Update: Quebec gov’t greenlights Osisko’s Canadian Malartic

Malartic, Que. — Osisko Mining (OSK-T, OSKFF-O) has jumped another big hurdle in the rapid development of its wholly owned, $1-billion Canadian Malartic gold project in Malartic, Que., with the provincial government in mid-August approving an order-in-council authorizing the completion of the mine.

Osisko says construction work on the open-pit mine and mill will begin shortly, as soon as the formal authorization certificates are issued.

Osisko’s shares responded well to the news, rising 24¢ to $7.28 and re-approaching the all-time high of $7.70 reached a week earlier, immediately after a $149.5-million bought deal was announced.

The mine construction work is slated to take 18 months, with the mine and mill due to be fully operational by the second quarter of 2011. The mine is set to produce 500,000 to 650,000 oz. gold per year, with the mill chewing through 55,000 tonnes of ore per day.
Some 800 direct jobs will be created during the construction phase, and 465 new, permanent direct jobs during the minimum 10-year mine life.

It’s already been a remarkable summer for Osisko, with the junior entering into the $149.5-million bought-deal financing on Aug. 12 with Thomas Weisel Partners Canada and BMO Capital Markets. Assuming an overallotment option is exercised, the two brokerage houses will pick up 21.26 million shares at $7 apiece.

A couple of days earlier, potential suitor Goldcorp (G-T, GG-N) announced it had bought in the open market 8.5 million Osisko shares and 4.3 million warrants, with each warrant exercisable into one Osisko share for $5.45 until Nov. 17, 2009.

Goldcorp now beneficially owns or controls 33.8 million Osisko shares plus 4.3 million warrants which, if exercised, would translate into Goldcorp owning 15% of Osisko’s shares.

“We found that out the same time everybody else did, with the press release,” says John Burzynski, Osisko’s vice-president of corporate development, of the Goldcorp buy-in. “We’re quite flattered that one of the most senior and fastest-growing gold companies is taking a strong interest in our work. Obviously, it’s a stamp of approval.”

EurAsia Holding, a private German fund set up by Burzynski and Osisko president and chief executive Sean Roosen, still owns 39 million of Osisko’s 262 million outstanding shares, plus warrants.

Burzynski attributes the strong hands of the Eurasia shareholders as a primary reason why Osisko has not yet been acquired by a major gold miner, despite the rumours that have swirled around the company for more than a year.

Says Burzynski of the takeover talk: “It’s safe to assume that there are a lot of senior mining companies around the world that have a very close understanding of what we’re doing. It’s obviously a deposit in a good jurisdiction with very few hurdles left to go until production.”

And that’s not all on the money side: in early July, Osisko struck a deal with the provincially owned Societe generale de financement du Quebec (SGF) for a $75-million convertible-debenture financing.

The debentures would carry an interest rate of 7.5% and be convertible at $9.18 per share. The hitch on the SGF financing is that it requires an additional $225 million in financing — which will be partly fulfilled with the closing of the latest $149.5-million bought deal.

Plus, in June, Osisko closed a $10.6-million flow-through financing by placing 1.2 million shares at $8.75 per share.

But Osisko closed the biggest financing in its history in February, with the company bagging $403 million. The company issued 88.55 units with a single unit comprised of a share and half a warrant, with a full warrant exercisable into a share at $5.45 until Nov. 17, 2009.

These well-in-the-money warrants will most likely bring into the Osisko treasury another $241 million when exercised in the fall.

“We felt this was a fundamental change in the nature of the company,” says Burzynski of the February financing. “Up until that point, we were a large project that had a very large financing need, and following that, we were one of the few, if not only, significant-sized projects that didn’t have a financing need anymore.”

At the moment, Osisko’s treasury stands at $400 million with no debt, but that doesn’t count up to $541 million yet to flow in from the bought deal, the SGF loan and two sets of warrants expiring in mid-November (one set well in the money at present; the other not, with a $7.90 strike price).

Assuming all that money rolls in (except for the out-of-the-money warrants), that would leave Osisko around C$100 million short of the estimated US$789 million needed to build the mine.

But Burzynski says that, because of the difficult markets in the past year, Osisko is acting conservatively, and is not counting on any of the warrants being exercised. The company is therefore assuming there remains at the moment a $300-million financing shortfall for the needed capital expenditures.

“We’ve been working with other elements of ‘Quebec Inc.’ to fill in that ($300-million) gap,” Burzynski says.

If Osisko fills that gap and then, in mid-November, the $241 million comes in from the warrants issued in February and another $75 million comes in from warrants issued in 2007, Burzynski says the extra money could be used to pay down debt.

At the same time, Osisko expects the capex estimate to decrease in the fall, when an updated feasibility study is to be released. This revised study will include a new mine plan that will incorporate the higher-grade South Barnat deposit plus cost estimates that reflect today’s broadly lower-cost environment.

In the original November 2008 bankable feasibility study, which didn’t include South Barnat as reserves, the operating and capital expenditures per oz. are estimated at US$319 and US$146 per oz., respectively, using a C$1.18 exchange rate.

As of November 2008, reserves stood at 6.3 million oz. gold in the Canadian Malartic zone, comprised of 183 million tonnes grading 1.07 grams gold per tonne, using a US$775-per-oz. gold price. It’s the largest gold reserve in Canada, and fifth largest in North America.

“And it’s the only large gold reserve in North America not held by a senior-intermediate or senior gold mining company,” Burzynski notes.

Raising the gold price to US$1,000 an oz. adds a million ounces to the reserve base, contained in 253 million tonnes grading 0.89 gram gold.

The deposit has a slightly higher-grade core, with gold hosted by a dioritic porphyry and metasediments, and associated with pyrite.

The brilliance of the Osisko geological team was to recognize only five years ago the tremendous gold-bearing potential of the porphyries immediately south of the famed Cadillac structural break.

Over the past century, most attention has been focused on high-grade gold veins or massive sulphides within the break or immediately north of it.

Indeed, Osisko — which now boasts a market capitalization of $1.8 billion — picked up its cornerstone Canadian Malartic property in November 2004 for a mere $80,000 at a McWatters Mining bankruptcy sale, where no reasonable offers on assets could be refused.

Osisko subsequently added to the property by a combination of claimstaking and deals with neighbouring claim holders.

(McWatters had picked up the property and its sulphidic-tailings environmental liabilities for a nominal amount from Barrick Gold [ABX-T, ABX-N] when the major exited the province during the last zenith in gold prices. It would be a bitter pill for Barrick to now pay billions of dollars for a property it essentially walked away from not too long ago.)

The South Barnat deposit, immediately to the northeast of the South Malarctic deposit, hosts measured and indicated resources of 42.5 million tonnes at 1.64 grams gold (2.2 million contained ounces) using a cutoff grade of 0.36 gram gold per tonne.

Much of that material should move into the reserve category later this fall. Burzynski says there was some delay in doing this upgrade over the summer because the company didn’t want to set back its permitting process, which has been based on the November 2008 feasibility study.

But blending the higher-grade ore from South Barnat with Canadian Malartic ore will produce a combined head grade of around 1.35 grams gold, rather than 1.1 for Canadian Malartic ore alone. This blending could conceivably boost annual cash flow by around US$70 million with the same mill throughput.

“The benefit of South Barnat is very marked here,” Burzynski says. “It’s changed the complexion of the project.”

There is also significant expansion potential to the southeast of the Canadian Malartic deposit, called the Southeast Extension, plus four targets south of the Cadillac break: Amphi Porphyry and Western Porphyry west of Canadian Malartic; and the Norrie and Jeffrey zones to the east of Canadian Malarctic.

Exploration and definition drilling has been ongoing at a blistering pace using six diamond drills, with 650,000 metres of drilling to date, including 200,000 metres planned for 2009.

A major, US$86-million effort to relocate some 200 houses from on top of, and near, the proposed Canadian Malartic pit to the northeast end of town is about 75% complete and progressing smoothly.

The company has been building substantial new facilities, including a large community centre, elementary school, an old folks’ home, an adult education centre, a daycare and subsidized housing.

Next, highway 117 will need be rerouted away from the mine.

Another theme in the Osisko story is the growing presence of former staff of Cambior, the Montreal-based gold miner acquired by Iamgold (IMG-T, IAG-N) three years ago. About 30 of Osisko’s 100 or so employees are Cambior alumni, including chief financial officer Bryan Coates and proven mine builder Luc Lessard, who is vice-president of engineering and construction.

So rather than developing the deposit and looking for a quick sale, Osisko is genuinely building up the in-house expertise needed to become a mine operator.

Given the rapid pace of Canadian Malartic’s development, that day may not be too far off.