Odyssey Shaft Progress And Project Pipeline Will Support Steady But Measured Royalty Expansion

Catalysts

About OR Royalties

OR Royalties is a precious metals royalty and streaming company that earns gold equivalent ounces and cash flows from third party mining operations.

What are the underlying business or industry changes driving this perspective?

• Although the Canadian Malartic and Odyssey complex is progressing with higher ore mined and ahead of schedule shaft development, the timing and configuration of a potential second shaft remains uncertain. This could temper the pace at which additional GEOs translate into revenue growth and cash flow per share.
• While Ramelius Resources has outlined an integration plan to bring Dalgaranga ore into the Mt Magnet hub and expand the plant to 5 million tons per year, interim lower recoveries and execution risk on the expansion could limit the expected contribution to GEO deliveries and delay a step up in earnings.
• Despite Harmony Gold’s plan to complete key projects at the CSA copper mine and target a higher sustainable production rate, the multi year integration process and pending updated life of mine plan mean the copper stream uplift may arrive more slowly. This could cap improvements in revenue diversification and net margins.
• Although projects like Cariboo, Spring Valley, Amulsar, South Railroad and Upper Beaver are advancing through financing, permitting and construction preparation, staggered timelines and dependence on partner execution may spread out the impact. This may lead to a gradual rather than rapid lift in consolidated GEOs, revenue and earnings.
• While OR Royalties benefits from high cash margins and a strong, debt free balance sheet, its disciplined capital allocation approach in a competitive deal market can limit new transaction volume. This may restrain the pace of future GEO growth and slow expansion in cash flows and net income.

Assumptions

This narrative explores a more pessimistic perspective on OR Royalties compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming OR Royalties's revenue will grow by 22.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 60.7% today to 63.6% in 3 years time.
• The bearish analysts expect earnings to reach $281.0 million (and earnings per share of $1.49) by about January 2029, up from $147.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 31.8x on those 2029 earnings, down from 48.8x today. This future PE is greater than the current PE for the US Metals and Mining industry at 23.4x.
• The bearish analysts expect the number of shares outstanding to grow by 0.77% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.15%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A large pipeline of growth projects, such as Odyssey, Dalgaranga, CSA expansion, Windfall and multiple shovel ready assets like Cariboo and Spring Valley, could add substantial new GEOs over time. This may support higher revenue, earnings and potentially a re rating if execution remains on track and long term metals demand stays firm, affecting revenue and earnings growth.
• If precious metals prices, particularly gold and silver which drive about 95% of current GEOs and 65% of revenues from gold alone, stay elevated for a prolonged period or rise further, OR Royalties' high cash margins near 97% and strong operating leverage could support higher net margins and cash flow. This may be inconsistent with a flat share price view.
• The company is now debt free, sits on a growing cash balance that recently moved above US$100 million, and has around US$1b of potential liquidity. If management eventually deploys even part of this into accretive new royalties or streams that meet its return hurdles, this could support incremental GEO growth, higher revenue and earnings, which may push valuation away from a steady share price outcome.
• Concentration in Tier 1 jurisdictions such as Canada, the United States and Australia may remain attractive if geopolitical and permitting risks rise in other regions globally. This could support investor preference for lower risk royalty portfolios and, in turn, support higher valuation multiples tied to revenue and net income.
• Optionality assets that are currently outside the 5 year GEO outlook, such as Eagle in the Yukon or future expansions at key mines, could be brought back into formal guidance if ownership changes or financing progress lead to restart or development decisions. This may surprise the market on the upside for long term GEOs, revenue and earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for OR Royalties is CA$52.24, which represents up to two standard deviations below the consensus price target of CA$62.58. This valuation is based on what can be assumed as the expectations of OR Royalties's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$85.06, and the most bearish reporting a price target of just CA$52.24.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $442.0 million, earnings will come to $281.0 million, and it would be trading on a PE ratio of 31.8x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of CA$53.18, the analyst price target of CA$52.24 is 1.8% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.