Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE, 10.64) remains the most undervalued and prospective of the royalty companies on our list. Of course, the valuation gap to its large royalty peers is partly justified, since Osisko is the newest of the "Big Four," with fewer assets and less diversification. Its assets, however, particularly its cash-flowing assets, are high-quality in a safe jurisdiction (Canada), and it is working hard to add more royalties and close the gap.
New silver revenue
At the end of February, Osisko acquired a cash-flowing stream, on the long-life Gibraltar mine. A copper mine in British Columbia, Gibraltar has a 23-year plus life. With a US$33 million upfront payment, Osisko has the right to buy 75%-owner Taseko's share of silver production, for future payments of $2.75 per ounce. The contract is backdated to January 1.
This is Osisko's first silver stream. It maintains the company's precious metals profile (with approximately 94% of revenue from gold) and politically safe profile (100% of cash-flowing assets are in Canada). Mildly accretive on an asset basis, the stream will boost cash flow by almost 10% through 2019. We believe the stream was acquired at a very good price.
After this transaction, the company has about CA$450 million in cash, which with its undrawn line of credit, gives it about CA$650 million in funding capacity. (This also follows the sale of its nearly 10% interest in Labrador Iron Ore Royalty, for CA$113 million.) This gives it more cash than any other royalty company, though less available credit than Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) and Silver Wheaton Corp. (SLW:TSX; SLW:NYSE).
What's next?
There is no secret that Osisko is looking for a large cash-flowing stream. Such streams, however, are subject to intense competition, and the returns—given the long lives—tend to be relatively modest, certainly at the prevailing commodity price. But such an acquisition, in my view, would give the company a greater profile, moving it clearer to the "big boys' league," and help close the valuation gap.
In the meantime, Osisko is building its strong pipeline with high optionality from its unique business model investing in smaller exploration companies, both directly and through Osisko Mines. Osisko is a buy, currently up to $10.75.
streetwisereports.com |
