Rio Alto Mining Limited RIOAF

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Mining is big in Latin America. The mining sector represents the lion's share of the main Peruvian indexes, and Chile and Argentina have significant mining operations as well. Kallpa Securities CEO Alberto Arispe talked exclusively with The Gold Report about some of the most promising small-cap plays in the area and the prospects of Peru, Chile and Argentina trading under a single exchange and what that might mean for the future of mine financing and investment opportunities.

TGR: What are some small-cap plays in Peru that you think have some promise?

AA:Rio Alto Mining Limited (TSX.V:RIO; BVL:RIO; OTCQX:RIOAF) is a good example. They have a project called La Arena in the northern mountains of Peru. It was explored by IAMGOLD Corporation (TSX:IMG; NYSE:IAG) and they did a deal with IAMGOLD to obtain the rights. It's like an option agreement, at a very low price.

In the fourth quarter of 2009, Rio Alto contacted us and we listed the company on the Lima Bolsa. They also are listed on other markets, including the Toronto Venture Exchange. Basically, we did a private placement for them: 100% Peruvian investors for around $5 to $6 million when the stock was at
.33.

At that time, management owned around 30% of the company. There were no big funds owning the stock. They needed to raise around $25 or $30 million in 2010 to build the plant and start producing gold. They have a reserve of gold and a reserve of copper. Some people bought it. Others of course didn't.

The company delivered what they promised investors. They got a loan with a prepayment of gold agreement with a U.S. hedge fund, Red Kite, for $25 million. Then we raised another $8 million. Afterwards, J.P. Morgan asked the management to participate and there was an issuance of another $8 million. The stock is trading now now $1.34—a 200% profit. It's the most profitable stock on the Lima Stock Exchange.

Now we are four months away from production. Everything is on track. We have the permits from the government, the environmental approval and the communities have approved. Everything has gone as expected. They have already everything fully financed for the first part of the project. We expect them to be producing around 90,000 ounces of gold next year. Cash costs will be around $500 per ounce; you know where the price of gold is right now. That project will last around eight years.

So the story is that through capital markets these guys were able to finance basically 100% of all their cash needs. A good part of it was done in the Peruvian market and in the U.S. Now, Rio Alto is a $128 million market-cap company. When we started this a year ago it was a $35 million market-cap company. So it's a success story. Of course, not all stories have happy endings.

TGR: Rio Alto recently announced reserves of 2.57 million ounces of gold and 1.57 billion pounds of copper.

AA: Correct. So this is basically a copper operation. But the good thing that management has done is that here in Peru you have four or five junior companies with very big copper deposits that in three or four years can be huge unit producers. But the problem is that to get these things into operation, the companies need to invest $300, $400, $500 million and these companies have a market cap of $30, $40 million. It's impossible for them to develop these projects. So they have to sell sooner or later, or they can joint venture.

What Rio Alto has done, which is very smart I think, is say, we have this big copper project, but we also have the oxides on the top of the hill. We have a small gold project. They are going to concentrate on the small gold project, which is easier to develop. They will start producing gold and use those cash flows for two or three years. That will make the market cap of the company go up from $40 million where it was a year ago to maybe $150 million. It's different to try to get a joint venture or raise money or even sell the company for the big copper project when you're worth $150 million and when you have a cash flow, than when you are $30 or $40 million and you don't produce anything.

TGR: And you can raise much more money with less dilution when you're financing at $2, $3 or $4 a share versus $1.25.

AA: Exactly. So I think there Rio Alto has played it smart. If not, they would be another junior with a lot of potential, and maybe in three or four years you could see that unit producing. For that you need a joint venture or to sell to somebody or huge dilution. So far management has delivered and I have a lot of confidence in them. We have a pretty good relationship. They have an open-door policy. When the stock came down at one time, we had a lot of investors visiting them and I think that says a lot about management.