Richmont expects $13.5M writedown at W Zone mine in Val-d’Or

Montreal-based Richmont Mines (TSX: RIC; NYSE-MKT: RIC) anticipates taking a $13.5-million impairment charge at its W Zone underground mine near Val-d’Or, Que., after recalculating the mine’s year-end 2013 reserves using a lower gold price of US$1,225 per oz. versus US$1,450 per oz. in 2012. 

The W Zone mine, which started commercial production last October, saw its reserves shrink by 58% to 12,832 oz. The company says the decline resulted from mining depletion, following the ounces recovered during pre-production and commercial production in 2013, as well as from a reinterpretation of the deposit’s geology. The latter led the miner to move 9,600 oz. from W Zone’s reserves back into the measured and indicated category. 

“So as a result, we will be mining from the already developed areas, because at these gold prices we can’t justify the development costs to go and get the other ounces,” says Jennifer Aitken, Richmont’s manager of investor relations.

Richmont forecasts producing 4,000 oz. gold from the developed areas, compared to 12,000 oz. previously. Once those easy-to-reach ounces are extracted, it will suspend the operation.

“We’re not closing it [permanently]. It’s just that in this price environment, we are not going to make money if we do more development,” Aitken adds.

Given the loss of reserves and the lower production from the W Zone mine, the junior producer is set to take a $13.5-million — or 34¢-per-share — non-cash writedown in its fourth-quarter 2013 financials, due out on Feb. 20.

It also reported reserve changes at its other two gold mines near Val-d’Or, with the reserve base dropping 20% to 31,133 oz. at the Beaufor underground mine, and a maiden reserve count of 30,702 oz. at the Monique open-pit mine.

But its Island Gold underground mine near Wawa, Ont., was largely unaffected by the lower gold price assumption, with reserves staying flat at 143,506 oz., thanks to drilling efforts that more than replaced last year’s production.

Once Richmont tallied up its company-wide reserves and resources, it said that the gold count at the end of 2013 increased 3% to 218,172 oz. from 212,476 oz. in 2012, largely because the Monique mine had no reserves at the end of 2012, while the measured and indicated resources grew 5% year-over-year to 1.9 million oz.

Along with that update, Richmont published its 2014 production guidance of 70,000 to 80,000 oz. The Island Gold mine, Aitken says, should deliver half of those ounces, making it Richmont’s largest contributor. Of the remaining half, 18,000 to 20,000 should come from Beaufor, 13,000 to 16,000 from Monique and 4,000 from the W Zone mine. Aitken says that the higher milling rates from the Monique mine this year should replace the production loss from the W Zone mine.

Commenting on the guidance, Desjardins analyst Adam Melnyk says while it is better than the estimated 2013 output of 61,000 oz., it missed his forecast of 88,000 oz., mainly due to the reserve loss at the W Zone mine, which he described as “a clear negative development for Richmont.”

That said, Melnyk notes the company has taken some steps to alleviate its tight balance sheet, including lowering its 2014 capital expenditure to $18.1 million — down from an estimated $34.4 million — of which $16.3 million will be used to develop the Island Gold mine and the Island Gold Deep project. It has also budgeted a smaller-than-usual $3.8-million exploration program for the year. 

With these changes, Melnyk projects that Richmont will end 2014 with a capital balance of $1.1 million, compared to a previous $17.8-million deficit.

He adds that the company will benefit from the weakening Canadian dollar versus the U.S. dollar, which has led him to increase his target price to $1.80 from $1.50, while maintaining a “hold-speculative” rating on the stock.

At press time Richmont was trading at $1.85, within a 52-week range of $1 to $3.09.