The skeptic's take on Osisko’s bid for Queenston

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There are two ways to interpret Osisko Mining Corp.'s acquisition of Queenston Mining for $550-million.

You could sit back and assume that Osisko's flagship Canadian Malartic operation is ramping up quickly and will soon be operating at full capacity, giving the miner the flexibility to go out and acquire medium-to-long-term production. Or you could wonder if Osisko is worried about the low-grade gold coming out of Malartic and speculate that the miner has realized it must add higher-grade deposits in order to get a premium valuation.

Analyst Brad Humphrey at Raymond James is concerned that the latter is true. "This transaction appears to represent a shift in direction for Osisko from the bulk mining, low grade, (soon to be) large producing Canadian Malartic operation to now encompassing the higher grade, underground mining, smaller producing Upper Beaver project," he noted. Upper Beaver is the name of Queenston's flagship project near Kirkland Lake in northern Ontario where a string of gold mines were shut down in the 1970s when the precious metal fell to about $35 per ounce.

"The deal introduces several questions for shareholders regarding the long-term direction for the company with respect to the future of Hammond Reef and the company's aspiration to be a [one million ounce] producer," he added.

Although Osisko bragged about its record production from Canadian Malartic last quarter, output came in far below what analysts were expecting. Plus, the gold mined in September was much lower grade than that of July and August, raising questions about future grades.

It could just be that the skeptics are reading too many tea leaves. Maybe this really is just a straightforward play by Osisko to acquire gold assets near its Malartic mine. Plus, chief executive officer Sean Roosen said on a conference call that Queenston's main project is "amenable to mechanized mining and larger-width mining. So that's a key to controlling costs, and as we know, one of the big issues in our space right now is capital exposure."

Either way, it's going to take some time before the project comes on stream. For now, Upper Beaver is simply being explored.

After six years of work, the project is on track for a feasibility study but isn't targeted to go into production until 2016, provided there are no hiccups. Contrast that with Hammond Reef, Osisko's other major endeavour, where a decision to move ahead with development is expected in about a year's time. Should this takeover go through, the future for Hammond Reef will be much less clear.

To pay for the deal, Osisko has offered Queenston shareholders 0.611 of an Osisko share for each common share of Queenston held, working out to about $6 per share. Should the deal go through, Queenston shareholders will own about 12 per cent of Osisko.

Dundee Capital Markets and Primary Capital served as financial advisers to Osisko while Fraser Milner Casgrain LLP offered legal advice. BMO Nesbitt Burns was Queenston's financial adviser and Stikeman Elliott LLP acted as legal counsel to the company.