Osisko launches incubator, bids for Barkerville

Osisko Gold Royalties (TSX: OR; NYSE: OR) has created a project development platform called North Spirit Discovery Group, and it hopes the resource development and finance company’s first asset will be Barkerville Gold Mines (TSXV: BGM) and its Cariboo gold project near Wells, British Columbia.

The gold-focused royalty company is offering Barkerville shareholders 0.0357 of a common share of Osisko for each share of Barkerville held. The proposed all-share transaction has an implied equity value of $338 million, or 58¢ per share, representing a 44% premium based on both companies’ trailing 20-day, volume-weighted average price.

Osisko’s offer includes a $7-million unsecured loan to advance Cariboo, and Barkerville’s board of directors has unanimously accepted the deal — although it still needs approval from the company’s shareholders.

Osisko Gold Royalties owns 32.6% of Barkerville’s outstanding shares.

On a conference call, Osisko’s chairman and CEO, Sean Roosen, said the North Spirit Discovery Group, under which Barkerville would operate if the acquisition is approved, is the next step in the evolution of the company’s accelerator business that Osisko pioneered over the last five years, “whereby we have been incubating projects and companies,” and said North Spirit signals “we are basically taking it to the next level.

A group of women geologists, first-aid responders and drill core technicians at Barkerville Gold Mines’ Cariboo gold project in south-central B.C. gather to celebrate International Women’s Day on March 8, 2017. Photo by Andrew Ganton.

“We see North Spirit taking on a significant role in the evolution of these assets while we separate the accelerator model from Osisko Gold Royalties, but maintain a direct drive from North Sprit into OR by holding equity within the North Spirit Group,” Roosen explained.

“Given the capital markets haven’t been very supportive of late-stage exploration and development projects — especially single-asset companies — lately, we see more access to capital at a lower cost for these projects through this model, and this is really the bridge to shareholders to access the capital at lower cost within the accelerator model.”

If everything goes according to plan, Osisko eventually will be somewhere between a 30% and 50% shareholder of North Spirit, Roosen said.

Roosen described Barkerville as a highly accretive transaction, and said Cariboo fits nicely into Osisko’s sweet spot — the “value gap” when companies are moving projects through permitting and construction.

Osisko allocates 25% of its capital to early-stage exploration stories and 75% to projects that are moving through permitting, construction and into production, much like what it did with Victoria Gold (TSXV: VIT) and its Eagle mine in the Yukon.

“Often there’s a value gap in that period, as it’s not always exciting for public markets to go through the permitting and construction process … we see that as a value gap, where North Spirit deploys capital into that area of permitting and evolution of the asset.”

A haul truck at Barkerville Gold Mines’ Cariboo gold project in British Columbia.  Barkerville Gold Mines

Last month, Barkerville completed a preliminary economic assessment (PEA) of the Cariboo project, outlining an underground ramp-access mine with payable gold over an 11-year mine life of 1.97 million oz. gold.

The PEA, which is based on only half of Cariboo’s total mineral resources, put initial capex at US$235 million and forecast an after-tax payback period of three years. The project’s net present value after taxes and mining duties could total US$310 million, and its internal rate of return, 28%.

The early-stage study envisions trucking concentrated material from Cariboo to Barkerville’s wholly owned Quesnel River mill, 50 km away. The project’s four deposits (Cow, Valley, Shaft and Mosquito) cover a 3.7 km strike length and run from surface down to 640 metres’ depth. Each deposit has multiple vein corridors that trend east–northeast.

Cariboo is a brownfield camp where Barkerville’s president and CEO, Chris Lodder, and his team, “have led the charge to unlock the value in this camp through the remodelling of the geology, and have been extremely successful, with over a 90% hit rate of drill holes in the last 24 months that have been drilled using the new geological model,” Roosen told analysts and investors on the conference call, adding that the project benefits from significant infrastructure, as well as a small-scale mining permit.

“The existing infrastructure is quite important to the value driver in that we aren’t building a new mill, cyanide facility, tailings pond or waste dumps to execute a 4,000-tonne-per-day underground mine, so it’s a pretty unique opportunity,” he said.

Roosen also described the Cariboo mining district as an area “very used to mining and logging [that] is very friendly to the resource sector.” In addition, he said, “it’s a jurisdiction that has been issuing mine permits,” adding “Pretium was permitted in under 20 months.”

In a research note, Mick Carew of Haywood Securities calls Osisko’s play for Barkerville “opportunistic,” despite the “short-term return.”

Drillers at Barkerville Gold Mines’ Cow Mountain gold project in the Cariboo mining district of British Columbia. Credit: Barkerville Gold Mines.

He also pointed out that while Osisko Gold Royalties owns 32% of Barkerville plus a 4% net smelter return royalty, Osisko Mining (TSX: OSK) also owns 16% of Barkerville, for a collective 48% stake.

Carew says the offer undervalues the company.

“The implied valuation of $338 million is considerably lower than our corporate net asset value of $886 million, or $1.25 per share,” he stated in a note to clients. “We stand by our valuation and believe Cariboo to hold district-scale potential, well beyond the 4.4 million oz. already defined.

“Not only do we expect the mineable resource [2.13 million oz. in the PEA] to grow with further infill drilling and optimization studies, but the global 4.37 million oz. resource at Cariboo is also expected to expand. Gold mineralization is open both at depth, beyond the 35- metre depth of the current resource estimate, and along strike.

“As the resource base expands, mining and cost assumptions are also expected to change, which could result in a larger mining operation than the 4,000-tonne-per-day operation outlined in the PEA,” Carew said.

Andrew Mikitchook of BMO Capital Markets said Osisko’s offer for Barkerville is “below the equivalent valuations of recent acquisitions such as Integra and Dalradian.” But the analyst, who covers the company, noted that while “there is likely some room for a competing bid … the probability is low with the imposing Osisko Royalties shareholding position.”

Andrew Kaip, an analyst who covers Osisko Gold Royalties for BMO Capital Markets, said the Barkerville acquisition adds an element of risk.

“Management is looking at this strategy as a way to jump-start development of investments and monetize these investments at a future date to benefit Osisko Gold Royalties shareholders, but there is risk in this strategy,” he explains in a research note.

“As royalty/streaming companies trade at premium multiples to developers, investors will have to re-evaluate their valuation perimeters in the context of the strategy shift going forward.

“Positively, management reiterated Osisko Gold Royalties will remain a royalty/streaming company, but, in our view, the move may not resonate with some investors, as it adds risk and uncertainty to what is supposed to be a safe business model.”

Kaip pointed out that the industry had “seen a similar story before,” when Sandstorm Gold Royalties (NYSE-AM: SAND) acquired 30% in the Hod Maden copper-gold project in northeastern Turkey.

“While the transaction was net asset value accretive, shares of Sandstorm underperformed as investors grappled with the change in operating model and the exposure to a development project, along with the associated risks,” Kaip noted.

If the transaction goes ahead, current Osisko and Barkerville shareholders will hold 91% and 9% of Osisko’s outstanding shares.