Richmont Mines' (RIC) CEO Renaud Adams on Q4 2015 Results - Earnings Call Transcript

| About: Richmont Mines, (RIC)

Richmont Mines, Inc. (NYSEMKT:RIC)

Q4 2015 Earnings Conference Call

February 22, 2016 08:30 AM ET

Executives

Anne Day - VP, IR

Renaud Adams - President and CEO

Nicole Veilleux - VP, Finance

Daniel Adam - VP, Exploration

Analysts

Adam Melnyk - National Bank Financial

Rahul Paul - Canaccord Genuity

Mike Parkin - Desjardins

Michael Gray - Macquarie Capital Markets

Operator

Good morning, ladies and gentlemen and welcome to the Richmont Mines' Fourth Quarter Results Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] This call is being recorded on Monday, February 22, 2016.

I'd now like to turn the conference over to your host, Anne Day, VP, Investor Relations. Please go ahead.

Anne Day

Thank you, operator and good morning, everyone. Thanks for joining us today for the Richmont Mines fourth quarter and annual earnings results conference call and webcast. On the line today we have Renaud Adams, President and CEO; and Nicole Veilleux, VP Finance. We’ve also other members of the senior management team on hand to answer any questions.

They will be available during the Q&A period at the end of the call to answer any questions you might have, and at the end of the presentation, the operator will provide instructions for those who wish to ask questions. Today's presentation, financial results, and press release are all available on our website at richmont-mines.com.

Before we begin, I will go through to an abbreviated version of our forward-looking statements which are also provided in the press release and today's presentation. Some of today's commentary may contain forward-looking information for Richmont; in this respect we refer you to our detailed cautionary note regarding forward-looking statements in our press release.

You are cautioned that actual results and future events could differ materially from their respective conclusions, forecasts or projections. We refer you to the section entitled the risk and uncertainties in our latest MD&A and other filings available on SEDAR which set out material factors that would cause result to differ. I would also like to remind listeners that all amounts today in Canadian dollars unless otherwise indicated.

I will now turn the call you over to Renaud.

Renaud Adams

Thank you Ann and welcome everyone and thank you for joining us today, very exciting times at Richmont Mines. We just ended 2015 on a very strong note, and on that let me start with some Q4 and 2015 operational highlights.

Our net annual productions of 98,031 ounces exceeded our guidance of 87,000 and 95,000 ounces, another year of production record for Island Gold. We have now since 2013 increased our production by 54%, significant increase or reserve increase by 187%, including 206% of Island Gold and 95% of Beaufor.

As a result of the reserve increase, we have now moved Island Gold mine life with a significant increase to seven years including three years of pre-developed [wasting] ore, while go for mine life increase to two years, all based on reserves.

In October 2015, we released the result of a Preliminary Economic Assessment, the PEA. The PEA demonstrated a significant high potential for Island Gold for an increased production and a significant reductions of costs.

Finally by September 2015, we launched a significant strategic exploration program at Island Gold with a view to unlock a significant potential both laterally and at depth. I will speak more on PEA point in the presentation.

Moving to slide number 3, early in 2015 we completed a 38.5 million financing, while combined with our record revenues of 143.7 million and a strong operating cash flow of $0.74 per share, we have managed and a very disciplined approach and maintained a cash position of 61 million at year end, while limiting our long term debt to a low 7.3 million.

We have relocated our corporate office to Toronto, assembled an experienced senior management team, and at year end the company announced the appointment of Mr. Rene Marion as a Non-Executive Chairman. We are surely now well positioned for growth.

And on that I will turn the call to Nicole Veilleux, Vice President, Finance for a quick overview of our financial highlights. Nicole.

Nicole Veilleux

Good morning everyone. For the fourth quarter revenues were $32 million, an 8% increase over 2014. For the full year, Richmont reported a record revenue of 104 million, a 9% increase over 2014. This increase in revenues was primarily the result of 30% higher production from the Island Goldmine and the impact of 6% higher Canadian gold price, 1,408 per ounce.

For the fourth quarter, the Corporation worked a net loss of $0.07 a share, which included higher than planned exploration cost, 2.5 million at Island Gold, higher depreciation charges of 1.2 million, a severance spend of 0.9 million and restoration site cost of 0.8 million; totaling 5.4 million or $0.10 per share.

For 2015 the Corporation reported earnings of $0.12 per share. For the fourth quarter, operating cash flow was $6.8 million or $0.12 per share. For the full year, Corporation reported operating cash flow of $42.4 million or $0.74 per share, which fully funded out all project capital requirement at Island Gold.

We ended the year with strong cash position of $61 million and we anticipate that will have sufficient cash to fully fund our 2016 capital requirements. In 2016, we will continue to maintain our focus on a disciplined capital allocation strategy that ensure we maintain a healthy cash balance, minimum 20 million at all times.

With the majority of the accelerated underground development program, Island Gold is expected to be completed by the end of 2016. We estimate that the Corporation will to start to generate free cash flow beginning in 2017.

I will now turn the call back over to Renaud Adams.

Renaud Adams

Thank you Nicole. I would like to move on to slide 7 for an operational over view and I’ll start with the Island Goldmine. So let me open by saying that we have completed the five years without lost-time injury at Island Goldmine. This is demonstrating a very safe operation and a commitment of our employees.

We did that while setting a new record production of 55,040 ounces exceeding our guidance of 45,000 to 50,000 ounces. Our cash cost and All-In-Sustaining Cost were in line with guidance despite the fact that we have aggressively depleted $22.3 million of sustaining capital while maintaining 50% of the total ton mine spend from the development of the new resources.

Our reserve significantly increased by 206% to 561,700 ounces, while increasing the grade by 29% to now 8.26 grams a tonnes. Very importantly we have now completed the waste development of the first two mining horizons down to level 740. While combine with our reserve increase we have now Island Goldmine life mine based on reserves increased to seven years with three years of pre-developing waste in ore.

Our mill capacity was increased to 900 tonnes a day, giving us a significant upside of production once we have completed the important waste development of the third mining horizon down to level 860.

The tailing facilities were expanded, while representing a significant investment. We have now more than 2.7 million tonnes of tailing capacity representing a 800 tonnes per day capacity up to year 2023. And finally we have also improved significantly some infrastructure, electrical surface, mine services and others.

Moving on to slide number 8, a quick gold review of the operating KPIs for the fourth quarter and the 12 months, significant improvement since Q4 2014, while improving quarter-over-quarter.

Let me say that Q4 was somewhat impacted by a three week shut down of the mine and a two week shut down at the mill to allow us to complete significant improvement. Nonetheless and restarting the operation in the Q4, we’ve seen in December 2015 over 800 tonnes per day and more than 8 grams per tonnes very much aligned with the PEA base case.

I will speak more of the 22.3 million of sustaining costs and 30.9 million of project cost going on in the operation. On slide number 9, we show our strong commitment to pre-develop the asset and position Island Gold for success.

Our unit cost remains a little higher at $240 unit mining cost which represents our effort to maintain above 50% of the total tonnes mine being from the development of ore. This compared to further down the road a PEA of $74 a tonnes, while most of the ore would have been already pre-developed.

Moving to slide number 10, we have discussed the PEA result at large over the last few months, but let me remind everyone that the PEA considers only a portion of the total resources located between the 450 and 600 levels. The results today showed a significant potential to increase the production and lowering cost of Island Gold.

In the short term, the Op side considers a potential increase to 900 tonnes per day, while when we have completed the waste development, which has represented over 298,000 tonnes mine of waste of Island Gold in 2015. PEA also highlighted a potential for an expanded case which we are now studying, with a view to release in the second half of 2016 an updated expansion case study.

On slide number 11, we could appreciate the significant advance in converting the ounces from the PEA to now reserves, with 80% of the total ounces considering the PEA already now in the reserve category. And on that as shown on the figure, we consider to dealing in the remaining ounces in 2016 and more.

Moving to slide number 12, in September of 2015 we announced a significant exploration program to unlock both laterally and at depth a total of 86,500 meters was announced and at year-end about 38,000 total meters were completed with both again the view to first priority extend laterally to deposit east-west contributing in a way to an increase of resources outside of the PEA leveraging all the investment that was done today increase the total ounces per vertical meters.

The exploration of that has to do with the following outcome on the [down] tranche very interesting hole of 20 grams per tonnes over four meters. The result today show a significant potential for the expansion of the deposit at depth and their four significant potential for resource growth.

Moving to slide number 13, we’ve shown some details of our capital expenditures for 2015, 22.3 million were spend, that’s compared to about $20 million that were originally announced. The extra capital has to do with some extra capital around electrical upgrading some other offices and surface improvement. While we have also mined outside of the PEA where about 30% of the ounces came from Goudreau and therefore required some additional development and also another result.

We believe that we have maintained an approach where would at all-time maintain our cost within in All-In Sustaining Costs already announced which we did. On the project capital side, we spend a total of 30.9 million, somewhat higher than the originally announced amount, but has a lot to do with the extra tailing down expansions we have now positioned Island Gold with sufficient capacity up to 2023.

In terms of exploration, a total 4.6 million was spend in 2015, and as discussed in the previous slide about 38,000 meters were completed out of a total program of 86,500 meters. The remaining meters are to be drilled in 2016 more or less up to the end of April.

Moving to slide number 14 on Beaufor; Beaufor has also an excellent safety indicator with now two year of without lost-time injuries. The production, cash cost and All-In Sustaining Costs were all in line with the guidance and that included $221 in sustaining capital allowing us to continue to develop the asset, reach the new Q zone where that have originally announced with the target to reach mineralization in Q1 2016.

We have also secured some tailings capacity, while completing some mill upgrade as well. All that with an All-In Sustaining Cost of $1216 an ounce Canadian.

Moving to Monique on slide number 15, Monique has been quite a success story for us. While Richmont is known for its expertise in underground mining, I must say that the success of Monique mine has also showed a potential for this Corporation to operate open-pit mines.

Mining of the pit was completed in January 2015 and the cash cost and All-In Sustaining Costs were surely within the guidance. With an All-In Sustaining Cost of 798 Canadian an ounce, compared to a realized price of $1486 an ounce, contributing to a significant strong free cash flow generation, allowing the company to be more aggressive at Island Gold in our [Q4].

The stockpile was all processed in 2015, averaging a grade of 2.37 grams a tonnes, exceeding our expectation of a slope slightly below 2 grams a tonnes. The reclamation is ongoing and we have about $1.2 million to spend over the next three to four years in a non-aggressive way.

Moving to slide 16, we’ve talked about a reserve increase of 187%, but let me point out that the Richmont has now established the highest level of reserve of its history, with a total of 625,000 ounces over 8 grams per tonnes never happened. Most of it is located at Island Gold but has now 485,000 ounces below the 400 and part of the PEA grading 8.52 grams a tonnes to a total Island Gold of nearly 562,000 grading 8.26 grams per tonnes, a significant improvement, and both assets are now with the life of mine increased to respectively seven years and two years all based on a reserve.

On slide 17, we completed the company release, its 2016 plans and guidance, setting the stage for another potential record production year of Island Gold and a reduction, an overall reduction of the All-In Sustaining Cost for Richmont. Island Gold is now positioned to replace the Monique mine; the production at Monique was completed. And over 2016 the guidance represent a more or less the cost in line with 2015.

The highlight of the 2016 guidance includes; potential production record at Island Gold, with potential increase of up to 22%. Lower sustaining capital at Island Gold, as we have completed more work in 2015, and decrease of cash cost and All-In Sustaining Cost of Island Gold, as we continue to develop a mine better grade and then more productive.

The Beaufor mine is in line with 2015 results. The project capital of $43.4 million at Island Gold include a $10 million for discretionary capital up to 1000 meters potential development outside of the PEA and another 4 million of general project which will be considered if the gold prices are higher than $1500 an ounce and all the parameters in order to protect our cash balance.

And on that and before we take the questions, I would like to announce that 2016 is a very important year for this Corporation. Indeed 2015 represents the 35th anniversary of the Corporation which was founded in 1981. It also represents the 25th Anniversary as producer of gold here in Canada.

While 20 years of the history will now be celebrated as well at the Beaufor mine, and we are now en route for 10 years of production of Island Gold. So a very interesting year for us. At the turn of what we consider to be the most important time for this company is also happened at a very interesting years of celebration.

And on that, I’ll turn it back to the operator for the questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Adam Melnyk, National Bank Financial. Adam please go ahead.

Adam Melnyk - National Bank Financial

A couple of housekeeping questions, first on G&A, looks like it was about 3.1 million G&A in the quarter. Even we are backing out the 0.9 million of severance charges, we still get to about 2.2 million which is higher than the G&A has been running. Is that what we should expect on a go-forward basis quarterly?

Renaud Adams

If you look at the total G&A for the year, 9.8 million moving forward this is pretty much what we see in 2016. Adam we’re targeting between 9-9.5 total G&A including all share based compensation and others for 2016.

Adam Melnyk - National Bank Financial

And in terms of exploration 4 million in the quarter, that was expense. Can you breakdown for us how you decided what is expense and what’s capitalized in your exploration budget?

Renaud Adams

Pretty much when it comes to exploration, definition drilling is of course part of the cash cost. The delineation drilling is part of the All-In Sustaining Cost in 2015, while all effort to grow the deposit per say in terms of pure exploration is considered expense.

Adam Melnyk - National Bank Financial

Right, so that delineation drilling is capitalized?

Renaud Adams

Correct.

Adam Melnyk - National Bank Financial

And then of the 7.3 million Canadian of drilling that’s in the budget for 2016 that was on the guidance how much of that would be capitalized versus expense, a rough sense for that?

Renaud Adams

The only portion capitalized will be what we call 740 level delineation exploration drift for about $1.1 million, the remaining should be expenses.

Operator

Your next question comes from Rahul Paul, Canaccord Genuity. Rahul please go ahead.

Rahul Paul - Canaccord Genuity

Just looking at slide number 12, and I know you announced some of those results in December as well. But if I recall in the past, you indicated that the Goudreau Zone may be has another, there’s some material that you could use in the first half of the year and then after you expected to be somewhat depleted.

But just looking at some of those drill results, 24.570, 01.26, 9.93 over 1.04, is there potential to add significantly to the Goudreau Zone?

Renaud Adams

I think its early stage to consider if any of this has to do with the continuity of the Goudreau Zone. I think when it comes to the Goudreau Zone per say, we’ve been very disciplined to advance slowly. We maintain a selective mining there. I think as we continue to drill and understand better, the mineralization to the east will be in a better position to state on this. But nonetheless you’re right, we see excellent result trend to the east, and on that we will put out another exploration update later this week, and eventually another one in March. But we continue to drill; we continue to understand the deposits. I think it’s not over yet, but fair enough that it’s too early stage to link any of this with the Goudreau Zone.

Rahul Paul - Canaccord Genuity

And then one more question for me, if I look at slide 9, you indicated that you’ve got three years of mine life pre-developed, and I know that this year again development is a big focus. So question for you, how many years of mine life would you like to have in front of you from a development standpoint?

Renaud Adams

Yeah, it remains of course an internal objective. But we believe that the Island Goldmine is one of these assets. If turning it to a world class asset, I think it’s fair that the 10 years mine life is a good objective for us. We continue to delineate in 2016 by adding the remaining of the PEA and adding some potential reserve outside of the PEA, with already nearly 600,000 ounces of Island Gold.

We are working hard towards increasing the 600 and eventually position Island Gold with a world class 10 years life of mine based on reserves.

Rahul Paul - Canaccord Genuity

And then just one more question on the 2015 unit cost? Just looked at mine side unit cost slide 9 again, SG&A was $49 a tonnes and I know longer term we’re looking at something closer to 35. So what are your expectations for mine G&A in 2016, should we expect it to come down from the year $49 a tonnes?

Renaud Adams

Yeah, it will come down. This is all fixed cost; most of it is fixed cost. First of all we would benefit by the economy of scales. If you recall, we put our plan out there for a minimum of 800 tonnes per day in ’16. We are starting on a much more efficient; we see a lot the services being improved over 2016 and on. So definitely as we ’16 going towards ’17, we don’t see why with cost side G&A will not be aligned with our PEA.

Operator

Your next question comes from Mike Parkin, Desjardins. Mike, please go ahead.

Mike Parkin - Desjardins

Just a couple of questions, for 2016 one housekeeping item, what do you expect your effective tax rate to be and do you still expect the majority of it to be cash tax full?

Renaud Adams

I will send this question that you ask to Nicole Veilleux, Vice President of Finance. Nicole.

Nicole Veilleux

We have a tax of over 25 million, so we don’t expect regular tax for (inaudible) or Quebec to government, but we will tax or mining tax in Ontario of around 10% of the net earnings from the Island Goldmine and around 16% from the Quebec division based on the earning taxable.

Mike Parkin - Desjardins

And then on the reserve update that gave on February 9, relative to the meters that you drilled in 2015, did it factor in all the meters that you drilled or is there some that weren’t factored in?

Renaud Adams

I’m not sure got your question properly, so if you could just clarify.

Mike Parkin - Desjardins

Just with the reserve update that you provided, did that factor in all the results from y our 2015 drill program or was there earlier cut off or some of it was left out?

Renaud Adams

It does not include everything, but I have Daniel Adam, Vice President of Exploration in Geology online. So Daniel if you could just clarify when was the cut-off?

Daniel Adams

For the drilling, all the drilling results were used. We got almost the drilling before Christmas and we were able to finalize the reserve with almost all the drilling we have done in 2015.

Operator

Your next question comes from Michael Gray, Macquarie. Michael, please go ahead.

Michael Gray - Macquarie Capital Markets

First of all on the development versus topping our ratio for 2016, you might have provided any guidance, but I’m just looking at slide 9 and wondering where are you expected to slide in on average.

Renaud Adams

We’re targeting again, and as explained it has a lot to do Michael all on the managing, the cash cost managing, the all-in. But at the $1500 price we would think potentially around a 40% will come from development and 60% from (inaudible). Should the price be higher and we see a good potential to add more development. Our starting point is about 60-40 ratio at a $1500 price.

Michael Gray - Macquarie Capital Markets

And then the 10% positive great reconciliation on the Island Gold ore from 2015, can you give us a write down between lower extension zone and the Goudreau Zone?

Renaud Adams

I don’t have all the details with me Michael, but happy to follow-up with you right after the call. But we’re very pleased with - I can tell you that on the new resources side, we think to have a slight tendency to maybe a little bit less tonnes and a little more grade. But I’d be happy to provide you all the breakdown after the call.

Michael Gray - Macquarie Capital Markets

And just on the discretionary capital 10 million, the timing presumably the latter part of the year and can you just remind us of the deployment. I got the impression it was lateral development and was seeking to expand reserves.

Renaud Adams

It is part of $4 million of potential project that we have established. The PEA does not consider any significant improvement in productivities and other cost reductions. So we see some pretty interesting potential at the mill and the mine, automation around the ventilation pumping, working out the automation on the reagent consumption. So all projects that could improve further the PEA in terms of the lowering cost. But I have a feedback attached to it.

So as we move forward and we manage our cash balance, we can see the proper timing for those project or not, the extra 6 million of development comes just of some discretionary and some room we may have to develop further to the east or west or lowering the second ramp. This is outside of the PEA which is as a result of the exploration will be very key as well for how we’re going to manage it.

And again all with a view that preserving our cash balance is our first priority.

Michael Gray - Macquarie Capital Markets

Last question Renaud, is the plan still to have an exploration update out before the end of February?

Renaud Adams

As a matter of fact we’re committed to an exploration of it later this week.

Operator

There are no further questions at this time. Please proceed.

Anne Day

Thank you very much everyone for joining. We will end the call now, but as always if you have any questions, feel free to contact us and we will follow-up with you. Thank you.

Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.

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