Does Goldcorp's Sale of Osisko Mining Stake Indicate Peak Gold or Big Gold Bust?

Includes: GG, OBNNF
by: Goombarh

Goldcorp (GG, TSX: G) just sold their 10% interest in Osisko Mining (OSKFF.PK, TSX: OSK), reaping about $530 million (Cdn). Osisko is in process of developing their flagship "Malartic" gold deposit in the safe Canadian jurisdiction of southern Quebec. The Malartic contains 9 million ounces of proven and probable reserves and 3 million ounces of resources.

Osisko has received their operating permits in 2009 and are presently constructing the mine. The mine is scheduled to commence operations in 2011. An estimated 600,000 ounces of gold will be produced annually for an estimated mine life of 12 years. If, as is widely assumed, Goldcorp will eventually end up buying out Osisko, why would Goldcorp make this startling about-face move?

Goldcorp's explanation for their move was "redeploying internal capital from non-core assets", perhaps a code for "we just do not want to be in this large and low grade open pit mining business anymore". The Malartic deposit is an Archean porphyry type deposit formed of disseminated gold and pyrite mineralization.

Here are the grades from Osisko's website:

1 NI 43-101 Proven and Probable Reserves: 28.4 Mt @ 0.92 g/t Au & 217.4 Mt @ 1.16 g/t Au

2 NI 43-101 Indicated Resource: 70.4 Mt @ 0.99 g/t Au

3 NI 43-101 Inferred Resource: 20.0 Mt @ 0.73 g/t Au

What this means is that it is a low grade deposit with the gold mineralization too small to be seen. To mine this low grade disseminated ore calls for large bulk extraction methods of open pit mining. Osisko will be digging a 10 square kilometer pit. The daily milling regime is an estimated 55,000 staggering tons per day. Imagine the costs of excavating and moving this mountain of materiel every day. Imagine the costs of energy required to maintain these operations. Imagine the impact on the environment and landscape. All very good reasons to not be involved in such costly, energy intensive and environmentally challenging operations.

But wait: Aren't the world's largest gold mines open pit and low grade? Following is a list of the world's largest mines:

  1. Grasberg Mine, Papau, Indonesia - open pit operated by Freeport-McMoRan Copper & Gold (NYSE:FCX). The grade is 1.5% copper and 2 grams of gold per ton.
  2. Yanacocha Mine, Peru - 251 square kilometre open pit operated by Newmont (NYSE:NEM) and Buenaventura (NYSE:BVN). The grade was .95 grams of gold per ton and it is presently declining.
  3. Bottington Mine, Australia - newer open pit in the basement of an older open pit mine operated by Newmont (NEM) with grade of .8 grams of gold per ton.
  4. Pascua-Lama Mine, border of Chile and Argentina - operated by Barrick Gold (NYSE:ABX). The mine is not yet operating and is scheduled for 2012. The grade is 1.4 grams of gold and 55 grams of silver per ton. This mine is the subject of much controversy due to the proximity of glaciers.
  5. Penasquito mine, Mexico - operated by Goldcorp (NYSE:GG). Mexico's largest open pit mine, the grade varies from .14 grams of gold per ton for oxide to .5 grams per ton for sulphides. Silver is 12- 30 grams per ton with credits for .32% lead and .69% zinc.

It appears that much of the world's large gold mining efforts are the very same type of mining operations which Goldcorp is shying away from. Do the major gold companies executives know something that investors may not be aware of? Perhaps this is a good time to review the startling revelation pointed out by the president of the world's largest gold mining company, Aaron Regent of Barrick Gold (ABX), in 2009:

"There is a strong case to be made that we are already at 'peak gold'," he told The Daily Telegraph at the RBC's annual gold conference in London.

"Production peaked around 2000 and it has been in decline ever since, and we forecast that decline to continue. It is increasingly difficult to find ore," he said

Two takeaways from Goldcorp's actions:

  1. Peak gold is a reality, as validated by Goldcorp's actions and gold mining output declines and higher gold prices are ahead.
  2. Large gold miners are struggling and may not be good investment candidates given the harsh realities of increasing costs and lower grades together with challenging environments.

Instead of the larger big cap miners, the author tends to search for smaller junior explorers and miners. Two critical factors for investment candidates would be the management quality (read: integrity) and the quality of the mining project (read: high grade). This author's favorite junior gold miner is Great Basin Gold (NYSEMKT:GBG). See my previous postings for information.

Disclosure: The author is long junior miners including GBG.