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 $)
Relative
Results
  Gold Price
(Cdn $)
Gold Price
(US $)
2014 643% -5% 648% 9% 0%
2015 29% -11% 40% 6% -12%
2016 161% 48% 113% 5% 9%
2017 5% 4% 1% 6% 14%
   
Compounded Gain 127% 7% 120% 6% -2%
Overall Gain 2,529% 30% 2,499%   25% 7%

 

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

 

May 18, 2018

To the Shareholders of Abitibi Royalties Inc.

 

Abitibi Royalties' share price increased by +5% in 2017 and by all accounts this is a pretty average return. Returns should be compared against our peer group (Gold Miners Index Canadian Dollars in 2017: +4%) and the gold price (Canadian Dollars in 2017: +5%).

What caused our share performance to fall back in line during 2017? I believe the largest factor was the initial resource at the Odyssey Project located at the Canadian Malartic Mine, where we hold a royalty. There was a general unknown associated with Odyssey's potential resource size and newly discovered zones were left out of the calculation (and hard to quantify). Since then, we have seen an updated resource for Odyssey, an initial resource for East Malartic and 140,000 metres of new drilling for 2018. This has led to a strong performance during the first half of the year. In 2018, the share price has increased an additional 8.5% (May 15, 2018), raising our price to CDN$10.05 per share, for a market capitalization of approximately CDN$114.5 million.   

This year's letter will focus on two main themes:

  1. Canadian Malartic Mine Exploration: We will discuss the deeper bulk tonnage potential. Although we don't control the underlying asset, it is our job to provide an honest assessment of the opportunities/risks associated with the projects where we own a royalty. Being able to understand the mineralized zones, future growth and potential cash flow is key component of our business.

  2. Building the Business: Over the past two years, we have been looking for the right opportunity to deploy our approximately CDN$40 million treasury. As you are probably aware, we have come up empty handed. This has been due to a lack of good opportunities. However, the mining sector is starting to look more compelling. We want to outline our criteria for investment as we look to grow our business.

My goal remains focused on becoming The Best Gold Company. By all accounts, we have had four successful years and our shareholders have been handsomely rewarded, but we still have a lot of work ahead of us. For me it is about growing the share price over the medium to long term. We continue to find ourselves studying companies like American Barrick (1985-1992), Goldcorp (1995-2005), Franco-Nevada and Berkshire Hathaway.  They are a wealth of information and the more we read, the more we learn. When joining Abitibi Royalties in August 2014, I thought it would take 4-8 years to achieve the goal of building The Best Gold Company. I have been in the job for 3.5 years, which gives me 4.5 years.

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1. Cash Flow

In 2017, Abitibi Royalties generated cash flow of approximately CDN$2.2 million (CDN$0.19 per share). This is up from approximately CDN$920,000 in 2016 (CDN$0.08 per share). It is important for shareholders to know that our largest (current) source of cash flow doesn't appear in our revenue line. Although I find this a little misleading, our auditors assure me it can't be changed. After flipping through our latest financials you will see this item under the heading "Financing Activities". This represents the premiums we receive from selling covered calls and put options on our Agnico Eagle and Yamana Gold shares.  Although we expect our royalties to become our main source of cash flow in the future, when we speak of cash flow today, option premiums are currently the largest contributor.

The simplest explanation as to how we intend to outperform the gold price and our peer group is to consistently increase the Company's free cash flow on a per share basis, year over year, while using this cash flow and cash on hand to make investments that are intended to have a compounding effect. However, I will be the first to acknowledge that the gold mining sector often does the opposite through ill-advised acquisitions (which are typically funded through equity).   

The Company's cash flow is expected to increase this year based on our royalties at the Jeffrey Zone starting in Q4-2018 (royalties from Barnat East are expected to begin in 2020). This increase excludes our two most important royalties at the Canadian Malartic Mine, Odyssey and East Malartic (there is potential for early cash flow as the operators build a ramp into the deposits and complete a bulk sample) or from the Near Pit Targets.

In addition to expecting cash flow to increase in the short and long-term, we expect to accomplish this without any new shares being issued (we expect the share count to DECREASE through share repurchases).

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2. Paradigm Shifts  

A quick Google search for "Paradigm Shift" returns the definition, "a fundamental change in approach or underlying assumption". Growing up, my three favourite gold companies were American Barrick, Franco-Nevada and Goldcorp. Each company created a tremendous amount of wealth for its owners after undergoing a big shift in terms of how their main asset was viewed.

American Barrick owned the Goldstrike mine in Nevada (where new metallurgical technologies for refractory ore and a much larger open pit design was combined with tremendous exploration success), Franco-Nevada owned the royalty on Goldstrike and Goldcorp operated the Red Lake Mine in Ontario (after 45 years and on the verge of closing, geologists discovered the world's highest grade ore-body in a part of the mine that was not considered prospective). A recent example is Osisko Mining, which took a property out of bankruptcy and transformed it into Canada's largest gold mine, Canadian Malartic (Osisko Mining developed the concept that a lower grade halo of mineralization existed at surface around the old mine and could be mined profitability on a large scale). It is this mine were Abitibi Royalties holds its most important royalty (eastern portion of Canadian Malartic) and where we believe a second major shift is occurring that has the potential to enhance the value of our royalties in a potentially big way.

Having spent the majority of my life, observing and working in the gold sector (my parents had me buying gold stocks at 5), two items stand out.  First, few great fortunes have been made investing in a mine that is already running well; it all starts with a major discovery (Pezim, Munk, McEwen, Friedland, Schulich or Lassonde accumulated their wealth through discoveries).  Second, I believe its important to look beyond an excel spreadsheet to see a paradigm shift. Costly examples include companies that passed on both Goldstrike and Red Lake.

Once a major shift is a success, imitators are sure to follow. However, most imitators seem to fail and cost investors money. Can you recall how many companies claimed to have a large, near surface, low-grade, open pit deposit like Canadian Malartic between 2006-2012, only to realize that the economics didn't stack up?

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3. Royalties at Canadian Malartic – Canada's Largest Gold Mine

In 2017, Canadian Malartic remained the largest gold mine in Canada, producing approximately 633,500 ounces of gold. None of this production came from areas where we hold a royalty, however this is set to change in 2018 as the mine has been granted its final approval to expand further east. Permitting for production at Odyssey and East Malartic commenced in Q4-2017. Cash flow is increasing, resources are growing and production permitting is underway for our two largest royalties. It is my belief, even at 36, I will never be associated with another discovery that will reach the ultimate size of Odyssey and East Malartic. 

A. Odyssey & East Malartic Projects (3% NSR)

In 2017, Agnico Eagle and Yamana completed one of the largest drill programs in Canada at the Odyssey and East Malartic Projects, totaling approximately 145,000 metres. In 2018, we are expecting more of the same, with an initial budget of 140,000 metres. We would not be surprised to see the number of metres increased, as the actual amount of drilling tends to be higher than forecast at Odyssey and more recently, East Malartic.  Abitibi Royalties holds a 3% NSR on the portions of Odyssey and East Malartic that are within the boundaries of Malartic CHL. Please see our corporate website (www.abitibiroyalties.com) for maps showing the project area.

It is my view that our NSR's at Canadian Malartic have the potential to become a cornerstone asset. The potential at depth was first realized in 2014 (followed by one year of no drilling) and today, we have a project that is meeting or exceeding each of our expectations.

  1. Updated Resource: The updated inferred resource for Odyssey, East Malartic, Jeffrey and Barnat East within the boundary of our royalty, now totals 2,313,925 ounces (32,779,651 tons (metric) at an average grade of 2.2 gpt). This is after only 2.5 years of continual drilling and is in addition to current proven and probable reserves and measured and indicated resources.  

  2. Near-Term Resource Upside: We believe there are several areas that could provide immediate growth in resources. The first includes the Jupiter Zone, which is part of the Odyssey Project. The updated resource estimate included only a "small" portion of the Jupiter Zone, where a number of significant drill results have been released. Also excluded from the resource update were the Internal North Zones. There is the Odyssey South Zone, which has been recently extended by approximately 400 metres onto the ground covered by our royalty.  Lastly, the resource estimate for East Malartic was calculated down to a depth of 1,000 metres. Historically, mining at East Malartic occurred to approximately 1,500 metres, including un-mined zones such as Norrie that encountered significant intercepts. These areas, combined with other mineralized zones, such as the CHL Porphyry and Shaft Zone, indicate that there is good potential to increase the total resources without even making a new discovery.

  3. In our 2016 letter to shareholders, we stated that the total number of ounces needed to be classified as a "world-class" royalty would be approximately 4 million.  At the end of 2017, we were more than halfway there. With the other areas still to be calculated into a resource and another large drill program underway in 2018, we are closing in on this goal.

B) Jeffrey and Barnat East (3% NSR)

The Jeffrey and Barnat East deposits, where Abitibi Royalties holds a 3% NSR are expected to become our next sources of cash flow. Jeffrey is expected to start in Q4-2018 and Barnat East in 2020.

Both deposits received their final permit for production and development is underway.  Although these deposits are smaller than Odyssey and East Malartic, I don't believe their current reserve numbers tell the entire story. Mineralization that falls outside of the reserve pit is now being looked at for its underground potential and more importantly, there appears to be good exploration potential at depth for both areas. When Osisko was the operator of the mine, the bulk of the drilling was confined to the first 300 metres, looking for gold mineralization that could be mined through open pit. The potential at depth was not given the same focus.  We would not be surprised if additional mineralization is discovered at these zones.

C) Near Pit Targets (2-3% NSR)

Abitibi Royalties owns royalties that are south (2% NSR on the eastern portion of Gouldie and all of the Charlie Zone) and east of the Canadian Malartic open pit (3% NSR on the eastern portions of Barnat East, Sheehan and the Barnat South Wall Contact). The operators of the mine began exploring these target areas in 2016 and are evaluating the possibility of production between 2019-2021, which could include the areas where we own a royalty. This would represent a new source of potential cash flow for Abitibi Royalties.  Although we don't believe these areas are in a reserve category, nor have they been officially approved for production, we like the steps that are being taken in order to move them forward.

We like royalties that deliver high rates of production over decades. It is even better when the gold mine is the largest in Canada, operated by two large companies with technical and financial strength and it is a large portion of each company's cash flow, providing a large incentive for them to keep reinvesting in the asset.  I am confident that we will be talking about new discoveries at Canadian Malartic for many years to come.

D) Option on Mill Capacity 

We believe our royalties benefit from a unique set of circumstances and this is due to the size of the Canadian Malartic mill. At 55,000 tonnes per day (tpd), it is one of the largest gold mills in the world. The biggest issue facing the Canadian Malartic Mine is replacing its reserves within the open pit, which have been falling for a number of years. This is the reason why our royalty enjoys a "free" option on expanded cash flows. Allow me to explain. Yamana has stated that Odyssey has the potential to operate between 8,000-10,000 tpd (no estimates have been provided for East Malartic). In order to accommodate this tonnage, the amount of ore coming from the open pit would most likely be reduced from 55,000 to 45,000 tpd. It is possible that if more underground resources are discovered, the percentage of the mill capacity devoted to the underground (and where we have our most important royalties) could increase. Very few royalties enjoy this type of immediate production upgrade, especially on a mill of this size. We feel this enhances the underlying value of our NSR's, as it could accelerate our future cash flows without the operators having to undertake an expansion of the process facilities.

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4. Agnico Eagle and Yamana Gold Shares

In 2015 we wrote, "The shares of Agnico Eagle and Yamana should be viewed as another royalty within our portfolio (and a valuable royalty at that!)".  We continue to stand behind this statement.

During the three years we have owned shares in Agnico Eagle and Yamana Gold, they have been a good source of cash flow through dividends/option premiums (approximately CDN$4.5 million) and share price appreciation (approximately CDN$3.3 million). Our initial shares that were worth CDN$35 million have generated a total value of approximately CDN$42.8 million  (May 15, 2018).  

This cash flow has been valuable for reasons that might not initially be apparent and are harder to quantify: 1) it helps pay the Company's operating costs, 2) has contributed to our share buyback and purchase of early stage royalties and 3) ensured that no new shares were issued in order to fund the Company, thus avoiding share dilution. This last point, although hard to quantify, is worth its weight in gold. The cost to existing shareholders when equity is issued is always high in mining (and most industries for that matter). Shares are typically issued at a discount to market (up to 20%), fees are paid to financial advisors (typically 7% of the total raised), warrants are given to new investors in order to "entice them to buy". Lastly, there are legal and exchange fees. Add it all up and you can see why issuing shares is a costly exercise.

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5. Growing the Business  

The most common question we get when meeting investors is "how do you plan to grow the Company?". My view is that being patient in the short-term will pay off. A few observations before we dive into this topic:

  1. Any acquisition will most likely be paid from our treasury or cash flow and not by issuing shares.

  2. Do we believe there will be opportunities that will offer a better risk-return ratio than holding cash and our Agnico Eagle/Yamana shares? The answer is yes. 

Our focus is to purchase royalties that will generate a rate of return that exceeds the cash and shares we hold. What do we look for in a potential acquisition, beyond price?

  1. What is the commodity? We wish to remain 80% gold. We have a better understanding of the gold industry than other metals. In addition, having 80% (or greater) of your cash flow coming from gold has historically led to a higher valuation in the market.

  2. Where is the royalty located? There is an old saying in mining that you shouldn't invest in a country if they don't wear winter jackets. There is a lot of truth to this statement! Often countries roll out the red carpet (via tax or fiscal incentives) hoping to develop their mineral industry or attract additional investment dollars to grow the economy. However, once a deposit is discovered and a mine built (unlike a factory, you can't just pick up and move) a once friendly government can become heavy handed. One of our greatest fears is that a country where we invest will not respect the rule of law and could cancel our royalty. This is one of the many things we review when evaluating potential investment locations.

  3. Who is the operator? If we are going to invest some serious dollars in a royalty we want to know the operator of the mine is committed/motivated and has the financial means to keep reinvesting in the asset through further exploration and development.  For example, Canadian Malartic is the largest gold mine in Canada and a very important asset for both Agnico Eagle and Yamana. Both care deeply about the mine after they paid approximately CDN$4 billion. Both companies have the technical and financial means to ensure its future remains bright.

  4. Is there a reasonable mine life? Can we foresee more years being added in the near term? Does the operator of the mine have a large land package that offers "blue sky" optionality? There has to be more incentive than the results of a discounted cash flow analysis in order for us to invest.

  5. How big is the investment? By nature, we are not a "bet the farm" type company. We would be rather foolish to risk what we have built and the organic growth we see in order to reach for a little more. Although we have no official limit on size, we follow a general rule of thumb of limiting our investment to 15% of the Company's overall market capitalization.

  6. We have to weigh each of these factors against buying back our own shares. In last two annual letters we went into depth on share buybacks and the arguments for and against (we are generally in favour).

Evaluating assets in mining is difficult. A single drill hole can drastically alter the value to the upside (so can an engineering flaw or community relations issue to the downside). We want to buy assets that have a bright future and not something that feels good short term. I read a recent example that highlights this point. Say you were offered a one-month job. The employer gives you two choices. You can either take a lump sum payment of $500,000 for 30 days of work upfront or you can take $0.01 that first day and have it double each day until the one-month contract expires. What would you choose? Without thinking most people would probably take the $500,000 lump sum. However, the one-penny, doubled every day for 30 days, would equal $5,368,709!  

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6. Stock Options – A Cost to Shareholders

It has been stated by a few media outlets that Abitibi Royalties has banned stock options and restricted share units (RSUs). This is incorrect. We have refrained from issuing either during the past 2 years, since there is typically an unrecognized cost to shareholders. It would be nice to take credit for this goodwill gesture, but it originated with Warren Buffett's Berkshire Hathaway. At Berkshire Hathaway, compensation is paid in cash and the recipient can decide to use the proceeds to purchase shares in the company.  This is not to say stock options or RSU's shouldn't ever be issued (we have issued both historically and detailed below).

It is my belief that there are only a few individuals inside most public companies that have a direct impact on share price. For example, a large gold producer will have both excellent and poor mine managers. I have seen how the staff at one mine can do an excellent job meeting their goals, but due to a poorly thought-out merger, the staff at the mine, who hold stock options, end up with no value. The same can be true for poor performers, where the gold price goes up, lifting the company's share price and potentially making them a king's ransom, despite operational goals being missed. I think it's better for everyone below the board and officers of a company to be compensated based on their own individual performance and in cash. Each person then has the option to use that cash to purchase shares at which point you are truly walking in the same shoes as your investors.

Approximately 8 years ago, I met an engineer who was getting ready to retire. He had worked his way up the corporate ranks. His comment one day astonished me. He had never in 35 years made money on his stock options. This is coming from an individual who is intelligent and hard working. Sadly, the lackluster performance of the Company's share price had a lot more to do with the overall corporate strategy than his individual performance.

There is also a cost to shareholders when stock options and RSU's are issued. Although determining the cost is open to debate (the Black-Scholes formula isn't perfect for making this determination). I believe most compensation committees of public companies would be hesitant about giving the same levels of compensation if the value associated with stock options was paid in cash.  Apart from the cost, it is my view that options could have the opposite effect of aligning boards/senior management with shareholders. Options are just that, an option to purchase a share at a set price. In the vast majority of cases, the option is exercised and the underlying share is sold immediately.  If during the life of the option the Company's share price declines, shareholders lose actual money, but the option holder loses nothing. A lot of companies let the options expire worthless and then grant more options, but this time at the new lower price. Since the option holder can't lose any actual money (but can make a small to large fortune should the stock go up) senior managers have been known to take very large risks with shareholders' money.

After reading this, you would assume that I am against people making money or becoming rich. This couldn't be farther from the truth. I joined Abitibi Royalties with this singular purpose.  As written above, both stock options and RSU's have been issued to myself.  How is this different? The cost to shareholders is actually no different. When you issue shares there is a cost and thought should go into why are they being issued (because none have been issued during the previous 12 months isn't a great answer). During my four years with Abitibi Royalties there has been essentially one grant of stock options and RSU's have been issued twice. Each time was for a specific reason or accomplishment:

  1. Stock Options 2014: Stock options were issued when I joined the Company because it had limited capital ($40,000 cash and $400,000 debt).  Majority came from other directors who agreed to cancel their own options. To date, I have exercised most of these options, paid the exercise price/tax and hold the shares. None of the underlying shares have been sold. 

  2. RSU's January 2016: The Compensation Committee rewarded me a cash bonus for 2015. I requested the cash bonus be converted into RSUs because our cash flow was still uncertain. RSU's were not granted on top of a bonus.

  3. RSU's March 2016: The Compensation Committee rewarded RSU's for settling the lawsuit with Agnico Eagle/Yamana Gold. It has been this transaction which has been the key factor for the Company becoming one of the top performing gold equities.

My last point on stock options concerns taxation. A lot of boards and management teams within the junior mining sector exercise options so the company has money to pay employees and suppliers. In lean years, this is the only source of capital for many explorers (you only have to go back to 2015 to see this). I don't believe stock options should be taxed when exercised (like they are today), only when the underlying shares are sold and the option holder has the proceeds from the sale. Otherwise, the holder cannot often pay the exercise price/tax and many people end up suffering. By taxing option holders right away, most people are forced to sell. This goes against the entrepreneur spirit, which Canada needs and doesn't align managements/boards with shareholders.

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7. Gold Prices & The Investment Theories    

In previous letters we outlined our thoughts on the price of gold and provided a range possible outcomes over the coming twelve months. Although we have once again provided our forecast, shareholders should know it is one of my least favourite parts of the job. However, gold prices play a key role in our cash flows and the valuation of assets we may wish to purchase. We have always believed it is important for shareholders to understand management's views on prices, since it will surely influence how a company is managed.  We also want talk about a few other gold related themes that are popular; peak gold and operating margin/leverage.

  1. Peak Gold: The theory behind peak gold is similar to peak oil, originally developed in 1956, which is that the world is running out of gold and annual production will peak and then enter into a permanent decline. Most theorists believe this will cause gold prices to increase.  At some point this prediction must come true since there is a finite amount of gold in the earth's crust. Gold grades around the world are falling, meaning companies are getting less gold out of each tonne of rock. We are also seeing other challenges such as getting mining permits approved and new tax regulations by foreign governments. Nowhere in the world is it becoming easier to mine. However, I don't foresee gold production falling off a cliff. China is now the world's largest gold producing country, not South Africa, not Canada, not Australia or the United States, but China, a country that had minimal gold production in 1980. It has come out of nowhere to become the world's leading producer. This has occurred without any of the world's largest gold companies having any real presence in the country. Processing plants are getting larger and driving down the grades that can be mined profitability, technology is advancing at mine sites and one should never discount human ingenuity, which in the oil sector has proven to be key at not only sustaining but growing annual production, which in 2017 was at an all-time highs. There are other factors one should consider such as un-economic ounces at mines that with a 10-15% increase in the price of gold would become profitable, adding to supply or the numerous gold discoveries around the world that would become viable should gold reach US$1,500-$1,600 per ounce.

    Gold is not like oil, copper, lead or iron that get consumed. Almost all the gold that has ever been mined still exists and can become a source of supply. Gold mining on an annual basis adds approximately 2% to the world supply. This percentage, even with flat production globally, will only decrease going forward. Over the next 100 years, we are confident gold prices will be higher than today, since it is the only currency that cannot be diluted meaningfully, but significantly higher prices near term based on peak gold seem unlikely.

  2. Operating Margin/Leverage: There are a few mining investment theories that look good on paper but fall apart when put into practice. The first is to invest in a marginal mine if you believe the price of gold is going higher because its profits will increase at a faster rate than a lower cost operation. For example, if a mine produced an ounce of gold for US$1,200 and sold it at US$1,300, it will earn $100 per ounce (excluding all other charges for this example). Let us assume the price of gold increases to US$1,450 per ounce. Profit would increase by 150%.  Now let us assume the same increase in gold but for a lower cost mine that produces for US$800 per ounce.  The second mine's profitability would only increase by 30%. Who wants 30% growth when clearly there is more profit to be made investing in a high cost mine during a rising gold market? Many large funds felt the same way during the last rise in gold, but costs are not fixed and most mines have operating costs that are denominated in currencies besides US Dollars. It is important to remember that gold is money and when prices rise there is a good chance the US Dollar is declining. If other world currencies are also rising against the US Dollar, costs at the mines will increase. Most fund managers like to point their finger at mining CEO's and say they got lazy controlling costs and this is why the share prices didn't outperform during the last bull market. The truth is a lot of the cost increase was due to currencies going up relative to the US Dollar. Similarly, mining costs were coming down between 2012-2016 and CEO's would often state they were finding cost savings, synergies or new technologies that were helping them become more efficient. There is no doubt there is some truth to this, but the biggest driver on costs up and down during the past 15 years has been due to currency fluctuations. 

    The second theory is that mining companies have more leverage to gold prices than gold royalty companies. Using the example above, a gold royalty company with a 3% NSR would earn US$36 per ounce at US$1,200 and US$43.50 per ounce at US$1,450 for an increase of 21%, a percentage increase that is far below our theoretical high and low cost producers noted above.   The key is that a NSR royalty (not a royalty stream) does not have any operating costs. It is a percentage of the gold price that goes right to the bottom line. Any increase in gold is captured with no offsetting costs such as local currency, labour or fuel costs. If the gold price declines, a royalty company's profits will decline less than the mine operators. This is a fact. If the price of gold increases rapidly, the mine operator will experience a greater increase in profitability than a royalty company but with increasing operating costs usually to follow, reducing the impact from higher gold prices (unions, suppliers, drillers, governments and communities will all come forward with an extended hand). Since an NSR is a right to a percentage of the revenue and not the costs, the cost creep stays with the operator.

  3. Gold Price: Before outlining our analysis for the coming twelve months, it is important for shareholders to review what we said last year, which included; "A couple of themes that we may see for the remainder of 2017: 1) Strength in US Dollar, 2) Rising yields in the US (perhaps at a slightly more moderate pace than the market is pricing) and 3) Flat to slightly positive yields in the rest of the world. What does this all mean for the gold price? My best estimate for the coming year is that the price of gold will be range bound, similar to 2016, which will include short term price swings up and down that will have commentators suggesting we are in the next bull or bear market. I am not sure we are in either. Therefore, my price range will be even more liberal in 2017. The bottom of my range is USD$985 per ounce (which I hope we don't see), while the top remains USD$1,425 per ounce."

    Gold stayed within our price range, touching a low of US$1,212 and a high of US$1,357. We run Abitibi Royalties based on a range of possible gold prices.  You will often hear commentators speaking of much higher prices because the US economy is in "shambles" or debt levels are too high. We are not in the doomsayer's camp. There haven't been many people who have made money betting against the US economy during the past 242 years, but a lot of great fortunes have been made betting with it.

    It appears the US and Canada (we will speak more about the Canadian Dollar below) are set for more rate hikes during 2018, unless some unknown factor causes the economy to slow or decline. What bonds will be yielding next year is anyone's guess, but we believe the odds favour them being higher than today.  World economies continue to improve and the current era we find ourselves reminds me of the mid-to-late 1980's. During this time, gold essentially moved sideways for a decade. Although the gold price may find itself in this price range, we would not be surprised to see some big swings up and down, with neither proving to be long-lasting. Shareholders who have followed our annual letter will notice a trend and that is our range for possible gold prices is getting wider and this year will be no exception.  This year the bottom of the range is $US1,000 while the top is US$1,625. We would expect gold price to average something in the middle. What does this mean for shareholders? First, we realize that investors don't typically purchase shares in a gold company if they think the price is going down. Most think the price is going up or you won't be investing. We will do everything possible to keep your upside to higher prices intact, while we run a business that could withstand and grow with prices near the lower end of our price range.    

    Equally important to our Company is the United States/Canadian Dollar exchange rate. Our revenues are stated in Canadian Dollars and so is our share price. A weaker Canadian Dollar helps our business. How? Assume the price of gold in US Dollars declines by 2%, but the Canadian Dollar falls by 10% (relative to the US Dollar), our revenues in Canadian Dollars would still increase despite the lower gold price. Today, when we make cash flow projections or consider stock repurchases, we use spot prices for gold and currencies. This could change should we find ourselves in a situation where prices rise or decline dramatically from current levels.

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Since writing our first letter in 2015, we have always felt that it was appropriate to share the core values that guide our managerial philosophy. For those of you reading this letter for the first time, you might find it useful to review last year's letter, as more detail is provided on each of these points.

Unlike a lot of companies, our approach doesn't change month-to-month or even year-to-year. We hope to avoid fads or follow the crowd, as the odds of that delivering us a superior share price over long stretches seems low. Should you ever see us veer from this path, we would encourage you to quickly contact us before we cost you and ourselves a lot of 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.  

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.

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Before we end this letter, it is important to acknowledge the recent transition of our Chief Financial Officer duties from Daniel Poisson to Rico De Vega who joined the Company in September 2017. We are very thankful for Daniel's services, which included 7 years as the Company's CFO. Daniel has agreed to stay on as Corporate Secretary and will continue in a managerial role, supporting Abitibi Royalties' financial and accounting activities. Rico joins the Company having held controller positions with various gold companies. It was clear during the interview process that he was extremely well qualified for the job. His enthusiasm and professionalism since joining, confirms we made the right selection and are fortunate to have someone of his caliber.    

I believe the best days for Abitibi Royalties are very much ahead of it.

Regards,
Ian Ball
President, CEO & Director

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