Osisko Gold to buy 
Orion’s royalties for $1.1B

VANCOUVER — Osisko Gold Royalties (TSX: OR; NYSE: OR) CEO Sean Roosen says his firm had been “keeping the powder dry” in anticipation of a transaction that would make it a “world-class royalty company.” That patience paid off on June 5 in a blockbuster, $1.1-billion deal with Orion Mine Finance to buy an expansive portfolio of Orion’s royalties, streams and precious metal offtakes.

Osisko will pay $675 million in cash — plus $450 million in shares — for six streams, 61 royalties and seven offtake agreements. The transaction will boost the company’s producing assets from five to 16, and could transform it into a high-growth, more than 100,000 equivalent oz. gold producer, thanks to three cornerstone assets.

These are: a 9.6% stream on Stornoway Diamond’s (TSX: SWY; US-OTC: SWYDF) Renard diamond mine in north-central Quebec; a 4% gold and silver stream on Pretium Resources’ (TSX: PVG; NYSE: PVG) Brucejack mine in northwestern British Columbia; and a 100% silver stream on the Mantos Blancos copper mine in Chile, which Anglo American (US-OTC: AAUKF; LSE: AAL) sold to UK-based investment firm Audley Capital and Orion for $300 million in 2015.

Osisko reports that the transaction will immediately double its near-term cash flow, while increasing equity dilution by less than 50%. The company forecasts production of over 100,000 equivalent oz. gold in 2018, with growth projected to over 140,000 equivalent oz. gold by 2023. Osisko generated $53 million in net cash flows from operations, while producing 38,000 equivalent oz. gold in 2016.

Aerial view of Stornoway Diamond’s Renard diamond mine in Quebec in 2016. Credit: Stornoway Diamond.

“It’s a rare opportunity to see a portfolio of this quality and size on the market,” Roosen said during a conference call. “We know a lot of these assets very well based on historic work our team has done. We’ve either been a participant in these projects, or taken a look at them through various stages. We’re quite comfortable with the portfolio, and perhaps had a more aggressive view on some of the projects based on our work. We knew this was the right fit for us, and we pursued this deal with prejudice.”

Osisko’s enlarged portfolio will have 131 royalties and streams, including 16 revenue-generating projects.

The company’s flagship gold assets remain its 5% net smelter return royalty (NSR) on Agnico Eagle Mines (TSX: AEM; NYSE: AEM) and Yamana Gold’s (TSX: YRI; NYSE: AUY) Canadian Malartic joint venture in Quebec; and a 2% to 3.5% NSR on Goldcorp’s (TSX: G; NYSE:GG) Éléonore gold mine in Quebec.

Osisko expects to receive between 43,300 and 46,100 equivalent oz. gold in 2017 from its stream and royalty portfolio.

Goldcorp’s Éléonore gold mine in the James Bay region of Quebec, 350 km north of the town of Matagami. Credit: Goldcorp.

The company reported cash and equivalents of $424 million at the end of the first quarter.

The Caisse de dépôt et placement du Québec (la Caisse) and the Fonds de solidarité FTQ (Fonds) will be subscribing for $200 million and $75 million in Osisko shares, as part of a private placement to fund part of the cash consideration.

Furthermore, Osisko will draw $150 million under its revolving-credit facility with the National Bank and Bank of Montreal, while $250 million will come from its cash reserves.

A view of the mill building and camp in February at Pretium Resources’ Brucejack gold project under construction in northwest British Columbia. Credit: Pretium Resources.

“This transaction more than triples the amount of producing assets in our portfolio and doubles near-term cash flow,” Roosen said. “We have also put together an unprecedented growth pipeline that’s really best in class. We set out to build a world-class royalty company three years ago, and we’re now there. We kept our powder dry waiting for a transaction just like this one.”

Orion, la Caisse and Fonds will hold 19.7%, 12.7% and 5.5% of Osisko’s post-deal shares. The transaction will involve Orion receiving 31 million shares priced at $14.56 each.

Orion is a mining-focused investment business with just over $3 billion under management. The group recently put together a US$200 million financing package for Leagold Mining’s (TSXV: LMC) Los Filos acquisition, and a US$225-million hybrid financing for Lundin Gold’s (TSX: LUG) Fruta del Norte development.

“We’re the largest alternative finance provider to the mining space globally. Since our foundation we’ve managed to put together a compelling group of assets to the streaming and royalty space,” Orion’s chief investment officer Oskar Lewnowski said.

Lundin Gold’s Fruta del Norte gold project in the Cordillera del Condor near Loja, Ecuador. Credit: Lundin Gold.

“We had a great deal of interest in our asset pools, but we believe that Osisko’s offer was, by far, the most compelling opportunity. Sean and I look at the mining world in similar ways. We value similar things in terms of assets and management teams, and there’s a high likelihood that we will find compelling projects to work on together,” he added.

Scotiabank analyst Trevor Turnbull notes that Osisko is converting “part of its … cash hoard into cash-flowing assets,” and added that there is “potential for the company’s valuation gap to tighten” relative to its royalty and stream peer group. Scotiabank has a “sector outperform” rating on Osisko alongside a $18-per-share, one-year price target.

Osisko Gold shares have traded in a 52-week range of $11.90 to $18.64, and jumped $1.95 after the news en route to a $16.35-per-share close at press time.

The company has 107 million shares outstanding for a $1.7-billion market capitalization. It expects to have $100 million in cash, over $450 million in investments and $200 million in debt after the deal closes.