Hammond Reef resource swells to 10.5M oz. gold

The owner of Canada’s largest gold mine has news from the largest drill program being completed at a mining project in the country.

As it ramps up production at its newly commissioned Canadian Malartic gold mine in northwestern Quebec, Osisko Mining (OSK-T) has also been busy drilling 388,000 metres with 18 rigs at its up-and-coming Hammond Reef gold project located 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 last estimate released by previous owner Brett Resources in 2009.

The in-pit inferred resource now stands 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. This contained in 336.5 million tonnes averaging 0.63 gram gold per tonne. It’s a lower grade than the 0.8 gram gold previously forecast, though Osisko points out that the overall strip ratio has improved from 1.43-for-1 to 1.25-for-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 with 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 that “the new in-pit resource for Hammond Reef has a low strip ratio of one and a quarter, 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 calculate the inferred resource. It says that by February, it will have completed another 130,000 metres of drilling on a 50-by-25 metre grid to allow for the conversion of the entire in-pit resource to the indicated category.

To convert one-third of the resource to the measured category, Osisko plans to drill an additional 70,000 metres on a 25-metre square grid.

Osisko plans to update the Hammond Reef resource in March 2012, and then start a feasibility study.

Right now, the rough plan would be to mine Hammond Reef using two pits – one targetting the A and Mitta zones, and the second targetting the 41 zone. The US$1,200 Whittle shell is 2.5 km long, 1.05 km wide and 380 metres deep. 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 for $372 million in stock – estimated that the deposit could produce an average of 369,000 oz. gold annually at a direct cash cost of US$414 per oz., net of silver credits, over a projected 14-year life.

According to that study, production would be higher in the first six years – an estimated 463,000 oz. per year – 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 of 259.4 million tonnes at 0.8 gram gold.

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

At the base-case gold price of US$825 per oz., the project has a net pre-tax 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 probably need Hammond Reef to get it there. 

The company aims to produce 700,000 oz. gold annually from Canadian Malartic when it reaches full design capacity, at average cash costs of US$450 per oz. to US$500 per oz. After reaching commercial production in May, Osisko poured 73,814 oz. gold in the third quarter at a cash cost of US$918 per oz., and has produced 120,419 oz. gold in the first nine months of 2012.

Osiko posted a profit of $9.3 million (2¢ per share) in the third quarter, compared to a $10.2-million loss in the year-ago period.

Osisko also reports that it has repurchased a 1% royalty interest from Geoconseils Jack Stoch for 460,000 Osisko shares.

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