Osisko Development: Things To Consider Before Jumping On The Bandwagon (NYSE:ODV)

Thesis

Osisko Development Corp. (NYSE:ODV) is a Canadian junior gold developer focusing on developing its three strategic mining assets in North America: the Cariboo Gold Project in Canada, the Tintic project in the US, and the San Antonio Project in Mexico. For gold mining companies, the grade is king. Fortunately, ODV’s flagship asset (the Cariboo Gold Project) has very impressive grades compared with peer Canadian gold mining companies, indicating that ODV has the potential to become a low-cost intermediate gold producer over the medium-to-long horizon.

In this article, we discuss the following areas to help us consider an investment thesis about the company:

1. Mining economics of the Cariboo Gold Project.

2. ODV’s attractive valuation is based on NPV estimates in the Cariboo Gold 2023 FS (Feasibility Study).

3. Growth Opportunities Linked With Exploration and Development Activities.

4. Near-Term Catalysts.

Let’s get into the details.

Mining Economics of the Cariboo Gold Project

The Cariboo Gold (or CG) Project’s January 2023 Feasibility Study (or FS) revealed that the project would be an underground mine with a total LoM (mine life) of twelve years and LoM AISC (All-In-Sustaining-Cost) of $968/oz Au. The mine will be operated in two phases: Phase I will span 3 years, and Phase II will span 9 years. The project’s expected mining economics will be mediocre during Phase I, but significant production volume/cost improvement is expected during Phase II.

For reference, Phase I annual production will be ~74 Koz (a thousand ounces) of gold at an AISC of ~$1,649/oz and a milling capacity of ~1,500 tpd (tons per day). At spot gold prices of ~$2,000+/oz, it barely leaves a margin of ~$400/oz. With a low-end annual production of ~74 Koz, margins/profitability would be low during Phase I. However, what’s important is that ODV will start generating operating cash flows. Meanwhile, during Phase II, the annual production is expected to grow by ~2.6x to ~194 Koz/annum at a significantly lower AISC of ~$886/oz and a milling capacity of 4,900 tpd. There are five known deposits within the CG Project, including the Mosquito deposit (603 kT mineral resource at an average ore grade of 4.93 g/t amounting to 95 Koz gold), the Shaft deposit (7,962 kT mineral resource at an average ore grade of 3.879 g/t amounting to 990 Koz gold), the Valley deposit (3,445 kT mineral resource at an average ore grade of 3.70 g/t amounting to 410 Koz gold), the Cow deposit (4,127 kT mineral resource at an average ore grade of 3.41 g/t amounting to 453 Koz gold), and the Lowhee deposit (557 kT mineral resource at an average ore grade of 4.56 g/t amounting to 83 Koz gold). Initial production during Phase I will come from the Lowhee, Shaft, and Mosquito deposits. The Cow and Valley portals will access the mine, from where the other deposits will be accessed through internal ramps, as shown below.

On a consolidated basis, the Project’s Probable Reserves comprise 16,703 kT of mineralized ore at an average ore grade of 3.78 g/t, amounting to 2.03 Moz (a million ounces) of gold. Additional exploration can convert these to the most certain Proven & Probable Reserves. Meanwhile, the M&I (Measured and Indicated) Resources comprise 14,682 kT of mineralized ore at an average ore grade of 3.33 g/t, amounting to 1.57 Moz of gold. Finally, the Project’s Inferred Resources are estimated at 15,470 kT of mineralized ore at an average ore grade of 3.44 g/t, amounting to 1.71 Moz of gold.

The CG Project is located in British Columbia, Canada. The Fraser Institute’s 2022 Annual Mining Survey (released in May 2023) reveals that BC had a stable IAI (Investment Attractiveness Index) score during the past 5 years within the range of 75 and 78 points, denoting the soundness of mining policies and the strong mineral potential of the region. This 2023 S&P Global report covering the Canadian mining industry’s performance in 2022 reveals that BC has the largest gold reserves and the lowest grade (of ~0.6 g/t) among all provinces.

The Cariboo Gold is an exception to this generality, with impressive average grades of 3.78 g/t for the 2.03 Moz gold in Probable Reserves. As noted earlier, the average head grades for M&I Resources and Inferred Resources are equally interesting, albeit with a lower level of certainty. Interestingly, these grades are much higher than the average grades of selected underground gold mines in Canada operated by prominent gold mining companies.

For reference, Cariboo Gold’s average grade of 3.78 g/t gold compares favorably with the 2.15-2.35 g/t average gold grade of Alamos Gold’s (AGI) Young Davidson underground mine, the 1.72 g/t average gold grade of Agnico Eagle’s (AEM) Goldex underground mine, and the 3.66 g/t average gold grade of AEM’s La Ronde Complex. The chart below shows that these promising grades help Cariboo Gold’s LoM AISC to be the lowest among the selected peer group assets. With reserves, resources, and expected annual gold production at par with the peer group assets, the Cariboo Gold Project is an attractive Canadian future gold mine.

The above numbers indicate the impressive “quality” aspect of ODV’s flagship asset. However, the same cannot be said about the “quantity” aspect, at least not on the basis of the discovered mineral reserves/resources reported in the 2023 FS. Nonetheless, there is potential for upscaling the CG Project’s mineral reserves/resources (discussed later).

On a different note, CG Project’s estimated initial CAPEX of ~C$137.3 MM (total growth CAPEX worth ~C$588.4 MM, including ~C$451.1 MM in expansion CAPEX for Phase II) is relatively low for an underground gold mining project. Building underground gold mines on greenfield projects typically requires CAPEX investment between US$1 BB and US$4 BB. In ODV’s case, the CG project benefits from existing infrastructure (it’s a brownfield project), which includes rail and road access to the mine site, connectivity with BC’s hydropower grid at an estimated cost of 6.6 cents per kWh to benefit equipment and fleet electrification, availability of a wholly-owned QR mill with ODV’s subsidiary (Barkerville Gold Mines) for ore processing, and the existence of a fully permitted tailings management facility within 100 kilometers radius of the mine site. The infrastructure support is another project enabler.

Osisko Appears To Be Trading Cheaply

1) Technical Indicators Suggest Attractive Pricing: ODV last traded at ~$2.42/share when writing. The stock is trading ~40% below the mid-point (at ~$4.08/share) of its 52-week range between $2.25 and $5.92. The share price is also ~32% lower than its 200-day Simple Moving Average of ~$3.61/share. A 14-day RSI (Relative Strength Index) score of 37.09 indicates that the stock is trading in the technically neutral territory; however, if RSI falls below 30, the stock will move into the oversold category. It’s also worth noting that ODV’s 1-year Price Returns lag significantly behind that of a prominent junior gold miners’ ETF, namely VanEck Junior Gold Miners ETF (GDXJ).

2) Valuation: Cariboo Gold’s 2023 Feasibility Study (linked earlier) uses a discount rate of 5% and highlights two possible NPV scenarios. First, assuming a LoM average gold price of ~$1,700/oz would yield an after-tax NPV of ~C$562 MM at an IRR of 21%, and second, assuming a LoM average gold price of ~$2,000/oz would yield an after-tax NPV of ~C$821 MM at an IRR of 31%. The second scenario makes more sense as spot gold trades at ~$2,050/o. In the near term, gold prices will likely sustain the $2,000/oz+ level due to the uncertainty associated with the Middle East Conflict, the direction of FED’s policy rate, and recession fears.

Based on the NPV estimates under the second scenario mentioned above, the stock trades at a discount. There is potential for ~2.9x upside in the share price of ODV. This is calculated by dividing the after-tax NPV of ~C$821 MM by the market capitalization ~C$283 MM) of Osisko Development’s Canadian listing (TSXV:ODV:CA). Notably, the company has to incur total growth CAPEX of ~C$588 MM (Initial CAPEX of C$137.3 MM and Expansion CAPEX of C$451.1 MM), and if the same is equity funded, then per-share NPV will be affected negatively. Nevertheless, it should also be considered that the company has a net cash balance of ~C$51.8 MM (cash and equivalents worth C$71.5 MM less total outstanding debt worth C$19.7 MM) and liquid securities worth ~C$28.4 MM. At the prevailing prices, ODV has a price-to-NAV ratio of ~0.4x, which is an appropriate relative valuation for development-stage gold mining companies working to achieve the status of junior gold producers. Check the chart below.

Growth Opportunities Linked With Exploration

1) Cariboo Gold Project

The following catalysts indicate the exploration upside linked with the CG Project:

• Historical drilling in the region during the past six years has demonstrated high-grade intercepts, including 164 g/t gold over 10.5 meters at the Valley deposit, 53.26 g/t gold over 11.55 meters at the Shaft deposit, 72.23 g/t gold over 12.05 meters also at the Shaft deposit, 23.32 g/t gold over 15.0 meters at the Mosquito deposit, and 35.25 g/t gold over 11.0 meters also at the Mosquito deposit. These drill results indicate the opportunity to convert additional Inferred Resources adjacent to the reserve blocks at low incremental development costs.
• As noted in Figure 4 above, the Cariboo Project has a 4.4-kilometer strike, with average mineralization occurring at a depth of approximately 350 meters. Meanwhile, the peer group assets have a significantly lower strike, with most of their reserves/resources located at depths ranging between 1,000 meters and 2,000 meters. This implies that the Cariboo Project has strong potential for discovering mineralization at a depth beyond the present average depth of 350 meters.

2) Tintic Project

The Tintic Project is the second asset in ODV’s mining assets portfolio. Like Cariboo, the Tintic Property (located in Utah, US) is also 100% owned by the company. ODV focuses on fast-tracking the Trixie deposit, one of the several gold/base metals targets within the larger Tintic Property.

In January 2023, ODV released the MRE (Mineral Resource Estimate) for Trixie, comprising five mineralized zones, namely T1, T2, T3, T4, and 75-85. The strike length for the Trixie deposit is 610 meters, with a maximum width and depth of 105 meters and 295 meters, respectively. The 2023 MRE of the Trixie deposit highlighted an M&I Resource of 236 kT of mineralized ore at average gold and silver grades of 28.08 g/t and 50.77 g/t, respectively, which translate into ~213 Koz gold and 385 Koz silver. The Inferred Resources comprise 385 kT of mineralized ore at average gold and silver grades of 1964 g/t and 42.82 g/t, respectively, translating into ~243 Koz gold and ~530 Koz silver.

Interestingly, the Trixie MRE is based on the exploration results of only ~10% of the property, with a significant portion of the property untested to date (check the yellow area in the diagram below). In a recent update, ODV reported the completion of 6,447 meters of underground DD (diamond drilling) across 73 holes at the Trixie test mine in 2023. Underground chip sample assays had been completed for 59 DD holes, revealing grades as high as 443.64 g/t gold over 1.19 meters.

What’s important is that the Trixie test mine/deposit is only one of the 23 historic mines/deposits within the Tintic Project. As shown in the diagram below, the larger Tintic Project hosts different types of mineralization at other known deposits, including epithermal high-grade gold-silver mineralization, CRD (Carbonate Replacement Deposit) silver-lead-zinc mineralization, and porphyry copper-gold-molybdenum mineralization, indicating the potentially significant exploration upside of the other deposits within the Tintic Project. In another recent update, the company reported the commencement of an initial 3000-meter surface exploration drill campaign at the Big Hill target.

Near-Term Catalysts

ODV aims to upgrade its status from that of a developer to a junior gold producer (targeting annual gold production between 100 Koz and 250 Koz in the medium term) and eventually to an intermediate gold producer (targeting annual gold production between 350 Koz and 500 Koz). While this is the company’s long-term target, meeting the near-term targets is paramount. ODV was granted the EA (Environmental Assessment) Certificate for the CG Project in October 2023. The company is now targeting receipts of the permit by Q2 2024. Multiple steps are involved in the permitting process, and ODV is already halfway through (check the timeline below).

Another important aspect of the permitting process is engagement with the local communities and tribes. The CG Project’s community stakeholders (First Nations tribes) include the Lhtako Dene First Nations, the Williams Lake First Nations, and the Xatsull First Nations. ODV is carefully advancing its relationship with the FN tribes regarding the CG Project’s development and has signed Participation Agreements with some. It’s important that the support of local FN tribes is obtained because, in case of opposition by any stakeholder tribe, the ensuing legal battle will only delay the permitting process. Alternatively, if the permit is delayed by the MRC (Mine Review Committee), the share price may drop further, given the significance of the CG Project for ODV.

Investor Takeaway

The preceding analysis highlights the promising mining potential of ODV’s flagship asset (the CG Project) in terms of low-cost, high-grade (compared with peer mining assets in Canada) gold production from and low initial development CAPEX for the proposed underground mine, infrastructure support, and the opportunity for significantly upscaling the mineral reserves and resources by exploring the CG Deep Zones (beyond the average depth of ~350 meters). The operational growth prospects are magnified by the Tintic Project, which comprises 23 known mineral deposits, including the Trixie test mine, whose January 2023 Initial MRE revealed interesting gold grades based on only ~10% of the property explored.

Despite these project enablers/tailwinds, ODV trades at a low price-to-NAV. The stock’s recent pullback was fuelled by recent gold price volatility, indicating the strong correlation between the precious metal and ODV’s share price. Nonetheless, obtaining the permit for the CG Project (expected and targeted for Q2 2024) will likely spark a strong share price recovery. That said, I believe ODV is a good long-term investment. However, the near-term upside will be limited due to pending permits for the Cariboo Gold Project.