Monday, September 12, 2016

Richmont Mines Revises Its 2016 Guidance But There Is A Problem

Today Richmont Mines announced a positive revision to its 2016 operating guidance. The company expects much better performance of its flagship property, Island Gold. 

The table below evidences new estimates:

source: Richmont Mines

Having this data, I have calculated the estimated EBITDA to be delivered in 2016. The table below summarizes these calculations (all figures are in thousands of Canadian dollars):

source: Simple Digressions

Before I go on, let me list basic macroeconomic assumptions:
  • the average price of gold: US$1,279 per ounce
  • exchange rate between C$ and US$: 1.315
As the table shows, in 2016 the company should deliver an EBITDA of C$50.7M (an increase of 58.4%, compared to 2015). Till that moment all things look fine.

However, there is a problem. In 1H 2016 Richmont reported the EBITDA of $29.9M so it looks like the second half of 2016 should be weaker than the first one. The table below compares 2H 2016 (estimate) to 1H 2016 (actual):

Well, despite higher guidance, the second half of 2016 is going to be definitely worse than the first one. What is more, in 2H 2016 Richmont expects higher cash cost of production (an increase from C$848 in 1H 2016 to C$1,000 in 2H 2016), which is quite a big negative surprise for me.

Summarizing - the management is confident that things are fine at Richmont. And, in my opinion, they generally are. If the company meets its guidance, at the end of 2016 its shares should trade at an EV / EBITDA of 14.4 (if share prices do not change). It is not an elevated figure and I would say that these shares are fairly priced today.

However, due to the fact that the second half of the year is going to be weaker than the first one, I cannot say Richmont shares offer a significant upside at the moment. 

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