Osisko keeps up the pace

SITE VISIT

Malartic, Que. — Heading west out of Val d’Or, Que., on the way to Osisko Mining’s (OSK-T) Canadian Malartic gold project, a headframe comes into view on the left side of the highway. It’s Agnico-Eagle Mines’ (AEM-T, AEM-N) Goldex underground mine and while our destination is the town of Malartic, 25 km away, John Burzynski, Osisko’s vice-president of corporate development, notes the proximity of the operation to Val d’Or.

“Keep that in mind,” he says to a van full of visitors as we begin the short drive. “It’s very much like Canadian Malartic.”

Like Goldex, the Canadian Malartic mine is being built on the edge of a town. However, as an open-pit operation producing 630,000 oz. gold per year over its 12.2-year lifespan, Osisko’s mark on the Malartic landscape will be a little more obvious.

The mine, expected to reach production next May, has already sparked big changes. In fact, more than 200 houses in the south end of the town of 3,600 were sitting right on top of part of the planned open pit, prompting a complex relocation operation — part of which was filmed by the Discovery Channel. At a cost of about $130 million, Osisko bought about half of the homes at a 25% premium and demolished them, and moved and upgraded the other half, creating a new neighbourhood in north Malartic.

Often touted as one of the best mining jurisdictions in the world, Quebec is also possibly the only place where such a plan would be feasible. But even here — a province that offers generous incentives to mineral explorers and producers — Osisko’s management is well aware that community support has to be earned.

“One of the things we’re most proud of has been our ability to earn the social licence to do the relocation — and to have it turn out so well,” says Osisko president and CEO Sean Roosen.

Osisko’s growth over the past five years — from a junior with a market cap of $6 million to a near-producer worth more than $5 billion — has been amazing to witness. But it is in the relocation that the company’s spirit has emerged.

The attention to detail, rapid pace and careful planning that have characterized the move, and the attendant building of new community facilities (long-term care facility, schools, subsidized housing, etc.) demonstrate the kind of company Osisko has become. The new facilities are built where possible with locally sourced materials and include such bonuses as geothermal heating. And the houses that were moved were furnished with everything from new paint and siding (chosen by the owners) to new furnaces and basements.

As for the homes that border the operation, they will be separated from the edge of the open pit (which post-mining will be turned into a lake) by a 5-to 15-metre high, 150-metre-wide “linear park” that will act as a physical barrier to the noise and dust generated by open-pit mining, as well as a visual barrier.

Other aspects of the operation — where construction began last August — have also been designed with Malartic residents in mind. The crusher, for example, was installed seven storeys underground to minimize dust and noise, as well as save on fuel for the trucks hauling ore to it.

Osisko sunk its first hole at Canadian Malartic in March 2005, building on about 55,000 metres of drilling carried out by past owner Lac Minerals. Since then, the company has kept up a relentless pace. The project hosts the past-producing underground Canadian Malartic mine, and Lac Minerals, which was eventually taken over by Barrick Gold (ABX-T, ABX-N), had proved up what looked to be a small open-pittable deposit with about 500,000 oz. gold in historical resources. Osisko paid just $80,000 for Canadian Malartic in 2004 (after the bankruptcy of its last owner McWatters Mining) and over time, added to its land holdings.

After posting an inferred resource totaling 6.5 million oz. gold in December 2006, Osisko followed with a scoping study in March 2008 and a feasibility study in November of that year that indicated a mine life of about 10 years with production at 591,000 oz. annually and an after-tax internal rate of return of 25.1%. The feasibility put operating costs at US$319 per oz., (after royalties and silver credits).

A reserve update in February 2010 increased reserves by 43% with the addition of the smaller but higher-grade South Barnat deposit, which is adjacent to and east of Canadian Malartic. Reserves now amount to 245.8 million tonnes grading 1.13 grams gold per tonne for 9 million oz. gold.

With the added reserves, life-of-mine average production was pegged at 630,000 oz. gold annually with the first five years averaging 673,000 oz. gold.

But the company is again aiming for better. Osisko is in the middle of updating its 2008 feasibility study to include South Barnat. The study will look at increasing throughput after the first three years of production to 60,000 tonnes per day (up from 55,000 tonnes), which could boost production to an average of 700,000 oz. gold per year over the first five years. It will also incorporate a higher Canadian dollar and updated metals prices.

To mine South Barnat, Osisko will have to deviate a portion of Highway 117, which overlies the deposit. The company expects permits to do so in the third quarter of this year.

South Barnat has been added to reserves assuming that the deviation will get the go-ahead and that all mining permits will be in place for the deposit by 2012.

Capex at Canadian Malartic has increased modestly to an estimated $956 million (from US$723 million in the feasibility). However, Roosen estimates that the company’s inhouse engineering team (boasting 500 collective years of experience) has cut costs by about a quarter, and shaved a year off the project’s development timeline.

Much of the recent mainstream media coverage of the company has focused on the glitch Osisko encountered at Canadian Malartic. A single Malartic resident, Ken Masse, whose house is located on the deposit, has refused to either sell his home or allow the company to move it.

Of Masse, Burzynski said in June: “He’s not a conscientious objector. It’s pure capitalism.”

According to media reports, Masse had been asking for $1 million for his house (actually his mother’s). But the battle appears to be over. The company applied to have Masse’s house expropriated in June and in August, he was finally evicted.

Now, a Quebec tribunal will decide his compensation and determine the fair value of the house.

Oodles of upside

With a $372-million takeover of Brett Resources and its Hammond Reef gold project in northern Ontario, now complete (the friendly, mostly-shares deal was a nnounced in March and completed this summer), Osisko now has another project to advance. And it is planning to bring the same energy and philosophy of drilling “bulletproof resources” to Hammond Reef as it has to its flagship project, where it’s drilled close to 800,000 metres.

Meeting its ambitious goal of bringing Hammond Reef online by 2015 would plant Osisko firmly in the big leagues, making it a 1-million-oz.-per-year gold producer.

The large, low-grade and near-surface deposit — which Roosen refers to as “Canadian Malartic without the relocation” — hosts inferred resources of 259.4 million tonnes grading 0.8 gram gold for 6.7 million oz. Three drills are currently working the deposit to upgrade and expand the resource, but that could be ramped up to 10 to 15 rigs, Roosen says.

In August, step-out holes intersected a new, high-grade extension at Hammond Reef, with one hole hitting 84 metres of 2.78 grams gold from 250 metres depth and another 60 metres of 0.74 gram gold from 402 metres.

The company is also exploring five additional targets near Canadian Malartic that could ultimately add to the mine life: the Southeast Extension, Western Porphyry, Jeffrey, Norrie deep target and Gouldie zones.

Lastly, Osisko is continuing to build its pipeline through joint v
entures with juniors exploring near Canadian Malartic, including the Duparquet joint-venture with Clifton Star Resources (CFO-V), 90 km to the northwest. Duparquet will see 120,000 metres of drilling this year.

Osisko’s success has spurred consistent takeover speculation, Roosen said in June. “We hear the rumours every four to six weeks.”

But the company has only just adopted a shareholders’ rights plan this summer. And after Kinross Gold’s (K-T, KGC-N) bid for Red Back Mining (RBI-T) in early August, there has been renewed talk of a gold major making a play for the company.

UBS analyst Dan Rollins has suggested that Kinross or Goldcorp (G-T, GG-N)– which already owns about 11.5% of Osisko and recently sold three assets in separate agreements totaling around $1 billion — could be candidates.

Whatever happens on that front, it’s clear the company is focused on continuing to create value for its shareholders.

At $14 a share, Osisko may seem expensive (in late 2008, the shares dipped briefly below $2), but Roosen points out that the company is due for a re-rating once commercial production begins next year. In June, Osisko traded at about 1.2 times its net asset value (NAV), while its peer group already in production trade at an average of about 1.9 times NAV.

“We think that sets the stage for a significant value increase,” Roosen says.

He adds that within six months of production, Osisko will qualify for the investment of more large funds, which could provide additional movement for the stock.

At presstime, Osisko shares traded at around $14 in a 52-week window of $6.88-$14.48, with 369.6 million shares outstanding. The company is fully funded and at the end of June had about $581 million in cash and equivalents.