Ounces in the Ground, Part 1

Eastern Canada hosts and has hosted some of the world's great gold mines. Names like Hollinger, McIntyre, Campbell-Red Lake, Hemlo, LaRonde, Malartic, and Sigma-Lamaque have launched companies, careers and, indeed, legends.

While no current junior explorer has found a deposit in the same league as those aforementioned mines, a few have projects with enough ounces to capture the attention of the gold majors, especially given that each deposit exists in mining friendly Canada (at least for a few more years).

Detour Gold and Osisko Mining have both outlined substantial deposits along the Abitibi Greenstone Belt, which never seems to run out of gold. Just when you think the gold is gone, another junior comes along and finds more.

Detour has the 13.2-million-oz. Detour Lake property, site of the former Detour Lake mine in northeastern Ontario; and Osisko has Canadian Malartic in Malartic, Que., which tips the scales at a mere 10.4-million-oz.

Farther east in Québec, Eastmain Resources is quietly counting the ounces at its Eau Claire project, where ongoing drilling should push the tally above 3 million oz.

Back in Ontario, Brett Resources has raised the bar to 4.8 million oz. at the Hammond Reef project and, finally, PC Gold (which, by the way, is not a gold play launched by Galen Weston Jr.'s Loblaw Co.), owner of the former Pickle Crow mine site in northern Ontario, where there are at least 1.4 million oz. in the old mine.

We offer an overview of each company below (in alphabetical order), with comments on each from John Kaiser, perhaps best known for his online newsletter, www.kaiserbottomfish.com

Brett Resources (BBR-V)

Hammond Reef is Brett Resources' flagship project. The property optioned from Kinross Gold (K-T) in March of 2006 was comprised of 132 claims and 1 mining lease totalling 57.4 sq. km, covering a strike length of 10 km along the favourable structure and lithology hosting gold mineralization. Since then Brett has staked or optioned an additional 53 claims or 133 sq. km contiguous to the original Hammond Reef claims. Kinross had a back-in option but in 2008 converted it into a major stake in Brett, thereby giving Brett 100% of Hammond Reef.

The deposit came with a 2.9- million-oz. low-grade resource outlined during the early 1990s, which was sub-economic at gold prices below US$500, as was the case when Brett optioned the property.

Brett tackled Hammond Reef with the goals of expanding the known resource by better delineating its geometry and securing access to potential additional ounces by consolidating the fragmented claim ownership along strike from the main zone.

Brett published an updated resource in late 2008, which boosted the ounces in the ground to 4.8 million inferred oz. at 1.05 grams gold per tonne. The company is now focused on infill drilling to upgrade the resource category and establish the metallurgy of a deposit it views as a future open-pit mine. Brett also hopes to establish additional ounces through exploratory drilling along strike.

The property is located in the Sawbill Bay-Marmion Reservoir Area, about 220 km west of Thunder Bay, Ont. The district has been the focus of intermittent gold exploration since the original discovery of the Hammond Reef property in 1895. Hammond Reef has seen extensive exploration drilling, including almost 18,000 metres of diamond drilling in 85 holes from 1984 through 1998.

Hammond Reef hosts widespread low-grade gold mineralization in a 100-to 300-metre wide northeast-erly-trending corridor of altered granitoid rocks. Mineralization is associated with fracture-controlled quartz vein stockworks and sometimes minor fine pyrite in variably altered granitoid rocks and mafic dykes in and adjacent to a foliated schist/fault zone.

Kaiser says...

Based on 74 million shares fully diluted and a $0.60 stock price the market is assigning a value of $40 million to Hammond Reef or about $8 per ounce in the ground. Brett's upside hinges on either the company boosting the overall resource without sacrificing grade so as to take advantage of economies of scale, or seeing the price of gold undergo a dramatic increase not linked to cost inflation.

In addition to a decline in the price of gold, downside risk lies in a possible inability to get a social licence and mining permit to develop an open-pit mine.

Detour Gold (DGC-T)

Detour Gold has outlined 13.2 million oz. (a measured and indicated resource of 10.8 million ounces and inferred resource of 2.4 million oz.) at its 265-sq.-km Detour Lake project in northeastern Ontario, about 180 km northeast of Cochrane.

Detour Lake is in the vicinity of the former Detour Lake mine, which was once operated by Placer Dome and produced 1.8 million oz. gold from 1983 through 1999.

The property sits just off Highway 652 and comes with a gravel airstrip, handy for those afternoon jaunts from Toronto.

In October 2008, Detour Gold optioned the property from Goldcorp (G-T). In return, Detour assumed all of Goldcorp's liabilities and obligations relating to the property. Part of the exploration concessions and the mine property are subject to a 2% net smelter return royalty (NSR) payable to Franco-Nevada (FNV-T) and a 1% NSR payable to Goldcorp. Detour can buy back the Goldcorp NSR at any time for $1 million.

The Detour Lake mine was discovered by Amoco Petroleum in 1974. Most of the previous exploration work and mine development was carried out by four companies, including Amoco, Campbell Red Lake Mines, Placer Dome and Pelangio Mines (PX-V).

Campbell (and later Placer Dome) put the mine into production in 1983, exploited the pit until 1986, and then went underground via a 600-metre shaft west of the pit and a series of ramps extending to the 785-metre level. Production ceased in 1999.

Past production totalled roughly 1.76 million oz. gold from about 14.3 million tonnes of ore at an average grade of 3.82 grams per tonne, including 5.2 million tonnes grading 2.57 grams (430,516 oz.) from the pit and 9.1 million tonnes grading 4.98 grams (1.46 million oz.) from underground. Average mill recoveries were 93.2%.

The various project interests were subsequently acquired by Pelangio Mines, which launched a drilling campaign in 2004 geared towards outlining an open-pit resource. From 2004 to 2006, Pelangio drilled 127 holes totalling almost 30,000 metres outlining a near-surface indicated resource of 160,000 oz. gold, while another 850,000 oz. are inferred.

Detour Lake caught the attention of the Hunter-Dickinson group in 2006, which persuaded Pelangio to transfer the project into a new funding vehicle -- Detour Gold -- which went public in 2007 through a $35-million initial public offering. On the assumption that gold prices were in a long-term uptrend, the new company posed the question, what happens to the gold resource and economics of scale if lower cut-off grades are used to define a pit shell? Can we grow the resource faster than we lose in terms of lower grade and increasing costs due to higher waste to ore stripping rates? With the help of 173,000 metres of drilling since 2007 the company has grown the Detour Lake gold resource from 1.7 million oz. in 2005 to the current level of 13.2 million oz. at an average grade of 1.38 grams gold per tonne.

With takeover specialists André Gaumond and Michael Kenyon (see "Super Seven" on page 19) now on the board, how far off can a takeover offer be?

Detour Gold expects Met-Chem Canada to complete a prefeasibility study on the project in the second quarter of 2009, followed by a feasibility study later this year.

Results from an additional 102,000 metres of infill diamond drilling (completed since the last resource estimate of July 2, 2008) will be used in the prefeasibility study.

Kaiser says...

The Detour Lake gold project is an example of how a higher gold price and a decision to think big can turn a marginal gold system into a world-class situation... A rising gold price has helped by first allowing a US$575 per oz. gold based pit shell, and now a US$700 pit shell. Detour Gold is nearing completion of a prefeasibility study for an open-pit mine in the 40,000-50,000 tonnes-per-day range. Given the size of the gold resource, which the market is pricing at about $11 per ounce, a positive feasibility study will likely lead to a takeover bid by a major gold producer.

The downside risk is that potential bidders are deterred by concern over erratic grade variation within the resource during the course of mining.

Eastmain Resources (ER-T)

Eastmain Resources' Eau Claire project consists of mining claims covering roughly 206 sq. km in the Eastmain/Opinaca greenstone belts in the James Bay district of Québec. The project is located about 1,120 km north of Montreal by road.

Eastmain Resources has been working on the Eau Claire vein system in central Quebec since 1996, gradually buying out its partners to end up with 100% of what has generally been viewed as a smallish gold resource that might one day lend itself to the sort of mom-and-pop mining operation abhorred by institutional investors.

Eastmain received a boost in 2005 when Virginia Gold Mines (the predecessor company to Virginia Mines) discovered the Éléonore gold deposit, which Goldcorp (G-T) bought for about $500 million in late 2005.

Eastmain had published a resource of about 1 million oz. at an average grade of 7.55 grams gold per tonne to a depth of 900 metres in 2005.

The resource could now be viewed in terms of a 500-tonne-per- day underground mine whose ore would be trucked to a future Éléonore mill.

Since then Eastmain has drilled more than 125 holes, extended the footprint of the vein swarm to a 1,500-metre strike, and established the existence of additional parallel veins in a corridor whose width ranges 100-300 metres. Because the gold grade is confined to fairly regular sequences of quartz veins the Eau Claire deposit does not lend itself to the large open-pit model being applied to deposits such as Detour Lake and Canadian Malartic where everything in the pit gets milled.

Eastmain, however, does believe a small open-pit mine is feasible at Eau Claire for material inside 300 metres of surface, in part because waste rock can be readily separated from ore. The current exploration program is geared towards converting the 313,072 oz. near surface indicated resource reported in 2005 into a measured resource that could become the basis for a standalone milling operation, starting with open-pit mining and eventually moving to underground mining.

Kaiser says...

The footprint and nature of the Eau Claire gold system is such that a global resource in the 2-3 million-oz. range supporting a long-lived mining operation is conceivable. The exit strategy for Eastmain would be a takeover bid by an established Quebec-based underground miner such as Agnico-Eagle Mines (AEM-T) or a merger with one of the smaller underground miners such as Wesdome Gold Mines (WDO-T). Eau Claire would be an example of a mine that is made rather than found, with additional upside coming from higher gold prices.

Osisko Mining (OSK-T)

Continuing on the path new of projects on old properties, Osisko Mining is seeking to develop the Canadian Malartic project into an open-pit mine on the edge of the old mining town of Malartic, Que., where 8.7 million oz. gold were produced from 1935-1983 via underground mining of high grade veins.

Osisko acquired the property in late 2004 on the premise that the low-grade mineralization in the "waste rock" surrounding the depleted high-grade veins could be developed as an open-pit mine.

The project gained market traction in late 2005 when gold moved beyond US$500, which allowed Osisko to raise the capital needed to outline a proven and probable resource of 6.28 million oz. at a grade of 1.07 grams gold per tonne.

Osisko has published a NI 43-101-compliant feasibility study for an open-pit operation that would produce 591,000 oz. gold per year over 10 years. The study says operating costs would total US$319 per ounce, ranking it in the lowest 25% among global gold producers.

Canadian Malartic is adjacent to Highway 117 in the town of Malartic, at the heart of the Québec's historic Abitibi mining district, an area equipped with extensive infrastructure. The Canadian Malartic deposit is one of the biggest in Canada in terms of gold reserves and ongoing drilling on mineralized zones, like the Barnat deposit, could push reserves higher.

One fly in the ointment is that about half the town must be relocated to mine the deposit.

An initial resource calculation was published in late January 2009 for this separate gold mineralization zone, situated northeast of the main deposit. Barnat's grades have consistently averaged nearly double those of the main Canadian Malartic deposit.

Current reserves for the Canadian Malartic property are 6.28 million oz., plus an indicated resource of 1.4 million oz. and an inferred resource (including Barnat) of 2.75 million oz., for a total of 10.4 million oz.

An extensive 200,000-metre definition and exploration drilling program is under way this year on five mineralized zones and exploration targets on the property. As of the end of February 2009, eight drills were turning at Canadian Malartic.

That same month Osisko closed a $403 million bought-deal financing. On a fully diluted basis, Osisko would have more than $700 million in cash.

Kaiser says...

Osisko is awaiting a permit to develop Canadian Malartic. With a market valuation of $1.8 billion ahead of a mining permit, and with half of the capital cost still unfunded, it is unlikely that Osisko will attract a takeover bid from a major unless gold has definitively breached US$1,000 per oz.

A more likely outcome is that Osisko will evolve as a new mid-tier gold producer that adopts a growth by acquisition strategy. Assuming the town relocation plan continues without any hitches and the mining plan is approved this summer, Osisko hopes to be in production by April 2011.

The biggest risks are a sharp drop in the price of gold coupled with a significant rise in the Canadian dollar.

PC Gold (PKL-T)

The Pickle Crow gold mine was famous. It was among the highest grade, longest-lived underground gold mines in North America, operating continuously from April 1935 through September 1966 while producing about 1.45 million oz. gold and about 168,757oz. silver from 2.79 million tonnes of ore. The average recovered grade over the life of the mine was 16.14 grams gold per tonne and 1.88 grams silver.

The mine, situated 400 km northwest of Thunder Bay, Ont., in Connell and McCullagh Twps., is thought to have established a Canadian record by paying a dividend to its shareholders a mere 11 months after launching production.

In its first year the mine earned $415,962 (now equivalent to about US$6.5 million) after taxes and continued to earn substantial profits through the Second World War, labour shortages and constantly declining real gold prices.

In the post-war years, under the stewardship of Dr. Norman B. Keevil, then president of Pickle Crow Gold Mines, the profits from Pickle Crow partially underpinned the growth of Teck (TCK. B).

Pickle Crow was forced to shut down when mining at 1,500 metres below surface became too expensive at the then fixed gold price of US$35 per oz. By the time gold had soared to US$400 the mine was flooded, stranding the roughly 1.4 million oz. there.

After the closing of the Pickle Crow mine, the property lay dormant for years, but saw extensive work by various operators through the course of the 1980s, 1990s and the early part of the Millennium. But none succeeded in outlining a sizeable near-surface, open-pit resource.

PC Gold assembled the various claim interests into a single package and went public in 2008 with the goal of revisiting the existing ounces as a redevelopment possibility if the gold price maintained its upward swing, and, more importantly, to raise exploration capital to test the theory that the veins could thicken and intensify in grade below the 1,500-metre level, much like what Goldcorp (G-T) discovered in the Red Lake mining camp.

The property is subject to two net smelter return royalties totalling 1.25%.

Kaiser says...

PC Gold has embraced a dual strategy for its Pickle Crow gold project, which offers its shareholders upside potential through either an increase in the price of gold or exploration results.

With an implied project value of only about $20 million PC Gold offers extraordinary upside if deep exploratory drilling confirms that Pickle Crow is indeed a replay of Goldcorp's Red Lake history, hich, in addition to turning Goldcorp into a major gold producer, aided Goldcorp's $1.2-billion takeover bid for Gold Eagle Mines in to secure the "Bruce Channel" structure.

The downside risk is that the downdip vein extensions at Pickle Crow prove elusive or pinched out, and that the price of gold ends up too low to justify redevelopment of the existing ounces in the ground.

-- The co-author writes Kaiser Bottom-Fish Online; you can visit his site at www.kaiserbottomfish.com