The Goldbug Weekly Comment - Feb. 28, 1997

The Ormetal Report

February 28, 1997

Want something undervalued?

Don't look further. Here is one gold mining junior that offers diversification through 3 operating mines in Canada and safety with strong cash flows of $15 million a year. And you can still buy this one at the bargain price of 5.5 times cash flow.

Richmont Mines has to be another wild card in my deck. With 14.8 million shares outstanding, RIC has a market capitalization of only C$85 million. The main attraction here is not so much the size of Richmont's reserves, but rather the company's ability to use efficiently their financial resources. In other words, RIC is a cash generator. It has been for years. Since commercial production began at the company's first mine in 1991, Richmont has had 20 consecutive quarters with positive net income. For the last 9 months ending on September 19, 1996, the company rolled out earnings of $2,374,000 or $0.16 per share. Operating cash flow for the same period stood at $3,394,000 or $0.23 per share. For all of 1996, gold production will reach 30,000 ounces. But that is the past. The numbers that are in store for 1997 and 1998 are even much better.

 

1997

1998

Gold Production (ounces)
Net earnings (C$ per share)
Cash flow (C$ per share)

65,000
0.50
1.09

90,000
.72
1.20

 

The C$7 million in net earnings and some C$15 million in cash flow forecasted for 1997 are generated from 4 different revenue sources.

The Francoeur Mine

The Francoeur Mine is located near Rouyn-Noranda - and has been the bread and butter of the company since 1991. It is a small deposit by all standards. Todate Richmont has been able to produce more than 200,000 ounces of gold, but has been able replace this production with new found reserves every year since day one. Currently, proven and probable reserves stand at 1 million tons, grading 0.2 ounce per ton - while geological reserves are 50% higher quality. The likelihood is that RIC will continue to replace annual production with new reserves for a period longer than the currently estimated 6 years remaining in the life of the mine. At the present production rate of 30,000 ounces per year, you can bet on healthy cash flow well into the next century. The company is continuing its exploration efforts by spending wisely. In 1996 they were able to delineate the new reserves for a cost of $10.14 per ounce. Expect more of the same in the next several years.

The Nugget Pond Mine

The new Nugget Pond mine in Baie Verte, Newfoundland is scheduled for commercial production sometimes in March 1997. The mine's current reserves are 400,000 tons grading 0.40 ounces per ton for a total of 160,000 ounces of gold. It will produce 46,000 ounces on an annual basis at a cost of approximately US$153 (excluding non-cash items). Needless to say this mine will be extremely profitable! Several promising exploration targets exist in the area - and Richmont is confident that local and regional exploration will add to its current reserves.

The Louvem Mines

Richmont owns 36% of Louvem Mines - which in turn owns 50% of Beaufort Mine, thus giving RIC an 18% indirect interest. Reserves in all categories stand at approximately 250,000 ounces (or 45,000 ounces net to RIC). Earnings from this source could reach $650,000 per year to Richmont.

The Camflo Mill

The Camflo Mill was acquired a few years ago almost for free and is now doing custom milling for various mining operations, including the Beaufort and Francoeur Mines. Recovery rates are usually extremely high at nearly 95%. The mill operated at 75% of its design capacity in 1996 and will reach 100% utilization in 1997. This mill value is not reflected in the current assets of Richmont, but could easily add at least $1 per share if it was valued at replacement cost. The long-term benefits of owning a mill in a region where mines are found should be obvious.

Now that Richmont has a reliable stream of strong cash flow, it is in a position to continue its growth without excessively diluting shareholder position. The company has more than $15 million in short-term assets and has financed the Nugget Pond Mine through a $12 million loan from the National Bank of Canada. With the coming cash flow, Richmont looks ready for new acquisitions. I spoke with president Jean-Guy Rivard last week, and he is very anxious to add a new project to the company. Last month he went to Peru and came back with a very positive attitude towards this new mining frontier. He is looking all over the world and his 1997 goal is to give Richmont an international status. However, Rivard is not keen on risky projects that take up a lot of exploration dollars, so you can bet on an acquisition that will have very strong odds of rapidly becoming another source of income.

Richmont should be listed
on the AMEX in the first
quarter of 1997.

 
 
 
 

Rivard and his financial team are very conscientious people and understand the nature of this market. In order to protect their cash flow, they are implementing a protection plan that covers approximately 75% of Richmont annual production. Rather than selling forward their gold, they protect their selling prices by buying and selling options on the metal. This is the most flexible way of hedging against the normal fluctuations of gold prices, while maintaining enough flexibility in case of rapid price increases. They also understand that successful miners must project high visibility, and therefore they have plans to list the company's shares on a major US exchange soon.

In conclusion, I view Richmont as an extremely well-managed junior producer that is about to start a rapid expansion phase on the international scene. Backed by strong cash flow, it is in a position to build up shareholders' equity without the heavy dilution that is so common in this business. The stock is selling for a mere 5.5 times 1997 forecasted cash flow - which is way below the normal ratio of 10 that juniors usually get. As Richmont grows over the next several years, it should command higher ratios. As long as gold prices remain in the current trading range or move to higher levels, RIC has indeed a bright future.

Richmont can be reached in Montreal at 514-397-1410 or in Vancouver at 604-662-4500. RIC has also its own website. Check it out!

Gold is using for heat dissipation in some cars.

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