Intermediate royalty company Osisko Gold Royalties (TSX:OR,NYSE:OR) broke into the silver space on Monday (February 27) with an agreement to acquire a silver stream on Taseko Mines’ (TSX:TKO,NYSEMKT:TGB) BC-based Gibraltar mine.
Under the deal, Osisko will pay US$33 million to acquire Taseko’s 75-percent share of Gibraltar’s payable silver production until 5.9 million ounces are delivered; from that point on, Osisko will acquire 35 percent of Gibraltar’s payable silver production. Osisko will also make ongoing payments of US$2.75 per ounce of silver delivered.
Osisko holds over 50 streams, but the Gibraltar stream will be its first silver stream. Chair and CEO Sean Roosen said in a press release that the company acquired it in order to strengthen and diversify its Canadian portfolio. “This investment also provides Osisko shareholders with silver price optionality over multiple cycles, with potential exploration and expansion upside,” he added.
Gibraltar produces high-quality copper concentrate that contains a silver by-product, as well as moly concentrate and at times copper cathode. It’s currently Canada’s second-largest open-pit copper mine, and last year it produced 133.2 million pounds of copper and 0.9 million pounds of moly.
According to Monday’s release, the mine is expected to produce 200,000 ounces of silver per year for the next 14 years. After that point, it should put out 350,000 ounces of silver a year. Gibraltar’s reserves stand at 3.2 billion pounds of recoverable copper and 58 million pounds of recoverable moly, and it is expected to produce for the next 23 years.
In a research note, Eight Capital says that at a silver price of $18.35, the deal will generate an IRR of 6 percent and will be NPV neutral for Osisko. While that’s “in line with traditional streaming deals,” the transaction differs from typical streaming deals in that it carries lower tax uncertainty — that’s because it was structured in Canada and not offshore.
“With a continuation of the deployment of Osisko’s material cash balance in royalty and streaming transactions, we see the potential for Osisko’s valuation gap to narrow with that of its royalty peers,” Eight Capital concludes.
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The deal is expected to close in early March, and the stream effective date is January 1, 2017.
At close of day Monday, Osisko’s share price was sitting at $14.22 on the TSX. While that’s a decline of 3.66 percent for the day, the company’s share price is up 8.63 percent year-to-date. Meanwhile, Taseko’s share price was sitting at $1.79 on the TSX by the end of the day, down 1.65 percent. It share price has risen 54.31 percent since the beginning of the year.
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Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.