Nov 8, 2010


As Gold continue to reach new  record highs, mining projects are being taken on that otherwise would be left for dead. Not to say the two following projects belong to this category, but due to the large capital outlays these mines require to bring them into production, the internal rates of return are now becoming lucrative enough for mining companies to develop. In this case I’m referring to Detour Gold’s project (Detour Lake) and Osisko (Canadian Malartic & others). Detour Lake will soon become the largest producing gold mine in Canada, reaching a peak production level of 840k ounces annually and an average of 800k ounces over an estimated 18 year mine life. Detour also recently acquired the adjacent property claim to the south of the Detour Lake Property (Aurora ), providing additional upside potential for this operation. Detour could easily become a 1m ounce producer just from their Detour Lake project if the Aurora property displays the same type of potential the rest of the property has. Though Detour Lake isn’t expected to commence commercial production until 2013, they have accomplished a lot in a rather short period of time. These include:
  •  Amassing 11.4 million ounces of proven and probable reserves.
  •  17.7 million of measured and Indicated ounces.
  •  21.1 million ounces of Inferred resources.
  • Securing a mine truck fleet contract with Toromont for up to 36 350-ton trucks.
  • Securing a rather substantial amount of financing (although they will need more going forward) of 530 million without having to access any debt facilities.
  • Having approximately 1B of capital expenditures left to be able to bring Detour Lake into production and another 200m to be able to have a 90k tpd mill throughput.

Due to the fact Detour Lake is a world class gold mine, there is high likelihood they will continue to add 2P reserves to their current 11.4m. A prudent estimate would be somewhere in the neighborhood of 15m-17m ounces given their historical conversion rates of resources into reserves. Additionally, because the Aurora property is adjacent to Detour Lake, the probability of adding reserves from this project is very high. Buying a high quality company isn’t always the wise thing to do as it all depends on the valuation relative to the current price as well as future catalysts. In my opinion now is the time to get into Detour as 2011 carries several catalysts that will boost the current market price. These include:
  1. ·         Resource and reserve update(s)
  2. ·         Receipt of Permits required to commence construction activities
  3. ·         Commencement of construction
  4. ·         Securing remaining capital needs
  5. ·         Drilling results covering the western extension of the open pit
  6. ·         Regional exploration results of the 514km land package
  7. ·         Arrival of plant equipment
If Detour is successful in these feats it will all come down to valuation:

Currently trading at .65x Net Asset Value which values it at : $49.50
Valuation Ratio of .32x , valuing it at $53.50/share
DCF (15% Discount Rate) - $56.71/share
MC/2P Reserves of $216 values it at approx $52/share
Relative Valuation: Values it at $54.20/share
Blended Valuation: $53.18/Share

These valuations may sound way to high but compare this potential 1m ounce producer to the likes of Yamana or El-Dorado, in which case, they should be trading at least 2x the current market price. One could argue the cash costs are much higher averaging $530/ounce, but they will stay subdued for the first three years of commercial production at $450/ounce. In any case Detour merits taking a look at.   
 The soon to be gold mining juggernaut Osisko also posses an extremely bright future, which has recently been augmented via the purchase of Hammond Reef. Toghether, Canadian Malartic and Hammond Reef provide Osisko with a short,mid and long term growth profile, which is every investors dreams. Additionally, Osisko bill boast low cash costs averaging approximately $400/oz for both mines. More about their flagship operations:

Canadian Malartic: The have amassed 10.1m in 2P reserves and 16.1m in 2P silver reserves. Canadian Malartic will produce approximatelly 600-625k ounces of GEO over a 14 year mine life, commencing commercial production in 2011. Everything has gone well thusfar on the construction front. But the most exciting issue having to do with Canadian Malartic is the West Porphyry Zone. Osisko had great results from this adjacent property last July, having an intercept of 197m grading .82g/t, mirroring initial drill results at Canadian Malartic during the exploration years. This provides upside potential for both production and mine life at this world class mine.

Hammond Reef: Unlike Canadian Malartic, this mine will not be as easy to bring online as they face permmitting challenges. If permits are indeed issued, watch out as Osisko will become a 1.1-1.2m ounce producer in approximately 5 years. This excludes the aforementioned exploration upside at Canadian Malartic as well as their aggressive drill program on the Duparquet Property. This program is 120,000 meters located in the Abitibiti region of Quebec. By spending 70million on exploration, they will earn a 50% interest if completed within the next two years. Coming back to Hammond Reef, having 6,3m ounces of modeled gold reserves and 7.1m of modeled silver reserves. If all goes as planned Hammond Reef will commence production in 2015 or 2016, producing an average of 425-450k GEO over a 14.2 year life span.

Adding all this up, Osisko will more likely than not become a 1.2m-1.4m ounce producer at peak production with their existing properties. Like Detour Osisko is only attractive if you can get it for the right price.

Currently trading at .65x NAV = $24.01/share
Market Cap/oz- $315/oz = $15.74/share
Valuation Ratio - .49 = $28/share
OCF Multiplyer = $17.55 share
DCF = $24.91/share
Blended Value Per Share = $22.04/share is fair value

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