Osisko Mining: Finally Turning The Corner

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About: Osisko Mining Inc. (OBNNF), Includes: KL
by: Taylor Dart
Summary

Osisko Mining is working on a multi-month base breakout.

The company continues to advance its Windfall Lake Project, and drill results coming out of the main zones continue to be outstanding.

I have started a position in the stock recently just below $3.40 per share CAD.

Osisko Mining (OTCPK:OBNNF) is a name I've followed very closely since 2016, and one I introduced to readers in late 2016 at just over $2.00 CAD. My article "Osisko: A Mine In The Making" discussed how the stock was making incredible progress at its Windfall Lake Project, and the company had one of the best management teams in the industry. They successfully built out Osisko 1.0 from a small bulk tonnage deposit to one of the largest open-pit gold deposits in North America, before being acquired in 2014 by Agnico Eagle (AEM) and Yamana (AUY) for over $2 billion.

The company looks to be on a similar path with Osisko 2.0 and has made great progress in the past year both delineating their deposits and divesting their less attractive non-core assets. While the attractive fundamentals have given the company a seat on my top takeover list over the past two years, the technical picture left a lot to be desired until recently. Fortunately, this has changed in a positive way over the past month, and for this reason, I've started a new position in the stock.

For those unfamiliar with the Osisko story, the progression of the company's total gold resources over the past few years might be confusing. Osisko has gone from having near 5 million ounces in 2016 to just over 3.7 million ounces currently, and this decrease in total ounces would certainly make it much less attractive to the untrained eye. What's actually happened is the company has increased ounces at its flagship Windfall Lake Main Zone by roughly 30% and has divested their 3 million ounce low-grade ounces at Marban and Garrison to focus on their most exciting project. In addition to the near 30% increase in resources at the Windfall Lake Main Zone from 1.61 million ounces to 2.04 million ounces, the company has an entirely new resource at their Lynx deposit. The Lynx deposit, which was a new discovery in 2016 with no NI 43-101 resources at the time, now has over 1 million ounces at a grade of 8.9 grams per tonne gold. This resource doesn't include the extensive drilling done over the past three quarters at the Lynx Zone, and the recent 400-meter high-grade extension at Lynx, which intersected 4.3 meters of 322 grams per tonne gold. Therefore, while the company may appear to have fewer ounces, they have higher quality ounces and are now focusing on their best assets.

The move by management to divest non-core assets is a massive plus and has significantly increased my confidence in the company. One of the largest red flags I see with gold juniors is when they have multiple projects and can't figure out after three to five years which are the ones they need to focus on. Typically, in these situations you have management teams that aren't all that competent, or projects that really don't have anything special. The decision to continue drilling at multiple projects and use a "shotgun" approach is made in hopes of finally hitting something and drumming up the occasional exciting press release to keep the company running and financed.

The best companies, however, figure out what they've got within the first few years, and then get laser focused on that one project as they know it holds the most promise. Osisko's decision to let go of their low-grade bulk tonnage deposits not only frees up capital that might be used on exploration and technical studies there, but also frees up valuable time to put all their eggs into Windfall Lake and the Urban-Barry District.

Let's take a look at the company's current assets and their new focus:

The below image I've shown is where Osisko's Windfall deposit stood in late 2016, which was more or less a 1.5-kilometer strike length zone with several gaps between drill intercepts that remained open in most directions.

(Source: Company Presentation)

Since that time, the company has delineated a roughly 3-kilometer strike length zone, with drilling success down to over 1200 meters in some areas, and as deep as 1800 meters in their Triple 8 Discovery. The company is currently testing Windfall up to depths of nearly 3000 meters with their Deep Discovery Hole 1 which is expected to be completed by year-end. Given the fact that grades are increasing in grade and thickness at depth, an impressive intercept here would spell very bullish implications for the company.

(Source: Company Presentation)

(Source: Company Presentation)

To put in perspective how far the Osisko team has come in the past two years, I have outlined the extent of their mineralization as of late 2016 with the black box drawn above. As we can see, Windfall was an exciting story with a lot of potential, but no promise yet that we had a mine here. Since then, the odds of this ultimately becoming a mine have increased significantly. Windfall currently holds just over 3 million ounces with the potential to prove up to 4.2 million ounces in resources by the end of 2020 in my opinion, and this is not including the Triple 8 Zone (which could hold another million ounces plus if it continues at depth). This area, as well as deeper drilling plans will require tighter drill spacing to put together a resource, but the upside is indeed very encouraging.

While my opinion may not hold much weight and is entirely speculative, the seal of approval from Kirkland Lake Gold (KL) in the form of a 13.6% stake in the company is very encouraging. There are few miners as proficient at analyzing the viability of high-grade underground deposits like Kirkland Lake, and their significant stake is a clear vote of confidence. Kirkland Lake Gold has been instrumental in increasing production from 500,000 ounces to 900,000 ounces, but organic growth past this threshold will not come as easy with most of their mines running at near capacity by 2020. For Kirkland Lake to continue on their past growth trajectory, they will have to consider the possibility of acquisitions, and Osisko would undoubtedly be a good fit. The Preliminary Economic Assessment done by Osisko showed the potential for nearly 250,000 ounces of production per year, with a reasonable capital cost to build the mine of under $500 million.

Taking a closer look at the Triple 8 Discovery, there is certainly a lot to be excited about here. As we can see from the below drill results, the intercepts in the Triple 8 Zone are not only coming in at higher grades than the average at Windfall, but they're also coming in at thicker intervals. A couple of these highlights are below:

  • 28.3 meters of 20.4 grams per tonne gold
  • 13.7 meters at 17.4 grams per tonne gold

(Source: Company Presentation)

To get a better idea of where the Triple 8 Zone is, I have included the below map of the current mineral resource and the Triple 8 Zone shown by the red star. We can see that Triple 8 is well out of the way of prior zones and is an entirely new discovery, similar to what Lynx was.

(Source: Company Presentation)

While Osisko's market capitalization of nearly $800 million CAD may seem expensive for a company with a Preliminary Economic Assessment suggesting an NPV of only $413 million after-tax, it's important to note that this PEA was done at $1,300/oz gold, and was based on just over half of the company's current resource at Windfall. If one can envision the possibility for 4.5 million ounces here, then it's not hard to see how this NPV could quickly increase to the $650 - $700 million CAD level using the same gold price. Based on the above fundamental developments and continued discoveries at the Lynx Zone, Triple 8 Zone, and Fox Zone, Osisko continues to be one of my top 5 takeover targets. Major world class discoveries are becoming rarer each year as larger producers quickly snap them up, and I'm not aware of any other juniors with the potential for a 4.5 - 5.0 million ounce resource at these grades in North America currently.

So why am I interested in the stock now? Let's take a closer look at the technical picture:

As we can see from the below monthly chart I've marked up, Osisko is trying to break out above a multi-year resistance level near $3.40 CAD. Out of the past six years and since the company's IPO, the stock has spent less than 18 months above this level, and the majority of time has been spent below it. The stock briefly headed outside this level in 2016 on its massive run from $1.25 to $5.00, but it was difficult for the stock to hold onto these gains as the prior uptrend occurred in roughly a straight line. Since that time, the stock has digested a lot of these gains and well as shaken out some weak hands, and is now making a second attempt at this breakout in 2019. So far, the volume is encouraging as we've traded above the average weekly volume on a short trading week, and a weekly close above $3.45 CAD would be a positive sign.

(Source: TC2000.com)

Moving to a weekly chart of the stock, we can see that the moving averages are all stacked near the $3.00 CAD level, which is a bullish development. The prior run above the $3.45 level in 2016 came with the stock extended nearly 45% above its 40-week moving average (blue line), but this time it's sitting much closer which is suggesting the stock has had some time to refuel.

(Source: TC2000.com)

Based on the above technical developments, I have started a small position in the stock at just below $3.40 per share. As long as the stock can hold above the $3.05 level, I plan to stick with my position. For full disclosure, this position represents less than 3% of my portfolio, but I may look to add to the position if another technical setup arises and if the pending breakout is successful.

Osisko Mining has a rare combination of a massive land package in one of the best jurisdictions, a team that has done it before, a strong treasury, so there's no need for dilution, and massive exploration upside. The company has made so many discoveries at Windfall that they have to prioritize where to drill and have left the Fox Zone (3.7 kilometers northwest of Windfall) on the shelf for the most part. This is a good problem to have. The recent investment by Kirkland Lake increases my confidence in the project, and bulk sample grades coming in higher than the block model is always a great sign. While I'm not willing to put on a full position in the stock just yet, the current technical picture is promising as long as the $3.05 CAD level is defended.

Disclosure: I am/we are long OSK.TO. 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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