RIO ALTO's La Arena gold mine, Peru.

RIO ALTO's La Arena gold mine, Peru.

Rio Alto Profits from Capital Discipline

Issue 27, January 2013

“I’m not displeased, but I’ll never be satisfied,” Rio Alto’s deadpan finance director Anthony Hawkshaw tells Global Mining Observer. Driven by the quality of its La Arena gold mine, Peru, the company’s share price has risen from C$0.44 to C$5.52 in three years, valuing it at C$964m ($963m). “I’m never happy with the share price,” says Hawkshaw. “We can always do better.”

Since its first gold pour in May 2011, Rio Alto has enjoyed consistently higher than expected grades, delivering 201,000 gold ounces in its first year of operation, versus guidance of 150,000. “It's not until you start moving rock that you find the high grade zones that we’ve found,” he explains. The results produced first half earnings of C$0.37 per share.

Rio Alto’s success also owes much however to a capital discipline rare in an industry environment in which only write-downs can keep pace with capital costs. Bordering La Arena’s 1.6m ounce gold oxide resource is a 4.1bn lb copper sulphide deposit, containing a further 4.5m ounces of gold. Rather than raise eye-catching money to develop both at once, management elected to develop the simpler oxide first, funding copper sulphide costs from free cash flow.

“We’re going to scale it so we can fund it internally.” Copper production is due for 2016, with current resources indicating a mine life of 21-years. “I’ll be dead before it's mined out.”

La Arena’s start-up costs in turn were partly financed by a $50m sales agreement with New York-based Red Kite Equity, in exchange for 61,000 gold ounces delivered by October 2014. Terms included sensitivity to the gold price, which coupled with Rio Alto’s performance largely dispels the notion that forward sales automatically cap a producer’s potential.

Hawkshaw likens the agreement to “an old-fashioned gold loan,” limiting dilution and preserving shareholders’ interest in any exploration upside. The company is currently drilling La Colorada, one of several targets within La Arena’s 27,000 hectare land package; a resource update is due mid-March.

The success of Rio Alto’s financing model arguably reflects management ownership levels close to 10 per cent, ensuring an aversion to upscaled cap-ex and dilution; “We’re not working for a salary,” Hawkshaw says flatly, “we’re working for share price appreciation.”

“I’ll be dead before it’s mined out.”
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