Once upon a time, circa 2000, there were lots of delightful investments in the mining sector. The technology world had sucked up a disproportionate share of investors’ money, and the commodity sector was like the ugly duckling waiting to be discovered. That tempted my contrarian bent.
My favourite play at the time was Richmont Mines (RIC-NYSE MKT/TSX), a gold producer with a squeaky clean balance sheet, a rarity in the industry. The company had both cash in the bank and zero debt and some interesting, highly bankable projects. I dove in at $1.81 and sold the position about two years later at $4.60.
Flip forward to September 2008 and the share price had tipped downwards, again touching the $1.81 level. This seemed rather absurd as the balance sheet had remained pristine, and the other financials attractive. It also appeared that the company’s projects were ripening once again with better times ahead. I dove in, hoping for déjà vu. Ultimately it was better than that as 90% of the stock exited the portfolio from $6.53-$10.29 before the stock price moved even higher to $13.40. Since then the stock price has been badly beaten, currently trading at the $4.50 level.
Once again however investors might be feeling antsy to invest in this enterprise. Though it would be delightful to hit the triumvirate and buy in again at $1.81, it is unlikely that share price will be seen again. Currently there is a relatively new guard in place, anxious to incite an upward move.
First up is President/CEO Paul Carmel, engaged during the summer. One of his specialities is mergers and acquisitions. Richmont has lots of money, over $55 million and it seems plausible that they are hunting for a suitable target. At the same time, it is not out of the question that the company will be the prey, as with their working mines and potential plays in politically stable Canada, another player in the sector could find this outfit to be a tasty morsel. Especially since the stock price has fallen.
A recent addition to the board is Bob Buchan, who was the founder of Kinross Gold (KGX (NYSE-TSX) and served as its CEO until 2004. He is also the executive chairman of Allied Nevada Gold Corp. (ANV-NYSE MKT/TSX) and is on the board of numerous companies. One thing that seems strange, and profligate, is that Richmont took a loan of $10 million from Mr. Buchan when he joined the board and is paying 7.5% interest. Given that RIC had plenty of cash, no debt, and no need for the money, this seems like a royal sum to attract Bob to what might simply be a further corporate involvement. Perhaps he has too many?
A primary reason that the stock price was hammered was Richmont took a $33.2 million write-down on the Franceur Mine. That meant the company lost $30.2 million in the most recent quarter. Barring something unexpected, it is likely the company will return to profitability in the not to distant future. This month’s results at the Island Gold Mine should help longer term.
Naturally, RIC is also impacted by the price of gold. While many pundits expect the price of the shiny metal to soar past the $2,000 an ounce level, the trajectory from my viewpoint is less clear. Certainly, it has fallen a distance since moving above $1,900 and with so many countries printing money to circumvent their financial difficulties, the supply of currencies could help gold. Of course, if the global economic situation does not improve with the employment rate rising, people will not have the cash to purchase this asset to either diversify or protect themselves from a financial meltdown.
People looking for a successful investment in the gold sector might examine Richmont. It is quite possible that this enterprise will regain lustre in 2013, if not sooner.
Benj Gallander will make a newsletter presentation on “How Contra has Achieved 15.3 Annualized Returns Over the Past 15 Years” on Saturday, Sept. 22, during the Chicago Hard Assets Investment Conference.