Richmont goes deep at Island Gold mine

At a time when many companies are putting exploration plans on hold to weather the downturn in metals markets, Richmont Mines (TSX: RIC; NYSE-MKT: RIC) is doing exactly the opposite.

The company is pressing ahead with underground development at its producing Island Gold gold mine in Ontario, and is adding 23,000 metres to its 61,000-metre drill program.

In what it describes as a “deep directional” drill campaign, Richmont says the extra 23,000 metres will follow up on a single deep hole drilled in 2014 that returned an intercept of 19.87 grams gold per tonne over 3.9 metres at 1,200 metres deep — 280 metres down-plunge from the Island Gold resource.

“If you look at our current 1 million oz. resource, it is mostly located between 500 metres and 1,000 metres below surface — so 500 metres vertical by 1 to 1.2 km laterally,” Richmont’s president and CEO Renaud Adams says. “The latest exploration program will try to answer questions about the potential of the deposit down to 1,500 metres. We believe this deposit can host a significant resource base, and this is the idea behind the more aggressive exploration to start unlocking the geological potential.”

The accelerated program will cost up to $4 million, with $1 million spent on drilling 6,000 metres this year, with 17,000 metres in 2016.

The reason Richmont chose directional drilling, it says, is because it will lower costs by allowing multiple pierce points from three deep pilot holes and ensure more accurate targeting.

Using three surface rigs, Richmont will drill three pilot holes, with 10 legs testing the targets. The 30 holes will help Richmont explore a part of the favourable shear zone covering 500 metres laterally and 640 metres vertically, between 860 and 1,500 metres deep.

Adams says management knows the area could hold a high-grade extension, and that the deep drilling will detail the deposit at depth. The exploration work could also lead to a resource expansion and help Richmont refine its long-term development strategy for the mine.

Island Gold has proven and probable reserves of 895,000 tonnes grading 6.39 grams gold per tonne for 183,750 contained oz. gold. Measured and indicated resources stand at 733,500 tonnes grading 9.29 grams gold for 219,050 contained oz. gold, while inferred resources measure 3.6 million tonnes at 8.79 grams gold for 1 million oz. gold.

On the development front, Richmont has extended the main ramp to 700 metres deep, and plans to reach 750 metres deep before year-end. The goal is to extend the ramp down to 860 metres in the second half of 2016.

“Our view is that as you go deeper, the deposit gets better and better in terms of width and grade, so the strategy is to reach the bottom of the phase-one ramp as fast as possible, with the view that we’ll be mining in the best ounces in the shorter term.”

Other achievements so far this year include lengthening the 620 level drift to the east by 480 metres. The drift is being used to finish the company’s definition and delineation drill program budgeted for this year. Meanwhile, lateral ore development on levels 560, 585, 610 and 635 have advanced, and the company anticipates production mining above the 635-metre level in the fourth quarter.

Of the 61,000 metres of other exploration drilling this year, 20,000 metres will consist of underground and surface testing the possible western and eastern lateral extension closer to surface, and 41,000 metres will be drilled from underground, mostly testing the possibility for an eastern lateral extension between the 450- and 860-metre level. (Just 5,000 metres will test the western lateral extension at those depths.)

Adams notes that the company has also seen improvements at the mill. While the facility is permitted for 900 tonnes per day, it has yet to meet that run rate, but he hopes that will change soon.

“For two months in the second quarter we milled above the 800-tonne-per-day rate, so not only are we developing the mine, but at the same time we have been successful in increasing throughput at Island Gold,” he says. “Our milestone is to reach the 900-tonne-per-day mark.

“It’s a positive story,” Adams says of the company and its Island Gold operation. “We’re well established in Ontario, and have great assets right in Canada’s backyard.”

He notes all the development work at the mine earmarked for this year — $19.1 million in sustaining capital and $29.2 million of project-related capital — is fully funded. At the end of June, Richmont had $77.9 million in cash and just $6.2 million of long-term debt.

The mine produced 25,761 oz. gold in the first half of 2015 (18% higher than in the same period of 2014) at a $1,120 per oz. cash cost and a $1,501 per oz. all-in sustaining cost (AISC). In the second quarter, cash costs were $954 per oz. and the AISC was $1,307 per oz., largely due to higher tonnage mined and processed in the second quarter.

“The AISC may look a little high, but that includes corporate costs and sustaining capital,” Adams says. “But as we develop Island Gold and we mine at a much higher rate and at a higher grade, we will start positioning ourselves and lowering costs.”

The other reason the AISC looked a little high in the first half, he explains, is that “50% of the tonnes that were milled at Island Gold was development ore coming from developing the mine, rather than what we would call ‘stoping.’ So actually we’re very, very pleased that we’ve been operating this company and generating free cash flow, considering the massive development activities that are going on.”

Over the last year, Richmont’s shares have traded between $1.66 and $4.55 per share, and at press time traded at $3.31 apiece. The company has 58 million shares outstanding and management holds 9% of the shares, while institutional investors own 45–50%.