High-grade hits sweeten low-grade resource at Osisko’s Hammond Reef (September 27, 2010)

VANCOUVER — Since acquiring 100% of the Hammond Reef gold project through a recently completed $372-million takeover of Brett Resources, Osisko Mining (OSK-T, OSKFF-Q) has focused on expanding and upgrading resources in order to advance the low-grade gold property into a substantial open-pit mine.

Situated 23 km northeast of Atikokan in northwestern Ontario, Hammond Reef hosts an inferred resource of 259.4 million tonnes grading 0.8 gram gold per tonne at a 0.3-gram cutoff, or 6.7 million gold oz.

While the open-pit project is at an early stage relative to Osisko’s flagship Canadian Malartic mine located in Quebec’s Abitibi region and slated for production in 2011, Hammond Reef’s development is part of an ambitious plan to transform the company into a 1-millionoz.- per-year gold producer by 2015 (T. N.M., Aug. 23-29/10).

Osisko aims to produce 630,000 oz. gold per year from Canadian Malartic over its 12.2-year lifespan, starting next May, and is appropriately focusing most of its attention on building the estimated $956-million open-pit mine.

The company is looking to Hammond Reef to make the final leap into the ranks of mid-tier gold producers while exploring other projects, mostly in Eastern Canada, on its own or through joint ventures.

One challenge it faces is that Hammond Reef has long been perceived as an intriguing yet marginal project — at least before gold prices began their tear to US$1,000 per oz. and beyond. Several companies, including Falconbridge, carried out drilling programs in the 1980s and ’90s, but no reserves were defined and the project languished until it was revived by Brett in 2006.

Brett subsequently outlined the project’s current inferred resource (6.7 million oz. gold), which caught Osisko’s attention and led to takeover discussions.

Osisko’s president Sean Roosen says the company was attracted by the unique nature of the disseminated deposit, hosted in old rocks within an under-explored, 25-kmlong structural belt, and the potential for resource expansion. “That (potential) was the key aspect,” he adds, “but obviously higher gold prices were a driver here too.”

The Hammond Reef deposit is believed to have geological similarities to the Fort Knox gold deposit near Fairbanks, Alaska, which was poorly understood in the initial exploration stage but later became a successful open-pit gold mine.

As for Hammond Reef’s low grade, Roosen says, “It’s the type of project we like. We specialize in low-grade bulk-tonnage deposits.”

That’s an understatement. Helped by a rising gold price environment, Osisko has transformed itself from an exploration-focused junior with a $6-million market cap in 2003 into a well-financed mine-builder and emerging producer with a current market cap exceeding $5 billion by defining and developing low-grade gold resources in mine-friendly areas of Eastern Canada.

Canadian Malartic boasts reserves of 246 million tonnes grad- ing 1.13 grams gold, or 9 million oz. gold, plus additional resources. Osisko acquired the past-producer in 2004, following the bankruptcy of a previous owner. It was a bold but questionable move at the time, with gold prices just starting to break through the US$400-per-oz. level.

In contrast, Osisko’s acquisition of Hammond Reef has been well received by the market, helped no doubt by the favourable long-term outlook for gold prices now widely held by mining analysts and investors. Also, 97% of the known resource lies within 300 metres of surface and is amenable to low-cost open-pit mining with an overall strip ratio of 1.43-to-1, waste-to-ore. Other favorable features are: easy access and good infrastructure; simple metallurgy with average 93% recoveries; potential for additional resources both downdip and along strike; and potential for new discoveries at promising exploration targets elsewhere on the property.

“We’re starting to drill these newly generated targets,” Roosen says, adding that the company has 16 drills on the go — the largest drilling effort under way in Canada.

In addition to the current bulk-tonnage resources, Hammond Reef has potential for higher-grade mineralization similar to that mined on a small-scale in several areas since the first gold discoveries were made in the 1890s. And in August of this year, one of two exploratory step-out holes intersected 84 metres averaging 2.78 grams gold per tonne, including 9 metres averaging 17.36 grams gold, while testing the downdip extension of the known deposit.

The high-grade hits added a new dimension to Hammond Reef as they did not include “pinch and swell” vein-type mineralization of the type mined in the past, but rather disseminated gold and pyrite in an area of strong carbonatization.

Osisko sees potential for “significant volumes of higher grade material” and is continuing step-out drilling to test this potential, as well as the possibility of downdip extensions to the deposit beyond the known resources and along a minimum strike length of 1,400 metres to define the outer limits of the deposit.

But the main focus continues to be definition drilling within the existing resource on 50-by 25-metre grid along the 2.5-km strike length of the known deposit.

Recent highlights from definition drilling include 130.5 metres averaging 1.07 grams gold (hole 295), 100.5 metres averaging 0.87 gram gold (hole 251) and 231 metres averaging 0.74 gram gold (hole 267).

Osisko’s confidence in Hammond Reef is largely based on a positive preliminary economic assessment study by Scott Wilson Roscoe Postle Associates, released in the fall of 2009.

Using a base-case gold price of US$825 per oz. and the current inferred resource (259.4 million tonnes at 0.8 gram), the study shows 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.

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. (These estimates are preliminary in nature as they’re based solely on inferred resources, hence Osisko’s focus on upgrading and expanding current resources.)

“Our goal is to try to bring the project to feasibility next summer, in Q2 or Q3,” Roosen says, adding that the company’s in-house mine-development and permitting team will focus on Hammond Reef now that their work is almost completed at Canadian Malartic in Quebec. “Obviously we want to keep up the momentum.”

Roosen says Osisko is also in the final stages of formalizing agreements with local First Nations, advancing memorandums of under- standing signed last year between Brett and eight First Nations in the region.

Osisko isn’t basing its long-term growth strategy solely on Hammond Reef, but is building a broader pipeline of projects primarily situated in Eastern Canada. The company and joint-venture partner Clifton Star Resources (CFO-V) are encountering continued success at a 122,000-metre drilling program under way at the Duparquet project, also in Quebec’s Abitibi region.

Recent results at Duparquet include 42 metres averaging 3.78 grams gold, 35.9 metres averaging 2.11 grams gold and 70.5 metres averaging 1.32 grams gold. Osisko can earn 50% of the project through exploration expenditures of $70 million and providing loans to help Clifton fund option payments on the property.

— The author is a freelance writer based in Vancouver, and a former editor of The Northern Miner.