Osisko’s Hammond Reef resource swells to 10.5 million oz. gold

The owner of Canada’s largest gold mine has news from the largest drill program currently being completed at a mining project in the country. Even as it rapidly ramps up production at the newly commissioned Canadian Malartic gold mine in northern Quebec, mid-tier gold miner Osisko Mining (OSK-T, OSKFF-Q) has been busy drilling 388,000 metres with 18 rigs at its up-and-coming Hammond Reef gold project located about 200 km west of Thunder Bay.

Global inferred resources at the low-grade, bulk-tonnage deposit have risen 65% in a new resource estimate to 10.52 million oz. gold based on a 0.3-gram-gold-per-tonne cut-off grade, an increase of 4.16 million oz. from the previous estimate released by Brett Resources in 2009.

The in-pit inferred resource, now at 6.86 million oz. gold based on a Whittle-optimized pit shell using a gold price of US$1,200 per oz. and 0.28-gram-gold cut-off grade, is contained in 336.5 million tonnes averaging 0.63 gram gold per tonne. This represents a slightly lower grade than the 0.8 gram gold previously forecast, though Osisko points out the overall strip ratio has simultaneously declined from 1.43:1 to 1.25:1, waste to ore.

The resource estimate sent Osisko’s shares down 63¢ or 4.8% on the day it was released to $12.50 on 4.43 million shares traded.

In comparison, Canadian Malartic’s in-pit resource as of March 2010 was 238.1 million tonnes grading 1.2 grams gold containing 9.17 million oz. in the measured and indicated categories, using a 0.34-gram-gold cut-off grade.

Sean Roosen, president and chief executive officer of Osisko, commented: “While there is no doubt that the resource has a lower overall grade than Canadian Malartic, an important point to note is that the new in-pit resource for Hammond Reef has a low strip ratio of 1.25 and is quite robust, as it is based on current processing and mining costs at Canadian Malartic, adjusted for higher electrical costs in Ontario.

 “Osisko completed 300,000 metres of diamond drilling in just over a year to get to today’s inferred resource numbers, a huge achievement in such a short period of time. By February, 2012, we will have completed an additional 130,000 metres of drilling on a 50-metre-by-25-metre grid to allow for the conversion of the entire in-pit resource to indicated category. To convert approximately one-third of the resource to measured category, we also plan to drill an additional 70,000 metres on a 25-metre-by-25-metre grid. The next resource update, slated for the end of the first quarter of 2012, will be followed by feasibility for Hammond Reef.”

The mine plan at Hammond Reef is now being modelled using two pits where the A and Mitta zones form a contiguous deposit and the 41 zone is separate. The US$1,200 Whittle shell uses approximate maximum dimensions of 2,500 metres in length, 1,050 metres in width and a vertical depth of 380 metres. Average gold recovery for the pit shell is 91%.

A positive preliminary economic assessment for Hammond in 2009 by Brett Resources – which Osisko took over in early 2010 in an all-stock deal worth $372 million – estimated that the deposit could produce an average of 369,000 oz. gold annually at an average direct cash cost of US$414 per oz., net of silver credits, over a projected 14-year life. Production would be higher in the first six years — 463,000 oz. per year on average — while direct cash costs would be lower at US$360 per oz. The study assumed a base-case gold price of US$825 per oz. and used the previous inferred resource estimate (259.4 million tonnes at 0.8 gram).

Initial capital costs for the proposed 50,000-tonne-per-day mine are estimated at US$614 million, with life-of-mine costs of US$772 million. Payback would be in 4.2 years with the higher production rate in the first six years.

At the base-case gold price of US$825 per oz., the project has a net pretax cash flow of $1.19 billion, with an after-tax net present value of US$413 million using a 5% discount rate.

Osisko hopes to become a 1-million-oz.-a-year  gold producer by 2016 and will need Hammond Reef to get it there. The company aims to produce around 700,000 oz. gold from Canadian Malartic when it reaches full design capacity, at average cash costs of around $450 to $500 per oz. After reaching commercial production in May, Osisko poured 73,814 oz. gold in the third quarter, falling short of analysts’ expectations at an average annual rate of 295,000 oz. Operating costs for the quarter are scheduled to be announced Nov. 11.

The company has a 52-week share price range of $10.87-$16.39 and a market cap of roughly $4.8 billion.