Rio Alto Mining: Mr. Market Off His Doctor's Pills

Issue 42, May 2013

With zero debt, operating cash flow of $98m on revenue of $317m and first quarter output 7 per cent above guidance, Rio Alto is far from the margins. In an industry fraught with cost cutting and knee-capped ambitions, finance director Tony Hawkshaw looks on cost control from an enviable position.

“We did so well last year,” he says, “people tend to feel they don’t have to worry if they spend $100 on something this week, or $10,000 on a piece of equipment. It’s typical of any business in any industry, but I’ve seen it time and again in the mining business.”

Rio Alto’s La Arena mine, Peru, produced 201,000 gold ounces last year, versus guidance of 150,000. The company is a set piece example of internally financed, incremental expansion, with free cash flow from its 1.7m ounce gold oxide resource currently in operation earmarked for its bordering sulphide deposit, containing 3.9bn lbs of copper and a further 3.9m ounces of gold.

Only below $1,000 would the gold price decelerate Rio Alto’s capital spending plans. Hardbitten Hawkshaw is nonetheless intolerant of cost inflation. “You get cost creep,” he says, “and then prices go down, there’s no money available and rather than rational cuts, it becomes almost desperate. I’ve seen examples where all the exploration offices are shut down, but the corporate office doesn’t get affected.”

Rio Alto conversely has budgeted $7m for exploration this year, drilling 25,000m at four gold targets 8km from La Arena. It has also capitalised on weakness in the junior market, striking earn-in agreements on projects held by Duran Ventures and Santa Barbara, in which it has taken a 10 per cent stake. “The financing window closed for a lot of these guys,” Hawkshaw says, “so it’s a good opportunity for us.” He does not rule out “tuck-in” acquisitions.

Having risen fifteen-fold in 3 years, Rio Alto has been sold off as an asset class year to date, losing 18 per cent in April. If Mr. Market is taking his pills, he has certainly lost his spectacles. At C$3.54, the company trades below 7 times earnings, which analysts at CIBC expect to rise this year and nearly triple in 2014 on higher gold production.

“All of the gold mining companies have taken a beating,” Hawkshaw concludes, “some of them rightly so and some, unjustifiably so, but the market will figure it all out in due course.”

“All of the gold mining companies have taken a beating.”

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