Richmont delivers double whammy in Quebec

Richmont Mines (RIC-T, RIC-X) has found itself in a tough spot, with its shares sinking to a new 52-week low, after taking the Francoeur gold mine offline and scrapping its exploration efforts on the Wasamac gold property, both near Rouyn-Noranda, Que.

Francoeur is currently undergoing an estimated four-month closure process, after commercial production was halted on Nov. 30, mainly due to high production costs. The closure impacted roughly 115 employees, of which 35 were temporarily retained to assist with the decommissioning. 

“The closure of Francoeur comes unexpectedly but in our view was the right decision taking into account the low realized grades, difficult mining conditions, and labour  issues,” writes CIBC analyst Kevin Chiew in a note. Ultimately, these factors contributed to the mine’s elevated costs.

Francoeur, Richmont’s first mine, started producing in 1991, before closing in 2001 owing to unfavourable gold prices. It was only this August that Richmont put Francoeur back into action, after taking a non-cash after-tax write-off of $28 million in July. That resulted from Richmont lowering the mine’s production guidance thanks to a revised reserve and resource estimate.

In its first two months of commercial production ended Sept. 30, Francoeur generated 1,800 oz. gold from 16,023 tonnes grading 3.61 grams per tonne. That’s 24% below the mine’s updated reserve grade. Cash costs came in at US$1,608 per oz.

In early November, the company’s president and CEO Paul Carmel explained Francoeur’s third-quarter performance by start-up issues and a tight labour pool for experienced underground miners, adding the company will look to improve productivity and recovered grades at all of its operations.  

More recently, on Nov. 29 Carmel said the company regrets not being able to make that happen at Francoeur.

“Given the ongoing high operating costs at Francoeur, and management’s inability to foresee marked improvements in the future, we are obliged to make the difficult but responsible decision to close the mine.”

Carmel added the Montreal-based firm will try to relocate many of the affected workers to its other operations.  

With the closure, Richmont estimates taking an $11–$13 million pre-tax write off, of which only $4–$5 million will be in cash and related to employee severance. The majority of the write-off will be recorded in the fourth quarter 2012.

The producer says it has several ways to recoup a substantial amount of the closure costs, including deploying equipment to its Island Gold and Beaufor gold mines in Ontario and Quebec, respectively.

Despite, closing a mine, the company expects to meet its full-year guidance of 65,000 oz. gold, however, has trimmed its 2013 target to 65,000–70,000 oz. from 85,000–95,000 oz. previously.

At the Wasamac property, Richmont will carry on with technical and permitting efforts throughout 2013, but has deferred any other exploration and development work as the project doesn’t appear economic in the current environment.  

Richmont came to that conclusion after contemplating several scenarios to improve the project’s bleak returns that were outlined in a preliminary economic assessment (PEA), released in late March. The PEA indicated Wasamac has a 7% internal rate of return (IRR) and net present value (NPV) of $71 million, using a gold price of C$1,350 per oz. and 5% discount. If a larger discount rate of 8% is applied, the NPV falls to negative $32 million.

In an attempt to lift Wasamac’s returns, Richmont looked at scaling down the 6,000-tonne-per-day operation to 3,000 tonnes a day. While this cut start-up capital, the IRR improved only slightly. It also considered only exploiting Wasamac’s high-grade area and shipping the ore to its Camflo mill, but that also failed to brighten prospects.

Currently, with less on its plate, Richmont aims to re-direct capital to its assets that offer higher returns.

“The main focus of the company rests squarely on Island Gold, where we believe RIC can generate the most value. These latest developments with Francoeur and Wasamac are certainly disappointing, making the success of Island Gold even more important,” comments Chiew, who has revised his 12–18 month price target to $5 from $6.

On Nov. 30, the first trading session after Richmont announced the mine closure and project suspension, its stock tumbled 26% to $2.82, and continued to slide. On Dec.4, it sank to a new low of $2.69, before closing up almost 3% to $2.86.

Richmont reached a 52-week high of $12.98 on Jan. 31, 2012.