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 

• Preliminary Q1 2021 numbers: Recently, the management shared its preliminary Q1 2021 numbers, where they recorded preliminary revenues of CAD 66.9 million, with a cash operating margin of approximately CAD 46.5 million. The group received approximately 19,960 attributable gold equivalent ounces “GEOs” in Q1 2021.

• Higher production guidance: The company’s asset base is performing well and is supported by several recent positive developments, including reaching a milestone on the underground Odyssey project that will increase production from its flagship asset Canadian Malartic for decades. The company raised its 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 of CAD 156.6 million, against CAD 140.1 million in FY2019, and cash flow from operating activities of CAD 108.0 million, which increased by 18% compared to FY2019.

Source: Company 

• Repaid convertible debentures: On February 12, 2021, the company repaid the convertible debenture of CAD 50 million and drew the same amount from its revolving credit facility, lowering the amount of interest payable by approximately 1.5% per annum. Furthermore, the group holds CAD 105.1 million in cash and CAD 386.4 million in undrawn facilities. 

• Industry beating margin profile:The group reported strong operational efficiency during FY 2020, which stood helped the company in outperforming the industry median, which is a key positive.

Source: Refinitiv (Thomson Reuters)

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 its profitability and cash flow. Any drawdown in the gold prices would impact the group’s performance.

Valuation Methodology (Illustrative): EV to Sales 

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 to growing it 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 CAD 108.0 million, which increased by 18% compared to FY2019. The Company holds 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 new mines' additions 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 15.52 on May 03, 2021. We have considered Royal Gold Inc, Nomad Royalty Company Ltd, Wheaton Precious Metals Corp, etc as the peer group for the comparison.

1-Year Price Chart (as on May 03, 2021). Source: Refinitiv (Thomson Reuters)

Torex Gold Resources

Torex Gold Resources (TSX: TXG) Inc is an intermediate producer of gold and other precious metals, engaged in the exploration, development, and exploration of its wholly owned Morelos Gold Property. 

Key Highlights 

• FY2021 operational outlook: On the back of continuous pattern of consistent and reliable operational performance, the gold production in 2021 is expected to be between 430,000 - 470,000 ounces. Capital expenditures would be in a range of USD70 - USD85 million, of which USD40 million to USD45 million is related to capitalized waste.

Source: Company 

• Improving cash flows: Through agile management and operational efficiency, the company increased its operating cash flow and free cash flow. In FY 2020, the group generated record operating cash flows of USD 342 million and a free cash flow of USD 168 million. 

Source: Company 

• Healthy operating matrix: The company deliveredrecord financial performance in FY2020, driven by high gold price and operational execution. The company produced 430,484 ounces in 2020, surpassing the high end of its revised guidance and sold 437,310 ounces at an average realized gold price of USD 1,771/oz, which resulted in a record total revenue of USD 789 million, increased by 23% over 2019. EBITDA recorded by the company stood at USD 413.0 million for the same period.

Source: Company 

• Strengthening balance sheet: The on-going robust performance of the Company’s operations and continuous improvement has strengthened its balance sheet. In 2020, the group madedebt repayments of USD 230.0 million. Recently, the Company has repaid the remaining USD 40 million of debt in relation to the 2019 Debt Facility and is now debt free.

Source: Company 

Financial overview of FY2020

Source: Company 

• In FY 2020, the Company posted revenue of USD 789.2 million, increasing by 23.2% compared to USD 640.8 million in FY2019. The increase in revenue was primarily due to higher average realized prices per ounce, which was USD1,771 in 2020 against USD 1,408 in 2019.

• Cost of sales stood at USD 532 million in 2020, compared to USD 480 million in the pcp, primarily due to higher depreciation and amortization.

• The Company posted a net income of USD 109 million, increased by 53.1% against USD 71.2 million in the pcp, primarily due to higher average realized gold prices, partially offset by higher income tax expense and higher other expenses. 

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

FY2020 was a transformational year for the company as it came out with robust performance, a strong cash position and almost negligible debt. Higher gold realization price is helping the company to drive the revenues as well as the cash flows. All these factors give a glimpse of the strong foundations led by the company. Furthermore, the management expects the gold production in 2021 to be between 430,000 - 470,000 ounces. The group also became a debt free entity after repaying early the remaining USD 40 million of debt, which is notable. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of CAD 16.00 on May 03, 2021. We have considered Dundee Precious Metals Inc, Endeavour Mining Corp as the peer group for the comparison.

1 Year Daily Price Chart (As on May 03, 2021) Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.