Osisko Gold Royalties (OR) has moved further away from the pure royalty model with the acquisition of Bakerville Gold Mines for equity valued (at the time of the bid) at C$338 million, explains resources sector expert Adrian Day, editor of the industry leading Global Analyst.
Based on the August PEA on Bakerville’s Cariboo project in British Columbia, this is an acquisition price of 0.6 times net present value. Osisko, which already held 33% of Bakerville, says in intends to develop the project and then monetize it “ultimately” when the junior market improves.
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At the same time, Osisko announced it had formed the North Spirit Discovery Group, intended to develop and finance projects in Canada, in conjunction with joint-venture partners or private equity. Few details were revealed.
Though the Bakerville acquisition is accretive to net assets — it does reduce cash flow per share — more importantly to us, it moves Osisko away from the pure royalty model. It has long been a hybrid with its increasingly important “accelerator model”.
But rather than financing a junior in exchange for royalties, it increasingly seems to be using royalty revenue to acquire and develop projects. It is fair to say that CEO Sean Roosen is a mine builder at heart; he and his team built Canadian Malartic, one of the largest mines in the country.
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They lost the mine after a hostile take-over fight initiated by Goldcorp, eventually selling to Agnico and Yamana in exchange for an attractive royalty, the foundation of Osisko Gold Royalties. We agree with Roosen when he says that there are tremendous opportunities in Canada and that the industry has underspent on exploration, drilling and development.
Osisko is a dynamic company, with two foundational cash-flowing royalties (Malartic and Eleonore), other cash-flowing assets, and an increasing pipeline; it has a strong balance sheet, and aggressive and technically strong management. But it carries significantly higher risk than a traditional royalty company.
So the opportunistic acquisition of Bakerville Gold Mines may be a good deal, it adds to the risk at a royalty company that was already a higher risk company than its peers.
Because of this, it has traded at lower multiples than other royalty companies. Now the risk is increased, and so too is the justifiable discount at which it should trade.
In the days after the announcement of the acquisition, the stock dropped from $12.25 to $9.70. The continued weakness is overdone, and Osisko can be bought here.
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