RIO ALTO MINING LIMITED (RIO)
1
EQUITY RESEARCH
Ricardo Carrión (627-5220) María Belén Vega (627-5220)
[email protected] [email protected]
The fair value of Rio Alto Mining Limited (RIO)’s equity,
calculated over a discounted cash flow to equity model is
USD$174.62 million. Fair value of RIO, taking into
consideration the number of shares outstanding - post money
is US$1.03 per share. We calculate the share’s fair value to be
194.51% higher than its current market price of USD$0.35
per share.
It must be noted that this calculation was based on the total
resources disclosed by the NI 43-101 and is focused mainly on
the development and exploitation of the first stage of the La
Arena Gold Oxide Project.
RIO is a mining company dedicated to the development and
exploitation of the gold and copper project La Arena, with
shares trading in the TSX-V (TSXV: RIO), Frankfurt Stock
Exchange (WKN: MS2) and the Bolsa de Valores de Lima
(BVL: RIO).
The corporate structure is depicted in the graphic below:
RIO has the option to acquire from IAMGOLD (IMG) 100%
of La Arena S.A. for USD$47.55 million. La Arena S.A. is the
owner of 44 concessions with a total area of 21,000 hectares
of which 1,720 hectares are the area of development of the
oxide and sulphide deposits.
November 19, 2009
RECOMENDATION:
Overweight +
Source: Bloomberg
Elaborated by KALLPA SAB
INITIAL COVERAGE
Fair Value: USD 1.03
Va RIO ALTO MINING LIMITED (BVL: RIO)
Fair Value of Equity (USD Mill ion) 174.62
Fair Value of Share (USD) 1.03
Share Market Price (USD) 0.35
Shares Outstanding - Pre Money (Mil lion) 75.50
Shares Outstanding - Post Money (Mil lon) 169.40
Market Capitalization (USD Mil lion) 26.49
Trading BVL / TSXV / MS2
52 Week Range (USD) 0.06 / 0.41
Variation YTD 321.05%
PER 2011e
2.34
Option to buy 100% of La
Arena S.A. from IAMGOLD
Rio Alto Mining Ltd.
La Arena S.A
La ArenaProyect
OtherProspects
21,000 ha.
1,720 ha.
IAMGOLD
RIO ALTO MINING LIMITED (RIO)
2
EQUITY RESEARCH
Ricardo Carrión (627-5220) María Belén Vega (627-5220)
[email protected] [email protected]
La Arena Resources
La Arena Mining Project covers a total 21,000 hectares, 1,720
hectares corresponding to the area of development and
exploitation of oxides and sulphides.
According to the current NI 43-101 report, inferred and
indicated resources are 4 million oz of gold and 3 billion
pounds of copper. This report was prepared by
independent consultant Coffey Mining, who is scheduled to
provide an updated reserve estimate by the end of Q1 2010.
Project Strengths
Location: La Arena is located in a traditional mining district,
known for its high content of gold and copper resources,
neighbouring the following mines: Lagunas Norte (Alto
Chicama - Barrick Gold Corp.), COMARSA (Compañía
Minera Aurífera Santa Rosa S.A.) y La Virgen (Compañía
Minera San Simón S.A.); and exploration projects: Shahuindo
(Sulliden Exploration Inc.), Tres Cruces (New Oroperu
Resources Inc.) and El Toro.
Source: Coffey Mining
Elaborated by KALLPA SAB
The La Arena Mining Project is located 18 kilometers from the city of Huamachuco, La Libertad region, in a major
mining district known for its high content of gold and copper resources. The project will be developed in two stages: the
first focused to development and exploitation of the gold oxide deposits; and the second, development and exploitation
of copper, gold and molybdenum sulphides.
The mine life for the first stage is estimated to be 7 years and it is expected to produce a total 540,000 oz of gold. RIO
plans to initiate operations on the oxide project during the last quarter of 2010 with first gold by Q1 2011. Mine life for
the second stage (sulphide deposits) is estimated to be 15 years during which the company expects to produce a total
of 1,334 million lbs of copper and 680,000 oz of gold; approximately 18 years of life for both projects combined.
Indicated Resources 2.8 M oz Au and, 1,700 M lbs. Cu
Inferred Resources 1.2 M oz Au and, 1,300 M lbs. Cu
Indicated + Inferred Resources 4 M oz Au and, 3,000 M lbs. Cu
NI 43-101 - La Arena Resources
Stage II: SulphidesStage I: Oxides
RIO ALTO MINING LIMITED (RIO)
3
EQUITY RESEARCH
Ricardo Carrión (627-5220) María Belén Vega (627-5220)
[email protected] [email protected]
La Arena’s proximity to major projects like Alto Chicama and
La Virgen not only are an indication of the exploration
potential of the area but also brings additional benefits to the
Project since many of the mining companies have invested in
the required infrastructure to initiate operations (e.g. power
lines). Proximity to the city of Huamachuco (12 km) reduces
expenses related to maintenance of a mining camp since the
majority of the workers live in that city.
Topography and Altitude: La Arena is located 3,400
meters above sea level, not a considerable altitude when
compared with many other mines in Peru. Also, the terrain
is relatively flat, an advantage that translates into cost savings
since it minimizes distances between mining areas and the
processing plant.
Existing infrastructure: Easy access to a paved road is a
great advantage as the Project is only 3.5 hours from the city
of Trujillo. With regards to power supply, an interconnected
high tension power line is located 15 kilometres from La
Arena. RIO is currently negotiating the installation of
infrastructure to connect to the power grid and include
these expenses in the cost per Kwh.
La Arena has access to underground water that will be
extracted by pneumatic pumping from a depth of
approximately 100 metres. Water will be reused once it has
been processed by mine operations.
Management and Board of Directors with mine
development and administration expertise: Directors
and Management of La Arena with proven experience in the
development and start up of mining projects. (Please read
Rio Alto Mining Limited’s Summary at
www.kallpasab.com/reporte-empresas.asp, Only available in
Spanish)
Good community relations: RIO has excellent relations
with local community members. Studies carried over La
Arena indicate a low probability of technical, environmental
or social difficulties that may impair the development of the
project. Another key advantage is the lack of systemic
agricultural activity in the area that could disturb mine
operations.
RIO ALTO MINING LIMITED (RIO)
4
EQUITY RESEARCH
Ricardo Carrión (627-5220) María Belén Vega (627-5220)
[email protected] [email protected]
Risk Factors and Mitigants
Prices of Gold and Copper: A decline in the price of
gold and copper would have a negative impact on the
financial results of La Arena. For the next five years market
consensus considers an average price higher than USD
1,000 per oz of gold and USD 2.5 per pound of copper.
With regards to the oxide project, our valuation has been
calculated on the base of an average price of USD 850 per
ounce of gold and an average operative cost per ounce
(cash cost) of USD 420. KALLPA SAB believes that during
the life of project, the price of gold won’t be lower than
USD 800 per ounce, thus easily exceeding the estimated
cash cost.
Financing Risk: Though mining operations require a
substantial investment of capital, start-up of La Arena
requires an initial investment of only USD 30 million; a
smaller investment than the start-up capital required by
most gold mines in Peru.
Political Risk: Operations could be hampered for
changes in regulation and development of political events;
i.e. elections. Nevertheless, it must be noted that during
the last two decades, Peru has become a very attractive
country for the development of mining operations which
is a reason why KALLPA SAB expects no fundamental
negative change to political risk.
Real reserves versus proven and probable reserves:
Like every mining company there is an amount of uncertainty
regarding possible differences between estimated and proven
reserves from studies and those actually extracted by
operations. Currently, Coffey Mining is updating existing
reserves for La Arena; this report should be finalized by the
end of Q1 2010.
Licenses, rights and permits: Usually among the risks
associated are those related to licenses, rights and permits. In
this particular case, RIO reached some very important
milestones when submitting its Environmental Impact Study
(EIA) to the Energy and Mines Ministry (MEM) in the month of
September of this year. It must be noted that the majority of
surface rights for the areas where the work for the oxide
project and subsequent sulphide project will be performed
have already been acquired. We must emphasize that RIO’s
operations will be carried out in a mining district and in
proximity to the city of Huamachuco where the community
understands mining activities.
RIO ALTO MINING LIMITED (RIO)
5
EQUITY RESEARCH
Ricardo Carrión (627-5220) María Belén Vega (627-5220)
[email protected] [email protected]
Valuation of the La Arena Mining Project
Calculation of the fair value of RIO’s equity was based on Coffey Mining’s NI 43 – 101 for the 1,720 hectares of the La
Arena project and focused on the first stage of the project corresponding to development and exploitation of the gold
oxide resources. KALLPA SAB believes that development of this first stage will generate significant value for the company
and make possible the funding of capital necessary to initiate operations on the second stage (sulphide project) and start
exploration on the other mining prospects located within the 21,000 hectares of La Arena. It is worth noting that, within
the 1,720 hectares of the project to be valued, oxide resources (720 hectares) represent only 1million oz of gold of the
total resources estimated by Coffey, hence, gold and copper reserves need to be valued in-situ in order to calculate the
actual fair value of RIO. As a consequence, the valuation of RIO’s La Arena Project includes the gold oxide project plus
value of gold and copper in-situ contained in the sulphide deposits.
I. Valuation of the Oxide Deposits
To calculate the value of the first stage gold oxide project, we used the Discounted Cashflow Valuation Method (DCF).
Thus, from the free cash flow to equity discounted at the shareholder’s cost of equity, which is 11.87%, we obtain a fair
value for RIO of USD 47.378 million.
Assumptions Used for the Valuation of Oxides
Price of gold Under a conservative approach, the price of gold used to
evaluate La Arena’s gold oxide project is USD 850 per
ounce. We must highlight that last month the price of gold
fluctuated between USD 1,028 and USD 1,142 per ounce.
Also, market consensus for the next four years is that the
price of the precious metal will continue to be above the
USD 1,000 mark as is shown in the table on the left.
Mineral reserves and production According to RIO´s management, total reserves for the
Oxide project reached 38.50 million tonnes with an average
ore grade for gold of 0.58 g/t and a recovery of 70%. Also,
the strip ratio is 1:1(one tonne of waste per tonne of ore).
These numbers are to be confirmed by Coffey Mining’s new
reserve estimate report due by end of Q1 2010.
The Company's production plan calls for extraction and
processing of 10,000 tonnes per day during the first year and
an increase to 24,000 tonnes per day starting in the second
year. Using the mentioned assumptions, development of the
gold oxide project would produce a total of 50,000 ounces
of gold in the first year and an average of 100,000 ounces for
each remaining year to complete 540,000 ounces of gold
during the estimated 7 years of life of the project.
Tonnes 38,500,000
Ore Grade (Au g/t) 0.58
Strip Ratio 1:1
First Stage - Oxide Deposit
Gold Price 2011 2012 2013 2014
Market Consensus (USD/oz) 1063 1082 1075 1198
KALLPA SAB (USD/oz) 850 850 850 850
Source: Bloomberg
Elaborated by KALLPA SAB
Source: Bloomberg
Elaborated by KALLPA SAB
Source: RIO
Elaborated by KALLPA SAB
500
600
700
800
900
1,000
1,100
1,200
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2007 2008 2009 . 2010 - 2017
US
D p
er
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nce
Evolution of Gold Price
Projection - USD 850 /ounce
RIO ALTO MINING LIMITED (RIO)
6
EQUITY RESEARCH
Ricardo Carrión (627-5220) María Belén Vega (627-5220)
[email protected] [email protected]
Estimated CAPEX
In order to initiate operations in Q4 2010, the gold oxide
project requires an initial investment of approximately USD
30 million. These funds will be used to acquire machinery and
equipment to build the plant and required infrastructure to
operate the project. It’s assumed that RIO will exercise the
option to purchase 100% of La Arena S.A. by 2012. The
exercise of this right will be reflected in a significant increase
of the CAPEX (USD 47.55 million) on that specific year. This
payment results in a significant increase of the CAPEX for La
Arena for that year as such payment corresponds to an
increase of the intangible assets of the project.
Estimated Operating Expense (OPEX)
Calculation of the operation expense (OPEX) for the oxide
project includes the mining, processing and treatment of ore
and effluents. According to management, mining cost totals
USD1.99 per tonne mined. Costs for processing and
treatment of ore and effluents were based on the preliminary
study prepared by the independent consultant Heap Leaching
Consulting S.A.C. in August 2009. This study detailed
processing, laboratory, maintenance and treatment of
effluents for the oxide project considering a production of
10,000 and 24,000 tons per day. The study determined that
the costs for the processing plant, chemical analysis lab and
its maintenance total approximately USD 1.69 and USD 1.44
per tonne for a rate of production ranging between 10,000
and 24,000 tonnes per day, respectively. Other fixed
expenses contemplated were waste treatment plants and
costs related to mining camp, salaries and insurance which
total USD 138 thousand and USD 346 thousand for a rate of
production of 10,000 and 24,000 tons per day, respectively.
Including all these items, the average operation cost (cash
cost) totals USD 420 per ounce produced.
It should be noted that Run of Mine (ROM) processing will
be through Dump Leaching, which has the advantage of not
requiring the additional cost of crushing.
Source: RIO
Elaborated by KALLPA SAB
Source: RIO
Elaborated by KALLPA SAB
-
20
40
60
80
100
120
2010 2011 2012 2013 2014 2015 2016 2017
US
D M
illi
on
Net Revenue vs OPEX and CAPEX
Net Revenue OPEX + CAPEX OPEX
OPEX
48 million
CAPEX
51 million
68%
22%
2%1%
7%
OPEX Distribution
Mining
Procesing Plant
Laboratory
Plant Maintance
Fixed Costs
RIO ALTO MINING LIMITED (RIO)
7
EQUITY RESEARCH
Ricardo Carrión (627-5220) María Belén Vega (627-5220)
[email protected] [email protected]
RIO ALTO MINING LIMITED
Income Statement (USD)
2011e
2012e
2013e
2014e
2015e
2016e
2017e
Total Revenues 42,768,110 107,044,370 76,138,553 71,451,596 85,850,143 46,991,936 29,004,415
Royalties -427,681 -1,540,887 -922,771 -829,032 -1,117,003 -469,919 -290,044
Net Revenue 42,340,429 105,503,482 75,215,782 70,622,564 84,733,140 46,522,017 28,714,371
Operating Expenses 1/
Cost of Sales
(Exc. depreciation y amortization) -23,321,722 -48,227,129 -49,666,217 -49,602,410 -49,034,927 -5,736,058 -1,272,000
Depreciation and Amortization 2/
-3,729,697 -3,926,063 -19,972,162 -19,992,888 -20,979,383 -2,875,533 -2,875,533
Selling, General and Admin. -500,000 -500,000 -500,000 -500,000 -500,000 -500,000 -500,000
Income From Operations 14,789,011 52,850,290 5,077,402 527,266 14,218,830 37,410,425 24,066,837
Other Income and Expenses - - -275 - - - -
Income Before Taxes and Worker Shares 14,789,011 52,850,290 5,077,127 527,266 14,218,830 37,410,425 24,066,837
Worker Shares -1,183,121 -4,228,023 -406,170 -42,181 -1,137,506 -2,992,834 -1,925,347
Income Tax -2,281,767 -14,586,680 -1,401,287 -145,525 -6,000,000 -10,325,277 -6,642,447
Net Income (Loss) 11,324,123 34,035,587 3,269,670 339,559 7,081,324 24,092,314 15,499,043
1/ Operating costs are kept relatively constant for the useful life of mine, except for the years 2016 and 2017. On those years, the operating cost related to mining is lower because the tonnes mined per day total
1.175 and 0 thousands, respectively, in comparison to the rate of production of 10,000 and 24,000 tons per day for previous years. Nevertheless the gold ounces recovered total 54 and 34 thousand, compared to the
annual production of 50 and 100 thousand. Therefore, ounces of gold recovered in the last two years would have lower operating costs since the tonnes leached would have been mined.
2/ The jump in the depreciation in the years 2013 - 2015 is due to the increase in the intangible assets of RIO after acquiring 100% of La Arena S.A. upon exercising the option with IMG. Intangible assets are
depreciated at an annual rate of 33.3%.
RIO ALTO MINING LIMITED (RIO)
8
EQUITY RESEARCH
Ricardo Carrión (627-5220) María Belén Vega (627-5220)
[email protected] [email protected]
Calculation of the Discount Rate
Calculation of the fair value of the first stage of the project
was based on the free cash flow to equity. The rate used to
discount the free cash flow to equity, corresponds to the
shareholder’s cost of equity (COK) as 100% of the
financing is equity based and corresponds to 11.87%.
To determine COK we used the Capital Asset Pricing Model
(CAPM) adjusted for emerging countries. The rate on risk
free assets equals 3.4% and results from the return of the 10
year American Treasury Bonds adjusted to Peruvian
premium risk debt. The latter adds a 2.20% premium to the
return of risk free assets.
COK
11.87%
Risk Free Rate(rf)
3.4%
Peruvian Premium Risk
2.20%
Levered Beta (b)
0.965
Market Premium (rm - rf)
6.50%
RIO ALTO MINING LIMITED
Free Cash Flow to Equity (USD)
2010e
2011e
2012e
2013e
2014e
2015e
2016e
2017e
Net Income - 11,324,123 34,035,587 3,269,670 339,559 7,081,324 24,092,314 15,499,043
Depreciation - 3,729,697 3,926,063 19,972,162 19,992,888 20,979,383 2,875,533 2,875,533
Cash Flow from Operating Activities - 15,053,820 37,961,650 23,241,832 20,332,447 28,060,707 26,967,847 18,374,576
Investing Activities
CAPEX 1/ 2/
-29,809,430 -1,788,420 -51,238,849 -3,966,795 -4,909,376 -5,314,008 1,147,601 -
Cash Flow Before Financing Activities -29,809,430 13,265,400 -13,277,199 19,275,038 15,423,071 22,746,698 28,115,448 18,374,576
Financing Activities
Rio Alto Mining Limited 30,000,000 - -
Issuing of Long Term Debt - - 11,799
Interest and Amortizations - - - -12,074 - - - -
Reserve Account 190,570 13,265,400 - - - - - -
Use of Reserve Account - - 13,265,400 - - - - -
Free Cash Flow to Equity - - - 19,262,964 15,423,071 22,746,698 28,115,448 18,374,576
1/ CAPEX for the year 2010 responds to the i nitia l investment required to s tart operati ons on the oxi de depos its .
2/ CAPEX for the year 2012 i ncl udes the payment of USD 47.55 mil l i on to IMG, after RIO exerci ses the option to acquire 100% of La Arena S.A.
RIO ALTO MINING LIMITED (RIO)
9
EQUITY RESEARCH
Ricardo Carrión (627-5220) María Belén Vega (627-5220)
[email protected] [email protected]
The employed beta was obtained from an average of mining
companies engaged in the exploration and development of
gold projects that are comparable to RIO, and are shown in
the table on the left. Thus the average unlevered beta for the
comparables is 0.9654 which is then applied to RIO’s
debt/equity structure. Since for the first stage, RIO will
finance its capital requirements through shareholder
contribution or issuance of new shares of the company, its
debt/capital structure is 1 and hence the unlevered and
levered betas are the same.
Finally, we assumed a market premium of 6.50%.
As mentioned before, La Arena resources, for both oxides
and sulphides, total 4 million ounces of gold and 3,000 million
lbs of copper. Of this amount, the oxide deposit has
approximately 1 million ounces of gold; while the sulphides 3
million ounces of gold and 3,000 million lbs of copper. This
evaluation assumes the development and exploitation of the
oxide project and leaves a balance of estimated resources of
3 million oz Au and 3,000 million lbs. Cu in-situ.
Canaccord Adams maintains a mining sector section that provides a weekly valuation of the price of ounce of gold and
pound of copper in-situ. This price is obtained from the weighted average of the market capitalization per ounce of gold
equivalent calculated for 40 junior companies trading in the TSX-V. The last report issued by Canaccord Adams, showed a
price of USD 40.56 per ounce of gold in-situ. KALLPA SAB used this price for valuation of gold in-situ. It must be
highlighted that among the list of comparable companies used by Canaccord Adams for this calculation we find six of the
companies we consider comparable to RIO. Furthermore, Canaccord Adams assumes an average price per pound of
copper in-situ of around USD 0.03. KALLPA SAB used USD 0.02 per pound of copper to determine the value of copper
in-situ.
Though La Arena will initiate operations soon, KALLPA SAB finds it prudent to apply a discount of 30% to the value of
average price of gold and copper in-situ. This discount will diminish with time as confidence and certainty grows from
development of the first stage resulting in the acquisition of capital necessary for the development and exploitation of the
second stage (sulphide project). Prices used to calculate value in-situ, after such discount are USD 28.41 and USD 0.014
per ounce of gold and pound of copper, respectively. Thus, the value corresponding to the resources for 3 million oz Au
and 3,000 million lbs. Cu is USD 85.24 and USD 42.00 million, respectively.
II. Valuation of Gold and Copper In-Situ
Assumptions for Valuation
Supuestos Empleados en la Valorización del Oro y Cobre In-situ
Source: RIO
Elaborated by KALLPA SAB
Gold (Au) Copper (Cu)
I. Oxides 1M oz Au -
II. Sulphides 3M oz Au 3,000M lbs. Cu
Total Oxides + Sulphides 4M oz Au 3,000M lbs. Cu
NI 43-101: Resources of La Arena Project
Source: RIO
Elaborated by KALLPA SAB
Company Country Unlevered Beta
Timmins Gold México 0.5707
Greystar Resources Colombia 1.5761
Guyana Goldfields Guyana 1.0081
Colossus Minerals Brazil 1.1284
Andina Minerals Inc Chile 0.8477
Luna Gold Corp Brazil 0.7910
Sulliden Exploration Inc Perú 1.4198
Pediment Gold Corp México 1.3620
Linear Gold Corp México 0.7697
Dorato Resources Perú 0.4685
International Tower Hill Alaska - EE.UU 0.6613
Rainly River Resources Canada 1.1274
Minera IRL Limited Perú 0.8188
Average 0.9654
Beta of Junior Comparable Mining Companies
RIO ALTO MINING LIMITED (RIO)
10
EQUITY RESEARCH
Ricardo Carrión (627-5220) María Belén Vega (627-5220)
[email protected] [email protected]
UPSIDE POTENCIALS
Price Vectors
In a conservative scenario, prices used to value gold and
copper amount to USD 850 per ounce and USD 2 per
pound, respectively. Given that market consensus expect
prices higher that USD 1,000 and USD 2.5 for ounce of
gold and pound of copper, respectively, this could be
translated later in an increase of the fair value calculated by
KALLPA SAB.
Sulphide Deposit
Although within the fair value of the company we have
assigned a value to mineral in-situ, the shareholder must
remember that such value has been assigned to a passive
situation where the mineral has not been extracted yet
and does not reflect real value if the company decides to
develop and exploit the project. In that sense, KALLPA
SAB believes it is convenient, and a good source of
reference, to establish the fair value of RIO in case the
sulphide project is developed. (See page 13) Also we must
note that valuation of the sulphide project does not
consider molybdenum production which may translate
into an additional source of revenue for RIO.
Potential for Further Exploration and
Development: Mining Prospects
Combined, the oxide and sulphide projects cover only an
area of 1,720 hectares of La Arena’s total of 21,000
hectares. Besides the mining project La Arena (oxide +
sulphide), RIO has other five prospects: María Angola, La
Florida, Cerro Colorado, Agua Blanca and El Alizar all with
a high potential for development of gold, copper and
molybdenum. Rio plans to start with preliminary
exploration of Agua Blanca as geological studies indicate a
high amount of copper and gold in La Florida due to its
proximity to La Virgen gold project.
Comparable Junior Mining Companies
We must point out that because RIO is a company relatively
new to the market and its project has not been extensively
marketed, its current market value is lower than those of
comparable companies at an earlier stage of development.
Dilution Effect
Valuation of the oxide deposit has been done using current
criteria as, for example, the total number of shares to be
issued by RIO to obtain capital for operations start-up. In this
regard, shareholders must remember that KALLPA SAB has
used the assumption of a USD 30 million CAPEX to be
financed via equity, taking into consideration the issuance of
shares at USD 0.35 per share. KALLPA SAB believes that if
the company decides to finance part of the project in the
future, it will be able to do it at higher levels than current
prices and therefore will require the issuance of a smaller
number of shares. (Lower dilution)
Company Country Market Cap. (USD)
Guyana Goldfields Guyana 401,638,602
Greystar Resources Colombia 390,014,377
International Tower Hill EE.UU 364,776,828
Colossus Minerals Brazil 363,066,717
Luna Gold Corp Brazil 162,884,044
Andina Minerals Inc Chile 154,250,329
Rainly River Resources Canadá 124,380,849
Timmins Gold México 107,077,899
Sulliden Exploration Inc Perú 91,426,659
MINERA IRL Limited Perú 71,048,060
Linear Gold Corp México 59,123,699
Pediment Gold Corp México 46,682,005
Dorato Resources Perú 40,052,772
Rio Alto Mining Limited Perú 27,950,000
Source: RIO
Elaborated by KALLPA SAB
RIO ALTO MINING LIMITED (RIO)
11
EQUITY RESEARCH
Ricardo Carrión (627-5220) María Belén Vega (627-5220)
[email protected] [email protected]
Potential for Additional Appreciation (UPSIDE): Development of Oxides + Sulphides
In addition to the previous valuation, focused in the development of the gold oxide deposit, we performed a valuation of the
resources stipulated in NI 43-101 contained in the project’s 1,720 hectares including not only the development and
exploitation of the oxide project but also the sulphides. That is to say this new valuation includes total development of the
resources: oxides + sulphides.
Therefore, from the free cash flow to equity resulting from the development and exploitation of the total resources, we
obtain a present value for the oxide + sulphide project of USD 219.62 million.
Additional Assumptions Used for Valuation of Oxides + Sulphides
To calculate the value of the oxide + sulphide project we
have used the assumptions detailed in the previous valuation
and other pertaining to the sulphide deposits which we
explain next.
Vector for Copper Prices
Using a conservative approach, the price of copper used to
calculate the value of sulphides is USD 2 per pound. We
must note that the market consensus is that the price will
fluctuate within USD 2.60 and USD 2.92 for the next four
years, as it is shown in the table on the left.
Mineral Reserves and Production
According to RIO´s management, total reserves for copper
and gold sulphide projects amount 184 million tonnes of ore
with an average ore grade of 0.4% and 0.3 g/t, respectively.
Likewise, recovery for copper and gold is estimated at 88%
and 40%, respectively. Strip ratio is calculated at 0.951:1.
These numbers are to be confirmed by Coffey Mining’s new
reserve estimate due by the end of 2010.
The production plan contemplates extraction and processing
of 36,000 tonnes of mineral per day during the life of project,
calculated to be 18 years. Using these assumptions the
development of the sulphide project would produce a total
of 1,334 million pounds of copper and 680,577 ounces
of gold.
Copper Price 2011 2012 2013 2014
Market Consensus (USD/pound.) 2.68 2.92 2.84 2.49
KALLPA SAB (USD/pound.) 2.00 2.00 2.00 2.00
Source: Bloomberg
Elaborated by KALLPA SAB
Source: Bloomberg
Elaborated by KALLPA SAB
Source: RIO
Elaborated by KALLPA SAB
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
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2007 2008 2009
US
D p
er
po
un
d
Evolution of Copper Price
Projection - USD 2 / pound
2010 - 2017
Tonnes 38,500,000
Ore Grade (Au g/t) 0.58
Strip Ratio 1:1
First Stage - Oxide Deposit
RIO ALTO MINING LIMITED (RIO)
12
EQUITY RESEARCH
Ricardo Carrión (627-5220) María Belén Vega (627-5220)
[email protected] [email protected]
Estimated Operation Costs (OPEX) The OPEX calculated for the sulphide project is USD 6.73 per tonne of mineral and USD 1.70 per tonne of waste. Within the USD 6.73, mining costs accounts for USD 1.99 per tonne of mineral and the other USD 4.74 include ore rehandling, processing, salaries and environmental & community costs. There are also costs related to the production of concentrates of copper and gold.
Estimated CAPEX
To initiate operations for the sulphide project, scheduled for
2015, the Company will require an initial capital investment of
approximately USD 300 million, to be used in the acquisition
of machinery and equipment also the construction of plant
and the necessary infrastructure to operate this project. We
assume that part of the initial CAPEX would be provided by
the cash flow from the first stage operation (oxides). It is
planned that the CAPEX not covered by the cash flow from
the oxide project will be financed as follows: 75% from the
issuance of shares of RIO and the remaining 25% from
issuance of a seven year debt.
Calculation of the Discount Rate
To calculate the value of the oxide + sulphide we worked
over the base of the free cash flow to the Company. The
rate used to discount free cash flow to the Company
corresponds to the weighted average cost of capital
(WACC), which is 10.95%. WACC combines shareholder’s
cost of capital and the cost of debt according to the debt /
capital structure of the company.
The cost of debt without taxes used is 4.90% the tax rate
used is 30%.
To determine COK we used the Capital Asset Pricing Model
(CAPM) adjusted for emerging countries. The rate of risk
free assets equals 3.4% and results from the return of 10 year
American Treasury Bonds adjusted to the Peruvian risk. The
latter adds a 2.20% premium to the return free of risk.
Source: RIO
Elaborated by KALLPA SAB
WACC
10.95%
D/(E+D)
25%
Cost of Debt* (1-T)
4.90%
E/(E+D)
75%
COK
12.97%
29%
13%
58%
CAPEX DistributionAccording to type of fixed assets
Intangibles
Buildings &
Roads
Plant &
Equipment
Source: RIO
Elaborated by KALLPA SAB
Tonnes 184,000,000
Ore Grade (Au g/t) 0.3 g/t
Ore Grade (Copper %) 0.4
Strip Ratio 0.951:1
Second Stage - Sulphides Deposit
RIO ALTO MINING LIMITED (RIO)
13
EQUITY RESEARCH
Ricardo Carrión (627-5220) María Belén Vega (627-5220)
[email protected] [email protected]
The employed beta was obtained from an average of junior
mining companies engaged in the exploration and
development of gold projects that we think are comparable
to RIO, and that are shown for the valuation of the oxides.
Thus the average unlevered beta for the comparables is of
0.9654 which is then leveraged to RIO’s debt/equity
structure which is of 75% equity and 25% debt. The levered
beta is 1.1343.
Lastly, we assumed a market premium of 6.50%.
Final Considerations
The following table shows a comparison of the total value of RIO taking into consideration the valuations contained in
this report.
In this table you can appreciate the substantial increase in the fair value of the equity caused by the development of the
sulphides instead of postponing the development or assigning the sulphides an in situ value.
I. Valuation of Oxides + Gold and Copper In Situ USD Million
Value of Oxides 47.38
Value of Gold In Situ 85.24
Value of Copper In Situ 42.00
Total Value of RIO 174.62
II. Valuation of Oxides + Sulphides USD Million
Total Value of RIO 219.62
Source: RIO
Elaborated by KALLPA SAB
COK
12.97%
Risk Free Rate (rf)
3.4%
Peruvian Premium Risk
2.20%
Levered Beta (b)
1.1343
Market Premium (rm - rf)
6.50%
RIO ALTO MINING LIMITED (RIO)
14
EQUITY RESEARCH
Ricardo Carrión (627-5220) María Belén Vega (627-5220)
[email protected] [email protected]
This document is for information purposes only. In no circumstances should be used or considered as an offer to sell or a solicitation of any offer to buy shares or other securities mentioned in this report. The information herein has been obtained from or it is based upon sources believed to be reliable, but KALLPA Securities Sociedad Agente de Bolsa does not guarantee the accuracy or certainty of such information, or future market values of stocks or other securities mentioned. The opinions expressed in this document constitute our opinion as of the date of this publication and are subject to change without notice. KALLPA Securities Sociedad Agente de Bolsa does not guarantee that updates could be carried out due to changes in market circumstances. Authors of this research report hereby certify that the view expressed herein accurately reflect his or her personal views and no part of the analysts´ compensation was, is or will be directly or indirectly linked to the specific recommendations or views expressed in this document. The securities mentioned herein may not be available for purchase in some countries. KALLPA Securities Sociedad Agente de Bolsa may have positions or be holding any of the investments or related investments mentioned in this document and effect transactions in any securities mentioned herein or may seek to do investment banking with them.
Management
Alberto Arispe CEO (+511) 6275225
Sales & Trading
Enrique Hernández Head Trader (+511) 6275221
Alberto Piaggio Trader (+511) 6275222
Corporate Finance & Capital Markets
Ricardo Carrión Managing Director (+511) 6275220
Equity Research
María Belén Vega Analyst (+511) 6275220
Miloban Paredes Analyst (+511) 6275220
Operations
Eduardo Macpherson Head of Operations (+511) 6275220
KALLPA SECURITIES SOCIEDAD AGENTE DE BOLSA
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