Osisko Mining: Best In Breed - Seeking Alpha

Every couple years a special opportunity comes along in the gold space, and if one keeps a large enough sample of miners on their radar, they can usually find it in the first stage of its move. I see lots of speculation in sub $50 million market capitalization names and often hear the argument that "If there's a discovery there won't be any time left to get in". While it's true that I may miss the first 100-200% of a move by avoiding ultra-speculative companies that are just beginning drilling their deposits, I also manage to avoid much less duds and keep my win-rate well above .500. There is always one in fifty junior gold companies that hits the big one and we're left a day late and a dollar short, but typically the other forty nine either go sideways or stay as penny stocks indefinitely. The majority of the time if a stock has been listed for few years and is still a sub $0.50 cent stock, it's down there for a reason. This is why I do not concern myself with trying to predict which will be the next junior de jour but instead sort through current juniors de jour to see which have the most potential.

The misconception that one must invest in the early stage exploration plays to make the most money in this sector is a terrible one. After 10 years of investing in gold companies, I believe the opposite is true. While one certainly can increase their upside this way if they're lucky, the added draw-downs and potential to be involved in 'zeros' increases substantially. I can count up to 500 different penny resource stocks that have de-listed, done nothing or changed their name and still done nothing in the past 10 years. Meanwhile, the biggest winners are contained to less than 30 names. This is because the largest winners have several ingredients all combined and this makes it rare to see more than a few per year.

The five most important qualities (in my opinion) are as follows:

• Management / Technical Team- great management teams that have done it before often help in the long-run as there is less dilution. This is because they are able to command better prices or terms for their financings due to their success in the past in the sector. A technical team with a few decades of experience and previous discoveries under their belt is always a plus. Always a bonus if they are familiar with that region.
• Jurisdiction - favorable location - Canada, USA, Australia, etc.
• Land Package - Large enough to support 5+ million ounces down the road. A 1-million ounce discovery is great, but it's meaningless if that discovery makes up 2/3 of the property and there's no real upside left.
• Resource Grade & Size, Deposit Type, Metallurgy - At least 2.0 million ounces or more, typically it's not worth building a mine for anything less. Good strip ratio, favorable metallurgy (recovery rates), and preferably over 1.0 gram per tonne gold for open-pit explorers, and over 4.0 grams per tonne gold for underground explorers.
• Something New - I have stolen this idea from the "N" of the CANSLIM methodology where O'Neill believed that a catalyst also helped for winning stocks. This category can mean a new acquisition, a new discovery, a new weekly breakout, a new mine coming online, a new permit, etc.

Ideally I want to have all five of these boxes checked with "A" grades, but will make exceptions typically for jurisdiction being less favorable (B, C, or D score), if grade is A++. Example: Mariana Resources (OTC:MRLDF) or Ventana Gold. Finally, the "Something New" category is not a deal-breaker, but I do obviously prefer situations where all five line up.

Yada... yada... yada... what does this have to do with Osisko Mining (OTCPK:OBNNF)?

Osisko Mining is currently in my top 3 juniors in the sector of the 300+ names I follow, and fetches a hefty price tag for a junior that has no producing assets. I believe the $880 million fully diluted US market cap scares off investors as it's trading at the same valuation of some smaller producers. While there's no debating this from a market cap standpoint, further digging reveals that Osisko is sitting on over $325 million US in fully diluted cash. Subtracting out this cash we're left with a $555 million enterprise value which makes things a little more reasonable. Having said that, this number is still high for an explorer and likely is a turn-off if you are unfamiliar with the company.

I don't believe that all investors truly get a grasp of just how immense Windfall Lake really is and why valuing the company based on their current resource base is insane. The company currently has 5.2 million ounces at an average grade of 2.3~ grams per tonne gold across their 3 deposits, but their flagship project (which I will focus on solely) has a resource estimate of 1.6 million ounces at 8 grams per tonne gold. Their Urban Barry / Quevillon Project (including Windfall Lake) is made up of 330,000 hectares of land in Quebec, Canada. The company acquired the project from Eagle Hill (previous operator) and this is what the project looked like with the 1.6 million ounce resource.

(Source: Osisko Mining Corporate Presentation)

This is what the deposit looks like now after a drill program that consisted of more than 20,000 meters a month the past 12 months. To put this number in perspective, Gold Standard Ventures (GSV) which is another gold explorer in the $350+ million market cap space has drilled 70,000 meters in the past 18 months, while Osisko has drilled over 300,000 meters. Osisko is not wasting any time fast-tracking this deposit towards a production decision. The high-grade extension east of the deposit is icing on the cake for Windfall.

(Source: Osisko Corporate Presentation)

The most exciting part about the extension to Osisko's deposit is the discovery of Lynx, a zone that is higher-grade than any other portion of the deposit currently. The Lynx Zone is located roughly 1 kilometer east of the Main Zone (shown in the Spring 2015 picture above) and thus far the results are very encouraging. This is a completely new discovery that didn't exist 9 months ago so the potential for 700,000 plus ounces at 30% higher grades than the current resource is very exciting. My current ultra-conservative and very back of napkin estimate for Lynx would be 650,000 - 775,000 ounces of gold at 9.0+ grams per tonne gold. Below are some of the better results we've seen from this Zone thus far:

OSK-W-16-760: 5.7 meters of 65 grams per tonne gold (discovery hole)

OSK-W-16-761: 2.3 meters of 64.3 grams per tonne gold

OSK-W-17-779: 7.9 meters of 16.9 grams per tonne gold

OSK-W-17-778: 3.6 meters of 36.6 grams per tonne gold

OSK-W-17-792: 5.4 meters of 42.5 grams per tonne gold

OSK-W-17-788: 17.3 meters of 12.8 grams per tonne gold

OSK-W-17-799: 4.6 meters of 49.7 grams per tonne gold

OSK-W-800: 2.8 meters of 25.4 grams per tonne gold

OSK-W-834: 3.7 meters of 421 grams per tonne gold

OSK-W-837: 3.4 meters of 35.5 grams per tonne gold

OSK-W-837: 8.4 meters of 97.4 grams per tonne gold

OSK-W-827: 2.7 meters of 50.1 grams per tonne gold

OSK-W-1006: 6.9 meters of 29.9 grams per tonne gold

All of the above results are strictly from the new zone the company stumbled upon late last year. I will be anxious to see where the average grade comes in as I believe it to be slightly higher than the Main zone grade of 8.0~ grams per tonne gold.

To truly get an idea of how massive Osisko's land package and exploration upside is, I believe it helps to zoom in on Lynx (the new discovery) and the Main Zone of the deposit, and then slowly zoom out over the property.

(Source: Osisko Mining website)

The first image above is solely of the new Lynx discovery which I believe to contain roughly 700,000 ounces of gold at 9.0+ grams per tonne gold if a resource estimate was done today. This is the portion of the deposit that didn't exist 9 months ago and is all added ounces to the current 1.6 million ounce resource estimate from Eagle Hill.

The above image shows Lynx in content with the Main Zone of the deposit (to the left of the Lynx). We can see that the project has been drilled to over a 3-kilometer strike length, and I believe this area alone to have the potential for 5 million ounces long term.

In the above image we can see that my projection for 3.7 - 4.0 million ounces by their new resource estimate (Q1 2018) at Windfall Lake is contained to a very limited portion of the current trend. Looking below we can see the pink circle, and this is the current area of exploration where I believe there is ultimately a potential for 5+ million ounces long term. Osisko has not even scratched the surface of the East Target or the Southwest Target, has not done any real exploration within the gap zones between these targets, and has only begun stepping out of the main 2-kilometer strike length of their Windfall Deposit.

This is precisely what I am looking for when it comes to the "Land Package" portion of my 'ingredients'. A company that is able to find 2-3 million ounces on a small portion of a property surrounded by similar and favorable geology has a very good shot of getting that to 5+ million ounces property wide.

So why Osisko of all the companies out there?

I believe Osisko to have one of the only undeveloped gold deposits owned by a junior with the potential for up to 10 million ounces property wide. The fact that the project has exceptional grades, is located in a top-tier mining jurisdiction and is being led by a management team that just did this 5 years earlier is a huge bonus.

Gold majors and intermediate producers are constantly looking to replenish reserves and add to their production profile - the issue is they're running out of places to do so. There seems to be a race for acquiring assets in B-ranked and better jurisdictions which means that those properties in the A and A+ jurisdictions should receive premiums. We've seen this through the acquisitions the past 18 months (Integra - Canada, Richmont - Canada, Kaminak - Canada, NewMarket Gold - Australia), and through strategic investments by majors in primarily North American explorers. 4 of the past 7 acquisitions have been companies in Canada or Australia, and all of the bigger deals ($200 M US +) in the past 30 months have been in A or A+ jurisdictions.

Osisko looks expensive from several metrics and this is why I believe further digging is needed for this company. The company looks expensive from a P/NAV basis, but the NPV on the company's projects is significantly dated and using an inferior resource. The company looks expensive compared to other juniors at two to three times the market cap, but I don't know of any other junior with 5+ million ounces and $300 M in cash. The company looks expensive on an enterprise value per oz basis ($110/oz), but this is because the 5.2 million ounce resource used for this calculation is over 2 million ounces shy of what I believe they truly have.

Due to the fact that I believe the company to be a top takeover target as it has what no other junior does (a massive land package in an A+ jurisdiction with a real possibility for 10 million ounces), I will use the average value per ounce paid for explorers/producers in only top jurisdictions. This incorporates Lakeshore Gold, Kaminak Gold, Integra Gold, NewMarket Gold, Richmont Mines. By averaging out the value per oz paid for these 5 juniors, we arrive at a price of $131.60/oz. I will be applying a 15% discount to this value as some of the above-mentioned companies were producing and Osisko is not currently. This leaves me with a value per oz paid for top juniors of $111.86/oz.

Based on my belief that Osisko will show an updated resource estimate of 7.5 million ounces property wide (3.7 - 4.0 million ounces at Windfall), a fair valuation in a takeover scenario currently would be $839 M US. Adding in the company's $300 M US in cash, this places a fair valuation on Osisko currently of $4.60 US (30% upside from current levels). This valuation assumes no new discoveries are made property-wide which we should have a better idea of next year. Based on the company's current drilling success and the size of their land package, I feel it's safe to lean on the side of 'yes' for new discoveries.

One of the advantages that Osisko has is their technical team that has built a junior from grassroots through to production (Osisko 1.0). This allows them to grow their valuation out long term and not push for a sale as they have a team that is capable of going the distance with this project. I believe the company's new resource estimate next year should help open investors eyes to what they are missing with Osisko.

Osisko continues to be my favorite gold junior along with Marathon (OTCPK:MGDPF) and I hold positions in all my portfolios. I see the potential long term for 8-10 million ounces company-wide with Osisko, and over 5 million ounces of gold at Windfall Lake. This should place the company in the top ranks for companies suitors are sniffing around for. I believe that investors passing now due to a high share price/valuation will regret it. A $550 million US price tag for 5 million ounces currently may seem high, but it's going to look very cheap in hindsight if Osisko proves up 5+ million ounces at Windfall Lake, and totals the 10 million ounce threshold across their properties.

(Source: TC2000.com)

I've received several questions on Osisko and what I'm doing with the stock. The stock is up nearly 400% since the 2016 lows vs. the Gold Miners Index (GDX) at 90%, and has also significantly outperformed most other juniors. A period of consolidation after a 400% move in 18 months is completely normal and healthy to shake some of the weaker hands out of a stock. The stock is currently consolidating in a very wide range and I will likely use a dip to $4.00 CAD to average up slightly on my position. I am long from the December lows and added recently closer to $5.00 CAD to move my average cost into the $3.00's (CAD) on this position. I would think any pullbacks to the $4.00 CAD area would be a good risk/reward entry for longs (if we're fortunate to get a pullback this deep).

The majority of my positions are actively traded but I have reserved Osisko and Marathon strictly for holds for the core of their positions. I have done this as I feel they are very likely takeover targets with 50% upside or more looking into 2019. In my opinion it makes no sense to try and trade around positions in companies that are the most attractive from a value standpoint in a sector. My plan with Osisko is to accumulate up to a maximum portfolio size of 5% of my portfolio and do so on dips. I am currently at a 2.5 - 3.0% portfolio size but would like to increase this on a deeper pullback.

Disclosure: I am/we are long GLD, OBNNF, MGDPF, KL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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