It's been a rough year thus far for the Gold Juniors Index (GDXJ), which has found itself down 55% from its highs, and it suffered a 60% drawdown at its recent lows. This violent bear market has seen more than twice the drawdown of the S&P-500's (SPY) 28% peak-to-trough decline, and it's lasted nearly three times as long, heading into its 27th month as we begin November. Given that bear markets require both price and time to wear out investors and prompt an exodus from a sector or market, the GDXJ is a much more fertile hunting ground for new ideas, with sentiment nearing the point of complete despondency, if not already there. That said, the key is to focus on quality names that are on the sale rack, not names that are cheap for a reason and could suffer similar fates to Great Panther, Pure Gold, and Aurcana. In this update, we'll look at one developer that's priced far too low for its potential, and one of the few developers that could have 8.0+ million ounce reserve potential long-term.
Osisko Mining (OSK.TSX) is a household name by now in the junior mining sector, consistently reporting intercepts with 500+ gram-meters, and reporting a sector-best intercept of 2.0 meters at 13,634 grams per tonne of gold in 2020. Its flagship Windfall deposit that continues to grow is located between Val-d'Or and Chibougamau in Eeyou Istchee James Bay, Quebec, and the company has delineated a ~7.4 million-ounce resource on the project, with 54% of this in the measured & indicated [M&I] category. However, it's the grades that really stand out at Windfall, where the company has an M&I grade of 11.40 grams per tonne of gold and an 8.40 gram per tonne inferred resource grade, placing its resource among the highest-grade gold mines/development projects globally. In fact, if we look at the below chart, we can see that Osisko's Windfall would be one of the top-5 highest-grade gold mines globally using its M&I grade if it were in production today, only behind Kiena, Macassa, and Eagle River, with two of these deposits owned by Wesdome Mines (WDO.TSX) and the other owned by Agnico Eagle (AEM.TSX).
(Source: Company Filings, Author's Chart - Windfall Resource Growth)
Recent Developments
While Osisko Mining ("Osisko") clearly stands out from a grade and size standpoint and has the potential to produce over 325,000+ ounces per annum over a 12-year mine life (which would make it one of Canada's largest gold mines), the margins, resource upside, modest capex, and continued positive grade reconciliation from bulk samples that make it somewhat of a unicorn. For starters, Osisko's Windfall should enjoy sub $675/oz all-in sustaining costs [AISC], giving the company ~60% AISC margins even at a $1,700/oz gold price. As we can see below, this places the company in rare air relative to other undeveloped gold projects, and it would also be a major outlier among gold producers, with estimated AISC of $1,280/oz industry-wide in 2022. Meanwhile, its scale, with the capability to produce well over 300,000 ounces per annum, makes it a highly attractive takeover target and a mine that is capable of being a company-maker like Canada Malartic was under the current management in the previous decade before its ~$4.0 billion takeover. Most exciting, though, is the resource upside and outstanding results from multiple bulk samples that suggest this mine will get much bigger, and its production profile could surprise on the upside due to grade outperformance.
(Source: Company Filings, Author's Chart & Estimates)
Digging into the results of bulk samples, Osisko already had an impressive track record heading into this year, delivering two bulk samples that massively outperformed predicted grades. The first bulk sample from Zone 27 saw 26% higher grades (8.5 grams per tonne of gold vs. 6.8 grams per tonne of gold), and the second bulk sample from Lynx 311 saw an 89% beat on grades, with gold grades for this ~5,700-tonne sample coming in at 17.8 grams per tonne of gold vs. 9.4 grams per tonne of gold predicted. When it comes to a multi-million-tonne gold deposit with a bulk sample representing just 0.0006% of contained tonnes, it's understandable if some chalked the second bulk sample up to a lucky fluke. However, Osisko's third bulk sample reported last week has now over-delivered as well, averaging 65.5 grams per tonne of gold vs. a predicted grade of 38.9 grams per tonne of gold (69% positive reconciliation).
(Source: Company News Release)
This has resulted in the average of the three bulk samples coming in at a 61% positive grade reconciliation which is quite significant and is supported by the fact that this ore body is so high-grade that Osisko is using massive top cuts. For example, Osisko uses a three-step capping strategy for all zones except Lynx Main and Triple Lynx, for which some lenses were interpolated using a four-step strategy. The result is that many 1,000+ grams per tonne intercepts (and even the 90,700 gram per tonne intercept over 0.3 meters) are being cut down to just 200 grams per tonne of gold when resources are estimated at the project. Given this conservatism, the extensive drilling to ~12.5-meter drill spacing, and the 1.8+ million meters drilled on the property, one could argue that these bulk samples hold some weight even if they represent only ~0.15% of the total measured & indicated tonnes at Windfall.
Assuming a 6.0% positive grade reconciliation (one-tenth the outperformance of bulk samples to date - ~61%) with an estimated head grade of 8.80+ grams per tonne of gold and a 94.8% recovery rate, we could see Osisko's actual grades milled coming in closer to 9.80 grams per tonne of gold. This would translate to an average production profile of ~350,000+ ounces per annum or an extra 20,000 ounces per year. This is not chump change, representing an extra $36 million in revenue per annum or an additional $400+ million in revenue over the mine life, assuming constant grade outperformance at this 6.0% figure. Hence, while I expect a very robust Feasibility Study from Osisko before year-end highlighting a 300,000-ounce plus production profile at sub $700/oz costs, it's important to note that we could easily see a 5-7% increase on the production profile and lower costs as the denominator increases vs. what's expected under conservative assumptions in the mine plan.
Resource Upside
While Osisko checks all the boxes from a jurisdiction, economics, and risk standpoint given the continued grade outperformance, which might be top of mind vs. other failed narrow-vein deposits (Revenue-Virginius, Madsen), the resource upside cannot be overstated, with the current ~7.4 million-ounce resource (that looks like it will grow to 10.0+ million ounces) sitting on just a fraction of the total land package of 2,400 square kilometers. In addition, Osisko's resource is contained to just 1,200-meter depths, and the company has already had success drilling down to over 2,000 meters. This suggests that the deposit doesn't need to grow from a strike standpoint; it could simply maintain the same footprint but increase its resource base by 50% or more (11.0+ million ounces total vs. 7.4 million ounces currently) simply by filling in the deposit and adding ounces another 800 meters below the current resource base. One could argue that this is a speculative statement to make, and this is always the case in mining. That said, Macassa, Red Lake, LaRonde, and Island all continue at depth, with most seeing mineralization down to at least 2,000 meters, and some seeing better grades at depth.
(Source: Company Presentation)
(Source: Company Presentation)
Valuation
Based on ~347 million shares outstanding and a share price of US$2.12, Osisko has a market cap of US$735 million or an enterprise value (factoring in cash/securities) of ~$600 million. The company also has significant exploration credits due next year that it can keep rolling over to fund drilling at Windfall from the Quebec Resource Tax rebate, meaning it can continue to target resource growth both near-mine and regionally without any share dilution. The project also benefits have a very rapid return (45%+ IRR at $1,650/oz gold), suggesting that it should be able to fund all of its upfront capex with debt and have no need for additional share dilution. This makes Osisko quite unique relative to many other developer peers that could see another 50% to 70% share dilution before they reach production based on additional infill drilling, permitting work, and having to finance construction with a mix of equity/debt due to having less robust projects and having to use weaker share prices which will impact how far each share goes in terms of raising capital.
If we compare Osisko's current market cap of US$735 million to an estimated net asset value of US$1.40 billion and add an additional US$460 million in exploration upside (2.3 million ounces of additional reserves at $200/oz), this places the fair value for Windfall alone at US$1.86 billion, or a net asset value of US$1.71 billion when factoring in a conservative US$150 million for corporate G&A. This leaves Osisko Mining trading at just 0.43x P/NAV, and this doesn't factor in additional upside at new targets such as Golden Bear, Fox, or Fox West, only resource growth at depth to 2,200 meters and resource conversion. Given that other archean gold deposits extend to 3,000 meters (Red Lake, there's additional upside at depth from 1,200 meters to 2,000 meters, which I have used as a cut-off level (2,000 meters) for estimated reserve growth in the exploration upside assumption (US$460 million). To summarize, investors are getting a lot for free in the current valuation, and they're still paying less than 0.50x P/NAV at conservative gold prices (1,700/oz gold price assumption from 2026 production start to 2038 end of mine life).
Given where we've seen takeovers occur regarding world-class projects in Tier-1 jurisdictions (Great Bear, Long Canyon, Cote, Gruyere at 0.90x P/NAV or higher) and where high-grade producers with sub $800/oz costs trade in Tier-1 jurisdictions (1.25x P/NAV or higher - Kirkland Lake Gold, Wesdome on a trailing 5-year average standpoint), I see a fair value multiple for Osisko Mining being 0.95x - 1.0x P/NAV at this stage. After multiplying this figure by US$1.71 billion, using a 1.0x P/NAV multiple, and using a conservative fully-diluted share count of 430 million shares, I see a fair value for the stock of US$3.98. This translates to a 90% upside from current levels, but it bakes in very conservative assumptions from a share count standpoint, a head grade standpoint (actual grades are likely to outperform the reserve model and deliver high cash flow), and it assumes no new major discoveries are made. If we do see a new major discovery like the recent step-out drilling (Lynx 4 high-grade extension), it's possible some majors may choose not to sit on their hands any longer and may look at acquiring Osisko. In fact, it was Pretium's Golden Marmot Zone discovery that catalyzed the multi-billion dollar acquisition of Brucejack by Newcrest (NCM.ASX) less than a month later.
The good news for Osisko is that it's arguably in a top-5 mining jurisdiction (Quebec), and its projected margins dwarf the industry average, meaning that nearly all intermediate/major producers would be interested in owning the project to improve their company-wide margins post-2025. The caveat is if they've already completed a major deal recently or their pipeline is simply so strong that they really don't need to acquire. I would argue that Osisko would be especially attractive to Barrick (ABX.TSX) relative to other majors, given that it has Canadian tax pools to provide future tax breaks, and Barrick has been very patient from an acquisition standpoint and been vocal that it would like to increase its Canadian exposure. Plus, while the market is used to punishing majors when they acquire, Barrick could complete this deal for less than a year of free cash flow and potentially get it done at an attractive price, which I think the market might be pleased with vs. the historical norm of over-paying at the worst possible time like Kinross has managed more than once now.
In summary, I see a significant upside to fair value for Osisko Mining, and I see the stock as a steal below US$2.20 [C$2.90]. However, the investment thesis is even more attractive given that this is truly a top-5 project globally, and I would be shocked if we didn't see an accelerated re-rating with a takeover in the next 12-15 months.
Disclosure: I am long AEM.TSX, OSK.TSX, ABX.TSX K.TSX
Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing. Given the volatility in the precious metals sector, position sizing is critical, so when buying small-cap precious metals stocks, position sizes should be limited to 5% or less of one's portfolio.
