Rio2 (RIO) – $1Bn Gold Disguised as $100M Miner

Rio2 Ltd 
  • TSX-V: RIO
  • Shares Outstanding: 182M
  • Share price C$0.84 (21.07.2020)
  • Market Cap: C$153M

Interview with Alex Black, President and CEO of gold developer, Rio2 Ltd (TSX-V:RIO).

If Rio2 isn’t a C$1Bn+ company by the time it gets into production, the man with a plan will be shocked. Why not check out our previous article about Rio2 while you’re here?

Black is a straight-talker and he can back it up. He and his team have done it before and, as far as he is concerned, this a cookie-cutter exercise because all the parallels are there. I always look for a management team who has done it before. There are so few; ask Ross Beaty or Rick Rule.

Matthew Gordon talks to Alex Black, 18th July 2020

Perhaps the rare quality of Rio2’s management team could be an indication of just how much of a discount there currently could be to Rio2 stock, considering the market cap is just C$153M today. Historical issues with water supply have been resolved by means of trucking water until a more permanent solution is agreed. This also reduces any delays whilst waiting for an underground water licence. There are 2 separate routes for trucking with only a US$30/oz different in cost.

In addition, the inherited Feasibility Study plan being cut in half by Black, a move that was roundly set upon as being unambitious, turned out to be a pragmatic move to get into production quickly. It’s been a hard slog to change the negative sentiment around Rio2 stock, but investors now seem to be appreciating the moves by the company to allow it to take advantage of the current gold bull market. Moreover, as a side issue, the company is also dealing with ‘naked shorting’, something that is ravaging a lot of Canadian mining companies right now. Rio2 is calling out those institutions and traders directly. Black discussed naked shorting in a previous interview with us.

Rio2 is hoping to start construction of the mine at the Chilean Fenix Gold Project next year. The PFS is robust, and an EIA from the Chilean environmental authorities is all the company is waiting on. The numbers are great using the base price of US$1,300/oz gold:

  1. Proven & Probable Mineral Reserves: 1.83Moz (0.49g/t gold)
  2. High-Grade to Leach Pad: 81.9Mt (0.57g/t gold)
  3. Low-Grade to Stockpile: 33.1Mt (0.30g/t gold)
  4. After-Tax Life-Of-Mine Cumulative Cash Flow (unlevered): US$222M AISC: US$997/oz
  5. Life-Of-Mine gold production: 1.37Moz
  6. Average Annual Gold Production During the Initial 13 years: 93,000oz
  7. Average Annual Gold Production During the Final 3 years: 50,000oz
  8. NPV(5%): US$121 million (US$241 million at US$1,500 per oz gold)
  9. IRR: 27.4% (44.3% at US$1,500 per oz gold)
  10. CAPEX: US$111 million
  11. LOM Sustaining Capital Costs: US$95 million

Construction is currently targeted for Q4/21 with first gold production in Q4/22.

All in all, this is a mine with a 16-year mine life that will operate at an initial 20,000tpd mining rate with expansion potential subject to additional water options and changes to the gold price. Black is aiming to be a 220,000 – 300,000oz pa. That places Rio2 straight into the mid-tier bracket.

In order to get this relatively modest CAPEX financed in an accelerated timeframe, one might expect heavy dilution for investors. This is exactly the opposite of Black’s approach. Rio2 is looking at “all the traditional forms of financing” for this project and some “unconventional forms.” It is doing everything in its power to avoid a dilutive equity raise. We wait to see what that looks like; it may be easier said than done, but in this gold bull environment, anything seems possible.

Black thinks that the best comparison for Rio2 is Orezone based in Burkina Faso: 5Moz gold with very similar characteristics. Both companies appear to be extremely undervalued when you look at what else is going on in the market. This highlights the disparity between “sexy drilling” and a company that is actually going to build a mine. This is an important point to note. Very few juniors actually get into production because despite what the studies say, the economics and the reality don’t often align. There are a few other gold development projects in Latin America, but they are some way from production, and it remains to be seen whether they can benefit from this cycle. Black feels that this will be one of a handful of mines that gets into production in the next couple of years.

Let’s hope for some significant catalyst moments in 2020 as the market begins to grasp this value proposition.

What did you make of Alex Black and gold-developer, Rio2?

I’ve reviewed other examples of potentially undervalued companies in recent months. Feel free to check out the articles if you have a spare moment. You could be onto a winner.

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