Richmont Mines (RIC-T, RIC-X) saw it shares tumble after publishing a preliminary economic assessment (PEA) for its Wasamac gold project in Rouyn-Noranda, Que.
The study, released on March 28, envisions the project as a 6,000-tonne-per-day underground bulk-mining operation, producing 140,000 gold oz. a year.
Over its 14-year life, Wasamac would churn out 1.75 million oz. gold at average cash costs of US$688 per oz.
Using a base-case gold price of C$1,350 per oz. and 5% discount, the net present value (NPV) of cash flow is pegged at $71 million, with a 7% internal rate of return (IRR). Payback is expected within eight years. But, when a slightly higher discount of 8% is applied, the NPV becomes negative $32 million, signaling trouble.
It’s only at a $1,500 per oz. gold price, that the project starts looking a bit more positive. Using an 8% discount, the NPV increases to $78 million, IRR to 10% and payback drops to seven years.
On the day of the news, investors pushed the stock down 9% or 82¢ to close the day at $8.02 per share.
While the base-case economics are “disappointing” most of the results such as production rate, cash costs, and gold recoveries were “in line with expectations and reasonable,” says Casimir Capital analyst Eric Allison in an email.
But, the “biggest surprise” was in the capex, he notes, which was 10 to 20% higher than anticipated.
The study estimates the project would cost $503 million to build, and another $177.5 million to sustain.
“The capex numbers at this stage are probably very conservative with a fairly substantial contingency built in,” Allison says, adding the company has several “initiatives underway to scrub both the capex and opex numbers.”
The company has budgeted $15 million to carry out further work and technical studies at Wasamac for the rest of 2012.
Richmont says there’s potential to increase resources through ongoing exploration and by improving its mining approach to incorporate more of the existing ounces on the property. The PEA used only 1.75 million oz. of Wasamac’s total 2.6-million-oz. resource.
The main mining method selected in the study is mechanized primary/secondary long hole stopes, and will include backfilling.
The company may readjust the mining plan, to mine the higher grade areas earlier.
To optimize the milling process, the junior will consider using a more expensive flotation-cyanidation process, which would boost gold recoveries to 92.9%.
The PEA used a conventional carbon-in-pulp (CIP) process, where gold recoveries are estimated at 90.2%.
Another opportunity to improve economics includes the potential revenue from silver. The company recently identified silver associated with gold mineralization in zones 1, 2 and 3, which could be recovered at a rate of 75%. Richmont has started re-assaying its existing samples for silver content.
On the PEA news, Allison has reduced his price target to $11 from $15 per share, but has reiterated his “overweight” recommendation on the stock. Predicting Richmont may outperform the market by at least 10% over the next 12 months.
Richmont shares have slid 27% to date since the end of last year. It has a 52-week trading range of $6.22-$13.39.
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