares to protect our tax pools.
And we started with USD$50M worth of tax pools. We’ve made almost USD$800M in revenue on on-shore, and we still enjoy tax pools in excess of USD$350M. So, tax management is a big thing for us and we don’t have any serious issues outstanding. And we’ve been able to do a model that’s a little bit different than others, but highly tax efficient.
When we buy equities under the flow-through model, if it’s federal, it’s a minimum of 22% gain, if it’s provincial, in Quebec, it can be up to 50% premium. If you pay a dollar for a stock we own, and we execute the same transaction using flow-through, we have only paid a net of 50 cents for the same equity that you bought. So it’s a bit unique, a bit complicated, but it saves a huge amount of money for us it makes a marginal asset look pretty good.
Matthew Gordon: You mentioned earlier that you changed the management around last year. Why, what happened?
Sean Roosen: Well, listen, we had a lot of the same management team from 2007, when we were operating and building a mining company, everybody got paid out in 2014. So we had a management team that largely hadn’t had a big win and a lot of them wanted to go off and do something else. And, so it was time for a change. Brian was 62, 63, the previous president. And, we felt it was time that for a refreshment and people were talking about our stuff, our plans. And we decided that, at the time, it was better off to reset, bring Sandeep Singh in who is 40. An extremely successful investment banker, he has been on most of the big M&A deals as a boutique AI banker last time. I let him set up his own team and handpick the people that he wanted to come forward with me. I’m 56. So, ’ve still got a bit of a kick at the can. And we took the tactical team forward with us, we really wanted to get the eagerness and the hunger back in the management team. And a lot of other people just made enough money, had paid for their house and wanted to move on and do something else. So, that energy level goes down when you have had the big win. And we wanted to give somebody else a platform to really take this thing to the next level.
Our business has been changing; it’s become much more financial engineering. We’re still pretty good at the primary assets, but we did want to increase our horsepower on the financial engineering level. And Sandeep is by far one of the best I’ve seen of the next generation of guys. And he’s really going to set the stage for what happens next in our space.
Matthew Gordon: In a gold bull market like this margins are great. You should, with your producing assets, be throwing off a lot more cash in Q3/Q4, COVID conditions allowing. How do you, in your mind, take advantage of this situation? because up until August you had a different a set of problems, what are your problems going forward?
Sean Roosen: Well, all of Quebec had instituted a shutdown of all the primary assets that we’re involved in. So, obviously, Canadian Malartic is back up and running. Eleonore is back up and running. These are our primary assets. We should be in pretty good stead coming through the end of the year to throw off a significant amount of cashflow. Last year we had revenues of just under CAD$150M and we made $100M after GNA and dividends. So, running one of the higher margins and we continue to build cash and pay down debt. And as we move forward in a bull market, we have to be very strategic about how we do things because it’s getting very competitive for Royalties. Our accelerator model becomes much more important where we’re able to incubate stories and put a proper management, both technical and financial together.
It’s a huge opportunity to have some of those stories that may not be capitalised to be the the catalyst investor to come in and then put both the management team, the asset and the appropriate Royalty and Streaming opportunity in place. So what we like to do in these markets is, this is when you can create Royalties, as opposed to Streams, because it’s relatively early time and we need the equity component at that point in time, because we know that we’re fairly far away from the mine being in production, so we like to make money on the equity positions and harvest those positions to pay for the Royalties. Much like the Arizona mining story that I cited, where we’ve got a free ride on the Royalty, and we’ve already paid USD$24M on the equity net of the Royalty. Whatever happens to the Royalty is a significant premium. So that’s the stories that we’re looking for in this upturn.
We’re also looking to see some of our development stories actually convert from development into mining with the added access to capital that they now have into higher commodity prices.
Matthew Gordon: How do you describe yourself now? You just talk about financial engineering as the way forward. There’s nothing wrong with it, but what are you?
Sean Roosen: Well, we are probably the best Royalty company in the space in terms of business model; the ability to actually execute is there because we have a technical team. So I would say we are different, but we are purpose-built for all types of weather, we do very well in downturn. And then we can harvest like nobody else in the upturn because we have that equity component. So, that people need to have a look at the hybrid model. There’s a lot of competition in the peer Royalty space which I don’t think is healthy. There’s a lot of winner’s regret out there in terms of overpaying for Royalties and bank run processes that people are looking to lay off in their multiples. If you pay $1.50 for $1 worth of cashflow and you can do an equity financing at $1.80, it’s not a bad business, but it’s not really what I would call a primary business. And certainly nothing that Warren Buffet would invest in because those premiums could erode. So at the end of the day, we’re pretty much a basic believer in a dollar in, a dollar out and to eat our own cooking as much as possible, rather than to get married to other people’s successes and failures.
Matthew Gordon: So do you think with this new structure, this new look, this , financial restructuring component, it is smarter, but do you think you have made yourself less attractive to be taken out, if that was ever a thing?
Sean Roosen: Well, I’ve been a takeout target as long as I can remember. And I guess if I’m doing my job properly it is because I do have a significant amount of assets and that if you talk to most investment bankers, they would say that Osisko has a valuation gap that’s attractive to both mining companies, because we all have the keys to several Porsches in the Gold deposit asset base, as well as we have one of the best Royalty portfolios out there. And we’re the fourth largest in the world. If you’re the top three you’d obviously look at the number four before you looked at number five. And the jurisdiction and the longevity of the assets that we have, like the Canadian Malartic Royalty, the Eleonore Royalty, and the Victoria Royalty are more than enough to justify the current NAV underpinning the company. I feel like we are a takeover target every day of the week, and we cover ourselves accordingly.
As people saw the last time, when Gold Corp went hostile on us, they bid USD$2.5Bn. At the end of the day, we sold the company for USD$4.3Bn. So for that reason alone, shareholders need to own a company like this. If you are focused on the takeover target, and we are the number one takeover target in the space, but we are guaranteed that we will get you paid. If somebody does come at us, we will drive for value. And that’s the nature of life at the waterhole: some days you’re the lion, some days you’re the zebra. Some days the zebra kicks the lion in the head.
Matthew Gordon: I have seen it happen Talk to me about who you rely on, because, as you say, this seems to be morphing into a different company, which means that you’re attracted to that. Who is going to actually manage the build out of these, , or these development plays that you’ve got investments into. Have you got any energy or appetite for that?
Sean Roosen: Well, where we sit is that Luc Lessard, our Chief Operating Officer, and, , Luc was the mine builder for Cambior. We built 20 mines. He built 10, then he built more. So that’s really, , Luc wakes up in the morning, as he tells me, ‘Sean, I love the smell of fresh concrete.’ So that’s his job,
Matthew Gordon: But you have got 135 Royalties, only 32 of which are producing or near term producing. There’s a lot in the background. So what happens with that? What is the model going forward? Are you going to offload some of those?
Sean Roosen: Well, a lot of those assets were purchased as portfolios, when you buy like a cable TV package, you want to get the football and all of a sudden you’ve got Martha Stewart and Snoop Dog on the cooking channel as part of your package. So, we don’t really ascribe a lot of value to some of those sleeper Royalties, right? They are a nice call, nice potential, but, we have 16 producers right now, which is more than most of the rest of the mid-tier or smaller Royalty companies. And we see, that growth going to 2021 over the next 3 to 5-years. And a lot of that’s organic growth out of the portfolio of companies that we’ve incubated. We’ve incubated seven companies now starting with Osisko mining, Windfall Lake, Falco resources, which has an exceptional deposit located in rural Noranda it’s 9.1Moz equivalent to 6.1Moz of it in reserves. The Barkerville assets, and then Victoria was an accelerator company and then things like Talisker Resources in British Columbia, Sable Resources, and the other companies that come along. And we try to incubate one of those companies per year. We assumed that the success rate would be 1 in 3, so far, we haven’t had a failure, which has been exceptional. And we have generated over 21Moz of discoveries in 4.5-years at the drill bit from those companies that our shareholders have Royalties on. So it’s been an exceptional success, but it’s going to take another, probably 6 to 12-months before the bigger market gets there. And, we’ll see some of these new Royalty companies have their euphoria. A lot of them are spin-outs of asset basis that basically went no-bid from the traditional Royalty & Streaming companies. So they fund them out and put some management teams in place that really don’t come from the Royalty space and they will see how they do in the long term.
Matthew Gordon: Are you looking over your shoulder at any of these guys? You seem to be looking over your shoulder with some disdain about what they have put together, but the market, the market is valuing them.
Sean Roosen: Yes, it’s indicative if the market wants to pay for them. So, well done lads. We appreciate that success in the mining business in any form, it is something I’m going to celebrate. It’s been a tough space, as you said in the beginning so I have no disdain for any success in our industry. I’m only there to clap and support but our business model is that we’re there to offer that a steady build of asset base and give a brownfield Canadian component to it, which is really our specialty. And, we will continue to grow the way we grow. And the next 6 to 12-months is crucial that we get Barkerville sorted and to the next leg. that will take some of the pressure off.
And that when people see our year-end results as we come through this, , we had a few assets that became problem children through the Orion Act transaction with Lydia. And obviously, having some issues in Armenia: the diamond market is getting some brain damage in terms of commodity pricing. So, all these things come through, and when you have a portfolio of assets, this is inevitable that you have some problems in your portfolio, but we do have a broad portfolio.
Matthew Gordon: What I’m trying to understand: I’m an investor, a family office. I’m trying to work out which Royalty companies I should be into. What I’m hearing from you is you believe in fundamentals, and you’re saying not necessarily a big believer in some of the promotion that’s going on elsewhere, and you need time to deliver the new strategy. What do you think you need to show the market in the next 12-months?
Sean Roosen: Absolutely. The evolution, the big rerating that we haven’t seen so far has been the Malartic underground, as Agnico continues to actually own that. There was a lot of crosstalk in the marketplace about whether Agnico and the Yamana were going to try and force us to take a reduced Royalty on the underground component or not. Obviously, at current Gold prices that’s not a discussion. And then they have recently come forward to this last quarter with their exploration and development program. So that’s pretty primary piece of ‘Steady-Eddy’, no-risk, Agnico and Yamana pushing hard to develop that underground. That goes directly into our asset base.
The other big one will be the evolution of what we do with Barkerville as North Spirit evolves and we have we’ll get that done by the end of the year. And we should see some pretty steady rerate as we come forward and Sandeep gets more and more known to the market. And hopefully we get a couple of deals done that are in the hopper now, and we can move on to the next level of the business.
Matthew Gordon: What’s your brief to him, Sean? You said, ‘right, we need some more energy in here. You are great financial engineer’, but what’s the brief that you have given him to sort your company out?
Sean Roosen: Well, where we are is the separation of the model, which was the accelerator company. We had said that we would do that with North Spirit and obviously, we ran into COVID-19 here in the spring. So we’re probably a quarter behind on the evolution of that, but we’ve said 25% of our AUM was going to go into the accelerator monitoring. And 75% was going to go into, – traditional last money in the strategy, if you will. Which is where shovel-ready, permanent, hand mine finances typically where Streams and Royalties play out. There was a period in 2016 where the big companies, the baseball companies were using Streams to refinance their debt packages, but that was probably a once off. I mean, that’s super cheap now.
So we’re back to traditional Royalty and Streaming business, which is mostly project finance. And now that we’ve incubated these 7 companies, a lot of them have moved from the 25% allocation to the 75% allocation. There needs to be separation, for lack of a better metaphor, of church and state within our group. We’re in the process of executing that. And, we want to create that pool of capital that comes to work with us to make sure that these assets that we incubated in the 25% component, transitioned to production and become producing Royalties and Streams, and to purify the Royalty & Streaming business, as we always said we would, once we’d got the cake baked, that we would move on and we would create that side car of capital that was more focused on the development space. we’re a little bit in the penalty box for having some of our capital allocated into that development space. And, we got the message, we’re going to do it.
Sandeep is the man to lead the charge and I will make sure that the mines get built so that the Royalties and Streams actually become a part of the revenue stream for the company. That’s my job. I’ve spent my whole life building mines. It’s not something that’s foreign to me. I’m not putting my my laptop to pick up my hammer. I was born with a hammer in my hand, so I’ll make sure that portion happens, and we’ll let Sandeep focus on making sure that we run the best Royalty company in the world.
Matthew Gordon: Separation of church and state: I love it. Simplicity of message as well. I like it. It sounds like he’s got a got a bit of work to do, get his feet under the table and start delivering, hopefully in a COVID-free zone soon as well.
Sean, I appreciate the run through. It is the first time we’ve met, first time we’ve spoken and heard that story. It is complex, but I understand it better now. You have got a lot of good moving parts. Let’s see where this year brings you.
Sean Roosen: Well, I want to also add as a group we’ve returned capital to shareholders many times. The last time we built Canadian Malartic, we were at 4.3Moz, gross revenue, and we spent USD$1.2Bn to make over USD$3Bn net. So that’s the plan.
Company Page: https://osiskogr.com/en/
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