[Hammond Reef] Gold project hampered by prices – by Bryan Meadows (Thunder Bay Chronicle-Journal – August 3, 2013)

Thunder Bay Chronicle-Journal is the daily newspaper of Northwestern Ontario.

Lower gold prices are impacting Osisko Mining Corp.’s plans for its Hammond Reef Gold Project near Atikokan.
In its second quarter report released Thursday, the company said that the Hammond Reef project requires higher gold prices to justify the investment on construction of a new mine there.

In addition, the company determined following a review of the project, that an impairment charge — a reduction on a company’s balance sheet that adjusts the value of a company’s goodwill — of $487.8 million was necessary. Accordingly, the project’s value recorded on the company’s books was reduced to nil, the report said.

Osisko acquired the Hammond Reef gold project, about 25 kilometres north of Atikokan in 2010, through the acquisition of publicly-traded Brett Resources Inc. for $375 million.

Hammond Reef is a large and growing development project with potential to become a substantial open-pit mine.
During the second quarter of 2013, Osisko invested $2.2 million, including working capital, on the property and focused efforts on the preparation of the feasibility study and the publication of the environmental assessment report.

An industry standard resource estimate for Hammond Reef, released last January shows measured and indicated resources of 5.43 million ounces of gold and inferred resources of 1.75 million ounces.

Due to significant inflation in the mineral industry over the past few years, the company says that a preliminary estimate of capital costs for a 60,000 tonne-per-day operation range between $1.5 billion to $1.8 billion. Gold output is estimated to average 400,000 ounces per year at a production cost of $800 to $850 per ounce.

Under that scenario, the company maintains that Hammond Reef requires higher gold prices to justify the investment. Despite that gloomly picture, a technical team continues to review alternatives to optimize capital costs and improve the returns, the company says.

Based on preliminary feasibility results and current market conditions in the gold sector, the company undertook a review of the Hammond Reef project during the second quarter. Part of that review was an impairment testing of Hammond Reef in conformity with IFRS accounting practices, which resulted in a significant reduction in the property’s value on company books.

The company says that staff are continuing to pursue low-cost permitting activities in the near-term and monitoring of market conditions.

Meanwhile, volatility in the price of gold and financial markets has also led Osisko to decrease its discretionary spending in 2013 by over $80 million.

The price of gold was hovering around $1,310 US an ounce on Friday.

In its second quarter report, Osisko reported adjusted net earnings of $25.1 million ($0.06 per share), compared to 35.6 million ($0.09 per share) for the second quarter of 2012.

The net loss for the quarter totalled $492.8 million ($1.13 per share) primainly as a result of the after-tax impairment charge on Hammond Reef, compared to net earnings of $19 million in the second quarter of 2012 ($0.05 per share).

Gold production at the company’s Canadian Malartic gold mine was 111,701 ounces during the quarter, with earnings of $42.6 million.

Company president Sean Roosen noted that “we continue our progress at Canadian Malartic with improved mill throughput and strong gold production.

“Despite challenging gold markets, we were able to generate operating cash flows of $55.9 million and free cash flows of $15.1 million during the period,” he said, adding that “our team is focused on further improving these results.”

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