Osisko Gold Royalties Ltd

Osisko Gold Royalties Ltd (TSX: OR) is a Canada-based intermediate precious metal royalty company. The Company holds a North American focused portfolio of over 140 royalties, streams and precious metal offtakes.

Key highlights 

• Higher production guidance: The company’s asset base is performing well and is supported by several positive developments, including reaching a milestone on the underground Odyssey project that would increase production from its flagship asset Canadian Malartic. The company raised the production guidance on the back of all these factors, which would be in the range of 78K-82K GEO with a 97% cash operating margin in 2021.

Source: Company

• Earned record revenues and cash flows from operating activities: For FY 2020, the company reported sales of 66,113 ounces of gold equivalent and surpassed its revised outlook of 63,500 - 65,500 (GEO). Furthermore, this helped the company to achieve a record revenue from royalties and flows of CAD 156.6 million, against CAD140.1 million in FY2019, and cash flow from operating activities of CAD 108.0 million, which increased by 18% compared to FY2019.

Source: Company 

• Better than industry margin profile:The group outperformed the industry margin profile, which is a key positive. The group reported EBITDA margin, operating margin, and a net margin of 53.8%, 15.8% and 7.6%, respectively, which was higher than the industry median of 32.1%, 8.6% and 3.3%. 

Financial overview of FY 2020

Source: Company 

• For FY 2020, the company posted revenues of CAD 213.63 million, as compared to CAD 392.60 million in the previous corresponding period (pcp). The lower gold production was partially offset by higher realized gold price of CAD 2,373/oz Vs CAD 1,821/oz in 2019.

• Gross profit stood at CAD 104.33 million in FY2020, as compared to CAD 82.79 million in pcp. The rise in gross profit was primarily due to lower cost of sales.

• The company reported operating income of CAD 41.7 million, as compared to a loss of CAD 183.23 million in pcp. The improvement was primarily due to lower impairment of assets, against FY2019. 

• Net earnings attributable to shareholders stood at CAD 16.88 million for FY2020, against a loss of CAD 234.20 million in 2019. 

Risks associated with investment

The Company’s financial performance is mostly dependent on the price of gold, which directly affects their profitability and cash flow. Any drawdown in the gold prices would impact the group’s performance.

Valuation Methodology (Illustrative): Price to Cash Flow 

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The Company witnessed an uptrend in GEOs and further look forward for growth in 2021. The group reported an industry-beating EBITDA margin and operating margins, which indicates operational efficiency. Moreover, the group reported cash flow from operating activities of CAD108.0 million, which increased by 18% compared to FY2019. The Company has a diversified portfolio of 17 producing assets (majorly Gold) and is partnered with high-quality operators. Moreover, most partnered groups have reported the restart of their operations and additions of new mines under their portfolio, which indicates improved royalties in the coming quarters. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of CAD 13.11 on March 4, 2021. We have considered Franco-Nevada Corp, Royal Gold Inc, Nomad Royalty Company Ltd, etc as the peer group for the comparison.

1-Year Price Chart (as on March 4, 2021). Source: Refinitiv (Thomson Reuters)

Wesdome Gold Mines Ltd

Wesdome Gold Mines Ltd (TSX: WDO) is a gold producer engaged in mining-related activities including exploration, processing, and reclamation. The company produces gold at the Eagle River Complex located near Wawa, Ontario from the Eagle River Underground and Mishi Open Pit gold mines.

Key Highlights 

• Monetizing “Moss Lake Project”: Recently, the company entered into a definitive purchase agreement with Goldshore Resources Inc. (“Goldshore”) to monetize its Moss Lake Project located in Ontario, Canada. The group would receive CAD 57 million from this deal and the Closing of this transaction is expected to occur in early Q2 2021.

• Robust preliminary numbers for FY2020: The management shared the preliminary numbers for FY2020, where the company clocked revenue from gold sales at CAD 215.3 million, a 31% increase over 2019 at an average realized sale price of CAD 2,360 per ounce, against CAD 1,853 in 2019. Moreover, the production from the Eagle River Complex in Q4 2020 totalled 20,006 ounces of gold, putting full year 2020 production at 90,278 ounces, meeting the low-end of 2020 production guidance.

• Outlook for 2021:For 2021, the company sets the production guidance at 92,000 - 105,000 ounces at Eagle River, and 15,000 - 25,000 ounces at Kiena. The company is also undertaking the largest drilling program in its history. Moreover, the group is now turning its attention to a regional focus while maintaining aggressiveness in mine exploration.

Source: Company

• Debt-free entity:The company has a strong balance sheet with a zero-debt component. Despite a capital-intensive business, the company maintains a zero-debt profile, which is commendable and reflects the operational resiliency and prudent management. As of September 30, 2020, the company has a cash balance of CAD 74 million with working capital of CAD 59.2 million compared to CAD 32.6 million on December 31, 2019. 

• Event update: The company will release its fourth quarter and full year 2020 financial results after market close on March 10, 2021. 

Financial overview of Q3 2020 (expressed in thousands of Canadian dollars)

Source: Company

• In Q3 2020, the company’s revenue increased by 20% to CAD 55 million against CAD 46 million in the previous corresponding period. The increase in revenues was primarily due to a higher average realized price of CAD 2,532 per ounce than CAD 1,957 in Q3 2019.
• The company reported a net income of CAD 14.6 million in Q3 2020 against CAD 12.4 million in the previous corresponding period. Net income increased mainly due to higher average realized price of gold, partially offset by Covid-19 costs, increased interest expense and other expenses.

Risks associated with investment

The Company’s financial performance is mostly dependent on the gold price, which directly affects its profitability, margins, and cash flows. The price of gold is subject to volatility. It is affected by various factors, such as the strength of the US dollar, Interest rates, Inflation rates, demand and supply, all beyond the Company’s control.

Valuation Methodology (Illustrative): Price to Cash Flow

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation

Q3 2020, was a transformational quarter for the Company as it came out with the robust performance. The Company is optimistic and shared the production guidance of 92,000 – 105,000 ounces of gold for FY2021. Furthermore, we believe that average realized gold prices per ounce would continue to expand, which would lead to margin expansions. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of 8.17 on March 4, 2021. We have considered Osisko Gold Royalties Ltd, K92 Mining Inc, McEwen Mining Inc, etc as the peer group for the comparison.

1-Year Price Chart (as on March 4, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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