RIO ALTO's La Arena gold mine, Peru.

RIO ALTO's La Arena gold mine, Peru.

Rio Alto Hooks Talons into Higher Grades

Issue 52, July 2013

Rio Alto Mining has reported second quarter production of 48,427 gold ounces at its La Arena gold mine, Peru, 11 per cent ahead of guidance. It is the sixth successive quarter that the company has beaten targets.

“The management of that company is absolutely 1st-class in every respect,” says mining financier Dr. Frank Lucas, director at issuing house Loeb Aron & Co., which raised equity for Rio Alto in London in 2010. “They have brought a sizeable project into production in very short order.”

Having poured its first gold in May 2011, La Arena’s oxide deposit delivered 201,000 gold ounces in 2012, versus original forecasts of 150,000. Its mine plan expects an increase in grades and a drop in strip ratios in the coming 6 months, but finance director Anthony Hawkshaw maintains full year guidance of 200,000 ounces.

“The great thing about Hawkshaw,” Dr. Lucas explains, “is that he is a bit of a nomen est omen, his name tells it all. He is hawk-like. He has the parsimony of a fishwife and an African Fish Eagle. He knows exactly where to cut costs.”

Figures for the last 6 months show that better than budgeted grades allowed Rio Alto to exceed guidance despite a lower than budgeted tonnage moved, a telling indication of an aggressive focus on margins. Operating cash flow of $98m on revenue of $317m last year implies total costs per ounce of $1,089.

Cost containment has given the company precisely the operating leverage that ought to be the hallmark of gold mining stocks. Despite having halved year to date, touching C$1.75 in June, shares have risen 7-fold in 5 years as La Arena has upped production.

Filings show cash of $47m, but gold price turbulence has forced Rio Alto to reconsider plans to internally finance construction of La Arena’s bordering sulphide deposit, hosting 3.9bn copper lbs and 3.9m ounces of gold. Instead, it will “evaluate alternative sources of funding.” Minimising dilution, development of its oxide deposit was part funded by a $50m gold price sensitive forward sale; management owns close to 10 per cent of the stock.

“Clearly, with gold at $1,500 they’re making money hand over fist,” says Dr. Lucas, explaining the Micawber principle. “With gold at $1,100, it gets a little trickier. There is an inflection point. It comes back to Dickens again really.”

“He has the parsimony of a fishwife and an African Fish Eagle. He knows exactly where to cut costs.”

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