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This Precious Metals Streamer’s Pullback Leaves it Attractively Valued

Market jitters and the threat of a trade war with China have helped drive gold higher in recent weeks. There is every sign that it will move higher, as fears of a market correction and growing economic as well as geopolitical uncertainty weighs on financial markets. This makes Osisko Gold Royalties Ltd. (TSX:OR)(NYSE:OR) an attractive investment, especially considering that it has pulled back in recent weeks to be 15% down for the year to date. 

Now what?

In mid-2017 Osisko Gold Royalties completed a transformative transaction, acquiring 74 royalties, streams, and precious metal offtakes for $1.1 billion from Orion Mine Finance Group. That deal almost doubled its portfolio of royalties and streams, while tripling Osisko Gold Royalties’s cash-flow-generating assets.

It also gave the company considerable growth potential and ensured that 80% of Osisko Gold Royalties’s combined cash flow would come from relatively low-risk jurisdictions in North America. The acquisition of that portfolio of streams, royalty, and off-take agreements also further diversified Osisko Gold Royalties’s assets, reducing much of the risk associated with its business.

The benefits of completing that deal can be seen from Osisko Gold Royalties’s impressive 2017 results. It reported record 2017 production of 58,933 gold equivalent ounces, which was a 54% increase year over year. Osisko Gold Royalties also reported record revenues, which rose by 240% compared to 2016 to $213 million.

Nonetheless, regardless of the impressive results, Osisko Gold Royalties reported a net loss of $42.5 million. This can be attributed to transaction costs associated with the Orion deal and an $89 million impairment charge on its Éléonore royalty.

Now that those one-off costs have been absorbed by Osisko Gold Royalties, the company is poised to unlock considerable value and deliver strong 2018 results, particularly with gold trading at well above US$1,300 per ounce.

Since the Orion deal, Osisko Gold Royalties has further bolstered its portfolio, entering an agreement with Victoria Gold Corp. to acquire a 5% net smelter return (NSR) royalty on the Yukon Dublin Gulch property for $98 million. This deal entitles the company to a 5% NSR royalty on all metals produced by the property, which contains the Eagle Gold project and Olive gold deposit, until 97,500 ounces has been delivered. The company will then be entitled to a 3% NSR royalty thereafter.

The Eagle Gold project is fully permitted and financed. It is expected to commence production in 2020, adding up to 10,000 ounces of gold to Osisko Gold Royalties’s annual production for the 10-year life of the mine.

The company predicts that 2018 gold production will grow by somewhere between 32% and 40% year over year, which, in an operating environment where gold is trading at over US$1,300 per ounce, will give its earnings a solid lift.

Furthermore, Osisko Gold Royalties finished 2017 with a solid balance sheet, holding $334 million in cash and having $232 million available from a revolving credit facility, giving it considerable liquidity.

So what?

Osisko Gold Royalties is one of the most attractive lower-risk means of gaining exposure to gold. By being a precious metals streamer, it is not exposed to the same risks as a miner, yet it provides investors with the same levered exposure to the lustrous yellow metal. Osisko Gold Royalties is positioned to unlock considerable value for investors, and that will boost its bottom line as well as stock.

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Fool contributor Matt Smith has no position in any stocks mentioned.

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