Osisko Mining Corporation is a mine developer based in Montreal, Quebec, with a published NI 43-101-compliant, positive feasibility study for an open pit operation that will produce 618,000 ounces per year for the first five years and 591,000 ounces per year over a ten-year mine life. The study revealed operating costs of US$319 per ounce, ranking it in the lowest-cost quartile among global gold producers. The study did not include the Barnat deposit, a separate gold mineralized zone located northeast of the main deposit, which the company is still drilling and for which the grades have consistently averaged nearly double those of the main Canadian Malartic deposit.
The flagship property is located adjacent to Highway 117 in the town of Malartic at the heart of the Abitibi mining district, an area already equipped with excellent road, rail, natural gas, and main grid power infrastructure. Current reserves are 6.28 million ounces* plus an indicated resource of 1.4 million ounces, with only 720,000 ounces remaining in the inferred category, to a maximum open-pitable depth of 375 meters. The project’s potential at depth will be investigated during Phase Four of the exploration program.
Osisko has eight surface core drills and one underground drill that are defining the fast-growing Barnat deposit. In addition, Osisko has concluded over $350 million in equity financing in the past 36 months and cash on hand at the end of third quarter was C$139 million with an additional US$146 million in equipment and CAPEX already financed, making Osisko one of the best-financed developers in the gold sector.
*Proven and probable reserves: 183 Mt @ 1.07 g/t Au
Which Way Will You Go, Mongolia?
Mining in Mongolia was humming along until in May of 2006, the government implemented a windfall profits tax, enabling them to take up to 70% of profits on gold and copper sales if they would rise above a certain price level, as well as wanting up to a 51% equity position in any mining project they deemed “strategic.” Some jokingly referred to this as the “Robert Friedland Tax” or the “Ivanhoe Tax,” because it seemed to be aimed squarely at his Oyu Tolgoi copper-gold porphyry development property.
Investors fled, companies stopped exploring and producing, and the Mongolian government got a lesson in economics 101. Now the county’s legislature is scrambling to come up with acceptable adjustments to its laws that will attract foreign investment back and create jobs. But which way will they ultimately go – keep the high windfall profits tax, or institute something more reasonable? Everyone is watching what the government decides with Ivanhoe’s Oyu Tolgoi project, as that will set a precedent for other companies operating in the country.
We spoke with XL-er Arnold Armstrong about the recent government movements in Mongolia and his coal company Red Hill Energy based there.
Explorers’ League: There’s been a flurry of activity on the part of the Mongolian government over the past 30 days in regards to revising their mining law. Tell us where the country stands at this point.
Arnold Armstrong: The national election was held in Mongolia in June 2008. That was a real turning point, because the democratically elected majority government, led by Prime Minister Bayar, understands the importance of establishing a cooperative mining environment.
XL: He is pro-mining then?
AA: Yes. That party controls 44 of 72 parliamentary seats, with four still in dispute. And even though they operate by way of a coalition and try to reach a consensus, not too much was happening until the past 30 days. The prime minister and parliament have directed the committee to negotiate an agreement with the Oyu Tolgoi property, owned by Ivanhoe Mines and Rio Tinto, and put together a draft investment agreement by February 1, 2009. If they complete that and the legislature approves it, then I think it will indicate to the world that Mongolia is in business again. It will establish the criteria for other companies, such as Red Hill Energy and others, to then complete their negotiations.
XL: So that agreement wouldn’t apply to all companies operating in Mongolia?
AA: No, you have to do your own – but remember the windfall profits tax only went after copper and gold properties; coal and other commodities are exempt. Right now coal producers pay a 5% royalty and are subject to a corporate tax rate of 25%. But there is still uncertainty as to the government also wanting an equity stake in certain projects that it deems valuable. What an Ivanhoe Mines and Rio Tinto agreement will provide is confidence and it will establish a precedent, as the Oyu Tolgoi project is the major one to be dealt with. And once that’s done, a precedent will be established and we’ll move forward from there.
XL: Everyone is watching to see what happens, because that windfall profits tax essentially killed mining there.
AA: The windfall profits tax they imposed was of course a very bad choice, as far as the mining industry is concerned. They were demanding certain industries give up to 70% of profits to the government in addition to possibly also demanding a 51% equity stake, which was in essence exploitation. And the change was very sudden. The directions to the committee now are predicated on the mining act of two years ago. At that time, the agreement was that the government would receive 34% and no windfall profits tax. That’s gone for now, and I think that by February 1, the committee will have put together the agreement for Oyu Tolgoi. I’m looking in the range of 34%, what they had agreed to before. Once that occurs, there’s going to be quite a change in Mongolia, because mining exploration has gone downhill tremendously in the last one to two years. If they don’t reach an agreement, it will do nothing but hurt the people of Mongolia. The government won’t be doing a good job for the people if they don’t exploit the resources.
XL: Are you optimistic, or not?
AA: I think there will be an agreement. I think it will come in somewhere around 34% with Ivanhoe and no windfall tax. And that will be a precedent that will be established. At least the uncertainly will be out of the way and we can move forward.
XL: Let’s say they agree to 34%, and Red Hill gets a similar agreement. Does that allow RH to be profitable?
AA: Oh, yes. There’s no problem as far as Red Hill is concerned. We have over a billion tonnes of coal, which we want to start exporting as well as put in a power station down the road. But we have to have this economic issue resolved so that financing will be available to us.
XL: How do you think investors will react to a 34% tax from the government? Will they think that’s onerous, or will they invest back in the country because of the certainty?
AA: The agreement two years ago was 34% and everybody was in business then. I expect the same reaction if they’re in the same ballpark as before. This is what investors expected previously, so that would be reasonable, I think. There are other terms within the agreement, such as taxes and that companies be able to retain all profits until capital costs have been repaid. But I think there’s a good spirit between Ivanhoe and Rio Tinto on the one side and the government on the other. I think they’ll come together.
XL: Speaking of Oyu Tolgoi, I understand you visited the project last year. Can you give us a sense as to the magnitude of the project?
AA: You’re flying into the Gobi desert, and normally you have warehouses for your core, but when you fly in, you see it right out in the open. There’s no problem because there’s no deterioration. And there are acres of core boxes.
XL: Acres?
AA: Acres of them! It’s mind-boggling. Thousands of boxes right out in the open. I was amazed because the weather is not a problem. They will have to move the airstrip because that’s where the open pit is going to start, but it’s a simple thing to do – the Gobi desert isn’t like the Sahara, it’s a very solid crust, not sand. So they just take the bulldozers and after a few plows, they’re in business. The first shaft at Oyu Tolgoi is 7 meters square, which in itself is huge, and it went down 1,350 meters and cost about $100 million to build. It’s completed now and it’s beautiful. The second shaft is 10 meters square, which is absolutely huge. Just the earth-moving operation alone is mind boggling. They’re still carrying on with their program, albeit slowly, to maintain everything until there’s an agreement. You can’t mine until you get the permits. They’re continuing to do some work, though, and they had a recent press release that extended the ore body out, with higher grade.
XL: How much metal do they have there now?
AA: I understand that once production begins, the mine is expected to produce over one billion pounds of copper and over 330,000 ounces of gold per year for 35 years! Once this project is in operation, it will be the largest, or one of the largest, copper/gold/moly mines in the world. It’s a huge deposit, and it’s continuing to grow. It’s not fully delineated yet. So it’s definitely in the interests of the Mongolian government to get an agreement wrapped up and bring this property into production. If they can do that, it will be a huge benefit to the Mongolian people.
XL: Railroad transportation is vital to inland deposits like yours. Does the Mongolian government have any plans to increase rail capacity between itself and Russia and China?
AA: The railroad system is quite antiquated yet still fully operational. It moves a lot of trade in and out of Mongolia each year, but it could use some upgrades. On December 5, the Mongolian Minister of Roads and the president of the Russian Railway formed a Mongolian/Russian working group to develop and refine its operations to meet their two countries’ economic interests. In essence, they intend to build a new railway line through Mongolia. Their goal is to strengthen each of their countries with a new railway. What you’d have is products moving from China through Mongolia and into Russia, and vice versa. It would also open up exports for all these countries. So it’s really quite an important issue they’re working on. Both our coal deposits are only about 100 to 120 kilometers from the central railroad. Any improvements to the railroad would benefit Red Hill Energy – our Ulaan Ovoo deposit has 208.8 million tonnes of quality thermal coal. Combined with our Chandgana projects, we have over 1 billion tonnes measured and indicated thermal coal, plus an additional 475 million tonnes inferred. Before we can begin exporting, we need a link to the central railhead – fortunately it’s close and covers relatively easy terrain. In fact, before Mongolian democracy in the early 1990s, the Russian government had already started building a link from our Ulaan Ovoo deposit to the main rail line. It’s not just us that will benefit from an expanded rail system but other companies as well.
XL: Assuming the government is reasonable, how long would it take Red Hill to go into production?
AA: I think we could be in production within 18 to 24 months. The only thing we have to wait on is tying a spur line to the rail system. And once we get a spur line in, we’d be ready to commence mining operations. So we’re holding our breath that Oyu Tolgoi is resolved in February, because that will allow us and others to move forward rapidly at that point.
XL: You have a pre-feasibility study coming up, correct?
AA: We have been working on readying our pre-feasibility study and we were almost there, but our consultants wanted to have a bulk sample. So we opened the ore body, which is primarily a single 60-foot deep coal seam, and took a sample. It’s out for analysis now. When that gets back to our consultants, which we expect to be late January or early February, our pre-feasibility will be completed on Ulaan Ovoo.
XL: Are you exploring in the meantime?
AA: We’ve stopped our exploration activities due to the uncertainty with the government. It’s very difficult to raise capital until things are settled by the legislature. This is the worst thing that can happen to a country, uncertainty. All companies want to know exactly where they stand, they don’t want surprises. Every company has to be able to run their numbers based on laws that can’t be changed. Mongolia has lost billions of dollars, and we would’ve lost millions if we hadn’t cut back. So as soon as this thing is resolved with Oyu Tolgoi and the world sees that Mongolia is working with mining interests again, things will accelerate.
XL: Do you anticipate a bump in your stock price if an investment agreement is reached?
AA: Well, take Ivanhoe for example. It’s down in the $2.50 to $3 range, but it was a $13 stock. The minute that investment agreement is approved by the legislature, I think you’ll see a substantial bump in that particular stock. But you’ll see a substantial jump in quite a number of other companies, too, including Red Hill. It’ll be a situation where the uncertainty is gone, we’ll know exactly where we’re going, and we’ll be able to set time tables for production. It will be quite an interesting time. Don’t forget, Rio Tinto agreed to put up something like $1.6 billion to earn a 40% interest in Oyu Tolgoi. And they’ll probably want at least a 50% interest or more at some point if the agreement is reached.
XL: What are you personally focused on right now?
AA: Our pre-feasibility study and ongoing communications with various international coal companies and coal buyers that continue to express interest in us. We’ve had all the mining costs for quite some time, but we need the transportation costs. And we obviously have to wait until the investment climate improves, meaning the Mongolian legislature. Once we have all of that, we’ll know exactly where we stand and we’ll ramp right up. In the meantime, we’ve cut back like every company has.
XL: Speaking of cutbacks, do you see a metals shortage someday because of all the mine closures and shutdowns?
AA: Yes, there will be shortages. The demand for steel is down, so that means the demand for coking coal is down, too. China’s gross domestic product has gone from double figures to something like 6.5%, which is a huge drop. But we anticipate that’s going to change – China and India are not going to stop. I think China will ramp back up to the 8-9% range within a year. And that will increase the demand for products and thus the prices of commodities. India itself is a sleeping giant, and eventually it will reach Chinese levels. So we’re quite optimistic about the future. For the short term, there’s still a fair amount of pessimism, and it may be a year or more before credit really starts to flow again and you see the financial market stabilize.
XL: What do you make of the global situation right now?
AA: In Japan, you’ll recall they dropped their interest rate to zero, and even that didn’t help because it took years and years for them to come out of it. And of course right as they came out of it, we had this global downturn. I don’t think the real estate market is going to improve for a couple years, either, and if that is not improving, you’ll maintain this weakness in commodity demand. Until such time as the general public comes to the conclusion that things are turning around, they’re going to hoard their money. We have to get the financial situation in order before things can dramatically improve.
XL: What to do in the meantime? Hold gold?
AA: Gold is going to increase in value. It will go up over a $1,000 within a year. The Canadian dollar will improve and the U.S. dollar will drop off, which will increase the price of gold. I’m positive on gold and negative on the U.S. dollar. And I’m not alone in my thoughts on that.
XL: We’re definitely on the same page there.
AA: In the meantime, you just have to watch every dollar and make sure you have sufficient funds to stay alive for the next couple years. Then just wait for the improvement. In the meantime, be positive and know that things are going to improve. You want to be ready for it.
XL: Well put, Arnie. Thanks for your time.
AA: You’re welcome. Merry Christmas!
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NAME THE EXPLORER
Arnie tells us to get ready for the improvement in the market. What’s the best advice our XL-ers have given on what to do in the meantime? And who said it?
“Don’t follow the crowds. We all make mistakes in our investing… I remember through the whole Bre-X mania, I bought some private placement stock around $2 or $3 a share, and it went to $9 during the hold period. But before the hold period expired, it dropped to 25c a share! Even people in our industry can get caught up in it. So don’t follow the crowd and buy that private placement in that hot new issue. Do your own research and be patient. People lose interest and they become impatient. In almost all instances, it takes about three years to make a real discovery or to find an ore body, and the market doesn’t have that kind of patience.” Name the Explorer
But the important thing is to recognize that our business is cyclical, so you pick things up during the low part of the cycle. Let's face it; the best way to get deposits is to get them off somebody else's shelf. My thinking is that if you can find a resource that has significant grade and significant potential, you can wait out the cycle for an opportunity to buy – the cycle will come your way. You look at the commodities, and they all have a cycle, so the opportunity is to get involved with them when they are out of favor… Very few deposits go from discovery to production in one cycle.” Name the Explorer
IN THE NEWS
We haven’t been able to run this section for the past couple issues, and virtually every XL company has released news in that period. So, for an end-of-year tribute to our honorees, we thought we’d link to every company’s website for you to check out recent news on your own. In addition, we think you’ll discover other interesting developments about each company. After all, these companies are run by some of the best explorers, developers, and financiers in the world!
XL wishes you a happy and healthy holiday season. And, get ready for 2009!
[Ed. Note: David Lowell is working on several interesting projects at the moment, and his team has promised we’ll be one of the first to know when he forms a new company.]
Lukas Lundin
The Lundin Group of Companies (all Lundin companies can be accessed from this website, which includes a summary of each company and current stock prices.)
Arnold “Arnie” Armstrong is a man whose reputation precedes him. He has been a market-mover in the resource sector since the 1960s. He orchestrated the rise of Pyramid Mines, which discovered the massive lead-zinc deposit at Pine Point in the Northwest Territories of Canada in 1965. Pyramid was so widely held that the discovery set off a major flood of investment into the entire resource sector, and started a claim-rush that had every piece of land from Pine Point down to the U.S. border staked.
Ross J. Beaty was once described as a "broken slot machine" for his remarkable consistency at making shareholders rich. In 1994, he founded Pan American Silver Corp. (PAA.T, PAAS.NASDAQ), one of the world's leading primary silver producers and currently serves as Chairman. In 2002, Mr. Beaty founded Lumina Copper Corp., a copper development company, and also serves as its Chairman.
Like many great stories, Jorge Patricio Jones' career in mining began with an unexpected turn of events. After studying water resources geology in his hometown of La Plata, Argentina, Jorge Patricio graduated to find the only job available was in hard rock mining in the gold and platinum fields of South Africa. He took the position, and his experiences with Union Corporation and Impala Platinum there gave him a case of mining fever. He's now been in the field for over 35 years.
Dr. Sergey V. Kurzin, a Russian-born nuclear power research engineer who moved to the United Kingdom in 1990, has played a key role in acquiring and developing several important mining assets in the former Soviet Union. These include Julietta, a high-grade gold deposit in Magadan, Russia, with Bema Gold; Kupol, a high-grade epithermal gold deposit in Chukotka, Russia, also with Bema Gold; and the Varvarinskoye copper and gold skarn deposit in Kazakhstan with European Minerals Corporation. He also played a key role in establishing UrAsia Energy, a uranium producer with mining operations in the Republic of Kazakhstan.
David Lowell may not be the last word on the world's largest copper deposits. But he's certainly the first.
In 1970, David co-authored a scientific report outlining the Lowell-Guilbert model of porphyry ore deposits – massive bodies of once-molten rock that host staggering amounts of copper, gold, silver and other metals. This groundbreaking bit of geological detective work revolutionized the way that exploration geologists search for porphyries. Thirty years later, these ideas are still compulsory learning for geology students.
When Lukas Lundin was ten years old, his father – resource industry legend and X-Leaguer, Adolph Lundin – sat him and his brother down and asked, "Who's going to be the mining engineer and who's going to be the petroleum engineer?" Thus were planted the seeds of his long and storied career of developing oil, uranium, gold, copper and even iodine, in Africa, the Middle East, South America, Russia and Mongolia.
Editors Note: Adolf Lundin passed from among us in September 2006:
Operating from his offices in Geneva, Switzerland, Adolf H. Lundin heads an internationally recognized group of natural resource companies with exploration and development projects worldwide. The twelve companies operated by the Lundin Group are actively engaged in the exploration for and development/production of oil and gas, gold, copper, cobalt, zinc, diamonds, uranium, iodine, sodium sulphate and potassium nitrate.
Catherine McLeod-Seltzer, a recognized leader in the minerals industry, is the Chairman of Pacific Rim Mining, Bear Creek Mining, and Stornoway Diamonds.
After spending the early years of her career working in mining Corporate Finance, both in North America and internationally, Catherine went on to co-found Arequipa Resources in 1993 with renowned mine finder J. David Lowell. Three years later, having discovered the Pierina gold deposit in Peru, Arequipa was taken over by Barrick for $1.1 billion, one of the most lucrative mining industry buyouts in the last decade. In 2003, Catherine and David joined forces once again to form Peru Copper Inc. to acquire the Toromocho Copper deposit. Three years after taking Peru Copper public, it was acquired by Chinalco for $840 million.
His propensity for success in the face of the most daunting conditions became apparent almost immediately after his graduation from the Masters geology program at the University of Calgary in 1967. At that time, the mining industry was mired in one of its cyclical lows, and Ron came out of school to find that companies weren't exactly beating down his door with job offers.
A firm confidence in ultimate success is one of the attributes of any serially successful individual-in any field of business and especially in mineral exploration.
In his long career, Ron Parratt has led the discovery of three large deposits, and today he believes he can do it again.
Over a period of forty-two years, Duane progressed from field work in isolated parts of Canada to project initiation and management, to investment analysis and decision making, to management of public companies and the discovery of several mines, resulting in profits for long-term shareholders and associates.
John Prochnau's quiet demeanor belies the fact that he may be one of the most successful resource project finders alive today. How successful? During the 1990s, while managing Brancote Holdings, he assembled a global portfolio of more than fifty exploration to development stage mineral properties in the U.S., Canada, Ireland, Australia, South America and South Asia, all 100 percent financed by industry partners as part of a low-risk, commercial strategy, prior to the breakthrough Esquel gold discovery in Argentina.
When Robert A. Quartermain joined Silver Standard as its president, in 1985, its market capitalization was only C$1.5 million. Today, the company’s market cap is literally about a thousand times higher. Not a bad achievement for someone who came from a small town in New Brunswick and started his career with a summer job at the very bottom of his field. That was back in 1976, when Bob helped as an extra hand, cooking food, maintaining motors and boats, drafting, carrying and categorizing rock samples, and even digging latrines.
Simon T. Ridgway is President and Director of Radius Gold, Inc. Unlike the heads of many junior exploration companies, Ridgway is not only known for making deals that profit his shareholders, but for actually getting out in the field with his team of prospectors and making grassroots discoveries.
Robert Dickinson is the Chairman and co-founder of Hunter Dickinson Inc., a Canadian corporation, which since 1985 has grown to become one of the largest and most successful mine development groups in North America.
Dr. Roman Shklanka may be the least-known of Vancouver's great explorers. This may be because he is soft-spoken and doesn't seem interested in self-promotion. Even when discussing his involvement in some of the world's greatest gold finds in recent history, his manner is calm and almost emotionless-he lets the facts speak for themselves. Who is Roman Shklanka?
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