Precious Metals

Michael Gray, analyst with Macquarie Capital Markets, recently offered his insight on why Richmont is a company he is watching.

With gold prices lagging the way they have been in 2014, it’s important to look for positive stories of companies that are able to be profitable despite the depressed market. Quebec- and Ontario-focused Richmont Mines (TSX:RIC) is one such company. 

Richmont’s team has a wealth of experience in exploration-, development- and production-stage gold projects, and that has contributed to the company’s production track record. While not a major gold company, Richmont nevertheless provides investors with exposure to a producing gold company with lots of potential.

To learn more about the company and its operations, Gold Investing News (GIN) spoke with Michael Gray, an analyst with Macquarie Capital Markets, who offered his insight on why Richmont is a company he is watching.

GIN: To start off with, what has been happening to the price of gold?

MG: Gold has overall been under pressure recently, but we think it will find a floor above $1,180 per ounce in the short term. There has been lots of speculation on whether India will reduce its import taxes. That was potential tailwind, and since that hasn’t happened we are mainly relying on relatively firm Chinese buying to support a +$1,180 floor.

Also on the positive side, gold ETF sales saw a strong sell off, but so far this year we’ve seen small net buying. There’s a mixed picture going forward — pointing to the US economy and the US dollar.

GIN: Goldman Sachs (NYSE:GS) recently revised its gold forecast for the year to $1,050; meanwhile, I’ve heard that gold should be going up — Sprott said $1,500 by Christmas. Where do you see things headed?

MG: Our house view is for an average of $1,250 in 4Q14. Longer term we are bullish on gold as underpinned by our economist and strategist in Toronto, David Doyle. He’s got a counter-consensus view on the US economy. He sees limited growth, largely driven by demographics — there’s just not much growth in the workforce, therefore GDP growth will be capped in the US. With an economy that is not accelerating, but approaching its potential, the move up in interest rates will be accompanied by higher inflation. This should mean real (inflation-adjusted) rates stay low and even negative, which has typically been quite positive for gold. Thus, we would agree with the Sprott $1,500 prediction, it is just a matter of when.

Given that the average gold price in the first three quarters was $1,250 per ounce, we would need to see an average gold price $600 per ounce in 4Q14 for the $1,050 per ounce forecast to be correct.

GIN: How come there is such a variance in gold predictions?

MG: We believe there is a high variance in the gold forecast mainly due to the divergent outlook for the US economy, and therefore the US dollar’s strength. It’s always been tough for any commodity analyst to predict the price of gold as fundamental analysis does not paint the full picture. In March 2013, our precious metal commodities analyst Matthew Turner had a bearish call on gold — this was when gold was still trading around $1,600 — and he was bang on. His negative thesis was really driven by the large ETF outflows that happened in 1Q13.

While he was right, it has been tough to predict the gold price with the uncertainty over the Indian import restrictions and level of Chinese buying.

GIN: You mentioned interest rates earlier, do you see those going up anytime soon?

MG: The Fed has kicked the can down the road quite a ways in terms of that policy. I believe at one point it said it would feel more comfortable increasing interest rates when unemployment was at 7.3 percent. Now I think we are down close to 6 percent unemployment in the US and the Fed is still very cautious in doing anything to upset this delicate recovery.

Our economist, David Doyle, has been looking at mid-2015 for the first interest rate hikes, and when they do go up, it will be a long, protracted increase. That means we won’t be seeing a couple percent per year or anything like that. It will be very gradual.

GIN: That’s comforting at least. Another thing that I’ve seen lately is that some countries, like China and Russia, are trying to move away from the dollar as the standard currency. Has that had any impact on gold?

MG: The dollar has obviously looked better with some of the jobs data and it is still the default, go-to currency. So in the short term, while there may be some desire to go to an alternative currency, the world certainly is not ready to go to the Chinese yuan or certainly any Russian currency. The US dollar is still the currency that the world has the most confidence in.

GIN: Looking at hard assets, I wanted to ask what key features you look for when assessing gold companies?

MG: One of the main things we look at is the asset quality and ability to deliver high internal rates of return — so high grades/high margins have been what we have been really pushing in the last couple of years, versus strictly growth and a focus on project NPV. That type of high-margin asset is especially leveraged when it is operated by a high-quality management team. That’s the sweet spot right now in the business. There aren’t many high-quality precious metals assets out there, but that’s the type of company that we tend to filter for and are attracted to cover from a research perspective.

Another key feature is jurisdiction. We look for countries that have a mining history and where mining is embraced. In our view, Canada is number one right now in terms of a safe jurisdiction. With good mining infrastructure, it is high on the lists of most intermediate and senior mining companies in terms of where they want to invest. We also like the outlook for a weakening Canadian dollar. Our economist, David Doyle, is estimating an C$0.80 dollar by YE2016, so that’s obviously good for operating margins if your costs are mainly in Canadian dollars and you get paid in US dollars for your gold.

GIN: As Richmont Mines is one of the companies that you are covering, I assume it ticks off some of those boxes.

MG: Yes. Richmont is a compelling story, our interest is largely driven by the discovery of the Deep-C zone, which is twice the grade, has twice the thickness and has twice as much visible gold as the upper part of the Island Gold Mine in Ontario. The Deep-C zone discovery changes the complexity of the company’s flagship asset in terms of its ability to deliver on margins and potential to extend toward a much longer mine life.

GIN: The Island Gold Mine is obviously the crux of the company’s portfolio. What is important for investors to know about this project? 

MG: First, the Island Gold Mine is a +40,000-ounce-per-annum underground gold mine that is well located in the Wawa area of Northwest Ontario. As mentioned, there has been a new discovery made call the Deep C-zone, which has the potential to deliver a long +10 year mine life — for the first time for any mine in the company’s history. Second, because the Deep-C zone is a discovery that lies immediately below a mine, there is no permitting process. Richmont was able to rapidly ramp down to the new zone within two years and should see some production from this high-grade zone in 4Q14. Third, because the discovery is open to depth, there is an exploration story still unfolding that provides Richmont with some torque from exploration drilling news.

Right now the Deep-C zone is about 1 million ounces at about 10 grams per tonne gold of indicated and inferred resources. However, the continuity has been good based on drifts driven down to the 585-meter level, and we now see potential for the deposit to increase in size towards 2 million ounces if expansion drilling is successful as the zone is wide open along strike and down plunge.

GIN: Can you talk a little about the area in which the Island Gold Mine is located? What’s the geology like?

MG: The Island Gold Mine is located in the Michipicoten greenstone belt, which is a classic Archean greenstone type-belt where lots of the gold in the Canadian Shield is hosted. The Island Gold Mine, hosted by felsic volcanic, didn’t have any real exploration history until the mid-80s when it was first discovered and work was done to mine a small deposit there. In contrast to the Red Lake gold belt (also in Ontario), which has seen production since the 1930s, the Michipitoten gold belt is relatively young.

So really, Michipicoten is a gold belt that isn’t that well known and hasn’t had a long production history. I’d say we are in the early days in the understanding of the gold belt. Up until now it’s looked like it was more of a deposit of 5 to 6 grams per tonne, and all of a sudden to depth it’s looking like it could be a deposit of 10 grams per tonne. And as mentioned it’s looking like it could be open for exploration expansion. There’s just still a lot to learn.

GIN: Lower in the Island Gold Mine the grade/width seems to improve. Is that typical of this type of deposit?

MG: The anatomy of these greenstone gold deposits in terms of grade and thickness can certainly change to depth and along strike depending on how favorable the trap rocks are and whether the structural setting is very permissive. So, yes, it is typical that there would be some variation in grade and thickness.

GIN: The company reported recently an increase in production combined with a decrease in cost per ounce. How has it accomplished this?

MG: At the Island Gold Mine, Richmont has had incrementally higher grades in the main zone that they have been mining, which has helped both increase production and lower costs. They have also been able to drive costs a little bit lower with some new equipment and changes to the mine plan where they’ve been mining these better-grade areas with less dilution.

Also, in 2Q14 the Beaufort mine in Quebec yielded higher-grade stopes that have helped lower their overall cost structure as well. In addition, they were able to optimize the Camflo mill throughput; running the mill closer to full capacity has also helped them with the processing costs.

GIN: You mentioned earlier that the Beaufort mine keeps on ticking, but what about Monique?

MG: Monique has basically been exhausted. It was a small, low-grade deposit that has been mined out and the stockpile is being trucked and fed to the Camflo mill. It’s more or less done.

In contrast, this is why the Island Gold Mine’s deeper zones are important. Although they are not at a reserve status yet, they’ve been able to sketch in what we see as potential critical mass for +10 years.

GIN: Recently the company completed the consolidation of ownership for the Island Gold Mine. What are the advantages of that move?

MG: The main advantage of consolidating the Deep-C zone ownership is that development can now proceed without any concern of ownership disputes or litigation. Richmont can now spend money developing the ramp in the optimal location. It also removed an overhang on the stock that was linked to ownership uncertainty and, therefore, a barrier for many investors.

So they consolidated the 31-percent ownership of a portion of the Deep-C zone in exchange for a 3-percent NSR — for a small upfront payment of about a half million or so. There are further staged advanced royalty payments before the royalty kicks in.

GIN: So it was definitely a strategic move for the company?

MG: Yes. I would say that deal was done quite a bit sooner than we expected. And obviously the stock price reacted quite favorably.

GIN: Looking ahead, what can investors expect next from Richmont?

MG: Over the next few months, investors can expect drill results from the Deep-C infill and expansion drilling program — it is the down plunge potential of the Deep-C zone that is very attractive in our view. Investors can also expect new CEO Renaud Adams (starts on November 15, 2014) to outline his plans for Richmont and for the development of the Island Gold Mine going forward and whether this will mainly be via ramp or if it will be via shaft.

The interim CEO, Elaine Ellingham, has been doing a great job to highlight the Richmont story for investors, and as a geologist she has been able to successfully convey the Deep-C zone opportunity.

GIN: What is your target price for the company?

MG: We’ve got an outperform rating and 12-month target of $5.

GIN: That’s great. Thanks for taking the time to speak with us.

MG: Thanks.


Securities Disclosure: I, Vivien Diniz, hold no investment interest in any of the companies mentioned in this article.

Editorial Disclosure: Richmont Mines is an advertising client of the Investing News Network. This interview was not published as part of the company’s advertising campaign. 

Interviews conducted by the Investing News Network are edited for clarity. The Investing News Network does not guarantee the accuracy or thoroughness of the information reported. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence. 


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