Osisko misses the spot

Osisko Mining (OSK-T) had a rough start as it kicked off its first full year at the Malartic gold operation near Val d’Or, Que., with operational setbacks impacting first-quarter performance, coupled by a temporary shutdown of the mill in May.

As the company struggled to ramp up Malartic, a fire broke out at the plant on May 9, causing Osisko to take the mill offline for to two to three weeks. Its share price plunged days after the company said delays would affect second and third quarter production and in turn would lower its output target for the year.

The bleak near-term outlook sent analysts trimming their price targets, but most expect Osisko should recover from the unfortunate twist of events. 

“We continue to believe in a steady re-rating of the shares as Malartic ramps up, albeit at a reduced pace, on both grade and throughput in 2012,” wrote Canaccord Genuity analyst Steven Butler in a May 11 note to clients. He lowered his target price from $16 to $12.75, but kept a speculative buy on the stock.

Taking into account the delayed ramp up and production revision, Cormark Securities cut its price target to $18 from $22, while Dundee Capital Markets’ target declined to $13 from $16. Both firms maintain a buy on Osisko shares, noting their positive sentiment towards the project remains unchanged.

But the first three months of the year were “clearly a disappointing quarter for the company with numerous challenges being experienced at Canadian Malartic,” said TD Securities’ analyst Daniel Earle, reducing his target to $11 from $14, advising investors to hold the stock.

For the quarter, the Montreal-based junior earned $29.4 million, or 8¢ per share, below consensus of 12¢ per share.

Malartic, the company’s sole mine, produced 91,178 oz., higher than previous quarters, but fell short of the company’s 109,000 oz. target and the likely consensus of the Street. Cash costs were $860 per oz., a 6% improvement over the preceding period.  

The company says it would have likely hit its first-quarter output target, if installation and start-up of the secondary cone crusher went smoothly.

But the crusher failed to perform as expected and was routinely adjusted, causing a week of downtime in March followed by five days of partial production, impacting tonnage.

For the period, Osisko processed 37,532 tonnes per day at an improved grade of 1.05 grams. The gold producer now aims to complete the secondary crushing facility in July compared to June. This should bring the mill towards its design capacity of 55,000 tonnes a day by September, which is three months later than planned.

The mill before shutting down was churning through 42,000 to 46,000 tonnes per day.

However, a cost overrun of $13 million is expected to bring the mill to design capacity. To allow for more production flexibility, Osisko plans to invest another $12 million for a second pebble crusher, which should be in service by September.

During the first quarter, the company also had some problems accessing the higher grade ore, adding mining activities were affected by low availability of loading units and by wet spring and wind conditions.

However, most analysts believe Osisko should be able to navigate through these hurdles.

Currently, Osisko is assessing the damages of the fire that broke out on May 9 around midnight and raged for nearly five hours before being extinguished. The fire is believed to be started by welding activities near the mill’s number four cyclone.   

Preliminary inspections indicate the fire damaged the number four cyclone, an overhead crane in the cyclone bay, along with the structure of the roof above the bay. Limited damages were done to the wall of the bay, but the SAG or ball mills and other areas of the mill were unharmed.

Fortunately, none of the roughly 50 workers at the plant were injured during the incident.

On May 10 the company said mining operations are continuing outside of the mill area and all employees are back at work. It added no industrial chemicals were released during the fire.

Osisko plans to update investors shortly on its 2012 production guidance for Malartic. For this year, Osisko had previously anticipated output of 610,000 and 670,000 oz. gold, and annual production for the first five full years of operation to average 625,000 oz. gold. 

The company touched a new 52-week low of $6.47 on May 14, with shares sliding over 24% since reporting the fire and its first-quarter struggles.