Happy New Year’s Eve!
In my previous column, I predicted that the lagging gold market is offering the most promising opportunity of 2021.
And I said that I would be back here soon in order to tell you about one gold stock you can use to take advantage of that growing opportunity.
Today, I’m going to do just that.
But to get there, first I want you to think back to around a year and a half ago.
For most folks, June 11, 2019, was a date of no particular importance … but for the subscribers of Fry’s Investment Report, that day on the calendar deserves at least a sticky note.
Both of these stocks are gold royalty plays, rather than actual miners, and both of them have performed admirably since then — not only compared to the S&P 500 but also compared to their gold-stock peers.
Somewhat curiously, while these two gold-focused royalty companies were busy racking up their market-beating performances, the shares of the gold-focused royalty company I want to tell you about today were doing a whole lot of nothing. They’ve gained only around 18% since June 11, 2019.
This lagging performance is one reason I am now making this company my InvestorPlace.com Best Stock for 2020 contest pick. It is a lagging stock in a sector that has been lagging the overall market since August.
But over the coming months, I expect this stock to play catch-up to the rest of the gold sector as that sector also plays catch-up to the broad stock market …
A New Growth Phase Is Underway
However, before taking a closer look at Osisko Gold Royalties Ltd. (NYSE:OR), let’s briefly review two key terms: “streaming” and “royalty.”
Under a streaming arrangement, the company that provides financing receives the right to purchase at a set price some fixed percentage of the mining company’s future metal production.
In 2017, for example, Osisko struck a streaming deal to pay $33 million to Taseko Mines Ltd. (NYSEAMERICAN:TGB) for the right to purchase Taseko’s share of the first 5.9 million ounces of silver produced by the Gibraltar copper-silver mine in British Columbia, Canada. After reaching that threshold, Osisko will receive a smaller percentage of the silver production.
But importantly, Osisko won’t be paying market price for the silver it receives under the streaming deal. Instead, it will pay just $2.75 per ounce for it. In other words, Osisko acquired the right to purchase future silver production at an 88% discount to the current silver price.
That’s a streaming deal: Taseko gets a big check up-front, and Osisko gets many years of silver production at a big discount.
A royalty arrangement is slightly different. With those deals, the company that provides the financing receives a percentage of the mining company’s future production.
For example, last year Metalla gave Atlantic Gold Corp. $3 million in exchange for a 1% royalty on the company’s Fifteen Mile Stream gold project in Nova Scotia, Canada. The royalty covers all metals recovered from the project.
In other words, Metalla receives 1% of all the metal the mine produces.
Now let’s return to the investment case for Osisko …
The company is a midsized royalty and streaming company that holds a portfolio of 138 royalties, streams, and precious metal offtake agreements.
Fifteen additional assets are in various stages of development. Until recently, Osisko also owned direct interests in a few mining projects.
Year after year, the Montreal-based company has been growing its portfolio of streaming and royalty deals, which means it has been growing its “attributable production” of precious metals. Gold accounts for 70% of total production, while silver accounts for most of the rest.
For 2020 as a whole, Osisko expects to produce approximately 64,000 gold-equivalent ounces (GEOs) — about 46,000 from royalties and 17,000 from streams.
And as you can see from the chart below, Osisko’s GEOs had been trending steadily higher until recently. Production growth stalled a bit in 2019, and then dropped even more this year, due to the COVID pandemic.
But a new growth phase is underway. The company expects its annual gold equivalent production to double over the next three years to more than 140,000 ounces, based on prospective output that is already in the pipeline.
A doubling of production in three years could be enough of a catalyst to boost the stock price significantly. But that’s not the only possible catalyst.
In fact, there’s a brand-new one: Osisko just reinvented itself as a pure-play royalty and streaming company.
Although Osisko has always been a gold royalty company, it has also engaged directly in mining projects. This dual focus has meant that Osisko was neither fish nor fowl. It was neither a pure royalty company nor a pure mining company.
Generally speaking, gold stock investors want one or the other.
So Osisko gave investors what they wanted. In late November, the company finalized a corporate restructuring that divided its assets into two separate publicly traded companies.
Osisko Gold Royalties (OR) retained all 138 of its royalty and streaming assets but moved all of its mining projects into a new company called Osisko Development Corp. (RNGTD).
The new Osisko Development comes into the world with a pristine, debt-free balance sheet that includes about $78 million in cash and $90 million in publicly traded mining stocks. Altogether, Osisko management values this new company at $660 million.
For now, Osisko Gold Royalties will retain an 88% interest in Osisko Development, worth about $580 million. Based on that calculation, the rest of Osisko Gold would be valued at just $1.57 billion.
Thanks to this restructuring, Osisko Gold clarifies its identity as a pure-play royalty company. At the same time, Osisko Development becomes a new midtier mining company with an excellent growth profile.
By becoming a pure-play royalty company, Osisko’s stock could gain an upward “re-rating” that would value the company more in line with other stocks in the gold royalty and streaming sector.
For example, Osisko is currently trading at about half the valuation of Wheaton Precious Metals.
Perhaps Osisko deserves to trade at a discount to Wheaton, one of the premier stocks in the royalty sector. But a 50% discount seems too severe, based on comparative fundamentals.
So I expect this steep discount to narrow over the coming months.
Additionally, the new Osisko Development company could add to Osisko Gold’s investment appeal…
Osisko’s Many “Hidden” Assets
As a stand-alone mining company with a focused operating strategy, Osisko Development could “unlock” the value of the assets that have been somewhat hidden inside the “old Osisko.”
Over the next 12 months, Osisko Development is on track to boost its annual production from 0 to 100,000 GEOs, and then ramp up to 275,000 GEOs by 2023. If the company delivers that growth, investors will take notice.
Returning to Osisko Gold Royalties, the analyst consensus expects the company to double earnings per share to about $0.55 over the next two years.
At that level of profitability, the stock would be trading for 25 times earnings. But these estimates do not include any prospective boost from rising gold or silver prices.
Nor do these estimates anticipate any upside surprises from the ongoing exploration at Canadian Malartic. But upside surprises would not be a surprise at all.
The Malartic mine is Canada’s largest operating open-pit gold mine. But as the mine’s operators, Yamana and Agnico, advance the project from open-pit to underground mining, they are likely to increase the proven gold reserves by several million ounces.
Proven reserves at the project currently total about 5 million ounces. But preliminary drilling already indicates that the deeper underground deposits may contain at least 10 million additional ounces.
To be clear, these additional ounces are not yet proven; they are inferred. But at a prolific gold mine like Malartic, inferred ounces usually become proven eventually.
If Yamana and Agnico prove the additional millions of ounces they believe Malartic contains, the share prices of all three companies could pop on the news.
But Osisko’s market value is just one-third the size of Yamana’s and one-tenth the size of Agnico’s. So, favorable news could cause Osisko’s share price to do a lot more popping.
Bottom line: A variety of favorable catalysts could combine to boost Osisko’s share price significantly in 2021 … and beyond.
On the date of publication, Eric Fry did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends … before they take off. And when it comes to bear markets, you’ll want to have his “blueprint” in hand before stocks go south.