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.
Released on March 28, the study 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 should 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. (US$1,300 per oz.) and a 5% discount rate, 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 an 8% discount is applied, the NPV becomes negative $32 million, signalling trouble.
It’s only at a C$1,500 per oz. gold price that the NPV at an 8% discount starts looking positive. The NPV rises to $78 million, the IRR to 10% and payback drops to seven years.
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 capital expenditure (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 operating expense 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 2.6-million-oz. resource.
While the main mining method selected in the study is mechanized primary and secondary long-hole stopes that will include backfilling, Richmont may readjust the mining plan to mine the higher-grade areas earlier.
To optimize the milling process, the junior may consider using a more expensive flotation-cyanidation process, which could boost gold recoveries to 92.9%. The PEA used a conventional carbon-in-pulp 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.
On the PEA news, Allison reduced his price target to $11 from $15 per share, but has reiterated an “overweight” recommendation on the stock. This means Richmont may outperform the market by at least 10% over the next 12 months.
On the day of the news, investors pushed the stock down 9%, or 82¢, to close at $8.02 per share.
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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