Roughly one month after acquiring Virginia Mines (TSX:VGQ) to become the fourth-largest company in the royalty space, Osisko Gold Royalties (TSX:OR) has secured another agreement — for a copper royalty. However, as part of its agreement with Highland Copper (TSXV:HI), the gold-focused royalty and stream company also has the option to earn a silver net smelter royalty (NSR) on the copper miner's Michigan projects. Looking at the copper side of things, Osisko will provide Highland Copper with a C$10-million secured loan in exchange for a 3-percent sliding-scale NSR royalty on all metals produced from the White Pine North project. The loan will be provided once Highland completes its acquisition of the project or by December 31 2015, whichever comes earlier. The base-rate NSR will increase by 0.01 percent for every $0.01-percent increase in the copper price above $3 per pound. Certainly, it seems odd that a precious metals royalty and stream company would strike a deal with a copper-focused junior. However, according to Haywood Securities analyst Stefan Ioannou, the option to purchase a silver royalty could very well have been the sweeter part of the deal for Osisko, meaning the agreement makes a lot more sense. "At the end of the day, it's the silver that's probably what they're really after in terms of enhancing their overall profile as Osisko," he said. Osisko also has the option to purchase a 100-percent NSR on all of the silver produced at Highland Copper's White Pine North and Copperwood projects for a cool US$26 million. It must exercise that right within 60 days of Highland Copper delivering a feasibility study on the projects. Furthermore, Osisko can nominate one director to Highland Copper's board following the completion of the secured loan, and another director should it exercise its silver royalty option.
Paving the way for construction at White PineTo be sure, it's a good deal for Highland Copper. Although Ioannou noted that the company's stock will see some dilution (the company concurrently announced a non-brokered private placement for proceeds of up to $10 million on Tuesday) and its corporate net asset value (NAV) will go down slightly as a result of Tuesday's royalty and streaming agreements, he also pointed out some important positives. "They walk away with financing in place to get [White Pine] right to a construction-ready status. This is going to take them right through bankable feasibility study and permitting, including a lot of drilling," he said. Furthermore, the loan will allow Highland Copper to take care of a much-needed reimbursement of a US$7-million-plus-interest promissory note to Orvana Minerals (TSX:ORV) related to the acquisition of the Copperwood project, all while retaining 100-percent ownership of the projects. Under a previous agreement with AMCI that fell through, Highland would have only ended up with a 50-percent interest in the projects as part of a joint venture. Unfortunately, investors didn't seem to pick up on that good news right away. Shares of Highland Copper fell 6.25 percent on Tuesday to finish at $0.375, but were back up 4 percent Wednesday morning. A good deal Highland said in a release that the endorsement from the streaming company — and from RMB Resources, which will arrange a US$20-million credit facility to be provided to Highland Copper — "demonstrate[s] the high quality of the copper assets that management of the Company has assembled in the Upper Peninsula region of Michigan." Still, from Osisko's point of view, why go through copper to get to silver? According to Ioannou, it simply may have been a good deal. "Osisko's not known for base metals royalties, but I think because they got this thing for so cheap, they took it ... this would be a great deal for anyone," he said. "It also then opened up the door for them to get their hands on the silver royalty, which fits in more with their company." To be sure, Haywood estimates based on $3.25-per-pound copper suggest that Osisko could stand to generate $135 million in revenue from the NSR on White Pine, based on a conceptual mine plan and 20-year mine life for the project. Currently, that works out to a $20-million NAV at a 12-percent discount — not bad for a $10-million investment.