The net impact of our Q4/15 commodity (long-term gold price, down 2.4% to US$1243/oz) and FX rate forecast (long-term CAD:USD, down 4.1% to 0.77) raised our LT CAD denominated gold price ( 1%) to C$1613/oz. The net impacts of a higher underlying valuation (weaker CAD), lower working capital position (2016 vs. 2015) and removal of our modeled M&A bid (higher technical/ execution risk) lowered our target price C$0.20 to C$0.60, which does not generate a significant positive return from current levels; therefore, we have lowered our recommendation to HOLD from Speculative Buy. RMX has underperformed the GDXJ benchmark in 2015 YTD (down 45-46% vs. down 8-9%). We remain focused on the project update in October 2015E and the release of its Q3/15 financials in November 2015, which could potentially guide any further adjustments to our forecasts and/or assumptions.
• As we noted in our research note dated October 5, 2015 ("Blindsided (again) – CEO departs"), we believe that the dilution/recovery and throughput (ramp up and long term) from the proposed underground operations at the F2 Zone of the Phoenix gold project are a more significant issue than the elevation of the ammonia levels in the effluent, Figure 4. However, the temporary plant shutdown may constrain RMX's ability to reconcile the majority of the trial stoping thus reducing the amount of data available to provide conclusive evidence (positive or negative) with respect to the reconciliation of the mining stopes versus the resource model.
• The increased technical risk, in our opinion, lowers the probability of a near-to-medium-term M&A bid such that we have removed the assumption from our model.
CEO stepping down; mill suspended with underground operations ongoing
The Desjardins Takeaway: Negative
Rubicon this morning made two significant announcements, neither of which is positive for the share price in our view. First, it announced that president and CEO Michael Lalonde has left the company, with Michael Winship, a director, taking over the duties on an interim basis. No details as to the reason for the departure were provided. The board will look for a new full-time president and CEO. A lunch meeting is set for today for analysts to meet Mr. Winship before he flies up to site.
The company also announced that it has temporarily suspended mill operations on orders from the Ministry of the Environment on September 30 due to elevated ammonia levels, and a need to discharge sufficient water from the tailings management facility (TMF) and to upgrade the TMF under specific timelines. We spoke with the company and our takeaway is that the cost will be relatively minimal, but it will take time and production will be halted for this period. The company will be required to upgrade its TMF to become compliant, and management said it is basically calling for a slightly more robust design to account for a potential 100-year rain event.
The company initially received the order on September 8 to commission a new temporary as well as permanent ammonia treatment system, and also to make upgrades to the TMF. The orders received on September 8 include the following timelines: (1) commission new temporary ammonia treatment system before November 30, 2015; (2) apply for permanent ammonia treatment system, with this being operational by April 1, 2016; (3) construct northeast dam; (4) take other measures to control run-off; and (5) submit a variety of monitoring analyses.