Richmont Sees Healthy Q4

While other junior miners continue to be undercut by economic uncertainty, Richmont Mines’ (RIC-T, RIC-X) fourth-quarter results show a company being rewarded for its shrewd moves.

In December, Richmont closed a friendly takeover of Patricia Mining, its joint-venture partner at the high-grade Island gold mine, 50 km north of Wawa, Ont.

The timing of the deal was perfect.

Richmont swooped when the mine wasn’t generating the anticipated cash flows that Patricia needed to meet its commitments. Richmont got Patricia’s 45% interest for just $17 million right around the time that many of the issues at the mine were being sorted out.

For the quarter, the mine processed 47,900 tonnes of ore at an average grade of 9.04 grams per tonne, and roughly 13,920 oz. of gold were sold at an average price of US$890 per oz.

That compares well with the previous year’s fourth quarter, when 35,200 tonnes of ore were processed at an average recovered grade of 6.45 grams per tonne, and just 7,300 oz. of gold were sold at an average price of US$726 per oz.

Richmont’s president and chief executive, Martin Rivard, says while the company had been anticipating mining higher grades in the quarter, it benefited from unforeseen events, too.

“What was unplanned was the workforce issue improving quite a bit with base metal mines closing,” Rivard says.

He explains that since taking over as operator of the project in 2005, Richmont has been dogged by staffing issues — issues that it was unable to resolve until the downturn in the base metals prices freed up skilled miners.

“Execution is a key thing at Island,” he says. “It’s not a large operation, so you need experienced miners to get the production levels.”

Coupled with improved production was good news on the cost side, as cash costs decreased to US$546 per oz. from US$621 in last year’s fourth quarter.

The rejuvenation of the mine helped bolster overall company revenue for the quarter to $22.9 million, up 122% from the same period last year, with full-year revenue up 85% to $70.6 million.

Company-wide, Richmont sold 70,950 oz. gold at an average price of US$876 per oz. That compares well with the 46,190 oz. it sold in 2007 at an average price of US$699 per oz.

Most importantly, the stronger revenue wasn’t completely eroded by higher costs and writedowns as it has been for so many other miners.

Revenue managed to flow down to the bottom line, bringing net income for the period to $2.1 million, or 9¢ per share, compared with a net loss of $1 million, or 3¢ per share for the previous year.

That isn’t to say, however, that the company escaped the quarter entirely unscathed.

Operating costs for the quarter came in at $13 million compared with just $6.5 million in the same period of 2007.

Rivard attributes the higher operating costs to Richmont’s Beaufor mine, in Quebec, where increased definition drilling and higher milling costs — due to higher steel and zinc prices — hurt the bottom line.

But with zinc and steel prices now lower, it is only a matter of time before Richmont’s milling costs also decline.

“Unfortunately, it takes a little bit more time getting the reductions,” Rivard says. “We don’t get reductions as fast we get increases.”

He anticipates the company will see such downward re-pricing of inputs in the second quarter.

In the meantime, increased production and lower costs — the average cash cost came down to US$550 per oz. of gold from US$556 per — managed to offset the higher operating costs.

But the solid results on the production side haven’t persuaded Richmont to neglect its exploration program.

The company upped its exploration and project evaluation expenditures to $2.4 million in the fourth quarter from $1.3 million for the same period a year earlier.

Of that amount, $700,000 was spent on exploration at the Beaufor mine; $900,000 was spent at the Island mine, and $500,000 at the Golden Wonder project.

And the company’s exploration program for the coming year calls for 45,000 metres of drilling at Beaufor to test for further development at depth and 26,000 metres of definition and exploration drilling at Island.

As for Golden Wonder, back in October Richmont announced it wouldn’t pursue its joint-venture option there. Results from 16 holes totalling 2,040 metres didn’t confirm continuity of an economically viable zone in the area the company was targeting.

Another key element to the Richmont story is the company’s strong cash position and lack of debt — two factors that speak to the prudence with which the company has been built since it went public in 1985. Richmont’s having just 26 million shares outstanding is also testimony to its financial sharpness, and leaves it with many options when it comes to raising new funds.

At year-end, cash and equivalents were $26 million, compared with $27.3 million at Dec. 31, 2007.

Being in such a strong position has Richmont looking to stay on the acquisition path. Rivard says any possible acquisition would be made with an eye towards strengthening the company’s position in Ontario and Quebec.

Still, Richmont isn’t about to throw off its carefully built balance sheet in a wild blaze of acquisitions.

“We’re not looking to get debt on the balance sheet,” Rivard says. “We’re focused on using our working capital to fund acquisition and for the right projects.”

That’s a statement many chief executives would love to make, but only a very few are actually in a position to follow through on.

The Island gold mine went into production in the fourth quarter of 2007 and currently has proven and probable reserves of 1.03 million tonnes grading 8.72 grams gold for 289,070 oz.

During the first nine months of 2008, the mine produced at about 65% of its design capacity. In the fourth quarter of 2008, production was at around 80% of design capacity.

The Beaufor mine processed 123,960 tonnes of ore at 8.62 grams gold for production of 34,350 oz. gold in 2008.

Proven and probable reserves at Beaufor stand at 244,060 tonnes grading 8.89 grams per tonne for 69,790 oz. of gold.