Bet on Gold’s Next Rally by Investing in Osisko Gold Royalties Ltd. (TSX:OR)

Get ready for gold to rebound by investing in Osisko Gold Royalties Ltd. (TSX:OR)(NYSE:OR).

| More on:
The Motley Fool

Gold has pulled back sharply in recent weeks to be trading well below the psychologically important US$1,300-an-ounce barrier to be at its lowest price since late December 2017. This has triggered a sell-off of gold stocks, with many junior gold miners having fallen sharply since gold’s dramatic decline. This has caused the VanEck Vectors Junior Gold Miner ETF (NYSE:GDXJ) to fall by 8% for the year to date.

Other gold mining stocks have plummeted even further, including precious metals streamer Osisko Gold Royalties Ltd. (TSX:OR)(NYSE:OR), which has plummeted by a whopping 15%. While there are signs that gold prices will remain soft for the foreseeable future, this has created a long-term opportunity, because there are a range of emerging positive catalysts for gold. 

Now what?

While the global economic outlook remains bright, generating considerable confidence among financial markets, there are an array of storm clouds gathering on the horizon. These include the danger of a trade war as Trump pushes ahead with his controversial protectionist trade polices, which include levying tariffs on up to US$200 billion of imports from China. Then there are fears that Italy’s poorly performing economy and heavily indebted banking system could fall into crisis, the contagion from which could threaten the very viability of the euro.

While higher oil has sparked a flurry of interest in energy stocks, it could trigger an economic downturn. Oil is the lifeblood of modern economic activity, powering a range of industries that are vital to global economic growth and rising global demand growth, because a stronger economy has helped to push prices higher.

Nonetheless, the fear is that demand growth will drop sharply once crude reaches US$80 a barrel, and if higher prices remain in play for a sustained period, they could trigger a global recession. According to analysts, the danger zone is US$80-90 a barrel, which is not much higher than Brent’s market price of US$75 per barrel.

Those threats — along with other economic and geopolitical fissures — make it imperative that investors hedge against those risks by holding a portion of their portfolio in gold.

One of the best ways of doing so is by investing in Osisko Gold Royalties. Because it is a precious metals streamer, it is not exposed to the same risks as a gold miner, but it still provides levered exposure to the price of gold.

Osisko Gold Royalties has delivered steady growth in its gold production with the volume of ounces produced in 2017 rising by 54% year over year to 58,933 ounces. This was almost double the amount in 2015 and close to five times greater than in 2014. For 2018, the company expects production to reach up to 82,500 ounces, which is 40% greater than 2017. That will give cash flow and earnings a solid boost, despite weaker gold.

An especially appealing aspect of Osisko Gold Royalties’s operations is that its stream and royalty interests are generating a cash margin of 91%, which is among the highest in the metals and mining sector. That underscores the profitability of its assets.

All of these characteristics bode well for strong earnings growth, particularly if gold rebounds in coming months. For the first quarter 2018, Osisko Gold Royalties reported record operational cash flows of $23.3 million, which was almost double the same period in 2017.

The company also repurchased 1.6 million shares during the first quarter, which equated to just over 1% of its float at the start of the quarter, underscoring just how confident management is in Osisko Gold Royalties’s future prospects. 

So what?

The quality of Osisko Gold Royalties’s assets and the low risks associated with precious metals streamers compared to a miner make it an attractive means of bolstering exposure to gold. While investors wait for gold to recover, they will be rewarded by Osisko Gold Royalties’s sustainable dividend, which yields 1.5%. There is every sign that as earnings rise, the precious metals streamer will hike its dividend, having hiked it for the last four years.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

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

More on Dividend Stocks

Piggy bank in autumn leaves
Dividend Stocks

CPP Pensioners: You’re Getting an Inflation Increase in 2025

CPP benefits increase with inflation, but this stock's dividends can outpace even that.

Read more »

coins jump into piggy bank
Dividend Stocks

Invest $15,000 in This Dividend Stock for $61 in Monthly Passive Income

Monthly passive income is well within reach, especially when you have a solid dividend stock like this on hand.

Read more »

RRSP (Registered Retirement Savings Plan) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

RRSP: 2 Reliable Canadian Dividend Stocks to Own for Decades

These stocks offer high yields and a shot at decent capital gains.

Read more »

concept of real estate evaluation
Dividend Stocks

Invest $7000 in This Dividend Stock to Make $600 in Passive Income

Looking to make monthly passive income? Timbercreek Financial (TSX:TF) stock's 8.6% dividend yield could turn into a steady stream of…

Read more »

space ship model takes off
Dividend Stocks

Dividend Investors: 2 Stocks That Could Soar in 2025

These top TSX dividend stocks might be oversold right now.

Read more »

Start line on the highway
Dividend Stocks

TFSA Passive Income: 4 Stocks to Buy and Never Sell

Looking for stocks that create perfect passive income? This TFSA dream team is the perfect portfolio just waiting to happen.

Read more »

analyze data
Dividend Stocks

Is Canadian Tire Stock a Buy for its 4.4% Dividend Yield?

Canadian Tire may have a current dividend yield of 4.4%, but that's not the only reason to buy the high-quality…

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

How to Use Your TFSA to Make $5,985/Year in Tax-Free Income

Investing in First National Financial (TSX:FN) stock could produce $5,985/year in tax-free passive income.

Read more »