Adrian Day - Thu, Jun 8, 2017

Osisko Gold Acquistion Offers Strong Growth

Adrian DayOsisko Gold Royalties announced the acquisition of a portfolio of royalties and streams from Orion Mine Finance earlier this week. Fund manager Adrian Day says the numbers clearly show the value of the transaction.

Gold Bar

In my recent article on the Osisko Gold Royalties Ltd. (OR:TSX; OR:NYSE) acquisition of various royalties and streams, we discussed the immediately accretive increase in cash flow, and we discussed the great pipeline of exploration and developmental assets. Between the immediate and the longer-term optionality, however, is a well-defined increase in cash flow from planned production increases.

Strong growth baked in the cake

The graph shows the growth from both Osisko's existing assets and the new assets acquired from Orion, from 66 million gold equivalent ounces (GEOs) this year to 162 million by 2023. The contribution from the Pretium Resources Inc. (PVG:TSX; PVG:NYSE) stream is in dotted red lines; this stream can be bought back by Pretium by the end of next year. In all likelihood, the stream will be repurchased, adding another $119 million to Osisko's cash balance.

OR's Assets and Acquired Assets

Even without the contribution from the Pretium stream, however, Osisko's cash flow is forecast to grow by over 50% by 2020, far higher than the growth of other major royalty companies. (Of course, these companies may make acquisitions, which would also increase their cash flow growth.) The acquisition also increases Osisko's taxable cost basis on its assets, meaning it is unlikely to be in a taxable position until 2020. These graphs are from Osisko's presentation.

Consensus Cash Flow Growth 2017-2020

Again, in sum, Osisko has experienced management, a strong balance sheet, solid near-term and medium-term growth, and a deep pipeline of projects at various stages, and yet is trading at a discount to its peer group. We suspect we will be holding Osisko (which we first received from our Virginia shares) for a very long time.

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."

1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Osisko Gold Royalties. 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: Osisko Gold Royalties. I determined which companies would be included in this article based on my research and understanding of the sector.
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