Sean Roosen on Osisko’s new plan, Virginia deal

VANCOUVER — It’s been a wild year for Sean Roosen and his team at Osisko Gold Royalties (TSX: OR; US-OTC: OKSKF), but now that the dust has settled the company looks poised to become a major player in the royalty and stream finance space.

Predecessor company Osisko Mining was involved in a tug-of-war over its Canadian Malartic mine in Malartic, Que., which ended with a US$3.9-billion deal that saw Agnico Eagle Mines (TSX: AEM; NYSE: AEM) and Yamana Gold (TSX: YRI; NYSE: AUY) split the prized asset down the middle. Left out in the cold was Goldcorp (TSX: G, NYSE: GG), which Osisko CEO Sean Roosen says came in with what he calls a “lowball offer.”

“I’d say in terms of the Malartic deal, when you’re in the Stanley Cup finals you can find yourself in a couple of dust-ups before you win the big prize, and then you’re right into the next season,” Roosen reflects during an interview.

“Obviously at the end of the day I think we did a great job getting value for our shareholders. I want to make it clear that we have great respect for Goldcorp. I’ve always been disappointed that they tried to come in with such a low-value approach, but it’s just another day in the NHL, and it’s really water under the bridge for everyone involved,” he continues.

Roosen says a spin-out was always in the cards for Osisko Mining, but the company had hoped to keep its production vehicle in place. The bidding war expedited the leap into the royalty space, with a 5% net smelter return royalty (NSR) at Canadian Malartic serving as the foundation asset for  Osisko Gold Royalties.

On Nov. 17 Osisko announced the next major step in its bid to become a royalty powerhouse with a $461-million merger with André Gaumond’s Virginia Mines (TSX: VGQ; US-OTC: VGMNF), which Roosen says was “really a natural evolution” for both companies.

Gaumond’s team discovered the Éléonore gold deposit in Quebec’s James Bay region, which Goldcorp picked up in 2005 for US$420 million.

Goldcorp poured its first doré bar at Éléonore in October, and the mine could produce between 40,000 and 60,000 oz. gold this year. Virginia’s deal with Goldcorp includes a sliding-scale NSR on the project that ranges between 2.2% and 3.5%, which strengthens Osisko’s portfolio. Goldcorp expects 600,000 oz. per year from Éléonore once the mine is fully developed.

“In terms of elite assets we think that pure royalties on operating mines — especially new mines that are low cost with a long mine life — are extremely rare. Everyone knows André and the royalty, and it sticks out ten-feet tall above everything else in terms of quality,” Roosen says.

“André will continue to operate the northern projects in James Bay where he’s had so much success. The continuity of these exploration efforts is really rare in these times. Exploration comes and goes quickly, but successful exploration is a long, methodical process,” he adds.

Under the agreement, Virginia shareholders will receive 0.92 Osisko share for each share held. The offer values Virginia at $14.19 per share based on Osisko’s closing prices at the time of signing, which a implies a 27% premium based on both companies’ 30-day volume-weighted average prices.

Existing Osisko and Virginia shareholders will own 61% and 39% of the new company. The combined vehicle will carry the Osisko Gold Royalties name and have an estimated $1.3-billion market capitalization.

In order to leverage Virginia’s expertise in creating value through the drill-bit, Gaumond will be appointed Osisko’s senior vice-president of northern development and exploration, while geologist Paul Archer will take up the reins as vice-president of northern exploration. Roosen envisions the company as a “royalty incubator” that advances greenfield exploration projects, with minimal capital investment via joint ventures and strategic partnerships.

“We see exploration as a business model,” Roosen comments. “If you look at the big royalty players like Franco-Nevada (TSX: FNV; NYSE: FNV) and Silver Wheaton (TSX: SLW; NYSE: SLW), they were essentially created from that model. They have a collection of royalties accumulated from exploration and mining companies that were spun out. We’re keeping that incubation and royalty creation vehicle alive with a relatively small investment.”

Virginia was one of the largest landowners in northern Quebec and holds a number of base- and precious-metal interests across the province at various stages of development.

Roosen mentions the company’s Coloun volcanogenic massive sulphide project, which it believes may represent potential for “a new mining camp.” Coloun hosts 3.7 million indicated tonnes grading 3.6% zinc, 1.3% copper, 0.4% lead, 37.2 grams silver per tonne and 0.25 gram gold per tonne. Inferred resources tack on 10.1 million tonnes of 3.9% zinc, 1.3% copper, 0.2% lead, 34.5 grams silver and 0.18 gram gold.

The Osisko partnership has secured financial backing from the Caisse de dépôt et placement du Québec and the Fonds de solidarité FTQ. The two funds are investing $70 million into the company as part of the merger transaction, with a right to buy up to 15% of any future royalties acquired by Osisko.

“If we look around we’re the fourth-largest royalty company in the space, and we have some legitimate capital firepower. We may be the little brother right now, but we’re going to be in every drag race to acquire outside royalties and streams,” Roosen says. “We’ll be looking for value, and we’re looking to punch above our weight here insomuch as we have institutions involved that can potentially make us competitive with the larger royalty companies.”

One wildcard in the Osisko portfolio is a vast 9,900 sq. km land holding in Mexico’s emerging Guerrero gold belt.

Roosen says his team went in with a “big-company approach” three years ago and they have outlined 165 targets along a 130 km trend on an extension to 25 million oz. gold discovered over the past decade. The discoveries include Goldcorp’s Los Filos operation, Torex Gold Resources’ (TSX: TXG; US-OTC: TORXF) Morelos multi-million ounce gold development and Newstrike Capital’s (TSXV: NES; US-OTC: NWSKF) advanced-stage Ana Paula deposit.

“We’re holding the Guerrero package in inventory. We view that asset as a royalty incubator and creator. It’s the old-style Anaconda model where you pursue methodical greenfield exploration over quite a few years,” Roosen adds. “We looked for mistakes that have been made in geological interpretation and found a long trend on the extension from some major gold discoveries. Now we’d look at cutting that project up and selling it off to partners and keep the royalty. It’s a huge asset that could add value moving forward.”

Osisko shares have traded within a 52-week range of $13.66 to $16.48, and closed at $15.06 at press time.

The company has 48 million shares outstanding for a $706-million market capitalization. 

Virginia shares have moved within a 52-week range of $9.25 and $14.45, and last closed at $13.55. 

The company has
34 million shares outstanding for a $457-million market capitalization.