Description

Osisko Mining (OBNNF) is trading at a 20% discount to the value Gold Fields placed (in May ’23) on its 50/50 JV with OBNNF for joint ownership and development of Osisko’s high-grade Windfall gold project in Québec, Canada. Gold Fields paid USD $900mn ($2.33 per share) for half ownership, and Osisko Mining now trades at a market cap of $725mn ($1.88 per share). Osisko shareholders were initially disappointed as they expected a buyout at a premium, and the disappointment continued after a 13% shareholder recently sold all of its shares (explained later).  

The Windfall deposit is one of the largest and highest-grade gold resources globally. At an average grade of 8.1 grams of gold/tonne versus a global average of 1.18, Windfall ranks in the top 10 globally.   

The chart below shows the progression of the Windfall resource. Note that the grade of the Measured & Indicated portion is 11.4 g/t and has consistently risen. With over 7 mn oz of M&I plus Inferred, Windfall is one of the largest deposits on a global scale.

Gold Fields’ $900mn investment fully funds Osisko’s portion of development costs out to mine production. Managements expects All-In Sustaining Costs (AISC) of $800/oz versus the global average of $1,315/oz. Alamos Gold’s Island Gold mine in Canada is a good proxy. It has 5.3mn oz of resources and reserves and a mine-site AISC of $576/oz. It also has a NPV(5%) of $2B at a gold price of $1,850, which supports the $1.8B valuation Gold Fields put on the Windfall deposit - a larger but pre-production resource. In addition to Windfall, the JV includes a 2,400 sq. km. land package and managements expect significant exploration and expansion potential. First gold production is expected by the end of 2026. Gold’s current price is $2,040.    

OBNNF shares have recently been weak after Osisko Gold Royalties (OR) issued a press release on Dec. 13, 2023 stating that it sold all of the 50 million shares of Osisko Mining (13% of outstanding) it owned at around $1.97 per share. OR’s interim CEO stated in the release:  “The sale of our equity position in Osisko Mining serves two important purposes. Firstly, it reaffirms Osisko’s commitment to aligning ourselves as a pure-play precious metals royalty and streaming company. Secondly, it bolsters our financial position by injecting immediate cash resources, therefore restoring our balance sheet to a strong position. We remain extremely enthusiastic about our ongoing partnership with both Osisko Mining and Gold Fields at Windfall; a fully-funded, high-grade gold project, situated in the province of Québec, one of the world’s best mining jurisdictions. Osisko maintains its exposure to Windfall through its 2.0 to 3.0% NSR royalty on the project and the surrounding property.”

FWIW, Keith Richards (the technical analyst, not the guitarist) found that gold mining stocks go through an 8-year cycle of 4 favorable years and 4 unfavorable years. His findings aren’t perfect but are pretty good: 7 of the last 8 favorable 4-year periods showed positive returns in the HUI gold miners index, with an average gain of 122% and a median return of 69%. 2024 is the last year of the 2021-2024 unfavorable period, and 2025-2028 marks another favorable period (link to the full video:  https://www.youtube.com/watch?v=oWzc8YO_p3s&t=970s).

I see 2024 as a year to accumulate OBNNF on weakness. If Richards’ observation holds true, sentiment should start to improve in ’25, and there’s typically excitement around a junior miner ahead of the day production begins (slated for late ’26). In the meantime, favorable exploration results and continued resource growth could serve as catalysts to improve sentiment. With OBNNF trading at a discount to NAV and sentiment being pessimistic, it's important to keep in mind that gold miners have historically traded at 2+x NAV in bull markets where valuations anticipate higher future gold prices.      

While OBNNF’s balance sheet appears cash-rich as the first payment (CAD $300mn) was already made by Gold Fields, it’s hard to tell how much is excess cash as both Osisko and Gold Fields will be investing in developing the Windfall mine and in exploring the nearby large land package. Out of conservatism, I haven't given OBNNF credit for any excess cash. Once the Windfall mine is producing, I would expect most of its FCF, if not all, to be applied toward growth capex as Gold Fields and Osisko don’t need immediate FCF. Gold Fields needs Windfall’s production to offset its flat to declining production outlook. 

A final word on the gold price. Gold has recently decoupled from correlations that held before Russia invaded Ukraine. Typically gold used to be weak when the Fed raised rates and real interest rates were positive. Yet, gold has held up surprisingly well and made a new all-time high of $2,078 in late-December. A large contributor has been global central bank demand which has doubled to 21% of total gold demand after the U.S. weaponized the dollar against Russia. Continued strong central bank demand could act as a floor under gold’s price, potentially setting up a strong rally if investment demand spikes. Conversely, if central bank demand normalizes, a meaningful source of demand could evaporate. This scenario appears less likely given that global tensions have only increased since the Ukraine war started, but it is a risk.    

Catalyst

Continued resource growth at Windfall, favorable exploration results from the 2,400 sq. km. land package, production beginning in late-2026, a higher gold price.