Richmont offers preview of expanded Island Gold PEA

VANCOUVER — Richmont Mines (TSX: RIC; NYSE-MKT: RIC) is having an impressive year at its flagship Island Gold mine near Wawa, Ont., with highlights including record gold production figures, falling operating costs and exploration success that has hinted the operation will likely outlive its seven-year mine life. On Nov. 1, the company unveiled a glimpse of its expansion plans for the project when it released details on next year’s preliminary economic assessment (PEA).

The technical work will update a 2015 study, incorporate a pending resource update and evaluate Island Gold’s “most cost-effective plan to mine over four horizons within the most continuous structure between the 450-metre and 1,000-metre levels.”

Surveyors underground at Richmont Mines’ Island Gold mine near Wawa, Ontario. Photo: Richmont Mines.

Richmont could boost throughput at the operation from 900 tonnes per day to upwards of 1,100 tonnes per day starting in 2018. The company figures it can fund the expansion internally since the price tag is estimated to be below $15 million. Management will also evaluate an expanded scenario of 1,200 tonnes per day as “additional resources are incorporated in the mine plan.”

Improvements to date at Island Gold have reportedly removed the need for a $17-million high-speed haulage ramp, which was outlined in the previous study. In addition, the year-end resource estimate will consider a new capping grade and resource model to address positive tonnage and grade reconciliations at the mine.

CEO Renaud Adams said that the expansion case study would “leverage the impressive performance from the Island Gold mine achieved to date, as the operation already exceeds the production and productivity targets identified in the October 2015 PEA.”

The expanded case scenario “would require minimal capital investment, as the operation would use the current ramp system and be internally funded using our strong cash balance and growing cash flow profile,” he added.

Underground equipment at Richmond Mines’ Island Gold operation near Wawa, Ont. Credit: Richmont Mines.

Richmont has generated encouraging results during a hybrid drill program at Island Gold this year. The company is putting 50,000 metres towards more resources, and another 142,000 metres in exploration aimed at near-mine inferred resource expansion and regional targeting.

On Oct. 12, Richmont released assays from the campaign that indicated “significant potential to grow near-mine reserve inventory and identify new resource blocks located within the 2016 PEA area.” Meanwhile, broader exploration work has indicated “the potential to increase resources laterally along strike, primarily to the east, and at depth.”

Richmont boosted Island Gold’s reserves earlier this year 206% to 2.1 million tonnes, averaging 8.26 grams gold per tonne for 561,000 contained ounces. The results marked a 29% jump in average grades at the mine. The company is working to upgrade remaining resources totalling 348,500 measured and indicated tonnes at 6.4 grams gold for 71,700 contained oz., and 815,000 inferred tonnes at 8.49 grams gold for 768,050 contained ounces.

Canaccord Genuity analyst Rahul Paul said the upcoming PEA would show “material improvement in economics” compared to the 2015 study, but says the expansion model “will likely not capture the full potential of Island Gold, as it will not include any potential resources below 1,000 metres deep, nor resource potential laterally to the east.”

Employees handle core at Richmont Mines’ Island Gold mine. Credit: Richmont Mines.

Canaccord forecasts processing rates of 1,150 tonnes per day at the mine by 2020, but figures it will run at 1,500 tonnes per day by 2021. Paul has a “buy” rating on Richmont and a $15-per-share price target.

BMO Capital Markets analyst Brian Quast noted the impact of positive grade reconciliation compared to the 2015 resource model, and said he “would not be surprised if Richmont points towards higher grades in 2017 when it releases [guidance].” BMO Research models Island Gold at 825 tonnes per day through 2017, with a “gradual ramp-up” to 1,100 tonnes per day in 2018, which assumes $15 million of capital expenses in 2017 for the mill expansion, in addition to $20 million of sustaining capital expenses.

Richmont Mines’ Island Gold mine near Wawa, Ont., which produced 18,617 oz. gold in the second quarter this year. Credit: Richmont Mines.

Quast has an “underperform” rating on Richmont, along with a $13-per-share price target.

Richmont has traded within a 52-week range of $3.73 to $15.01, and closed at $11.80 per share at press time.

The company has 62.6 million shares outstanding for a $686-million market capitalization, and finished the second quarter with $95.5 million in cash.

Island Gold is expected to produce between 62,000 and 67,000 oz. this year at cash costs of US$660 to US$705 per ounce.