Roosen touts ‘extra punch’
Osisko Gold Royalties brings technical know-how with its cash
The mining royalty space already has some serious players for investors to choose from, but Sean Roosen is convinced his new offering stands out from the pack.
“We’ve got a couple of areas where we think we bring a little extra punch to the table,” chief executive of Osisko Gold Royalties Ltd. said in an interview.
The stock started trading last month and was well-received from the start, opening above the implied valuation at launch and remaining there ever since. The company does not even have a website yet (apart from a splash page), but has generated plenty of investor interest.
That is not surprising. The royalty firm was spun out of this year’s $3.7-billion takeover of Osisko Mining Corp., which was one of the mining sector’s most successful companies of the past decade. The team at Osisko Mining, led by Mr. Roosen, found and built the massive Canadian Malartic mine in Quebec, a world-class gold mine.
Nearly all the key players behind Osisko Mining are working together again at the royalty firm, including Mr. Roosen, John Burzynski (senior vice-president) and Brian Coates
It’s a one-trick pony right now
(president). They have a dedicated investor following that made money with Osisko Mining and are keen to do it again.
Osisko Royalties was put in a good position to succeed: It has $157-million of cash, a 5% royalty on the Canadian Malartic mine, a 2% royalty on other properties that belonged to Osisko Mining (including promising assets in Ontario’s Kirkland Lake camp), and 9,000 square kilometres of exploration ground in Mexico that could be spun out. A dividend policy is in the works.
For all that, the company has a market value of $750-million. By almost any metric, it has a premium valuation compared to traditional mining companies. That fact is not surprising, because every gold royalty company has a premium valuation.
Put simply, the mining royalty firms (Franco-Nevada Corp., Silver Wheaton Corp. and Royal Gold Inc.) have thrived while most of the mining sector suffered over the past couple of years. That is very much by design. These companies move into action when a downturn hits, supplying capital to needy miners struggling to find it anywhere else. The royalty firms have plenty of negotiating power in these scenarios, and by acquiring royalties and metal streams on promising projects, they get cash flow from the mines without any of the operating risk.
But the question is how a new player like Osisko fits into this space. Franco, Silver Wheaton and Royal Gold dominate the market, and Sandstorm Gold Ltd. has built itself into a promising fourth player. There is a limited supply of good deals for these companies to chase.
Osisko’s valuation is below market leaders such as Franco at this point, according to portfolio manager Dennis da Silva of Middlefield Capital. That is because it only has the single Canadian Malartic royalty that generates cash. It needs to add more of them to catch up, he said.
“It’s a one-trick pony right now, but it’s one nice pony,” he said.
Mr. Roosen said his strategy is to bring more to the table than competitors. In addition to just providing capital, he may bring Osisko Mining’s proven technical team “off the bench” to do more hands-on work on projects Osisko Royalties invests in.
“There are institutional investors who are looking to participate with somebody who has technical oversight. So that’s where we might be a little different than the other guys,” he said. “It’s a niche we’re trying to work on.”
The other royalty companies have strong technical teams as well. But Mr. Roosen thinks his team has developed a unique skill set from building Canadian Malartic. If it can deploy that in an effective way, he thinks Osisko will be a more attractive source of capital to some miners than other royalty firms.
“Canadian Malartic ended up being one of the top three assets in the gold space,” he said. “And it was built in-house by us, not by a Hatch or SNC-Lavalin. So I think we’re well recognized that we have a little extra something that you can’t get when you’re handing out contracts [to construction firms].”
Finding deals will not be a problem. Mr. Roosen’s phone is ringing off the hook with mining CEOs that are desperate for cash (much like the other royalty firms). His team did due diligence on more than 2,400 exploration companies back at Osisko Mining, so it does not take him long to identify which companies have promise.
Because of Osisko Mining’s success, Mr. Roosen said he has institutional investors willing to co-invest with him if he finds good opportunities. That means Osisko could be involved in transactions much bigger than its market value would suggest, he said.
Osisko Royalties is unlikely to sit on its cash pile too long. The company needs to do deals in order to diversify and set itself up as a serious competitor to the sector’s big names. Mr. Roosen knows there are promising deals out there, and he won’t hesitate to act quickly if he finds one.
But don’t expect the new company to blow its brains out with too many deals. The Canadian Malartic royalty, which could generate about $35-million a year a current prices, has so much value that Mr. Roosen does not want to dilute it too much. He would rather concentrate on a few assets with high value than take on the sort of vast portfolio that Franco-Nevada has.
“If anything, we’re feeling a lot of push by institutions who would like to see us get bigger quickly.”