Osisko Gold Royalties just announced it has purchased a royalty and streaming portfolio from Orion Mine Finance for over $1 billion.
This is a tremendous deal as Osisko gains 74 royalties, streams and precious metals offtakes; the deal includes a valuable stream on Pretium's Brucejack mine.
Here, I discuss the deal and what it means for shareholders.
Osisko Gold Royalties Buys $1+ Billion Royalty Portfolio
OR data by YCharts
Huge news was announced Monday as Osisko Gold Royalties (NYSE:OR) says it has agreed to buy a precious metals portfolio from private equity firm Orion Mine Finance Group for $1.13 billion.
For $675 million in cash and credit facilities and $450 million worth of Osisko shares, the company gains 74 royalties, streams and precious metals offtakes, pushing its total assets to 131.
For some background, I have been bullish on Osisko Gold Royalties for at least a few months now and I previously sold Silver Wheaton (SLW) shares to buy Osisko. Then Osisko announced its fourth-quarter 2017 financial results, and I was quite impressed.
Shares have been up and down since then and I recently bought more at prices between $10.40 and $10.70, bringing my cost basis to about $10.65. Shares have reacted positively to this latest news, up more than 8% as of writing, and could have further room to run.
I'm a big fan of this deal, as you can probably tell by now. It doubles the company's cash flow and triples its cash flowing assets from 5 to 16, while only diluting existing shareholders by less than 50%. Meanwhile, Osisko's gold production forecast has increased to over 100,000 ounces in 2017 to more than 140,000 ounces by 2023, a tremendous jump from the 38,270 gold equivalent ounces produced in 2016. It expects its cash flow to grow by 10% annually to 2023.
The main assets acquired in the deal include a 9.6% diamond stream on the Renard diamond mine, a 4% gold and silver stream on the Brucejack gold and silver mine, and a 100% silver stream on the Mantos Blancos copper mine in Chile. Other key assets include a gold and silver stream on Lydian's Amulsar mine, a 3% royalty on Silver Standard's (NASDAQ:SSRI) Seabee mine, and a 1% to 4% royalty on Kinross Gold's (NYSE:KGC) Bald Mountain mine.
The Brucejack stream is my favorite asset acquired in this deal. This is a world-class, ultra high-grade gold mine in Canada that is currently in the commissioning phase, but will be in production this year. I'm bullish on the mine's operator, Pretium Resources (NYSE:PVG), and I previously called the company a strong takeover target.
Osisko will get 4% of the total gold and silver production at Brucejack until 7.067 million ounces of gold and 26.297 million ounces of silver have been produced from the mine; it will pay $400 per gold ounce and $4 per silver ounce delivered.
If you look at Pretium's corporate presentation, you'll see that the company expects to produce an average of 404,000 ounces of gold over the 18-year life of mine at Brucejack, which would equal just over 16,000 ounces of gold attributable to Osisko annually. With gold at $1,200 per ounce, the gold stream would bring in $12.8 million in annual cash flow alone (not including the silver stream). Of course, the returns would be much higher with gold prices north of $1,200 per ounce due to the fixed-cost of the stream.
The Renard diamond stream is another key asset acquired in the deal. Osisko says the mine will produce an average of 1.6 million carats per year over 14 years, with significant recovery upside. Osisko gets 9.6% of diamond production and will pay an ongoing transfer price of $50 per carat. Commercial production was announced on Jan. 1 and the mine's operator has guided for 1.7 million in carats recovered this year. Check out Stornoway's investor toolkit for more information.
To finance the deal, Osisko will pay $450 million worth in shares to Orion, $250 million out of its existing cash balance, $150 million from its credit facility, and $275 million worth in shares of a private placement.
In conclusion, I'm a fan of this deal after my initial analysis. My previous criticism of Osisko was that the company just didn't have enough growth, and this deal more than solves that issue. Osisko's growth is now the main story of the company, as it aims to grow its annual production from under 40,000 ounces in 2016 to 140,000 ounces by 2023. Meanwhile, Osisko holds a ton of exciting development and exploration royalties which I haven't even mentioned.
I remain bullish on Osisko and I view this deal as a positive long-term growth driver. I don't plan on adding shares here given the rally, but I'll look to buy more if shares dip below $11.
Disclosure: I am/we are long OR.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.