Monday, August 7, 2017

Richmont Mines - There Is Only One Problem

A few days ago Richmont Mines (RIC) released its 2Q 2017 report. As I expected, the results were excellent. The flagship property, the Island Gold mine, delivered outstanding results. Simply put, there is nothing to comment.

However, the company has one problem, which is called the Beaufor mine. Particularly, costs of production at which the gold is produced at this mine. Look at this chart:

and this one:

source: Simple Digressions

As the charts show, in 2016 Beaufor became a cash flow negative mine. The all-in sustaining cash cost of production (AISC) of C$1,854 per ounce of gold was much above the average gold price received in 2016 (C$1,640 per ounce).

This year the company expects to cut AISC to C$1,565 per ounce of gold but:
  • in 1Q 2017 this cost was standing at C$1,580 per ounce (with gold price received of C$1,624 per ounce - slightly above 1Q 2017 AISC, which was good)
  • in 2Q 2017 the AISC was C$1,791 (once again above the gold price received of C$1,688 per ounce of gold, which was bad)
As a result, in 1H 2017 the average AISC was C$1,682 per ounce of gold while the average gold price received was C$1,659. Simply put, the Beaufor mine was once again cash flow negative (each ounce of gold sold was burning C$23).

It looks like this mine is a big problem to the company's management - the guys are surely scratching their heads on discussions what to do with this mine...anyway, the 2017 Beaufor cost guidance is endangered, in my opinion.

Further, I think that the management should focus on cutting mining costs at Beaufor. Since 2015 these costs, measured on a-per-ton-of-ore-processed basis, have been in their strong upward trend:

source: Simple Digressions

Now, in 2Q 2017 each ton of ore processed at Beaufor was grading 5.21 grams of gold. With recovery rate of 97.7% and price of gold received of C$1,688 per ounce, each ton of ore processed was worth C$276. So the Beaufor mine was very close to its break-even point (as the chart indicates, the cash cost was standing at C$263 per ton of ore).

In other words, with lower and lower grades and higher costs of mining and processing the only thing the company can do is to cut costs. If it is impossible...the only solution is to put the mine on care and maintenance and wait for much higher prices of gold....

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