Osisko’s Canadian Malartic study predicts 14-year life

A scoping study of the Canadian Malartic gold project near Val d’Or, Que., suggests the deposit will produce 572,000 oz. gold per year at a cash cost of US$314 per oz. for the first three years of production starting in 2011.

Over the mine’s 14-year life, average production from the open pit is expected to be about 457,800 oz. at a cash cost of US$381 per oz. generating an internal rate of return of 22.2% for owner Osisko Exploration (OSK-T, OSXLF-O).

“One of the more important aspects, I think, is that in the early years the grade is a little bit higher at 1.05 grams per tonne (compared to 0.84 gram over the life of the mine) and our cash costs remain around the US$300-per-ounce mark prior to royalties,” said president and CEO Sean Roosen in a recent conference call with analysts.

As a result of higher production and lower costs early in the game, the mine is expected to have a payback period of just over three years, assuming an average gold price of US$775 per oz.

The assessment is based on National Instrument 43-101-compliant inferred resources of 8.4 million oz. gold to a depth of 400 metres, but Osisko has just wrapped up infill drilling to establish a measured and indicated resource that will form the basis of a final feasibility study to be completed by the end of the year.

Though Roosen was publicly projecting capital costs of US$550-650 million (accurate within 10%) as recently as February, the scoping study estimates that it will cost US$760 million to build the mine.

“There has been quite a bit of inflation in capital equipment items throughout the industry, but these are real numbers that reflect the reality of the current market conditions,” he told analysts during the call.

The cost escalation includes an extra charge of US$17 million — bringing the total to US$82 million — to relocate 200 houses and several institutional buildings, and help develop a new community nearby.

On the other hand, Osisko locked in the cost of milling equipment by ordering the semi-autogenous grinding and ball mills back in 2006.

The company has US$160 million of cash in the treasury, has already spent US$30 million on capital costs and has negotiated a US$20-million unsecured financing.

Investors, however, are unimpressed with the results of the scoping study. By mid-April, Osisko was trading at about $4.35, down from more than $6 a month earlier. During the same period, the gold price rose about US$20 to US$928 per oz.

During the conference call on March 31, senior analyst Steve Butler of Cannacord Adams pointed out that the average grade at Canadian Malartic was lower than earlier estimates had indicated.

Osisko has revised the resource estimate to 287.7 million tonnes grading 0.84 gram gold per tonne at a 0.4 gram gold cutoff in the latest assessment, up from 170.8 million tonnes grading 1.2 grams gold at a 0.5 gram cutoff in December 2006. The strip ratio is 1.16:1.

“What became evident through our modelling work on the pit is that the strip ratio is sensitive to the cutoff grade,” Roosen said. “We could have increased the cutoff, but that would have affected our strip ratio.”

Another reason that the grade is lower, he said, is because the company used a large mine block (10 by 20 by 30 metres) in its modelling that is representative of how the deposit will be mined, but incorporates a lot of dilution.

The preliminary assessment does not include any resources from the higher-grade South Barnat deposit, though the company continues to drill off the deposit and hopes to include it in the final feasibility.

“The biggest contribution in terms of increasing overall average grade will be to blend (the ore) with South Barnat,” said chief operating officer Robert Wares. “My objective at South Barnet is to secure 25 million tonnes at around two grams per tonne.”

Wares says that by blending in the South Barnet ore, average grades of more than 1 gram gold could be maintained for at least six years beyond the initial three-year period of mining higher-grade ore.

Osisko acquired a 100% interest in the Canadian Malartic property in November 2004 and completed a detailed compilation of the extensive historical database, including data from over 5,000 surface and underground drill holes. The company began drilling in March 2005 and has completed more than 300,000 metres at the property, employing up to 15 rigs at one time.

The deposit is part of a 3-km-long east-west-striking mineralized system that was historically mined by three underground operations: Canadian Malartic, Sladen Malartic and East Malartic. Total production from 1935 to 1983 was about 4.22 million oz. gold.

In the late 1980s, Lac Minerals completed several thousand metres of drilling at Canadian Malartic to define the surface expression of what Osisko has identified as a much larger, low-grade continuous porphyry gold system extending to a depth of 350 metres, including the former Canadian Malartic mine.

The mineralized shell can been traced over an east-west strike length of 1200 metres and a width of 350-400 metres using current and historical drill holes. True thickness varies from 60-270 metres, and gold grades vary from 0.5-3 grams gold per tonne.

Earlier this year, Osisko received the Bill Dennis Prospector of the Year Award from the Prospector and Developers Association of Canada for its discovery and expansion of the gold resource on Canadian Malartic, where the geological model of a sediment-hosted Archean gold porphyry system developed by Wares has helped the company a achieve a 94% hit rate in their drilling.

Osisko expects to spend about US$25 million this year on exploration. While most of the drilling completed last year focused on infill at Canadian Malartic, most of this year’s effort will investigate and define new targets at a rate of about 25,000 metres per month.

The main targets include: the footwall of East Malartic, South Barnett along 850 metres of strike length; Western Porphyry, about 2 km northwest of Canadian Malartic, where an infill drilling program will begin soon; and surface showings that will be investigated with about 10,000 metres of reconnaissance drilling.