While sentiment for the general markets (SPY) has been trending lower over the past two months with a violent 15% decline from the August highs, sentiment for the Gold Miners Index (GDX) is in the incinerator and has rarely ever been worse over the past decade.
This is evidenced by the fact that we have just two bulls for every eight bears in the gold market, the index is down over 40% from its April 2022 highs, and valuations are at their most depressed levels since 2015 when the gold price was trading $600/oz lower at just $1,100/oz.
Some market participants might argue that some of this decline is justified, given that producers have seen a sharp rise in costs over the past two years, impacted by higher fuel, labor, steel, cement, cyanide, and reagents costs to process their gold.
While this is true, margins are still up more than 400% vs. 2015 and 30% since 2019, even after the recent decline in the gold price.
So, while some multiple compression makes sense, the group has no reason to be trading at their steepest discounts to NAV since 2015.
However, while the violent correction in the GDX is extreme (though partially justified), the correction we’ve seen in the precious metals royalty/streaming companies is a head-scratcher.
This is because these companies are shielded from inflationary pressures, continue to report 85%+ margins on average, and are enjoying their best setup in years.
The reason is that shares prices are down sharply, and debt is expensive. Meaning that if companies need to finance, they are better to sell streams/royalties on their projects vs. dilute heavily using equity or take on extremely high debt, which in some cases isn’t possible for most developers.
Hence, this group should be trading near all-time highs yet is trading at fire-sale prices.
One name that stands out from a growth/value standpoint is Osisko Gold Royalties (OR), which trades at its steepest discount to net asset value [NAV] since it went public in 2016, outside of a few days in March 2020. Let’s take a closer look below:
A Growth Story On The Sale Rack
Osisko Gold Royalties is a $1.9BB company in the gold sector, but it has a unique business model vs. its peers.
Osisko Gold Royalties (“Osisko”) is a precious metals royalty/streaming company, not a producer, meaning that it provides upfront payment to exploration/development companies and producers to finance mine construction/expansion in exchange for a portion of metal produced over that mine’s life.
The result is that Osisko is inflation-resistant, not exposed to rising costs for sustaining capital, and rising operating costs related to the sharp increase we’ve seen in labor costs, fuel prices, and steel.
Given this attractive business model, Osisko is expected to report 90% cash margins this year, with its margins being more than 4500 basis points above the industry average of ~45% cash margins in FY2022.
However, despite this inflation-resistant business model and the company’s strong growth profile, evidenced by ~70% production growth from FY2021 to FY2026, the stock has plunged over 30% from its all-time highs at $15.10 per share.
This makes little sense, especially when the company has a very high-quality portfolio, with most of its cash flow coming from Tier-1 rated jurisdictions (Canada, Australia, United States) and operated by some of the best miners globally, like Agnico Eagle (AEM).
From a valuation standpoint, Osisko trades at a massive discount to its peer group, sitting at just 0.90x price to net asset value [P/NAV] vs. a peer group that regularly trades at 1.50x – 2.50x P/NAV, and currently trades at 1.30x P/NAV to 2.0x P/NAV.
While this discount makes some sense given that Osisko has an attributable production profile of ~100,000 gold-equivalent ounces [GEOs] vs. a peer average for the larger names of 320,000 to 800,000 GEOs, Osisko has the best portfolio from a jurisdictional standpoint and the highest growth among its peer group.
In my view, this should offset some of the discount that it receives from a scale standpoint, with a more fair multiple being 1.40x P/NAV.
So, even assuming no growth in net asset value per share from newly acquired royalties/streams, Osisko should trade 50% higher at $16.70+.
Moving to the technical picture, Osisko was in a steep downtrend until recently, but while the Gold Miners Index made a lower low in September, Osisko did not, showing relative strength vs. its peer group.
Since then, the stock has jumped above its 20-day and 50-day moving averages, with the 20-day moving average set to cross up through the 50-day moving average, a positive development.
Given this renewed momentum combined with a high value score, Osisko could have significant upside potential in Q4.
The Bottom Line
Based on what I believe to be a fair multiple of 1.40x – 1.50x P/NAV and an estimated net asset value of $2,300MM, I see a fair value for Osisko of $3.22BB to $3.45BB. After dividing this figure by 185MM shares, this translates to a fair value of $17.40 – $18.65.
Even using the low end of this range and the more conservative multiple points to over 50% upside from a current share price of $10.70.
However, in addition to this, Osisko’s significant growth should give the company to increase its dividend from $0.16 in FY2022 to $0.28 in FY2026, giving investors a nearly 3.0% forward dividend yield, an unheard of yield for a peer group whose average dividend yield is 1.20%.
So, for investors looking for a growth story on the sale rack that’s largely immune to inflationary pressures, I see this short-term breakout in Osisko Gold Royalties as a buying opportunity.
Disclosure: I am long OR, AEM, SPY
The above analysis of Osisko Gold Royalties (OR) was provided by financial writer Taylor Dart. Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing. Given the volatility in the precious metals sector, position sizing is critical, so when buying small-cap precious metals stocks, position sizes should be limited to 5% or less of one’s portfolio.
Is Osisko Gold Royalties (OR) A Buy or Sell?
Based on MarketClub’s technical analysis tools, Osisko Gold Royalties (OR) is in a strong uptrend that is likely to continue. With short-term, intermediate, and long-term bullish momentum, OR continues to climb. Traders should protect gains and look for a change in score to suggest a slow down in momentum.
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