Adrian Day: Royalty Company’s New Game Plan Not Recognized By Market

Source: Adrian Day for Streetwise Reports   12/21/2020

Money manager Adrian Day provides updates on two of the large royalty companies in his portfolio, both rated as buys.

Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE) (11.69) completed the spinoff of its development assets in a new company Osisko Development (ODV:TSE). The links between the companies remain strong, with Sean Roosen chairman of both companies and OR holding 88% of the shares of ODV. However, it is clear that Mr. Roosen will be focused on ODV, building assets and getting mines into production.

In addition, OR intends to reduce its interest in ODV. It will not take part in future financings and will look to sell blocks to institutions who want significant holdings in ODV that could not reasonably be acquired in the market. That sounds like along slog, but CEO Sandeep Singh said the reduction in ownership “will probably happen faster than most people think,” adding he would like to get the holding down to 20% and eventually to zero. OR will continue to benefit from ODV’s assets through royalty interests.

Hybrid model to continue, pared down

It will also continue to pursue the “incubator model” in what he called “its pure form,” meaning OR would finance companies, obtain royalties and then look to sell down equity, but it will not be directly involved in the development of assets. This model, he admits, was a lot easier in a down market, so there may be only one or two deals a year going forward. In reality, notwithstanding the market perceptions and concern, this has been a very profitable exercise over the years.

Properties progress, with new milestones ahead

In the meantime, OR will benefit from the development of ODC’s properties. A new resource study on the Cariboo is expected in the first quarter, with a small satellite deposit starting production in the first quarter, and full operations by mid-2022. It is also expecting a first-quarter resource update on the Malartic underground, which the company expects to extend the life of the mine by another one to two decades. Osisko holds a very valuable net smelter royalty on the underground of between 3% and 5%, with 5% on the high-grade portion of the deposit.

Largely because of the relatively small reduction in Osisko’s position in ODV, the market is a little skeptical and the stock has not reacted in a strong way, though it has held up better than other large royalty companies since the late July peak in the market. It also has a better valuation. The price-to-NAV (net asset value), at 1.5x, is the lowest by far of the companies, and Osisko has just launched another share buyback program, of up to about 9% of the shares outstanding.

As Osisko executes on its goal to reduce its exposure to ODV, and as we receive resource reports on various projects, the market will begin to appreciate what the company is doing. There is some skepticism, but that is why the stock price is low and gives us our opportunity to buy.

Royal Remains Undervalued

Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX) (108.80) is essentially at its low point since late April. Given improvements in revenues, the valuations declined to below-average levels, and favorable on a comparison basis with other large royalties. In addition, it has arguably the most leverage of the big three; asset, not financial, leverage. It has been disciplined with its share count, issuing no equity since 2012.

The biggest negative to Royal is the revenue concentration, with the top three sources contributing 60% of total revenue, and particularly Mt. Milligan, which accounts for about

27% of the total. The company acknowledges this, and CEO William Heissenbuttel says “this is always a concern,” though in truth the concentration is less than Wheaton Precious Metals Corp.’s (WPM:TSX; WPM:NYSE), while the onset of new projects in the next couple of years will see it decline naturally. At the current level, Royal Gold is a buy.

Vista Gold Corp. (VGZ:NYSE.MKT; VGZ:TSX) (1.03) reported that recent drilling confirms the existence of higher-grade mineralization adjacent to the planned Batman pit at its Mt. Todd project in Australia, not only increasing overall resources but potentially changing the planned pit design. Buy.

Almaden Minerals Ltd. (AMM:TSX; AAU:NYSE) (0.69) reported a strange court ruling in a complex case against the Mexican government to which it has been attached, essentially preventing Almaden from giving up ground it no longer wants. The market reacted negatively, not because of the substance of the ruling as much as a sense that the company’s final permits may be delayed even further. Hold.

Top buys now,in addition to above, include Midland Exploration Inc. (MD:TSX.V) (0.81); Lara Exploration Ltd. (LRA:TSX.V) (0.65); Orogen Royalties Inc. (OGN:TSX.V) (0.305); and Barrick Gold Corp. (ABX:TSX; GOLD:NYSE) (22.87).

Originally posted on December 16, 2020.

Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is “Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks.”

Disclosure:
1) Adrian Day: I, or members of my immediate household or family, own securities of the following companies mentioned in this article: Osisko Royalties, Royal Gold, Vista Gold, Almaden Minerals, Midland Exploration, Lara Exploration, Orogen Royalties, Barrick. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. Funds controlled by Adrian Day Asset Management hold shares of the following companies mentioned in this article: All. I determined which companies would be included in this article based on my research and understanding of the sector.
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