It has been a roller-coaster ride this year for investors in the VanEck Gold Miners ETF (GDX, Financial), which has gone from outperforming in the second quarter to significant underperformance by mid-year, with a further decline in the seasonally weak third-quarter period. However, one name that was bucking this trend was Osisko Gold Royalties Ltd. (OR, Financial) until its uptrend was derailed in July following the sudden departure of CEO Sandeep Singh, with rumors that there was a clash with the board and with the company noting a leadership change "was necessary to position the company for long-term success.” The market did not take the news well, with Osisko sliding over 20% since then and slipping into a negative territory for the year.
In this analysis, I will dig into the recent results and determine whether the stock is offering enough margin of safety yet.
Third-quarter results
Osisko Gold Royalties announced its third-quarter results last week, reporting quarterly attributable volume of approximately 23,300 gold equivalent ounces, including about 1,400 ounces from its new silver stream at the CSA Mine in Australia. This translated to a 3% decline on a year-over-year basis, but with the company lapping easy comparisons from an average metals price standpoint, it reported record quarterly revenue of $62.1 million and a 93% cash margin. This decent performance was despite a softer quarter from Eagle, which had to contend with wildfires in the Yukon, and minor interruptions for partners in Ontario and Quebec due to wildfires. Finally, the company also saw an impact from lower rough diamond prices related to its Renard Diamond Stream and noted that it is tracking toward the lower end of its annual guidance (95,000 to 105,000 GEOs) due to these impacts.
While the expected miss on guidance is a little disappointing, the more important thing to look at for royalty and streaming companies is the environment for transacting, progress at their producing assets and any progress in their development pipeline. And in these three cases, the news continues to be overwhelmingly positive.
Source: Company filings plugged into author's chart
Current environment and recent developments
For starters, the environment for adding royalties and streams should be among the best it has been in years, at least for development-stage assets, given that appetite for equity is low and selling shares at multiyear lows is hardly an attractive option for most developers. This means that selling royalties or streams is more attractive than taking on high-cost debt (assuming it is available). It is also often more attractive than selling shares to raise capital given that each share sold is not going very far if many stocks are down more than 70% from their highs. While nearly all the royalty and streaming companies are sitting on massive war chests to take advantage of potential opportunities, it is nice to see Osisko having around $370 million in total liquidity, giving it the flexibility to take advantage of multiple smaller deals or a couple of larger deals if they come across the plate.
Moving over to the company's current portfolio, Osisko continues to have one of the better organic growth profiles sector-wide, and this growth profile is well diversified, with multiple assets contributing to future growth. At producing assets, Capstone's ramp-up at Mantos Blancos has been slower than expected, but the company expects to see a full ramp up to design of 20,000 tonnes per day by year-end, setting this asset up to contribute upwards of 15,500 GEOs per annum.
Meanwhile, although the Eagle Mine where Osisko holds a 2% net smelter return will have a slower year, the company successfully employed year-round stacking this year, and we should see a better year in 2024 and 2025 with average annual gold production closer to 185,000 ounces ($17 million-plus in attributable revenue per annum to Osisko) assuming no hiccups.
Finally, at the Trixie Mine in Utah, the company may not yet have ramped up to its higher throughput rate of 500 tons per day, but it is making progress, with the decline that is 95% complete expected to improve access to underground workings and potentially support much higher throughput rates. And assuming all goes to plan (even without a further expansion at Mantos Blancos that is being explored), these three assets combined could contribute roughly 28,000 GEOs per annum post-2025.
CSA Mine
Looking at company's most recently acquired and new number three asset from a GEO contribution standpoint (once the copper stream comes online), the CSA Mine is also off to a solid start. This is evidenced by production of 7,300 tonnes of copper in its first two months of production combined, translating to an annualized rate of around 44,000 tonnes and in line with 2023 plans.
The second positive development was that throughput for the month of July hit a record of 118,000 tonnes, translating to an annualized rate of 1.42 million tonnes, well ahead of the 1.09 million tonne average over the past six years (2017 to 2022). Besides, the company has enjoyed exploration success since closing the acquisition, drilling highlight intercepts of 50.4 meters at 8.9% copper and 36 grams per tonne of silver, 25.5 meters of 12.7% copper and 55 grams per tonne of silver and 28.7 meters of 10.6% copper and 41 grams per tonne of silver. Not only are these exceptional intercepts with a rock value above $750 per tonne, but these should help to convert inferred resources to higher confidence categories and ultimately increase the reserve base at this asset.
Source: CSA Mine Mineralization - Metals Acquisition Corp. presentation
However, the other positive takeaway from the report is that outside of encouraging results from QTS North and QTS Central, the exploration upside when it comes to adding new ounces is also quite encouraging. This is because closer to surface in QTS South Upper, the company reported a solid intercept of 3.4 meters at 8.7% copper in definition drilling, confirming the potential for another high-grade resource closer to the surface with resource preparation work ongoing.
Second, downhole electromagnetic surveying suggests the presence of sulphide mineralization extending up to 800 meters below the deepest holes drilled to date at the main QTSN, K and L3 lenses. So while definition drilling and resource conversion drilling is looking promising, there looks to be considerable upside to the resource at depth as well, which is great news for Metals Acquisition Ltd. (MTAL, Financial) as well as Osisko, which could benefit from a meaningful mine life extension at this new asset where it holds a silver and copper stream.
Island and Odyssey
Digging into another high-grade asset in Ontario where Osisko holds royalties, Island Gold continues to see solid progress on its P3+ Expansion, which will transform Island into one of the top-10 largest gold mines in Canada from an output standpoint and the lowest-cost mine (sliding in ahead of Macassa) once shaft construction is completed and production begins in the first quarter of 2026. However, at the same time as production doubles to more than 280,000 ounces per annum, Alamos Gold will also move more of its mining operations toward royalty ground with a 2% and 3% royalty applicable to Osisko (lower vertical depths and Island East) versus the 1.38% currently to take advantage of this shaft. Hence, attributable production from this asset could start contributing upwards of 6,500 ounces per annum ($12.4 million) post-2025, up from around 2,500 ounces in 2022.
Last but certainly not least, Agnico Eagle (AEM, Financial) continues to report progress at Odyssey, with the paste plant commissioning on track for the third quarter, which will allow for a ramp-up to 3,500 tonnes per day mining rates. It also shared that surface construction for Odyssey is 60% complete. While the current 3,500 tonne per day mining rates might not seem that significant, nor does production of 6,700 ounces from Odyssey South in the second quarter, the real production will come in 2027 once East Gouldie comes online. For those unfamiliar, East Gouldie will be the highest-grade and most productive asset at Odyssey, where Osisko holds a 5% NSR, with mine production by ramp and shaft increasing to 12,000-plus tonnes per day by 2030 from this deposit. So while Odyssey may not be contributing all that much currently, it is positive to continued progress here and it is a bonus that Osisko could benefit from double-dipping with the future Upper Beaver Mine, with a 2% NSR on any material from the Kirkland Lake Camp west of the Quebec border and a 40 cents per tonne royalty on any ore coming from outside of the Canadian Malartic boundary (which would apply to Upper Beaver).
To summarize, there is no shortage of positive developments for Osisko across its producing and development royalty and streaming assets. This suggests the estimated net asset value of $2.45 billion may actually be conservative, especially if we continue to see the continued exploration success across the portfolio that we are at key assets.
Valuation and technical picture
Based on around 186 million shares and a share price of $12.15, Osisko trades at a market cap of $2.26 billion and an enterprise value of $2.45 billion. It is back to trading at around 1 times price-to-net asset value, a significant departure from its previous multiple of over 1.20 when the stock was finally getting some respect earlier this year. I see this as a steep discount to fair value for a company with royalties on some of the best assets in Tier-1 ranked jurisdictions and with it owning arguably a top-3 royalty in the gold sector with its massive royalty on Canadian Malartic, which is owned by a top-3 gold producer globally.
Using what I believe to be a fair multiple of 1.30 times price-to-NAV to adjust for the multiple compression we have seen, I see a fair value for Osisko of $17.40, pointing to 42% upside from current levels. If we apply a discount of 33% to bake in a margin of safety, this translates to a buy zone for Osisko of $11.70 or lower. So while the stock is nearing a buy zone, it is not there quite yet.
Source: StockCharts.com
However, if we look at the stock from a technical standpoint, it has an unfilled gap below (with a propensity for filling its gaps) and the more significant support level comes in at $10.50 to $11. So while the stock would decline into a low-risk buy zone from a valuation standpoint below $11.70, the lower-risk buy zone appears to be closer to $11. While there is no guarantee the stock gets to this level, especially if a suitor makes a move following the CEO search like what we saw happen with Newcrest, this is where I see the higher probability trading setup for starting new long positions. Hence, although I see Osisko having one of the best royalty portfolios in the sector, I remain on the sidelines for now.
Summary
Osisko Gold Royalties had a decent third-quarter report helped by higher metals prices, but GEOs earned were below my expectations. And while I was expecting a much stronger fourth quarter with the closure of the CSA Mine stream and higher contribution from Mantos Blancos, it could be a little softer with limited contribution from Renard, what look to be weaker metals prices sequentially and the delayed ramp up at Mantos.
The silver lining is that Osisko's partners continue to make solid progress, the company has two monster royalty developments assets in the Eeeyou Itschee Territory of James Bay among lithium and gold (Windfall/Corvette) and it continues to be the premier name for investors looking for a royalty streaming company with most of its net asset value tied to Tier-1 assets. So if we were to see further weakness in the stock below $11, this would make the stock much more attractive from an investment standpoint.
