Osisko Gold Royalties Ltd

Moat: 1/5

Understandability: 2/5

Balance Sheet Health: 4/5

Osisko Gold Royalties Ltd. (OR) is a Canadian-based company focused on acquiring and managing gold and silver royalties and streams, providing it with a diversified portfolio of precious metal assets.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Osisko Gold Royalties is not a traditional mining company, rather, it operates in the royalty and streaming segment of the precious metals industry. This means that instead of directly operating mines, they acquire the rights to a portion of the metals produced from mining operations run by other companies. These rights come in two main forms: royalties and streams.

  • Royalties: A royalty gives Osisko the right to receive a percentage of the revenues (or sometimes production) from a mine’s output, without the operating cost and risk.
  • Streams: A stream provides Osisko the right to purchase a portion of a mine’s production at a pre-set price, lower than market value.

This business model offers several advantages:

  • Lower Operating Risk: Because Osisko does not operate mines, the risks associated with mine construction, development, and operation are minimized, along with reduced operating cost and capex.
  • Diversification: Osisko’s portfolio is typically spread across many different mines operated by various companies and located in a range of regions, thus minimizing exposure to risk from single mine issues.
  • Upside Potential: Because their share of metal production comes with a lower cost than market prices and a fixed share of revenue in the case of royalties, they can benefit from increased metal prices.

Revenue Distribution and Trends in the Industry:

Osisko’s revenues primarily consist of payments from its royalty and streaming assets, which are directly tied to the price and production output of the underlying precious metal mines. These revenue streams come from geographically diverse jurisdictions like Canada, Mexico, the US, etc.

In the current market, several trends are influencing the royalty and streaming industry:

  • Demand and Volatility for Gold: Historically, investors have sought safe harbor in gold during times of uncertainty. Consequently, the demand and volatility of gold prices has a direct effect on the profitability of royalty and streaming companies like Osisko.
  • Interest Rates: Given the inverse relationship between interest rates and gold, rising rates can pressure gold prices, while falling rates can provide a boon.
  • Geopolitical Instability: Global political conflicts and economic uncertainty typically drive investors towards precious metals, leading to increases in price, which is beneficial for OR.
  • ESG: Environmental, Social, and Governance (ESG) practices have become increasingly important in investment decisions. As a result, companies involved in projects with low ESG standards may face increasing difficulty in access to capital, leading to potentially lower prices or slower development.

Margins and Competitive Landscape:

Osisko’s gross margins are very high because there are no cost of goods sold. Instead the cost is the amortization of the value paid for the stream. Net margins can be variable and can also be influenced by non-recurring gains and losses from the sale of their assets. As such, the metrics of greatest focus is free cash flow. The competitive landscape for royalty and streaming companies includes a handful of other large, established players and a wide variety of smaller ones. This competitive landscape does create challenges but with their assets being tied to the underlying mines that have moats due to their location and other factors, there is limited direct competition.

  • What Makes the Company Different: Osisko differentiates itself through its focus on precious metals royalties and streams that have been selected using rigorous analysis of the assets. They also seem to favor smaller transactions rather than large ones, which they describe as “surgical” acquisitions. Management also has a strong focus on its Canadian assets which is also a differentiator. Moreover, unlike a mining company which is under constant pressure to develop more assets, OR has more flexibility to allocate capital where management finds the best risk adjusted return (be it from more acquisitions, paying down debt, or rewarding shareholders).

Financial Analysis:

Let’s look at Osisko’s financials in depth, to understand the robustness of its business model and its financial stability. All numbers are in Canadian dollars unless otherwise stated.

Recent Financial Performance: The company has recently reported Q1 results which show strong performance. Revenues for the company grew by 20% year over year to $43.3 million, while its cash flow from operations increased by 27% to 32.4 million. The company’s adjusted earnings per share also grew from 9 cents to 13 cents and this earnings growth was mainly fueled by increased metal prices. The average realized price of gold during the quarter for them was $2,003 per ounce (as compared to $1,955 per ounce during the previous quarter) and the average realized price for silver was $24.15 per ounce. Management said they are focused on creating value and not necessarily on increasing volumes.

  • Revenues: Osisko’s revenues depend heavily on prices of the underlying precious metals. In 2023, total revenues were 141 million as compared to 185 million in 2022. This drop was mainly due to decreasing gold prices. Even though total volumes of gold received remained mostly flat around 70K ounces, the average realized price fell from $1,806 per ounce to $1,456 per ounce.
  • Margins: Their gross margins are very high, consistently above 80%, given the low cost structure of the business, while Net Profit Margin are consistently fluctuating. As such, the key focus is on the company’s cash flow margin. In Q1-24, the operating cash flow as a percentage of total revenues was around 75%.
  • Net Income: In 2023, the company’s net income was $48 million compared to $135 million in the previous year. This decrease was mainly due to the drop in prices of gold and silver, affecting the gross margin of the company. Net income for a streaming and royalty company can be volatile as the price of the underlying asset can fluctuate greatly.
  • Cash Flow: Osisko’s cash flow from operations was $125 million in 2023 as compared to $176 million in 2022. Free Cash Flow, which excludes capital expenditures, was $122 million in 2023 and $174 million in 2022. Operating cash flow has remained strong for the most part, even when income declined, showing the operational strength of the business model.
  • Debt: Osisko had $646 million in long term debt at the end of Q1 2024. Their debt to equity ratio has consistently hovered around 40%. This has been achieved by active management of debt, including paying it down using cash flows from the operations and using low coupon debt for debt issuance, thus minimizing the impact of interest rates on the business.
  • Equity: As of Q1 2024, their total equity was valued at $1,552 million. Equity is not only generated by new share issuances, but can also be achieved through retaining the income within the company.

Moat:

Osisko Gold Royalties lacks a wide moat, which is why we rate it a 1 / 5. Although they have certain advantages, they do not possess a clearly defined durable competitive advantage:

  • Intangible Assets (Low): While they may have some brand recognition, this doesn’t translate into a pricing power. Moreover, their assets don’t have patents or anything that sets them apart from the next mining company.
  • Switching Costs (Low): Mining companies can easily sell their output to other royalty companies. There is also no lock-in mechanism to make mining companies stick with them.
  • Network Effects (Low): While the royalty market does have aspects of a two-sided market that connects companies who own mines and investors, these network effects are small and do not provide any real advantage.
  • Cost Advantages (Low): While they don’t have costs associated with operations, they are still competing with other such royalty companies. Cost advantage therefore doesn’t exist.

While the royalty and streaming business model has inherent strengths, their main advantage is being in a good industry with highly profitable assets that the company has a claim on and nothing else. The actual business model itself doesn’t create a moat.

Risks and Business Resilience:

The main risks to the business’s long-term value are:

  • Dependence on Commodity Prices: As the company’s profitability and cash flows are closely tied to the price of gold and silver, significant declines can drastically affect financial results. This can be mitigated by having a diversified portfolio across multiple assets and countries, however, cannot be eliminated entirely.
  • Underlying Mine Performance: If the output of a mine underperforming, it may create challenges for OR as it will reduce revenues, or if an agreement has a threshold it may require more investment or may make the asset not viable.
  • Political and Regulatory Changes: Changes in regulations in jurisdictions where mines are located or the company is headquartered may significantly affect profitability.
  • Acquisition Risk: Because of the competitive landscape in the royalty and streaming market, companies have to make acquisitions. In order to create value, the acquisition must be made at the right price and with a clear roadmap to enhance the asset. High acquisition prices may negatively impact the long term returns for shareholders.
  • Volatility of Emerging Markets: The company also has operations in emerging market and may face disruption because of geopolitical events, economic downturns, or a sudden change in laws.
  • Taxation: Like all global companies, they face the impact of higher global tax rates, as well as potential taxation that their government has not yet recognized.
  • Interest Rate Risk: While the company has a fixed coupon debt, changes in interest rate may affect their financing and cost of capital, especially when there are any near term large maturities.

Osisko is able to withstand short-term problems very well due to their business model, with low operating costs and the fact that they don’t actually run the mines. Also, the diversity within their portfolio helps to offset challenges in individual mines. However, due to the lack of a moat, they may struggle more than others if faced with intense competition, large or frequent declines in commodity prices, or bad decisions on acquisitions.

Understandability:

We rate the company’s understandability as a 2 / 5. While the general concept of royalty and streaming is relatively straightforward, understanding the company and valuing its business requires looking at a few specialized metrics like ROIC with and without goodwill, working through complex accounting statements, and having a basic understanding of macroeconomics. There are a lot of nuances in valuing and understanding its business.

Balance Sheet Health:

We rate their balance sheet as a 4 / 5. The company has a clear focus on managing their debt, which they have done by paying it down and securing low-coupon debt. They seem to have significant current assets as well as low operational and overhead expenses, making them relatively robust to deal with operational downturns. Their balance sheet is healthy as it carries a low risk of debt and their book value has consistently grown over the years.

I hope this has been helpful for you in evaluating the business of Osisko Gold Royalties.