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.
Although we did not expect a road map to commercial production with the Q2/15 results, we had hoped for some details on progress to date at the Phoenix underground (UG) gold project in the Red Lake District of NW Ontario. Our concerns revolve around the progress of UG development in the ramp up to commercial production (Q1/16E) and the potential optimized mining methods (impacts on dilution and throughput). We acknowledge that there are legitimate reasons to delay guidance as management seeks to provide achievable targets. But nonetheless, the delay of guidance to potentially October 2015E (Q3/15 results) has generated enough consternation to force our hand.
We revised our model to accommodate a slower and lower, throughput ramp up to steady state levels (1.65 kt/d vs 2.0 kt/d), higher FY2015 capital spend to commercial production (C$162 M vs C$135 M) which was offset only slightly by a change in the ramp up head grade (H2/15E, +18-20% to 6.0-6.5 g/t Au, +2 koz to 10 koz). We modeled a small equity financing (C$30 M, C$1.30) to support its balance sheet in H2/16 due to the slower throughput forecast. The revisions led us to lower our target price (C$0.20 or 13%) to C$1.30. The implied return (