Osisko Gold Royalties Interview

ladies and gentlemen today we welcome sandeep singh president and ceo of oh cisco gold royalties for those of you who had the pleasure of attending my natural resources investment symposium and boca raton florida you would have had the opportunity to listen to mr singh and meet him uh personally for the thousands of you who weren't able to come down to uh florida this is going to be the second best thing first of all sandeep thank you for your support of the symposium and thank you too for subjecting yourself to this q and a session happy to do it rick we're it was great to get uh together in person again after so long and and see you and the crowd it was a great show we got a lot out of it and she'll be happy to talk to you anytime for the newer listeners to our series sandeep perhaps we could start off with you giving an overview of what you see as the investment attributes of the royalty and royalty and streaming companies particularly vis-a-vis other mining industry investments sure happy to start uh broadly uh i do we've had this conversation i do think we are entering the phase which uh suits gold royalties precious metal royalty companies the best um you know in a world where inflation is no longer transitory it's real it's deep rooted uh and and the fed is doing everything they possibly can to push us into a recession uh you know this is when as sad as that is for the rest of the economy and maybe all of us on a personal basis that's the best possible backdrop for us as a gold royalty company uh you know we have we offer that safe haven gold investment that is much needed and frankly underweight in most people's uh portfolios i do think that will change we do it in a diversified way uh for us at a cisco we have 20 different producing assets this year in a basket of 165. we're diversified by asset we're diversified by geography and we don't have the opex and capex risk that many miners are suffering through right now if you're following the quarterly reporting it's been a tough season um and i think in the mining world especially that mining inflation which is labor-intensive energy-intensive uh is going to continue even longer than in the broader economies so at the end of the day it's gold exposure it's inflation protected uh and and it's growing at least for us it is so this is the best possible backdrop for us i think it's it's important for our listeners to note very very specifically that yours is a financial uh interest if you have a five percent uh overriding royalty interest you get five percent of the revenues but when they're passing out uh either a capex bill or an opex bill you don't get one uh on an operating basis effectively net of refining at least your gross is your net yeah uh and you give the audience some sense of your operating margins yeah and that refining is a trivial amount we're talking you know a few dollars an ounce really um so that's exactly right so for instance you use five percent i imagine you were thinking of the malarkey royalty that we have so malarkey for those that don't know it is canada's largest gold mine it's the mind that our team our predecessor company and our founders built uh well it's found delineated financed built and then sold it's currently run by nico eagle and humana um and we get five percent of the ounces off the top line no matter what the the cost structure of that mine is thankfully and and we want our partners to be um healthy and and and making a lot of money as well that is one of the most profitable assets for nico and humana as well but regardless we get five percent of the ounces off the top and uh to your point uh you know where whilst they might uh have creep in their cost because you know they're going to inflation uh our costs remain essentially zero on those ounces so we get about 35 000 free ounces just from that asset alone per annum um that that that production is going to carry on for decades and in the spring of 2021 they made the investment decision to build the underground portion of that mine underground right now as an aggregate 15 million ounces and it's growing uh that's to the tune of 1.3 billion dollars for them and again our contribution to that is zero so the beauty of the royalty model if you do it right that if you choose your assets correctly which i would say we have is you know you pay some fair value for what that asset is at that point in time and then anything that comes thereafter you benefit from disproportionally because you don't have the finding costs and you don't have the extraction cost so uh it's it's a pretty great model when you do well that said i think it's also a benefit to the sector there's a lot of people looking for capital in a capital intensive industry uh and and our you know our capital is important to the sector there's not enough oftentimes equity and debt to fund the projects that need to be funded um so i think it's a win-win that works for both minor and and wealthy one of the things that i've noted that many even of the mining analysts haven't noted around the royalty space is that your indirect costs can be lower too uh if i walk through agnico eagles headquarters or yamana's headquarters you have by necessity dozens maybe hundreds of technical people geologists engineers financial people that are involved in the operation of 12 or 13 minds around the world yours is a financial uh interest you need to spend a lot less time and hence a lot less money on engineering on geology on cost control so it isn't just that your site costs your direct costs are lower your indirect costs have the ability to be much lower could you talk about that as a bit you've been a financial officer uh really in every aspect of the mining business so if you could talk about those differences you look at very true so so not only structurally do our royalties come at low cost but our gna is also quite low uh and you know you're right it's hundreds of people not not not tens of people at some of those mining operations and then obviously as you get to their sites you're talking about several hundreds of people if not thousands in some cases so uh out of cisco gold royalties we have about you know rounds to about 25 maybe we're up to 26 people globally really an office space half of those people would be you know kind of the people you need to run dual listed tsx nyc listed company uh the other half would be more more capital markets facing uh you know bir or pork dev or what have you so very thin team uh and frankly that's all the people we will ever need give or take so that that business is very scalable you know what we're doing is uh we're searching for new investments we're looking to deploy capital uh that's all i've done in my background you got hinted to it i'm i'm not a technical person although i've been in mining for the you know better part of the last 20 years so no enough to be dangerous but i'm a financial person that surrounded himself with one of the best technical diligence teams in the business i think uh so really what we're doing is we're deal-making and we're diligencing assets once we have our exposure we keep an eye on those assets but they're being run by other people which is why we don't have the same same you know workforce um but again all the people we need to do our jobs and all the people we need to continue to grow this business to whatever size we want to grow it to uh you know we don't need to add more people as you would when you pick up new asset sets on the on the operating side let's look now at the uh the genesis of the company it seems to me that there were four transactions at least the one that spun off the malarked royalty then the acquisition of the virginia asset then the uh package transaction uh that you did with orion at all so if you could take us through the corporate history uh and talk about how the company was created with the description if you could of all of the major assets in the company uh i'll do my best it's uh i don't know how much time you have on your hands rick but uh you hit the the the the high points i will i i guess i would say so yes back to what i was referring to earlier a cisco one if you will uh was the entity within which malartic was was built and operated and ultimately sold in 2014 uh if you recall there was a hostile bid from goldcorp at the time and all of us myself as an advisor the company at the time worked to uh to create more value and ultimately ended up selling the company for about 4.3 billion to igneco and humana spinning out the royalty company in in the process so that was that was a win um and in doing so we we made sure we had as much exposure to molar pick as possible and that decision i think has proven out uh to be wildly successful given what's happened to that asset uh just in the last couple of years um from there you know we had one producing asset within a basket of five you know four other exploration assets basically so phenomenal flagship but not necessarily diversification and the team uh again with sean roosen as the lead and myself as an advisor amongst the larger team uh set out to to grow and to grow creatively and to build some diversification actually turn it into a worldly company um you know quite successfully virginia was the first major transaction bringing in the alienware royalty um you know it hasn't exactly played out uh as advertised at the time it was relatively early stage but it's still a core asset for the long the long term it's currently run by pneumont it's a you know so a great partner uh the orion portfolio in 2017 brought with it a lot of asset a lot of different a lot of assets and a lot of diversification that was just north of a billion dollar transaction so the large transaction for the group um and brought in assets like mantos and casino and others so uh that brought a fair bit of the diversification uh when you fast forward and you look through all those transactions and you you get to where we are today i think i hinted at it earlier you know from one producing asset to 20 from five total assets to 165. so built a real company centered that company in good jurisdiction so most of our value is still in the americas when you say canada is 75 of our value you add the us and the right parts of south america you get into the low 90s so we've built that diversification we're associated with some of the best minds and some of the best miners in the business i'll talk to you about some of those as well and we've done it in good jurisdictions so i think we've built a very important portfolio in the royalty business you know one that matters one that is senior scale just happens to be in an intermediate company body so that's that's you know the the quick synopsis of eight years of hardcore let's talk uh a little bit about uh financial stability describe if you can other than with adjectives the balance sheet and the income statement do you have adequate capital to grow do you have foreseeable adequate capital to grow what sort of uh recourse of non-recourse liabilities might shareholders inherit yeah look it's a good question and we have a phenomenally strong balance sheet is the the upshot out of it um rough numbers we have canadian 300 million just north of that actually in cash at the end of the second quarter uh we have the only debt we have is 300 million canadian in converts that come due at the end of the year that we intend to pay out uh we're making cash flow every day as a royalty company at a 93 margin we build up cash every week um and we have a completely undrawn credit facility with 650 million canadian that we can use to grow our company and that's what we will use to fund growth if we can find growth that we find the creative and value enhancing for the portfolio so all the capital we need to grow the business uh the only you know the only assets that have contingent payments are or really only a couple and they're small so most of the assets that we have that are going to fund our growth are all bought and paid for we bought and paid for them in a 12 to 1300 gold environment we intend to benefit from them in a in a golden environment that's much more supportive and we think going further um so we certainly picked the right time of the cycle to deploy capital uh and the balance sheet today is still extremely strong we raised 250 million dollars uh in uh march to fund some acquisitions that are you know in the in the works uh have been announced that are in the works so that's what strengthened our balance sheet we raised that money at 1345 us today even though we're coming off a record quarter and looking forward to a record second half you know stock prices drifted down towards 10 u.s just because of market malaise and a lack of interest in the gold sector but the business is exceptionally strong and the balance sheet is acceptable strong as well so summarizing that basically uh current assets uh and current liabilities balance you have 650 million dollars in dry powder in a credit facility and what's the sort of midpoint of guidance in terms of uh uh cash generation this year yeah so we're guiding to 90 to 95 000 ounces uh delivered to us at a 93 margin pick your gold price put in a round where we're talking right now you're talking about cash margin of about 150 million dollars uh from that we run our business we pay our moderate gna and then everything else after the taxes is available for either padding the balance sheet or for uh for funding new growth so yeah we're we're in exceptional shape i didn't even mention it but uh as it happens we also have on a you know on a bad day we have about 450 to 500 million dollars worth of equity investments in other sister companies um not all the obviously that's less liquid but that's sitting on the balance sheet as well as a pretty nice uh you know asterisks well that's interesting between four and five hundred million dollars in equity investments what would you suggest then net of that your enterprise value is uh market capitalization less debt add back cash yeah so our market cap today in u.s dollar terms probably about 2 billion back off back off that number we're probably sitting at an ed at us 1.6 billion give or take as you said the rest of the balance sheet cancels itself out if you're looking at some of our assets if you're looking at um some of the recent transactions that have happened in the sector uh you know cortez being the most recent if you apply those multiples to canadian arctic which you know is their flagship but it was only 35 000 ounces out of our 80 000 ounces last year you know that asset alone could justify our enterprise value if you compare it to what the uh what the deal flow is out there so um yeah we got a lot of inherent value in the company and and you know we're looking to to continue to unlock that value in a more supportive more supportive market or put differently uh you're generating pardon me year trading if in effect your enterprise value is uh 10 times uh ebit uh in a 93 operating margin business exactly that's uh by by any stretch of the imagination but particularly at these interest rates uh that would seem to be an extremely attractive value given that the majority of the ebit comes from long-lived assets that have exploration development upside let's move on to competitive and comparative advantages relative to other players in the space you're not the biggest guy in the space but you are also by no means the smallest guy in the space how do you compare both with the dozens dozens of juniors nipping at your heels and also with the behemoths of crowd you at the top uh what are the competitive and comparative advantages uh to grow in this space look i actually happen to think and you're right there are some much bigger players with with uh significant multiple advantages so cost the capital advantages uh but i actually quite like our our sweet spot uh as to where we are in the middle if you will uh we're not really looking to compete with some of those smaller players there's been a you know a lot of new entrants uh in the smaller scale building up generally earlier stage portfolios some of them have done a good job with that um but when we look for well a we have so much early stage in our in our in our company already assets that you know people lump together with 100 million dollar you know research nav individually we could spawn you know a dozen of these micro uh royalty companies by seating them with assets so we're not looking to compete on the early stage frankly when we do early stage investments they come to us through our network they come to us they come to us to our technical team you know if you're a geologist and you're pushing forward an asset of merit in in the americas odds are you want our team to know it you want our team to endorse it you're probably bringing it to us first uh or certainly you know that's not always the case but it happens enough uh enough enough for us to to make make good use of it on the larger side in terms of groups that can pay you know significant cash uh outlays to to fund you know real projects big projects the the group is really the same it's been the same competition for some time uh and we've always managed to fare well within it um you know the reason i say i think we're in a sweet spot is you know our business is is hey it's growing if we do nothing we're growing you know we did 80 000 ounces last year we're saying 90 to 95 this year off of existing assets getting bigger we've got exposure to some of the best development assets we think in the business and they're going to start to come on in the next several years so we have the ability to grow by a double-digit compound rate you know if we invest next to nothing uh that's pretty special um and then to that we think we're still the size of company where we can do you know where we can do enough deals to to grow and only will grow if we can do it equitably anytime we put money to work we compare it against you know is that a better use of capital versus just buying back our stock and when our stock is trading as it is right now below now you know it's pretty hard to make that determination it's pretty hard to say we're not better off going and getting more exposure and large thick in our other assets so i think we're in a good place we don't need to do billions of dollars of deals a year like our larger peers do they're in some ways victims of their own success uh and and you know the world to finance is relatively finite there's not a laundry list of mining operations that we like out there it's a it's a lit it's a finite list that ebbs and flows uh but within it uh we see enough to do to grow our business if if we don't we won't and we'll grow organically but i think we do still see enough to do it to grow our business um and again if you're looking at some of the prices that are being paid to fuel those bigger businesses you know it's getting tougher and tougher but our business is one that can continue to grow i want you to uh go a little deeper into something you just said to me the most outstanding part of your presentation was in book or in boca raton was the fact that you looked at every transaction as to whether or not it was accretive on a per share basis uh as a guy who doesn't own your whole business but rather owns some shares that was refreshing to me so if you could talk about the sort of per share hurdle rate how you look at investments and how you compare them with buying back equity and also how you look at the difference between dividend distribution as a form of returning capital shareholders versus buying back shares i think that would be uh a discussion that would be appreciated by a more sophisticated audience yeah i'm happy to do that and there's a quite a bit there to discuss i guess it makes no sense to do anything unless it is aggregate and you know you can measure accretion in different ways nav per share cash flow per share et cetera et cetera but it has to be creative for us to care um you know we're trying to stick to high asset quality and things that improve our business not not take away um so that that's a given and i think you know the poop is in the pudding i mean i think it's not just lip service you've heard me rick for the better part of two and a half years my tenure and certainly the first year and a half of that saying we just found growth too expensive in the sector in 2020 uh equity markets were wide open debt was available to everybody and the deals we saw in that market we thought were higher risk assets getting you know pretty low return uh funding and we said we're gonna opt out of that we're gonna be disciplined and we'll pick our spots and if that means we're gonna have to do smaller transactions kind of hit some singles and doubles for a while and wait for our moment then that we'll do that and that's exactly what we did we hit some singles and doubles brought some really nice assets into the company for cheap and then we waited to pick our spots and then we lo and behold our spot was in q1 of this year when the equity markets were essentially closed to everybody else and we used that window to deploy some more capital so that's exactly how we're going to continue to run our business if the deal flow makes sense if it's equative uh measured in a number of different ways uh per share metrics first and foremost asset quality uh then we'll then we'll transact but we have no pressure i feel no pressure to to grow for the sake of it uh as i said we you know to be able to grow this size of company you can grow a company by by 10 per annum you know if you're a micro cap but to be able to say that over the next five years we expect double digit compound growth is exceptional uh and to that if we can add it you know we can add smartly we will if we're in a window of time where we can't we won't and and if you think about the royalty sector it is a contrarian sector you should at least be contrarian in my view and when the markets don't need our capital we shouldn't be rushing to put it to work because we're not going to get good deals and when the market is like it is right now and it desperately needs our capital then we're going to be really active and that's the way we're running our business and that's the way we'll continue to run our business in terms of uh dividends versus buybacks you know middle last year we upped our dividend by ten percent it's already the pure leading dividend i believe uh you know it's the highest in our in our sector so we pay a real yield right now about 1.7 um we upped that last year as i mentioned by 10 and then we went out in the next month or month and a half we bought back a percent and a half of our company so if you take the dividend with the the buyback that we did we've returned if you will three percent of the business to shareholders and we're happy to keep doing that if the market is as volatile as it is right now you know our underlying fundamentals have never been stronger you know q2 we never generated as much in you know geos we never had higher deliveries of gold and silver essentially we've never had higher cash margins and yet our share price is amongst the lowest it's ever been just because of that pendulum swinging with the gold price weakness and the us dollar strength so that's what the market's going to give us an opportunity to buy back at cisco at these current levels we're happy to take more of our cash flow and do that and i think we can do all of the above i think we can continue to pay a peer leading dividend i think we can continue to take advantage of weakness in the market and i think we can continue to grow the business you know some of your competitors and would-be competitors uh are beginning to participate throughout the capital stack uh making equity investments as an example to get access to royalties uh streaming as opposed to merely participating uh in royalties uh and two in the case of uh as an example orion uh competing in project lending or building a debt book do you have any aspirations or any willingness to participate in the rest of the capital stack in terms of growing a cisco you know it is interesting you're right there has been a kind of step change in what uh our peers are doing to get access to the the world streaming side um things that they've never done before i've never been willing to do before uh it's interesting you know at cisco because we started from scratch we had to build out a company we were a little bit more nimble uh in the past and those are some of the things we've actually been criticized for doing now we're slow and behold our our larger peers are having the same i think for us we've always we're interested in you know if we can get an early stage royalty uh you know sprinkling in a little bit of equity to make that go down easier you know make that more digestible for the other counterparty sharing risk that way that's always something that we've done before others uh and i think we'll continue to do that in moderation um but you know we worked hard rick to get ourselves back in the middle of our lane uh where we're pure play royalty and streaming company certainly there's room for as i said that that's that's that's the meat on our plate if uh if it helps to put a little bit of equity here and there uh for instance on the csa transaction earlier in the year we we put in we threw in a little bit of equity uh but the chunk of our dollars are going towards royalties and streams uh and we can still see enough of our in our pipeline to continue to grow that way i think what you're seeing you know without nitpicking on other people's deal flow but i think when you're seeing those types of transactions i think when you're seeing people diverge from what they've been steadfast about in the past those should be you know canaries in the goal line a little bit those are those are kinks that are starting to to show up in the armor uh and i think it's all in keeping with that theme of you know when you're that big it's really tough to grow it's tough to maintain the growth trajectory that they've been on you know those half a billion dollar streams in 2016 and 2017 when uh the base metal sector the diversified sector was just in terrible shape balance sheet-wise and you had the likes of glencore and tech and ballet and others selling streams on world-class copper assets that's not the world we're in right now and probably won't be for for a really really long time so it's tough to grow those businesses they're having to uh to deviate a little bit uh again you know they're great companies they trade at a multiple advantage so they got a lot of things going for them but that's one one headwind they have uh that's not a headwind that we we particularly see at cisco worlds uh finally sandeep and we're gonna wind this up and give you a chance to get back to making us some money uh but finally one of the things that you said in boca raton that uh really impressed me was when i asked how investors could learn more about the company and who they should contact uh you gave the best possible answer perhaps you could repeat that now if people want to learn more uh about a cisco gold royalty uh and they have some detailed questions who should they contact and how should they contact that person well they should contact us so at the bottom of every press release there's a uh there's an email address to our uh ir team we you know that goes to an actual person it doesn't go into the abyss uh so we're we're reviewing those and if you're not hearing back from our ira team you're hearing back directly from me um you know we were quite happy to hand out business cards in person again rick and that business card has my cell phone on it so people want to talk to us about our business we're very proud of it uh and we're very very happy to talk to them especially your um your crowd it's a it is a sophisticated group of people that that understand the gold sector and uh and those are the types of people we want keeping up on on the cisco so go to the the website look at the bottom of a press release if you write to us uh i guarantee you will hear back sandeep flattery will get you everywhere thanks for subjecting yourself both to boca raton and to this interview uh and thank you too as a shareholder for the incredible job that you've done i look forward i hope at seeing you in future investment symposiums and also having the opportunity from time to time to subject you to scrutiny like this yeah whenever whenever you're free rick we'll chat uh it's always a good time it's always useful for me as well and uh and thanks to your audience for listening and and happy investing well thank you too and goodbye i'll leave you go now okay take care

Channel: Rule Investment Media

Views: 9,578

Keywords: Rick Rule, Gold, Silver, albert lu

Id: VswqgAFwy6U

Length: 30min 12sec (1812 seconds)

Published: Thu Sep 08 2022