Osisko realizing Canadian Malartic’s potential

Osisko Mining (TSX: OSK) released some impressive third quarter results, which it believes should put any doubts about its Canadian Malartic mine in Quebec to bed for good.






Osisko Mining (TSX: OSK) released some impressive third quarter results, which it believes should put any doubts about its Canadian Malartic mine in Quebec to bed for good.

“With the millionth ounce of gold production we have proven beyond a doubt that Canadian Malartic is a solid producer,” president and CEO Sean Roosen said in a conference call.

But it isn’t just the volume of gold that the mine has turned out that is impressive. The mine’s economics continue to improve with each passing quarter and that is protecting from severe effects of lower gold prices. Net earnings remained positive at $9.8 million, or 2¢ per share, and while that was less than the 7¢ per share it reported for the same period last year, it shows the mine is able to perform in tough price environments.

Even more reflective of the mine reaching its potential are cash flows from operating activities, which are often considered a better gauge of a company’s economic health. Those cash flows rung in at an impressive $70.7 million, beating last year’s tally of $55.8 million.

Getting to those lofty dollar sums came on the back of the mine exceeding nameplate throughput of 54,000 tonnes per operating day. That helped Osisko record gold production of 120,208 oz. at operating cash costs of $754 per ounce.

Much of the reason for the good news was the mining fleet moving into the North zone of the pit. While drilling at the North wall is made more difficult by its irregular surface – requiring smaller drills and the added cost of leveling the ground with tailings – the better grades and better recoveries at the mill are well worth the effort.

The good news for shareholders is that as the pit deepens at the North wall, mining will become less complicated and costs should drop.

Roosen said that from the surface mining costs come in the $3.50 to $4 per tonne. But with Osisko now 80% complete on the construction of the level two and level three benches, the costs will fall into the $2.75 to $3.25 per tonne range. And by the time it gets down the fourth bench and deeper, costs will fall into the $2.25 to $2.50 range.

As it goes deeper, fragmentation also improves, which will make milling easier and more cost effective. It currently has to blend ore from near the surface of the North wall with lower grade material to make it suitable for the mill.

“The best fragmentation we get is down in the fifth and sixth benches,” Roosen explains. “The first two to three benches don’t generate the fines we’d like to see.”

The North zone is currently providing between 25% and 35% of the ore going to the mill.

Scotiabank analyst Leily Omoumi was impressed by the operating cash flows, especially in light of the “underwhelming” grade of 0.90 g/t.

“We believe they did process 1.0 gram per tonne material in September; however, it appears July and August were lower than we expected,” she wrote. “The key here is access to the high grade North zone gives them access to 1.2 grams per tonne plus grades and, as the pit opens up, this access is improving over time.”

Osisko re-affirmed production guidance of 485,000 oz Au production for the full year, which according to Omoumi, means that grades will have to continue to improve through the fourth quarter.

The company has produced 338,000 oz so far, leaving a gap of 147,000 oz before reaching guidance. To get there Omoumi says it will have to continue at the 55,000 t/d clip, with on-line time at 92% combined with an average grade of at least 1.10 g/t.

Leily has Osisko rated as "sector outperform" with a $6.25 per share price target.

In Toronto on Nov. 8, Osisko’s stock was trading for 6¢ more at $4.57 on 3.08 million shares traded.

Dialing in on some operation specifics the reported cash costs of $754 per oz are an 11% improvement over last year, and the throughput of 54,000 t/d represents a 25% increase over last year.

The theme of steady improvement is also seen in the mine’s production profile. Canadian Malartic has gone from producing 91,000 oz Au in the first quarter of last year up to the 120,000 oz it produced in the most recent quarter.

On the financial side, Osisko’s vice president and CFO Bryan Coates heralded the company’s ability to renegotiate the terms on its $225 million in long term debt. Osisko extended principle repayment by one year, converted its variable interest rate to a fixed rate and reduced its overall interest charge on the debt.

“The takeaway from this renegotiation is the confidence that our financial partners have in us,” Coates said. Those partners include the Canada Pension Plan and the government of Quebec, to name only two.

The quarter also saw its cash position grow by $16 million to reach $171.62 million, while debt went down $9 million, “which demonstrates the cash generating machine that Canadian Malartic is,” Coates said.

“With these large open pit mines you’ve got to find them, build them, bring them up to name plate capacity and then capture whatever margins you can get from gold price,” Coates continued.

Another positive development for the mine, which sits just south of the town of Malartic, is improved community relations based on the work the company has done to keep the operation from being too loud.

“I think we’ve become a very good neighbor in terms of our noise,” Roosen said. “It is probably the quietest mine in the world at this point and companies from around the world come to see how we do it.”

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