Osisko Gold Royalties, Regulus Resources: The AntaKori Royalty Deal Analyzed (NYSE:OR)

The royalty agreement between Osisko Gold Royalties and Regulus Resources is beneficial to both.

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On October 1, 2020, Osisko Gold Royalties Ltd. (OR) and Regulus Resources Inc. (TSX-V: REG)(OTCQX:RGLSF) announced that they have entered into a strategic partnership agreement concerning the AntaKori copper project (Fig. 1), whereby Regulus will grant certain royalty and stock warrant rights to Osisko in exchange for US$12.5 million of upfront cash. The transaction is expected to close by the end of October 2020.

Fig. 1. Regulus claim map, including 100%-owned in red, Colquirrumi JV (70%-owned, in pink). Source.

Existing royalties. There are existing royalties on the AntaKori claims that are currently held by various private parties (Fig. 2). Fig. 2. NSR royalties on AntaKori concessions. Source.

Mina Volare. Regulus has acquired a 1.5% or 3% NSR on the Mina Volare claim of the AntaKori project (Fig. 2; Fig. 3) for US$750,000 from a private vendor. Osisko acquired 50% of the royalty (0.75% or 1.5%) for 75% of Regulus’ purchase price, with Osisko’s acquisition cost for the royalty included in the upfront payment. Meanwhile, Regulus has retired the remaining 0.75% or 1.5% of the royalty.

Fig. 3. Previous royalty on the Mina Volare claim. Source.

Option for future royalties. For the other claims, Osisko obtains the option to acquire 50% of the acquired royalty by paying 75% of Regulus’ purchase price for the royalty, in the event Regulus acquires any existing royalties within the current AntaKori project area or within a 1 km area of interest surrounding the project on claims owned 100% by Regulus (Fig. 1).

Osisko will have a right of first refusal (aka, RoFR) on all future royalty or stream transactions to claims of the AntaKori project where Regulus has 100% ownership or any additional claims Regulus might acquire with 100% ownership within the area of interest. Should Regulus receive a royalty or stream as consideration for the sale of AntaKori, Osisko will have a RoFR if Regulus later chooses to sell that royalty or stream.

Stock warrants. Regulus also issued 5.5 million stock warrants to Osisko. The warrants are to expire in 3 years and have an exercise price of C$2.25 per share, which represents a 48% premium to the VWAP of Regulus’ shares over the 20-trading day period ending September 30, 2020.

So what

The royalty agreement is a win-win for both Osisko and Regulus. The deal strikes a subtle balance between the short-term requirements and the long-term interests of both companies. I commend both management teams for their creative negotiating skills that led to such a masterful agreement.

For Osisko

The AntaKori project currently has an in-situ resource with 2.6 Blb Cu, 2.3 Moz Au, and 61 Moz Ag in the indicated category, and 2.4 Blb Cu, 2.2 Moz Au, and 67 Moz Ag in the inferred category as of February 22, 2019. Of the above mineral resource, the Mina Volare claim contains approximately 75% of the indicated resource tons and approximately 50% of the inferred resource tons. In addition to the 2019 mineral resource, there are out-of-pit mineralized blocks yet to be reported. In other words, Osisko has acquired 0.75% or 1.5% NSR on 5.0 Blb CuEq or 10.8 Moz AuEq of global mineral resource in Mina Volare and additional unreported mineral resource. Roughly estimated, the NSR entitles Osisko to at least 70 Mlb CuEq or 156,000 oz AuEq, when AntaKori is brought on stream.

To Osisko, this is a great deal. Firstly, Osisko acquired a 0.75-1.5% royalty interest on approximately 5.0 Blb CuEq or 10.8 Moz AuEq of global mineral resource in an excellent jurisdiction – Peru. The AntaKori project is in an advanced stage of exploration, with production to potentially start around 2025 (see below).

  • As compared with Franco-Nevada’s (FNV) acquisition of a 1% NSR on the 14 Blb CuEq Alpala deposit of SolGold (OTCPK:SLGGF) for US$100 million (or 1.5% NSR for US$150 million), Osisko appears to have made a better deal with Regulus. AntaKori of Regulus is located in a more established jurisdiction (Peru vs. Ecuador), of higher grades (0.66-0.74% CuEq vs. 0.53% CuEq), lower-cost mining (open-pittable with a strip ratio of 0.85:1 vs. underground), and probably nearer to production.

Secondly, Osisko may be able to acquire additional royalty interest in the AntaKori project before 2025. Regulus has stated its interest to sell AntaKori to a developer, probably Coimolache JV or Goldfields whose nearby mines are near closure by 2025 (Fig. 4). The deal with Osisko incentivizes Regulus to utilize its local know-how to negotiate the purchases of royalties from the private parties.

Fig. 4. The timeline for two operating mines that are nearing closure by 2025. Source.

Thirdly, the 5.5 million stock warrants granted to Osisko may end up more than covering the upfront cash payment. Regulus currently trades at US$0.01/lb CuEq, while in-situ copper resource typically transacts at US$0.04/lb. So, by the time of the sale of AntaKori around 2025, Regulus stock may quadruple. Additionally, Phase II drilling of Anta Norte is an additional driver for Regulus share price although Anta Norte itself will be excluded from the royalty agreement. Between re-rating and Anta Norte, Regulus stock may well deliver a 10-bagger.

It’s no wonder that Sean Roosen, Chairman and CEO of Osisko, commented as follows:

“Through this investment we have a unique opportunity to gain exposure to one of the largest and highest grade undeveloped copper-gold projects in the world, located in a premier jurisdiction, and to work with a management team with a proven track record of delivering world class projects… This mutually beneficial transaction will allow Regulus the opportunity to continue its excellent exploration work while adding value to Osisko’s royalty investments along the way.”

For Regulus

The investors have had concerns over the high arsenic content in the AntaKori ore (Fig. 5). The acquisition of royalty interest in the deposit by Osisko is a strong endorsement on the viability of the project, which may boost the underperforming stock of Regulus.

Fig. 5. A cross-section showing Cu/As ratio in AntaKori ore. Source.

Much of the exploration upside lies in Anta Norte (Fig. 6). Because Regulus will earn a 70% interest, not 100%, Anta Norte is excluded from the royalty agreement with Osisko.

Fig. 6. The exploration upside in Anta Norte (the donut-shaped prospect). Source.

Recently, Regulus has had difficulty in raising equity capital for Phase II drilling. With the injection of US$12.5 million upfront cash, Regulus is now fully funded to launch Phase II drilling, yet without diluting existing shareholders at the current low share price. The equity dilution will be delayed until the Regulus share price surmounts C$2.25 per share.

Regulus even managed to reduce outstanding royalties on the AntaKori project, partly paid for by Osisko, thus making the project more attractive to the acquirers in the future.

John Black, CEO of Regulus, said as follows:

“Osisko has a track record of being able to identify high quality assets, and their investment in AntaKori provides a strong endorsement of our vision for the future development of the project. Through this transaction we have been able to reduce outstanding royalties on the AntaKori project, thereby improving the overall value of the project, while at the same time raising a significant sum of money. Additionally, we will continue to look for opportunities to acquire outstanding royalties with our partner. We are now fully financed to complete our Phase II drill program which will restart shortly. We are mobilizing rigs and expect to commence drilling in the coming week.”

Now what

Last week, I stated in an article the following concerning Osisko,

“I like Osisko’s producing royalty and stream assets for their politically-stable domiciles, high quality, exploration upside, and long remaining life of mine, judging in totality… When will be the best time to make an entry? I suppose the corporate reorganization will likely happen anywhere between now and the end of 2021, so interested investors may begin to consider establishing a starter position and adding to it in dips.”

Lo and behold, on October 5, 2020, Osisko announced the spin-off of newly-formed Osisko Development Corp. to advance the Cariboo and other development projects, which I believe will help unlock the latent value in Osisko’s high-quality royalty portfolio. The AntaKori royalty deal adds one of the largest, highest-grade, undeveloped copper-gold projects in the world to that royalty portfolio. On the other hand, Osisko Development Corp. stands to benefit from the warrants of the Osisko-Regulus agreement.

Prior to the transaction, Regulus was deeply-undervalued relative to the famous peer SolGold (14.0 Blb CuEq mineral resource at an enterprise value of US$713 million) and new market darling Solaris Resources (OTCQB:SLSSF)(pre-maiden mineral resource estimate early-stage exploration for an enterprise value of US$285 million). The royalty agreement helps remove much of the technical uncertainties concerning AntaKori, and de-risk the funding aspect of Phase II drilling. Considering the enormous upside hidden in Anta Norte and upcoming news flow from turning drill rigs, I now believe Regulus is a strong buy.

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Disclosure: I am/we are long OR, RGLSF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.