Second Shaft And New Streams Will Drive Long Term Cash Flow Expansion

Catalysts

About OR Royalties

OR Royalties is a precious metals royalty and streaming company focused on generating high margin cash flows from a diversified portfolio of mining assets.

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

• Acceleration of underground development and potential sanctioning of a second shaft at the Canadian Malartic Odyssey complex is poised to add roughly 15,000 incremental gold equivalent ounces to OR Royalties, supporting durable revenue growth and higher earnings through the next decade.
• Ramp-up of newly producing and near producing assets such as Namdini in Ghana and Dalgaranga in Western Australia should drive a step change in portfolio volumes, increasing GEO deliveries and improving operating leverage on corporate costs to support net margin expansion.
• Ongoing expansion projects at Mantos Blancos and CSA, including throughput optimization and copper production growth under Harmony, are expected to unlock latent capacity at existing plants, lifting streaming volumes and diversifying metal exposure in a way that enhances cash flow resilience and long term revenue.
• Advancement of shovel ready, fully permitted projects such as Cariboo and Spring Valley, along with progressing optionality assets like Windfall and South Railroad, should convert currently unmodeled ounces into producing royalties, lengthening mine lives and supporting sustained earnings growth into the 2030s.
• Peer leading cash margins near 97% combined with a debt free balance sheet and roughly $1 billion of available liquidity enable disciplined capital deployment into high returning royalty and stream acquisitions, which can compound cash flow per share and underpin continued dividend growth.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming OR Royalties's revenue will grow by 20.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 60.7% today to 78.4% in 3 years time.
• Analysts expect earnings to reach $336.7 million (and earnings per share of $1.81) by about December 2028, up from $147.9 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 31.6x on those 2028 earnings, down from 44.2x today. This future PE is greater than the current PE for the US Metals and Mining industry at 21.1x.
• 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 7.13%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• OR Royalties is heavily leveraged to currently elevated precious metal prices, with roughly 65% of revenues tied to gold and a growing exposure to silver. A cyclical or secular pullback in precious metal prices after this period of record realized pricing near $3,188 per ounce could reduce GEO values and lead to lower revenues and earnings, even if physical volumes remain stable or increase.
• Many of the key growth drivers such as Dalgaranga, CSA expansion, Cariboo, Spring Valley, Windfall and other optionality assets are still pre production or mid ramp up. Any delays, cost overruns, permitting setbacks or weaker than expected mine plans at partners could push out GEO contributions, constrain the anticipated growth in GEO deliveries and limit revenue and cash flow expansion.
• The portfolio is concentrated in a small number of cornerstone assets like Canadian Malartic and Odyssey. If Agnico Eagle ultimately scales back plans for the second shaft, revises the mine plan downward or encounters geological or operational issues, the expected incremental 15,000 GEOs and long dated production profile may not materialize. This could weigh on long term revenue growth and cash flow visibility.
• OR Royalties’ disciplined capital allocation framework relies on finding accretive royalty and streaming deals that clear internal return hurdles above an approximate 4.5% cost of capital. In a competitive market with high asset valuations and looser deal structures among peers, the company may struggle to deploy its roughly $1 billion of liquidity, which could lead to slower external growth and limit upside to earnings and cash flow per share.

Valuation

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

• The analysts have a consensus price target of CA$62.18 for OR Royalties based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$85.82, and the most bearish reporting a price target of just CA$51.89.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $429.4 million, earnings will come to $336.7 million, and it would be trading on a PE ratio of 31.6x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of CA$48.08, the analyst price target of CA$62.18 is 22.7% higher.
  
• 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.