Annual Letter to Shareholders and Outlook

Annual Percentage Change
Abitibi Royalties Performance vs. GDX Index and Gold

Year Abitibi Royalties
(Cdn $)
Gold Miners Index
(Cdn $)
  Gold Price
(Cdn $)
Gold Price
(US $)
2014 643% -5% 648% 9% 0%
2015 29% -11% 40% 6% -12%
Compounded Gain 209% -8% 217% 7% -6%
Overall Gain 857% -15% 872% 15% -12%

*Numbers may be slightly different than your own due to different sources for prices and exchange rates
**All percentages rounded


May 11, 2016

To the Shareholders of Abitibi Royalties Inc.

Abitibi Royalties’ share price increased 29% in 2015, as we continued towards our goal of becoming The Best Gold Company. As of this letter, the share price has increased an additional 27% in 2016 (as of April 29, 2016), increasing our market capitalization to approximately CDN$46.5 million. It is important to remember that the Company’s share price isn’t necessarily the Holy Grail when evaluating our performance, but over the long-term, it does a fairly decent job.

On the previous page we showed our share performance versus the Gold Miners Index (GDX) (stated in Canadian Dollars for easy comparison) and the price of gold (stated in both U.S. and Canadian dollars). Overall, it was a good year for shareholders, as Abitibi Royalties outperformed the GDX and the gold price in both currencies by a meaningful percentage. It will be difficult to do this every year, but we expect over the long-term to consistently outperform due to the caliber of assets we hold inside the Company. If we were unable to deliver this type of performance, it would be better for us to sell the Company and for you to invest the proceeds in an index fund or gold bullion.

Although you have probably heard me say it before, I think it is worth repeating why becoming The Best Gold Company is our goal. First, our definition of the “Best” is the company that achieves the greatest long-term share performance, not overall size. Since the early 1980s there have been three companies that standout in my mind, American Barrick 1985-1992, Goldcorp 1995-2005 and Franco-Nevada for most of its history.

Ultimately it is not just about market capitalization or how much gold a company produces. It is about BUILDING VALUE ON A PER SHARE BASIS, creating capital gains for the Company’s owners. Far too often corporate presentations highlight growth in market capitalization (not very relevant to your wealth) without referencing share performance (which is very relevant to your wealth!). It would be fairly easy for Abitibi Royalties to raise equity, dilute your ownership percentage, increase our market capitalization, and purchase an asset. However, I am not convinced this will increase the value of our shares.


1. Long Term Vision


In 2015, we ended our letter by reiterating our goal of becoming The Best Gold Company, which included a number of items we felt and continue to feel are important in order to achieve this goal. We often find ourselves re-reading this list whenever an investment banker encourages us to do a “strategic transaction”. As Warren Buffett says, asking an investment banker if you should do a deal is like asking a barber if you need a haircut.

This list is a sobering reminder of our principles and allows us to cool off before doing something irrational that would only feed our egos and probably cost you money!   

1. Share structure: The Company has a small number of shares outstanding. Investors who purchase shares become partners in the business.  They are also treated like partners.

2. Per share value: The Company generates meaningful cash flow on a per share basis.

3. Physical gold: The Company takes a portion of its royalty income in gold bullion, which should continue to grow each quarter. This should also defer tax.

4. Share buybacks: The share count goes down, not up.  Few if any mining companies follow this strategy. We aim to be different.

5. Exploration: Provides exposure to exciting discoveries.

6. Growing the business: Continually builds its royalty portfolio through cash flow and other creative means.

This is the foundation from which we will continue to grow the Company in 2016 and beyond.


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2. Royalties - Growing the Business


Last year, we outlined two points in the lifecycle of a mine where we would focus and look to acquire additional royalties. The first would be on early stage projects. These are low cost entry points that have tremendous optionality on potential ounces in the ground and future cash flow. Once acquired, we are no longer obligated to put up any of the associated exploration or development costs. We are seeing a once-in-a-decade opportunity to acquire assets that would not be available in a better market. I think these are smart acquisitions since we are either in the bottom third of this gold market or the industry as we know it will essentially cease to exist. Since gold mining has been around for 7,000 years or so, I think it is safe to assume the industries demise is not anytime soon.

Second, we will look at acquiring “world-class” royalties.  These are royalties in production, with a long mine life and considerable exploration potential. As we have stated in the past, there are not many world- class royalties for sale. Patience will be required. As you are probably aware, we came up empty handed in 2015. On a very positive note, it appears our main 3% royalty on the eastern portion of the Canadian Malartic mine is starting to show signs that with more positive exploration and additional development, it could enter world-class territory. More on this later. 

We still have no intention of acquiring metal streams or royalties on feasibility or development-staged assets. The former requires too much capital relative to the return for a small company like Abitibi Royalties. The risk profile of the latter is too high compared to the reward. There is a debate emerging in the precious metals industry as to whether streaming is the equivalent to hedging (advocated by Rob McEwen) or similar to a joint venture, mentioned by the buyers of metal streams. I have to agree with my old boss. A gold hedge is when you are contractually obligated to sell a fixed amount of gold and silver at a certain price over a specified number of years. This is similar to a metal stream. The difference is that you can buy your way out of a gold hedge through free market forces (similar to when Barrick raised USD$5 billion to eliminate its gold hedge book in 2009), in most cases there is no “out clause” or “eject button” under a metal stream. It is there for the life of the mine. Also, unlike a true joint venture, the royalty companies will not suffer losses if a mine enters a rough patch and starts to see red on its balance sheet (only if the mine shuts down). There are no cash calls for the buyers of metal streams should the mine operator decide to double capacity.

Over the long-term it will probably cost the sellers of the streams (and their shareholders) more than the money they are getting up front, but on the flip side, owning royalties and metal streams is generally a great business to be in.


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3. Canadian Malartic Mine - Malartic CHL (3% NSR)


In 2015, Canadian Malartic remained the largest gold mine in Canada, producing approximately 570,000 ounces of gold. This is starting to become a consistent theme for the mine. Cash costs were approximately USD$600 per ounce. Very little of this production came from areas where we hold a royalty, since these portions of the mine are either being permitted for production, which is expected to start in 2017 (Jeffrey Zone and then later the Barnat Extension in 2018) or are in the advanced exploration stage (Odyssey North). The biggest issue facing the Canadian Malartic mine is replacing its reserves within the open pit. We think this is a positive for our royalties since it gives the operators of the mine (Agnico Eagle and Yamana Gold) an incentive to move Odyssey North forward quickly (which is envisioned as a bulk tonnage underground operation), which remains our most important royalty. 


A) Odyssey North Discovery (3% NSR)


In 2015, the operators completed 44 drill holes for 35,000 metres of drilling at the Odyssey discovery (includes Odyssey North and South Zones). This was above the initial 25,000 metre budget set last year. Although no drill results were released, we have every reason to be optimistic for Odyssey North’s future, (where we own a 3% NSR), and for the potential for our royalty to increase in value:

  1. The strike length more than doubled and the vertical extent of the discovery also grew.
  2. The operators have increased the exploration budget from CDN$3.5 million (2015) to CDN$8 million (2016), which includes 60,000 metres of drilling. This is a large exploration program, where Abitibi Royalties puts up none of the capital.  
  3. An initial resource estimate is expected by year-end.
  4. The operators will then use the resource estimate to complete an internal scoping study.

During Yamana Gold’s Q4-2015 Results Conference Call, the company stated, “Canadian Malartic were still drilling the Odyssey deposit and expect a sizable addition to the resource-base, based on that discovery in 2016”.  Furthermore, Yamana Gold’s states on its Q1-2016 Results Conference Call “the Odyssey drill program continues to define the north and south mineral bodies and has discovered two, previously unknown mineralized structures. Geologic and mineralization models have identified two zones within the north zone where cross-cutting structures have created blow-out zones of mineralization much wider than other portions of the deposits.”

In addition, Agnico Eagle stated during their Q1-2016 Conference Call, “[Odyssey] has similarities in terms of thickness and a bit better grade than Goldex and the intention when we got involved with our partner Yamana with the Canadian Malartic opportunity was certainly we had a sense that Odyssey could be an important component to that mine and that property going forward. So we are certainly starting to see that.”  

As might be expected, we get excited when the property where we own a 3% royalty interest appears poised to provide a “sizeable addition to the resource base” at Canada’s largest gold mine and is also compared to Goldex, a key operation for Agnico Eagle.  However, shareholders should be cautioned. The Company has not received any additional assay results or drill hole locations since we last reported exploration results on February 23, 2015. I can’t give you any assurances that all or any of the recent drilling at Odyssey has encountered additional mineralization where we own our 3% NSR.

You might be asking yourself if there is potential for our 3% royalty at Canadian Malartic to enter the category of “word-class”. The answer is yes, but it doesn’t come without risk. In order to achieve this level, I believe proven and probable gold reserves over time would need to reach 4 million ounces, the deposit(s) would need strong economics to motivate the operators to advance and subsequently mine them, there would need to be exciting exploration targets that could provide additional value, and although there is nothing to suggest otherwise, the Canadian Malartic mine would need to keep operating at similar levels.

The next twelve months will be very important, as the resource estimate from Odyssey North will have a large impact on our Company. Although the Company continues to discuss potential opportunities, both management and the board of directors believe there is a fair bit more value at Odyssey North than we are getting in the market and being patient may be the best course of action. It is possible the resource size or economics won’t meet expectations, but we feel the reward is higher than the risks based on the information that has been publicly disclosed by the mine operators.


B) Jeffrey Zone & Barnat Extension (3% NSR)


Agnico Eagle and Yamana Gold are continuing to permit the Jeffrey Zone and Barnat Extension for production. These two areas at Canadian Malartic represent the next phase of our growing cash flow. Our 3% NSR covers all of Jeffrey and a portion of the Barnat Extension. The operators have disclosed that they expect the permit to be approved in late 2016 and begin production in 2017. I think Agnico Eagle and Yamana Gold are terrific operators and we are happy to own a royalty on portions of their mine, but Abitibi Royalty shareholders should not be surprised if there is a delay in either permitting or the production start-up. Permits are dependent on many external and variable factors. I have little doubt that the permit will be approved, since Jeffrey and the Barnat Extension are just part of a larger permitting effort at the mine. Not only is Canadian Malartic the largest producing gold mine in Canada, but it is a huge driver of economic activity in this part of Quebec. Permitting tends to take longer than you think, even when you have two operators with great track records.

It is also noteworthy that there will be additional drilling completed in 2016 around the Barnat Extension and at the Gouldie and Charlie Zones, where we own a 2% royalty. The operators of the mine believe there are additional open pit/underground opportunities around these target areas that could become potential sources of ore for the Canadian Malartic mill. Fingers crossed they are right!


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4. Royalty Search - Growing the Business Organically


Last June, we launched the “Abitibi Royalty Search” ( This is an online platform where companies and prospectors can upload their geological data and have the property taxes paid by Abitibi Royalties in exchange for a royalty. It seemed like a logical way for us to grow organically by reinvesting a small portion of our cash flow for a potentially large return (also the cost of acquisition can be used to offset future tax). In order for us to agree to a transaction, the property needs to be near an operating mine, with good geology and have evidence of mineralization through previous exploration. With these items in place, we felt the odds of a royalty being successful would increase.  The strategy called for us to stay 80% gold and 80% in North America.

The objective is to build a portfolio of 25-30 royalties around some of the world’s larger mines, with the goal that 1 or 2 will be successful. We view these as bolt-on acquisitions that resemble perpetual lottery tickets. To date, 95 properties have been submitted and 12 new royalties have been purchased. Our total investment to date is approximately CDN$140,000. In most cases Abitibi Royalties is entitled to 15% of the proceeds should the property be sold or if there is a monetary component to a joint venture on the property.  This twist could end up being worth more than the royalty. The royalty within this package that has the best potential to generate cash flow for Abitibi Royalties is the 2% NSR on the Menderes Project that surrounds Eldorado’s Efemcukuru mine in Turkey. Eldorado has established reserve and resources close to the property boundary and they have good drill results even closer. Although I wish this royalty was located in North America, the risk/reward ratio made sense. Our total acquisition price was CDN$36,000. If we lost this investment due to government intervention, it would have close to no impact on our Company. Abitibi Royalty shareholders should watch this royalty, because it could be the one that delivers the most value outside of our portfolio at Canadian Malartic.

By building this portfolio, we are getting a lot of potential upside and limited downside. We like these type of investments and look forward to adding more royalties through the coming year. 


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5. Investments - Agnico Eagle and Yamana Gold


In the table below, we show the value of our common stock investments at year-end and as of April 29, 2016. In addition, we show the income that has been generated by these investments. The cost basis is the value of the shares on the date they were received. It is not the cost basis used for tax purposes, which would be closer to zero.

Shares Company Cost Market Value Market Value> Income Total Return
    (March 20, 2015) (Dec 31, 2015) (Apr 29, 2016) (Apr 29, 2016) (April 29, 2016)
444,197 Agnico Eagle $16.9 m $16.2 m $25.6 m $0.6 m 55%
3,549,695 Yamana Gold $17.5 m $9.1 m $22.1 m $0.5 m 29%
Total   $34.4 m $25.3 m $47.7 m< $1.1 m 42%


We view both Agnico Eagle and Yamana Gold as well run companies that have a portfolio of stable, low cost mines that are located in good jurisdictions. Any gold company would love to own their top mines. Agnico Eagle is quickly earning the reputation as the best-run gold company in North America or as Bloomberg put it “the most resilient”. Sean Boyd, Agnico Eagle’s CEO, and his team have done a tremendous job managing the business for today and positioning it for the future.  

I continue to believe Yamana Gold represents good value, because its low cost per ounce should decline relative to its peers, as it has runoff the currency hedges that were preventing it from realizing the depreciating currencies where its mines are located. In addition, there have been substantial tax reforms in Argentina that will benefit its mines and projects in that country. Yamana Gold has been making a number of smart moves to improve its business.

These shares should be viewed as the equivalent of owning a very valuable royalty on a mine due to the amount of cash flow they generate through dividends and covered calls premiums.


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6. Cash Flow


In mining, like a lot of industries, analyst and investors tend to focus on revenue (topline) or earnings (bottom-line). What is important to me is cash flow (more money coming in than out). Free cash flow from operations, which continues to grow and can be reinvested and thus compounded (my grade 10 business teacher said compounded rates of return would be the best lesson I learned in high school…he was right). You should be leery of companies that cannot generate cash, but instead consume it.  Our basic premise is to consistently improve the earnings power of our Company.

April 2015 was the first time Abitibi Royalties generated cash flow and for the year it totaled approximately CDN$875,000. As of the date of this letter, we have generated approximately CDN$630,000 in 2016 and expect to end the year above last years total. The Company’s cash flow is expected to increase further in 2017 and 2018 based on our royalties at the Jeffrey Zone and Barnat Extension entering production


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7. Share buyback


Share buybacks in mining are rare. The usual argument is that gold companies trade above their net asset value (NAV) and it would be value destructive to buy back shares. However, issuing lots of shares certainly hasn’t made the gold industry a star performer! In 2015, there were a few other precious metal companies besides Abitibi Royalties that announced their intention to repurchase shares. Share repurchases (assuming the price is right, as outlined below) would seem to make sense versus an acquisition: 1) you don’t pay the typical 20-40% “premium” above market, 2) there are no “golden parachutes” paid to management and 3) you already know the assets (since you own them!), reducing the risk of finding a hidden skeleton(s), which are common in takeovers.

You will often hear that a mine is a depleting asset. This is true, but this can also be said about other products/assets (when was the last time you purchased an original iphone or a ipod shuffle from Apple? Those products have very short lives relative to any mine).

Some of the best mines have been operating for very long periods of time. Consider these examples: 1) Rio Tinto’s Bingham Canyon in Utah 110 years, Goldcorp’s Dome Mine in Timmins Ontario 106 years (just recently shutdown), Goldcorp’s Red Lake Mine in Red Lake Ontario 68 years, Barrick’s Goldstrike Mine in Nevada 40 years and Freeport McMoran’s Grasberg Mine, approximately 25 years.  Most executives I have encountered tend to think the grass is greener on the other side. Sometimes this is true. Most often it is not. I like to believe it is greener where you water it.  Share buybacks are not right for every company, but they deserve more consideration than they are being given in our sector. I think we need to have more faith in our assets and not somebody else’s. Owning a single wonderful business has made a lot of great fortunes. If you understand that business, you don’t need to own many of them. I think it is best for shareholders when management is focused on one great asset, maximizing every bit of value from it.

In last year’s letter to shareholders I stated “some shareholders have worried that we will trade as a holding company or directly put, trade at a discount to our net asset value (because we own so many shares in Agnico Eagle and Yamana Gold relative to our market capitalization). I don’t believe this will happen…but if it did, it could then represent an attractive buying opportunity for investors.” I was flat out wrong. For much of 2015 our market capitalization equaled the market value of our shares in Agnico Eagle, Yamana Gold, plus our cash. I continue to believe that when our share price trades at such levels, it represents an attractive opportunity to repurchase our own shares.  The objective is to pay $1 for $2 worth of assets in order to benefit the owners of the Company over the long-term. We are essentially buying back our portfolio of royalties for free (assuming the value of the shares in Agnico Eagle and Yamana Gold stays the same).

Buybacks are the best use of shareholders capital when the trading price of a company’s shares, conservatively calculated, is significantly below management’s estimated after tax net present value. To date, we have repurchased 77,600 shares at an average price of CDN$3.19 per share. Should our shares trade at a price where the criteria outlined above are met, we will be aggressive buyers of the shares. It is important to note that these repurchases are coming from cash flow and not cannibalizing our treasury, which would be self-defeating.

A last thought on buybacks. Without free cash flow and a clear understanding of the value underpinning the company, buybacks can and will often backfire. These companies will most likely have to issue additional shares at some point to fund their future growth. It reminds me of Russian roulette. This isn’t to say the management teams aren’t looking out for shareholders’ best interests, but investors should be aware that the capital allocation strategy could be flawed and that any increase in share price due to the repurchases is probably temporary. As the old saying goes in the world of capital allocation“if you are not creating value, you are destroying it.”

Assuming we can keep purchasing $2 worth of assets for $1, my goal is to see our share count reduced from 10.9 to 10.0 million over the next 3 years. This would increase your ownership in Abitibi Royalties by approximately 8%.


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8. Gold Price


There continues to be many individuals in the gold sector that are better at predicating future prices than me. The chances of my gold price forecast being right is probably no better than 50% (and that’s being a bit optimistic). However, I think it is important for any company and its management team to analyze where they are in the cycle. You want to buy low and sell high. However, history has proven this is easier said than done.

Last year we stated, “Gold’s in a down cycle, and it’s competing against a strong U.S. dollar that is higher against every major world currency. It is also losing interest due to lower oil prices, the expectation we could see lower inflation. I expect both themes to continue into 2015, along with the potential for U.S. rate hikes.  The price of gold was USD$1,200 per ounce to start the year and we are basically flat one-third of the way through 2015. As an industry, I believe that we are closer to the bottom than the top. This may not provide a lot of comfort. I believe the gold sector started to bottom about a year ago and the industry is now treading water. For most companies, I think there is more treading to do before gold and share prices go up. Hopefully I am wrong.”

In 2015, the price of gold was down 12% in U.S. dollars and up 6% in Canadian dollars. Since we are a Canadian company, who reports its financials in Canadian dollars and trades on a Canadian exchange, it is also important to mention the Canadian gold price. I would consider 2015 to have been a year where the gold price “treaded water”.  As I write this letter, the gold price is USD$1,260 per ounce, still fairly flat.

I believe the United States will continue to raise interest rates in 2016, albeit at a measured pace, while many countries around the world will remain in negative interest rate territory. This lends me to believe gold will be range bound for the reminder of the 2016. The bottom of my range is USD$1,125 per ounce, while the top is USD$1,425 per ounce (I know what you are thinking, “USD$300 dollars leaves a lot of room for error,” I couldn’t agree more!).


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I hope this second annual letter to shareholders has given you insight into your investment. We end this letter with a balance sheet that is as good as gold, with securities (market value) and cash valued at approximately CDN$49.4 million (value of shares calculated as of April 29, 2016 and cash balance as of December 31, 2015), NO DEBT, growing cash flow and exposure to what could become a world-class royalty at Odyssey North. I believe the best days for Abitibi Royalties are very much ahead of it.



Ian Ball
President and Director

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