Monday, July 13

Osisko Gold Royalties Is Lacking Punch

Reading Time: 8 minutes

Image: Canadian Malartic mine is an open-pit gold mine located in Quebec, Canada. Courtesy: Canadian Malartic

Investment Thesis

Montreal-based Osisko Gold Royalties (NYSE:OR) posted the first-quarter results on May 17, 2020. The results were in line with analysts’ expectations, but they lacked punch. Gold Equivalent Production was weak this quarter primarily due to the restriction imposed at Canadian Malartic mine, and next quarter may not be stellar either.

In terms of investment, the gold streamer has not delivered much since October 2019. The first nine months of 2019 were significant for shareholders where the stock reached a high of $13+ in September 2019. However, starting in October 2019, OR lost its momentum and drifted lower.

The trend is mimicking, basically what has happened to the gold price. After a considerable rally, gold is now plateauing for many weeks, around US$1,700-US$1,725 per ounce. It is a clear sign of exhaustion.

The investment thesis is not bright at the moment. I believe the gold price is about to retrace below $1,650 per ounce and will trigger a small healthy sell-off in the gold miner and streamer group. Thus, I recommend holding the stock and wait for this expected retracement before accumulating again.

Sean Roosen, the CEO, said in the conference call:

In terms of where we are right now, obviously, our hybrid business model has been a little bit less valued in the marketplace in the past, but we think that we’re well geared for this market and certainly with the evolution of the accelerator assets within the project we’re seeing more and more value being ascribed to those through the community — through the analyst community.

Osisko Gold Royalties: Financial And Production In 1Q 2020 (in US$)

Note: Values can differ a little due to the conversion from CAD$ to US$. Osisko Gold Royalties indicates results in CAD$ with an exchange rate [CAD$ vs. US$] of 0.716 in Q1’20. It is what I applied to the table below.

Osisko Gold Royalties 4Q’18 1Q’19 2Q’19 3Q’19 4Q’19 1Q’20
Total Revenues in US$ Million 87.31 75.76 98.38 82.51 38.66 37.68
Net Income in US$ Million -86.21 -20.0 -4.9 -34.69 -117.56 -9.54
EBITDA US$ Million -101.7 -13.1 8.8 -30.6 -118.66 3.12
EPS diluted in US$/share -0.73 -0.13 -0.03 -0.24 -0.79 -0.09
Operating cash flow in US$ Million 14.05 18.62 16.0 21.4 13.03 17.05
Capital Expenditure in US$ Million 36.25 21.04 0 32.86 9.27 16.01
Free Cash Flow in US$ Million -22.2 -2.4 16.0 -11.5 3.76 1.04
Total Cash US$ Million 131.9 91.47 74.57 112.96 97.67 128.62
Long-term Debt in US$ Million 267.1 244.0 243.7 262.6 264.4 303.4
Dividend per share in US$ 0.038 0.038 0.037 0.038 0.038 0.038
Shares outstanding (diluted) in Million 156.335 155.059 154.988 144.446 150.35 155.37
GEOs 4Q’18 1Q’19 2Q’19 3Q’19 4Q’19 1Q’20
Estimated Production gold equivalent Oz Eq. 20,005 19,753 19,651 18,123 20,479 18,159
Gold price realized 1,240 1,304 1,309 1,472 1,481 1,583
Silver price realized 14.54 15.57 17.32 16.90

Source: Company release and Morningstar. More data are available to subscribers only.

Analysis: Revenues, Earnings Details, Free Cash Flow, Debt, And Production Details (in US$)

1 – Revenues were US$ 37.68 million in 1Q’20 (Revenues include revenues from offtake interests).

Osisko Gold Royalties posted a revenue of US$37.68 million in the first quarter of 2020, down 49.7% from the same quarter a year ago and down slightly sequentially. Net income was a loss of US$9.54 million or US$0.06 per share. The loss was mostly relating to the impairment of US$18.84 million, of which US$13.8 million was to the Renard diamond stream net of taxes.

The net adjusted earnings were US$5.4 million or US$0.036 per basic share.

The cash margin from royalty and stream interests was US$24.69 million or 91.1%. Osisko is now 81% gold exposure.

Results were mainly in line with expectations. However, the Canadian Malartic, which is the company’s flagship mine, was affected by COVID-19. The mine was shut down for care and maintenance from March 25th to April 15th. The mine is currently ramping back up and should be in full production now.

Osisko now has over 135 royalties and streams.

2 – Free cash flow was a loss of US$ 1.04 million in 1Q’20

Note: The generic free cash flow is the cash from operating activity minus CapEx.

Free cash flow for the first quarter of 2020 was a profit of US$1.04 million. And annual free cash flow was a profit of US$9.1 million ttm.

CEO Sean Roosen said in the conference call:

Throughout the quarter, we also acquired just under 430,000 common shares through our normal course issuer bid process for an aggregate of CAD3.9 million. And the average price per share that we purchased [Indecipherable] was at CAD 9.15

3 – Net debt is US$174.75 million in 1Q’20

Net debt is $US174.75 million as of March 31, 2020. The debt includes a drawdown of CAD$50 million in March on the company revolving credit facility as a cautionary measure. Osisko’s available credit on the facility was over CAD$400 million at the end of March.

However, on April 1, 2020, Osisko Gold completed CAD$85 million equity financing with Investissement Quebec.

Below are the details:

Source: OR Presentation (partial) Warning: Values indicated in the presentation in CAD$

4 – Production in gold equivalent ounce and details

Osisko Gold Royalties produced 18,159 GEOs in the first quarter of 2020, down 8.1% from 1Q’19 and down 11.3% sequentially.

Gold price increased this quarter to $1,583 per oz, and silver was $16.90 per ounce.

The gold production in GEOs was lower this year, partly due to the sale of the Brucejack offtake in Q3 2019 and the impact of COVID, but a higher realized price on gold offset this.

5 – Guidance 2020

Osisko Gold Royalties withdrew the 2020 production guidance as a result of the uncertainties related to the COVID-19 pandemic impact.

Conclusion and Technical Analysis

Osisko Gold Royalties is oscillating down without definite conviction despite a price of gold now above US$1,700 per ounce. There is nothing wrong with the business model, and the company presents some good growth potential.

However, with all this theoretical potential, the company is lacking a decent free cash flow. Free cash flow yearly is now $9.1 million, but with a quarterly dividend of US$0.038 per share, the company is paying more than it can afford. Furthermore, the second quarter of 2020 will be affected by restrictions due to the COVID-19 as well.

Thus, it is time for a pause.

Technical Analysis (short term)

OR has a clear descending channel pattern with line resistance at $9.20 and line support $8.50. The descending channel is considered bearish, which means that it is more likely that OR will experience a support breakout and retest lower support estimated at ($9.20-8.50), which means around $7.80.

However, if gold turns bullish again and crosses $1,755 per ounce, then we may experience a resistance breakout with a retest of $10. In this case, I recommend selling about 30% of your position, assuming a profit.

I see a high probability of a downside coming, and I recommend accumulating from $8.50 to $7.50. Selling a good part of your position at or above $10 makes sense.

Author’s note: If you find value in this article and would like to encourage such continued efforts, please click the “Like” button below as a vote of support. Thanks!

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Seeking Alpha

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