Gold stocks have been on their not-untypical first-quarter ride, rallying 33% from the mid-December lows before giving back most of that move. The decline in mining circles is known as the “PDAC curse,” since it occurs right before the world’s largest mining conference in Toronto. This year’s show, which attracted over 24,000 attendees, up a little from last year though still down some 20% from 2012’s record, had an air of growing optimism, among both companies and attendees, though far from mania. One good sign: many exploration companies noted that the senior companies seemed more interested in doing deals than they had been the last few years.
Osisko Gold Royalties Ltd. (OR) 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) and Silver Wheaton Corp. (SLW).
