Osisko Pursues Clearer Path: Better Late Than Never
Source: Adrian Day 12/20/2023
Several resource companies reported good news this past week, much of it long anticipated but welcome all the same. After the run-up in stock prices this month with the increase in the gold price and following the news, Global Analyst Adrian Day shares his recommendations.
Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE) sold its entire block in Osisko Mining, one of its numerous offspring, for $132 million, keeping its royalty on Mining’s projects. The shares were sold at $2.63, less than the $3-plus at which they traded for most of the year. The sale is a major positive step.
First, the proceeds immediately paid down some of Osisko’s credit facility, taking it under $200 million; the company ended the last quarter with $71 million in cash. The company also renewed its buy-back program giving it authorization to buy approximately 5% of the shares.
Secondly, the move, following the departure of founder Sean Roosen as chairman, is another step towards separating OR from its various offshoots, turning it into a pure royalty company and improving governance. It is not a secret that former CEO Sandeep Singh had pushed for these moves but was unceremoniously fired in July for his pains.
One might ask, if not, then why now? Some have suggested that OR is cleaning itself up for sale, with Franco as the most commonly named purchaser. Franco certainly would not be interested in buying shares in Osisko Mining and the other equity positions, particularly at more than twice NAV!
Pressure Likely Caused Step-up in Revised Strategy
More likely, after Mr. Singh was fired, there was increased pressure on the board from institutional investors to do their job and improve governance. Mr. Roosen is also CEO of Osisko Development (ODV), which is just over 39% owned by OR. The potential for conflict is very obvious. We expect to see a reduction in the ownership in ODV next year.
When Mr. Singh originally spun out ODV at the end of 2020, OR owned 88% of ODV, which it steadily reduced over the following 2 ½ years. In addition to Osisko Mining and Osisko Development, OR holds smaller stakes in Osisko Metals and other spin-offs. The stock rallied on this news, though I will note that the shares continued to trade below the level at which they traded when Mr. Singh departed.
Osisko has not only a cornerstone asset in its Malartic royalty but also a very solid pipeline. If the structure can be cleaned up and simplified, it will make Osisko an attractive intermediate royalty company. When new CEO Jason Attew starts next month — I look forward to meeting with him — we shall have a clearer idea of the strategy going forward, though recent steps indicate what that is.
Given the rally since mid-November, we are holding for now.
More Production and Lower Costs for Barrick
Barrick Gold Corp. (ABX:TSX; GOLD:NYSE) received two items of good news last week. First, it finally received approval from the Bureau of Land Management to start the Goldrush underground project, part of the Cortez complex in the Nevada Gold Mines joint venture with Newmont. The mine will start production next year, ramping up to 400,000 ounces per year by 2028.
Second, it announced the restart of the Porgera mine in Papua New Guinea after long negotiations with various local groups. Production will resume next month. Barrick, the operator, will receive 24.5% of the cash flow from the mine, which has been suspended since 2020. Barrick is looking at average annual production of over 650,000 ounces per year (on a 100% basis) over a 20-year mine life, with average All-In Sustaining Costs of a very low $700-$900.
Separately, Barrick was named Employer of the Year by the Association of Tanzania Employees, even as allegations for global NGOs of mistreatment of villagers continue. The Goldrush and Porgera news will help boost Barrick’s production in coming years, as it has failed to meet production guidance last. They will also help reduce overall company costs. With a strong balance sheet, visionary management, a suite of world-class mines, and a strong pipeline, Barrick is one to own.
After the recent run-up, we are holding for now.
Breather for Vista With Royalty Agreement
Vista Gold Corp. (VGZ:NYSE.MKT; VGZ:TSX) has sold a 1% gross royalty on its Mt Todd mine for $20 million, with the initial $3 million to be received later this month and a further $7 million once the royalty has received Australian approval. The last $10 million will be paid following the commencement of a drilling program.
The deal obviates the risk of near-term equity financing for Vista. However, the fact that half of the payment is contingent upon a new exploration program suggests that Vista is planning to drill to expand the deposit and undertake an updated Feasibility Study, which, as outlined, could take about $6 million and more than a year to complete.
It further implies that there is no buyer waiting in the wings for an imminent purchase. Removing the threat of an imminent equity raise is very positive, gives Vista breathing room, and allows it to continue to be patient in driving the best deal for Mt. Todd. The market cap of $52 million significantly undervalues the project. But it seems clearer than ever that patience is required. I shall be talking with CEO Fred Earnest after the holidays and hope to have more insight at that time.
Hold.
Fortuna Sees Exciting Exploration Upside at Many Projects
Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) provided an exploration update, with strong results at its newest mine, Séguéla that indicate the potential for underground mining, as well as for regional mining. The recently acquired Diamba Sud project in Senegal extended mineralization with “very encouraging” results, while at San Jose in Mexico, drilling continued to define the recently discovered Yessi vein, with strong results including 1,431 g/t silver equivalent over 1.1 meters.
The drilling aims to help with understanding the regional structure and looks for near-mine targets for additional exploration. Fortuna, as discussed previously, has turned the corner with solid operational results at all its mines, low costs, and steady cash flow to cut debt. This is one to own in the upcoming bull market as it gets revalued.
For now, however, we are holding.
Franco Would Gain in Likely Arbitration Award
Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) will benefit from any arbitration award that First Quantum, owner of the shuttered Cobre Panama mine, may receive. Last month, the government ordered the mine to close after the Supreme Court ruled its contract unconstitutional on health and environmental concerns.
Brokerage firm Canaccord held an analyst call on the arbitration procedure from which much of this information is derived. First Quantum has now initiated arbitration in Panama and in two separate international forums. The International Chamber of Commerce in Paris judges under international law, and decisions are typically received in about one-and-a-half years. The second would be at the World Bank in Washington under the Canada-Panama Free Trade Agreement, with decisions based on whether the investor received “fair and equitable” treatment, a lower standard, but decisions usually take over three years.
An award would be based on the net present value of the mine, including care and maintenance costs and consideration for loss or market cap. FrancoNevada would share in any award on a pro-rata NAV basis. There would still remain the issue of actually collecting the award, of course.
Franco, a blue-chip in the gold mining sector with conservative management, a solid balance sheet, and a deep pipeline, is a Strong Buy.
BEST BUYS this week include Nestle SA (NESN:VX; NSRGY:OTC), Altius Minerals Corp. (ALS:TSX.V), Metalla Royalty & Streaming Ltd. (MTA:TSX.V; MTA:NYSE American), Midland Exploration Inc. (MD:TSX.V), Lara Exploration Ltd. (LRA:TSX.V), and Orogen Royalties Inc. (OGN:TSX.V).
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Important Disclosures:
- As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of [Osisko Gold Royalties Ltd., Fortuna Silver Mines Inc., Franco-Nevada Corp., Altius Minerals Corp., Metalla Royalty & Streaming, Midland Exploration Inc., Lara Exploration Ltd., and Orogen Royalties Inc.].
- [Adrian Day]: I, or members of my immediate household or family, own securities of: [All]. My company has a financial relationship with [All]. I determined which companies would be included in this article based on my research and understanding of the sector.
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Adrian Day Disclosures
Adrian Day’s Global Analyst is distributed for $990 per year by Investment Consultants International, Ltd., P.O. Box 6644, Annapolis, MD 21401. (410) 224-8885. www.AdrianDayGlobalAnalyst.com. Publisher: Adrian Day. Owner: Investment Consultants International, Ltd. Staff may have positions in securities discussed herein. Adrian Day is also President of Global Strategic Management (GSM), a registered investment advisor, and a separate company from this service. In his capacity as GSM president, Adrian Day may be buying or selling for clients securities recommended herein concurrently, before or after recommendations herein, and may be acting for clients in a manner contrary to recommendations herein. This is not a solicitation for GSM. Views herein are the editor’s opinion and not fact. All information is believed to be correct, but its accuracy cannot be guaranteed. The owner and editor are not responsible for errors and omissions. © 2023. Adrian Day’s Global Analyst. Information and advice herein are intended purely for the subscriber’s own account. Under no circumstances may any part of a Global Analyst e-mail be copied or distributed without prior written permission of the editor. Given the nature of this service, we will pursue any violations aggressively.
( Companies Mentioned: FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE,
FNV:TSX; FNV:NYSE,
OR:TSX; OR:NYSE,
VGZ:NYSE.MKT; VGZ:TSX,
)
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