Rio Alto Mining Limited RIOAF

$3 target

[LocoToro]

INVESTMENT RESEARCH


Rio Alto Mining Limited BUY
(RIO-TSXV, $1.31) 12-Month Target: $3.00




Please refer to the final page(s) of this report for required disclosures.
October 19, 2010 Mike Bandrowski [phone]
Robert Tuerke, Associate [phone]
Near-term Gold Production
with Huge Copper Potential




With gold production expected in Q1 2011, Rio
Alto is well positioned to capitalize on record
high gold prices, and it’s indicated and inferred
sulphide resource of 3b lbs Cu and 3MM oz. Au
adds significant growth potential. In addition,
only 20% of Rio Alto’s 20,673 hectare land
package has undergone systematic exploration.
We are initiating coverage with a BUY
recommendation and a 12-month target price of
$3.00 per share.
?? Near-Term Au Production – Rio Alto is
fully financed and on schedule to commence
gold production in Q1 2011 at a rate of 75,000
oz. in year one, expanding to between 96,000
and 120,000 oz. per year in years two through
six.
?? Prolific Gold Mining District – La Arena is
located in Peru’s most prolific gold mining
district, 18km from Barrick’s Lagunas Norte
(8.9MM oz. Au) and 10km from the La
Virgen Mine (1.1MM oz. Au).
?? Compelling Metallurgy – Bulk column tests
of 8 inch, 4 inch and 2 inch material has
resulted in recovery rates of 84% and 93%
over 30 days from the Calaorco and Ethel Pits.
?? Head Grade Upside – Channel and bulk
sampling program results suggest a potential
head grade lift of between 40% to 96% over
reserve grades.
?? Base Metal Kicker - In addition to 634,000
oz. of recoverable oxide gold reserves, the
Company’s indicated and inferred sulphide
resource includes 3b lbs Cu and 3MM oz. Au.
Sulphide production is expected in 2015.
Fis c a l Y e a r End M a y 3 1 2010A 2011E 2012E 2013E
(A ll fig ure s C A D$ )
Estimates
Cu Price (US$/lb) $3.37 $3.75 $3.25 $2.75
Au Price (US$/oz) 1,200 1,300 1,300 1,000
Au Production (000's oz) 0 44 119 120
Cu Production (mm lbs) 0 0 0 0
Revenue (MM)
$58 $159 $126
Cash Flow (MM) ($4) $27 $77 $57
EPS (
.10)
.16
.40
.24
CFPS (
.03)
.20
.58
.42
Valuation
P/E nmf 8.2x 3.3x 5.5x
P/CF nmf 6.5x 2.3x 3.1x
Stock Data
Previous Close $1.31
Potential Return 129%
52-Week High-Low
.30/$1.47
Avg. Daily Volume (millions) 1.70
Basic SO (millions) 122
Fully Diluted SO (millions) 135
Largest Shareholder (JP Morgan) 8.6%
Float (millions) 97
Market Cap. (MM) $160
Cash (MM) $6
Debt (MM) $29
Enterprise Value (MM) $184
Fiscal Year End 31-May
Source: Cap ital IQ
Rio Alto Mining Limited engages in the acquisition and exploration of
mineral resource properties in Peru. It explores primarily for gold and
copper ores. The company owns interests in the La Arena project
located in Peru. The company was formerly known as Mexican Silver
Mines Ltd. and changed its name to Rio Alto Mining Limited in July
2009. Rio Alto Mining is based in Lima, Peru and Vancouver, Canada.


Rio Alto Mining Limited
October 19, 2010 / p.2 Mike Bandrowski [phone]
Robert Tuerke, Associate [phone]
Table of Contents
INVESTMENT THESIS .................................................................................................................................... 3
COMPANY BACKGROUND ............................................................................................................................. 4
IAMGOLD OPTION AGREEMENT................................................................................................................. 5
GOLD PREPAYMENT FACILITY...................................................................................................................... 5
LA ARENA GOLD PROJECT........................................................................................................................... 6
LOCATION & CLIMATE................................................................................................................................. 6
INFRASTRUCTURE ........................................................................................................................................ 7
GEOLOGY ..................................................................................................................................................... 8
MINERAL RESOURCES.................................................................................................................................. 9
CHANNEL AND BULK SAMPLING PROGRAM................................................................................................. 9
PROCESSING ............................................................................................................................................... 11
EXPLORATION POTENTIAL......................................................................................................................... 12
FINANCIALS................................................................................................................................................ 14
VALUATION................................................................................................................................................ 15
INVESTMENT RISKS.................................................................................................................................... 16
APPENDIX A: OXIDE GOLD FLOWSHEET .................................................................................................... 17
APPENDIX B: SULPHIDE COPPER FLOWSHEET............................................................................................ 18
APPENDIX C: DIRECTORS AND MANAGEMENT BIOGRAPHIES .................................................................... 19
APPENDIX D: SUMMARY............................................................................................................................ 23
Rio Alto Mining Limited
Mike Bandrowski [phone] October 19, 2010/ p.3
Robert Tuerke, Associate [phone]
INVESTMENT THESIS
Rio Alto Mining Limited is a Canadian based resource company focused on developing its
highly prospective La Arena Copper-gold Project located in north central Peru, the most prolific
gold mining district in the country. The La Arena Project area consists of 44 mining concessions
totaling 20,673 hectares. Rio Alto has an option agreement with IAMGOLD to earn 38.7% by
spending US$30m and acquire the remaining 61.3% for US$47.6m by December 2012. The
Company has commenced construction of its US$44m La Arena oxide gold project and
anticipates gold production as early as January 2011. Rio Alto is fully financed to production and
expects to produce 75,000 oz Au in year 1 ramping up to between 96,000 oz and 120,000 oz. per
year between years 2 & 6.
We note that the oxide gold project should generate significant cash flow and position Rio Alto
to commence development of its La Arena Cu-Au sulphide Project, which contains an indicated
and inferred resource of 3b lbs Cu and 3m oz. Au. While the sulphide project provides the
Company with a positive growth profile, the focus is on near-term gold production and realizing
record gold prices. In addition, positive channel and bulk sampling suggests metallurgical
upside. Results from a recent channel and bulk sampling program have produced gold grades
that are significantly higher than gold grades from original HQ diamond drill assays (Table 3).
Hence, the possibility of increased head grades and improved cash costs is highly probable. We
are initiating coverage of Rio Alto with a BUY recommendation and a 12-month target price of
$3.00, based on 1.0x our NAV of $2.93 per share.
Figure 1: Leach Pad Construction (September 2010)
Source: Clarus Securities
Rio Alto Mining Limited
October 19, 2010 / p.4 Mike Bandrowski [phone]
Robert Tuerke, Associate [phone]
COMPANY BACKGROUND
Rio Alto Mining Limited, formerly Mexican Silver Mines Ltd. (MSM), was engaged in the
acquisition and exploration of mineral properties in Mexico. On June 25, 2009, MSM acquired
100% of the outstanding shares of Rio Alto Mining Limited (RAML). RAML was a privately
owned mineral exploration and development company formed to earn into and eventually
acquire the La Arena gold oxide/copper-gold sulphide project. Subsequently, MSM and RAML
amalgamated and the Company’s name changed to Rio Alto Mining Limited.
The La Arena Cu-Au Project was discovered in December 1994, and in January 1995, Cambior
staked a 1,800 hectare claim. Since 1994, Cambior and later IAMGOLD, staked additional
claims and the total area of the La Arena claims now total 20,673 hectares. Cambior was
acquired by IAMGOLD in November 2006 and later decided to sell La Arena to a new Peruvian
company, La Arena SA and these concessions are fully owned and registered to La Arena SA.
Rio Alto has been developing the La Arena Project under the radar and expects to be producing
gold by Q1 2011. Led by an experienced management team and board of directors, we expect
Rio Alto to achieve its production goal and use the oxide project as a stepping stone to develop
its La Arena sulphide project, which contains an indicated and inferred resource of 3b lbs Cu and
3MM oz. Au.
Figure 2: La Arena S.A.
Option to acquire100%
of La Arena S.A. from IAMGOLD
(IMG)
• Gold Only
• 57 Million tonnes
• Grade: 0.44 g/t Au
• Au Recovered:
634,000 ozs Au
• Life: 7 years
• Copper, Gold &
Molybdenum
• 187 Million tonnes
• Grade: 0.4 % Cu
0.3 g/t Au
• Life: 21 years
Rio Alto Mining Limited
La Arena S.A
La Arena
Project Other Prospects
Stage I
Óxides (720 ha)
Stage II
Sulphides
Agua Blanca
La Florida
Maria Angola
Cerro
Colorado
El Alizar Capex: approx US$ 51M
Initial Production: Dec - 2010
21,000 ha
1000 ha
IAMGOLD
Capex: approx US$ 300M
Initial Production: 2015
Source: Rio Alto Mining Limited.
Rio Alto Mining Limited
Mike Bandrowski [phone] October 19, 2010/ p.5
Robert Tuerke, Associate [phone]
IAMGOLD OPTION AGREEMENT
Rio Alto has signed one of the most favourable earn-in agreements we have seen in a long time.
Upon signing the La Arena Option Agreement Rio Alto issued US$1m in shares (5.5% interest)
rather than cash. Under the agreement Rio Alto will earn 38.7% interest in La Arena by spending
US$30m on the project (US$20 million has been spent to date). Rio Alto has the option to
acquire the remaining 61.3% interest for US$46.7m until December 2012. We expect the
Company to spend US$30m prior to calendar year end and fund its US$46.7m payments through
cash flow provided from the oxide gold project expected to be in production Q1 2011. With
634,000 oz. of recoverable Au and cash costs between US$508/oz. Rio Alto should easily meet
its option agreement requirements and possibly earn-in 100% long before the December 2012
deadline. Note that IAMGOLD does not have a back-in option on La Arena and 100% (not
38.7%) of the cash flow from La Arena can be used to pay IAMGOLD.
GOLD PREPAYMENT FACILITY
On April 20th 2010, Rio Alto entered into a Gold Prepayment Facility with Red Kite Explorer
Trust. Under the loan agreement Red Kite will provide a US$25m loan that is to be repaid via the
delivery of 36,800 oz. Au (subject to adjustment as the price of gold changes; for example at
US$1,350/oz. Rio Alto would have to deliver 33,120 oz. Au) over a forty-month period from
July 2011. The payment terms account for roughly 9% of monthly production, which is quite
favorable vs. comparable agreements announced by competitors of typically between 20% and
25% of payable gold production. In addition, Rio Alto will enter into a marketing services
agreement over the expected life of the La Arena gold oxide project and will pay a variable fee
based on the gold price. Management estimates the fee to be approximately 1.67% of the gold
price. Note that the Red Kite transaction and subsequent delivery of physical gold is dependent
on the amount of drawn funds. Should Rio only decide to draw down on 50% of the US$25m the
deliverable gold ounces would be adjusted.
Rio Alto Mining Limited
October 19, 2010 / p.6 Mike Bandrowski [phone]
Robert Tuerke, Associate [phone]
LA ARENA GOLD PROJECT
LOCATION &CLIMATE
The La Arena Project is located in Northern Peru, 480km NNW of Lima, the capital of Peru. La
Arena lies within the Huamachuco district, Sanchez Carrion province, access to the site is via a
710km paved highway or upgraded road from Lima or alternately via airplane to the town of
Huamachuco (pop. 20,000), approximately 18km from La Arena.
The project is located in the eastern slope of the Western Cordillera, close to the continental
Divide at an average altitude of 3,400 meters. The average annual temperature is 12 degrees
Celsius while total annual rainfall varies between 750mm and 850mm and the total annual
evaporation rate ranges between 950mm and 1000mm. Maximum precipitation usually occurs
during the months of January through March while June to August are the driest.
Figure 3:La Arena Location Map
Source: Rio Alto Mining Ltd.
Rio Alto Mining Limited
Mike Bandrowski [phone] October 19, 2010/ p.7
Robert Tuerke, Associate [phone]
INFRASTRUCTURE
Unlike many Greenfield mine developments in South America, infrastructure exists in the
immediate vicinity primarily due to other mining operations close by. The nearest power supply
is the Trujillo Norte – Alto Chicama 138kV transmission line 18km from La Arena. The power
line is privately owned by CTA (Compania Transmisora Andina), a subsidiary of Barrick Gold.
A power arrangement is being discussed with Barrick and a major Peruvian power distributor,
however, the oxide project power requirements are low with diesel generators providing power
until connection to the transmission line is achieved. Water will be extracted from underground,
adjacent water courses and through recycling and reuse of water wherever practicable. In
summary, the region should be able to provide the needs for both the oxide and sulphide projects
at La Arena as well as labour requirements for various stages of development and production.
Figure 4: Power Line at La Arena Figure 5: Highway at La Arena
Source: Clarus Securities Inc.
Rio Alto Mining Limited
October 19, 2010 / p.8 Mike Bandrowski [phone]
Robert Tuerke, Associate [phone]
GEOLOGY
La Arena occurs as Au-Ag mineralization within a Mesozoic quartzite cap to a Tertiary porphyry
Au-Cu intrusion. Mineralization occurs in five major areas of the deposit, namely Calaorco and
Ethel Breccia, both epithermal gold oxide, and North Porphyry, South Porphyry and Dacite
Breccia, mainly primary and secondary Au-Cu. Our site-visit confirmed the porphyry and
epithermal settings and significant potential to add additional resources through further
exploration at both identified deposits and exploration prospects on the property. The oxide zone
contains Au mineralization associated with goethite and hematite with copper values reduced to
300ppm. The enrichment blanket is primarily chalcocite while the primary zone carries most of
the Au-Cu mineralization in a quartz-pyrite-chalcopyrite matrix. Figures 1 & 2 are pictures of
fractured quartzite and typical stockwork porphyry taken at our recent site-visit.
Several vein types have been described for the porphyry mineralization. Early type A veins
generally consist of quartz only, these typically correlate with higher Au grades. They are cut by
B type quartz sulphide veins that are often banded or have sulphide developed along their axes.
Subsequent D type pyrite veins cut all other veins. Two post mineralization dykes cross-cut the
units, one associated with moderate dissemination and the other sterile and andesitic.
Figure 6: Oxide Gold Core Sample Figure 7: Copper Sulphide Core Sample
Source: Clarus Securities
Rio Alto Mining Limited
Mike Bandrowski [phone] October 19, 2010/ p.9
Robert Tuerke, Associate [phone]
MINERAL RESOURCES
The geological model is almost built entirely on historic trenching, RC Chips and diamond
drilling completed by Cambior and IAMGOLD. The La Arena resource estimate is based on
results from 340 diamond core holes (58,805m), 11 reverse circulation holes (1,186m) and 60
surface trenches (4,120m). The deposit has been drilled at a nominal spacing of 50m in the
brecciated sandstone and 65m in the porphyry. Below are the NI 43-101 compliant resource
estimates as at July 31st 2010. The resources are confined within a pit shell based on
US$1,050/oz Au and US$3.00/lb Cu.
Note that the following resource estimates are in-situ values only and do not include recovery
estimates. Metallurgical test-work suggests gold recoveries of 80% from the oxide resource and
copper and gold recoveries of 88% and 40% respectively from the sulphide resource.
Table 1: La Arena Mineral Resources
Material Cut-off Category Tonnes Au Grade Cu Grade Ag Grade Au Cu Ag
(MMt) (g/t) (%) (g/t) (000's oz.) (mm lbs) (000's oz.)
Oxide 0.11g/t Indicated 79.6 0.41 0.08 1,050 172
Inferred 9.2 0.19 0.29 57 66
Secondary 0.1%Cu Indicated 225 0.27 0.35 1,932 1,721
& Primary Inferred 178 0.21 0.3 1,216 1,170
Source: Rio Alto Mining Ltd.
CHANNEL AND BULK SAMPLING PROGRAM
In Table 3 we highlight results from channel and bulk sampling vs. original HQ diamond drill
assays. Note that the average Au grade reported in the channel and bulk sampling is 96% and
40% higher than reported grades from the original HQ diamond drill assays. The upward bias is
typical of projects near La Arena, and is due to gold mineralization occurring in fractures within
the host rock. Water used during diamond drilling tends to flush out gold mineralization resulting
in understated reserve and resource grades. We have valued the oxide project using reserve
grades and do not take this upward bias into consideration, however, we do assume higher grade
material for the first two years of operation. Below is a sensitivity table representing the potential
upside to our NAV that the respective percentage increases in head grade can have. While we
believe there to be significant upside we will wait until La Arena is in production before we
make any assumptions on LOM head grades.
Table 2: La Arena Oxide NAV Sensitivity to Increases in Head Grade & Gold Price
Percentage Long-term Gold Price (US$/oz.)
Increase $800 $900 $1,000 $1,100 $1,200 $1,300 $1,400
0% $216 $269 $318 $373 $426 $478 $531
10% $264 $320 $377 $434 $491 $548 $605
20% $330 $393 $456 $519 $582 $645 $708
30% $396 $465 $535 $604 $673 $742 $812
40% $557 $641 $726 $810 $894 $979 $1,063
Source: Clarus Securities Inc.
Rio Alto Mining Limited
October 19, 2010 / p.10 Mike Bandrowski [phone]
Robert Tuerke, Associate [phone]
Table 3: Channel & Bulk Sample vs. Original DDH Assays
Hole From To Recovery in Original Channel in Average bulk Channel Pit vs.
DDH (%) Grade DDH pit (Au ppb) sample from pit vs. DDH DDH
(Au ppb) (Au ppb)
96D-LA-045 2 4 no data 33 25 13 -24% -61%
96D-LA-045 4 6 no data 25 1,506 1,023 5924% 3992%
96D-LA-045 6 8 no data 1,180 881 4,523 -25% 283%
96D-LA-045 8 10 no data 460 2,197 989 378% 115%
98D-LA-058 0 2 57.5 1,000 1,424 2,032 42% 103%
98D-LA-058 2 4 60 360 1,021 550 184% 53%
98D-LA-058 4 6 70 180 196 253 9% 41%
98D-LA-068 0 2 75 510 2,157 851 323% 67%
98D-LA-068 2 4 85 770 2,754 912 258% 18%
98D-LA-068 4 6 100 930 3,687 1,629 296% 75%
98D-LA-068 6 8 100 2,700 5,643 2,343 109% -13%
98D-LA-068 8 10 100 3,770 6,394 3,541 70% -6%
98D-LA-075 0 2 89 570 883 649 55% 14%
98D-LA-075 2 4 80 440 1,273 515 189% 17%
98D-LA-075 4 6 78 42 274 369 552% 779%
98D-LA-075 6 8 75 350 108 413 -69% 18%
98D-LA-077 0 2 80 270 156 72 -42% -73%
98D-LA-077 2 4 82.5 92 1,565 1,442 1601% 1467%
98D-LA-077 4 6 84 2,010 2,138 3,798 6% 89%
98D-LA-077 6 8 98 6,940 2,614 3,394 -62% -51%
98D-LA-087 0 2 55 1,240 789 1,260 -36% 2%
98D-LA-087 2 4 67.5 1,380 4,340 1,529 214% 11%
98D-LA-087 4 6 55 11,100 21,160 5,073 91% -54%
98D-LA-087 6 8 57.5 1,640 4,634 4,212 183% 157%
98D-LA-087 8 10 60 1,680 5,092 7,259 203% 332%
98D-LA-123 0 2 99 239 296 190 24% -21%
98D-LA-123 2 4 97.5 517 575 458 11% -11%
98D-LA-123 4 6 95 659 2,791 1,959 324% 197%
98D-LA-123 6 8 92.5 2,079 1,917 1,275 -8% -39%
98D-LA-123 8 10 95 89 2,119 622 2281% 599%
05D-LA-146 0 2 80 1,105 5,355 6,685 385% 505%
DDH-LA-245 0 2 91.5 1,000 2,127 1,351 113% 35%
DDH-LA-245 2 4 97.5 534 3,472 1,065 550% 99%
DDH-LA-245 4 6 97.5 1,475 1,815 1,071 23% -27%
DDH-LA-253 0 2 32.5 1,155 2,363 999 105% -14%
DDH-LA-253 2 4 28.5 254 851 1,160 235% 357%
DDH-LA-253 4 6 37.5 526 809 1,541 54% 193%
DDH-LA-253 6 8 50 388 1,384 3,308 257% 753%
DDH-LA-253 8 10 95 2,320 3,142 2,645 35% 14%
AVERAGE 1,334 2,614 1,871 96% 40%
Source: Rio Alto Mining Limited
Rio Alto Mining Limited
Mike Bandrowski [phone] October 19, 2010/ p.11
Robert Tuerke, Associate [phone]
PROCESSING
The La Arena Project will comprise of a dump leach to process the gold bearing oxide material
and a conventional grinding and flotation circuit to process the sulphide material.
Oxide Material
The leach pad will be constructed in two phases to reduce initial capital costs. Phase 1 has been
designed to process the initial 9MM tonnes of ore while Phase 2 will contain the balance of the
dump leach reserves. The pregnant leach solution (PLS) will be pumped from the PLS pond and
circulated through five columns containing activated carbon. Coffey engineering has assumed a
contact time of 20 minutes is sufficient to achieve gold extraction of 98%. Gold loading on
carbon is expected to reach roughly 3000ppm at which point it will be sent to the elution plant.
Once the loaded carbon is washed and deleterious organics and inorganics destroyed, the
reactivated carbon will then be screened to remove carbon fines. The eluate solution will be
circulated through two electrowinning cells where gold will be platted on cathodes. Electrowon
gold will then be acid washed, filtered and smelted to produce gold dore bullion bars. A
representation of the oxide gold flow sheet can be seen in Appendix A.
Sulphide Material
The sulphide material will be mined and processed through conventional truck and shovel
methods then trucked to the crusher plant where it would be crushed to 80% minus 200mm using
a gyratory crusher, conveyed and discharged to a stockpile. The mill will be fed by a set of apron
feeders. The ore will be ground using a SAG mill and ball mill. Classification will be done via
hydrocyclones in closed circuit with the ball mill. The primary grind size target is 80% minus 95
feeding the flotation circuit at 35% solid by weight. The rougher flotation circuit will consist of 8
flotation tanks with a residence time of 20 minutes. The copper rougher will be sent to a precleaner
to remove slimes before regrind. Pre-cleaner concentrate to a regrind mill where it will
be ground to a product size of 80% minus 35um to increase the copper mineral liberation prior to
cleaning stages. Final concentrate will be filtered and conveyed and discharged in a storage
shed. It is assumed concentrate will be trucked to the coast then to overseas smelters. A
representation of the sulphide flowsheet can be seen in Appendix B.
Further Met-work Could Increase Gold Recoveries 50%
So far we have focused on the potential oxide gold head grade upside and the variance between
assay results vs. channel and bulk sampling. We should also point out the potential upside with
respect to the Cu-Au project. Initial metallurgical test-work suggests copper recoveries of 80%
and gold recoveries of 40%. While gold recoveries initially look low, preliminary test-work
suggests it is possible to recover 50% of the gold rejected to the flotation tail with relatively low
reagent and residence time requirements (Not included in PFS). Furthermore, if demonstrated
that flotation tail cyanidation is suitable it would increase the overall gold recovery to
approximately 60%. Should Rio Alto economically increase gold recoveries from 40% to 50% or
even better 60% it could result in an increase of roughly 300,000 to 600,000 ounces of
recoverable gold over the life of the project. This would be a game changer for the economics of
the Cu-Au project.
Rio Alto Mining Limited
October 19, 2010 / p.12 Mike Bandrowski [phone]
Robert Tuerke, Associate [phone]
EXPLORATION POTENTIAL
Historic geochemical work on the property suggests potential to add additional ounces to the
oxide gold project (Figure 8). Agua Blanca and La Florida are two highly underexplored areas on
the property that have the potential to increase resources and add to the life of the oxide project
(according to IAMGOLD geologists, only 20% of the property has been systematically
explored). We expect these two areas to be the primary exploration targets once gold production
commences. In addition, the undrilled 3km x 2km copper anomaly at Agua Blanca could be a
game changer for the copper project, which has already proven up an indicated and inferred
resource of 3b lbs Cu and 3MM oz. Au. (Figure 9). Finally, Cambior & IAMGOLD focused on
gold potential at La Arena and we believe the copper potential was never fully understood. Our
review of past drill work at La Arena highlights that many of the sulphide core results
terminated in grades well in excess of reserve and resource grades. Further modeling and strong
copper prices should result in a larger resource and pit shell at La Arena.
Figure 8: La Arena Gold Geochemistry
Source: Rio Alto Mining Limited
Rio Alto Mining Limited
Mike Bandrowski [phone] October 19, 2010/ p.13
Robert Tuerke, Associate [phone]
Figure 9: La Arena Copper Geochemistry
Source: Rio Alto Mining Limited
Rio Alto Mining Limited
October 19, 2010 / p.14 Mike Bandrowski [phone]
Robert Tuerke, Associate [phone]
FINANCIALS
CAD$m 2010 2011 2012 2013 2014 2015
Net Revenues
La Arena Oxide-Au 0.00 58.48 159.41 126.14 126.14 98.55
La Arena Sulphide-Cu 0.00 0.00 0.00 0.00 0.00 155.73
Total Revenues 0.00 58.48 159.41 126.14 126.14 254.28
Operating Expenses
La Arena Oxide-Au 0.00 19.17 53.88 51.73 51.73 51.73
La Arena Sulphide-Cu 0.00 0.00 0.00 0.00 0.00 80.46
Total Operating Expenses 0.00 19.17 53.88 51.73 51.73 132.19
EBDITA 0.00 39.31 105.53 74.42 74.42 122.09
Depreciation & Amortization 0.00 (6.40) (20.10) (21.63) (21.63) (22.31)
EBIT 0.00 32.91 85.43 52.78 52.78 99.78
Financial (Net) 0.00 0.00 0.00 0.00 0.00 0.00
Provision for Taxes 0.15 (8.96) (24.54) (15.07) (15.07) (28.71)
Net Operating Earnings 0.15 23.96 60.89 37.71 37.71 71.07
Corporate (4.41) (2.58) (7.38) (5.89) (5.89) (9.57)
Writedowns + Gains (9.16) 0.00 0.00 0.00 0.00 0.00
Derivative Instruments 0.00 0.00 0.00 0.00 0.00 0.00
Net Earnings (US$m) -13.42 21.37 53.51 31.82 31.82 61.50
Net Earnings (C$m) -13.42 21.37 53.51 31.82 31.82 61.50
EPS (C$/sh) -0.11 0.17 0.44 0.26 0.26 0.50
EPS (C$/sh, diluted) -0.10 0.16 0.40 0.24 0.24 0.46
Cash Flow (C$m) -4.04 27.30 77.36 56.80 56.80 89.31
CFPS (C$/sh) -0.03 0.22 0.63 0.46 0.46 0.73
CFPS (C$/sh, diluted) -0.03 0.20 0.58 0.42 0.42 0.66
Shares Outstanding (basic) 122.49
Shares Outstanding (diluted) 134.51
Source: Rio Alto Mining Limited, Clarus Securities Inc.
Rio Alto Mining Limited
Mike Bandrowski [phone] October 19, 2010/ p.15
Robert Tuerke, Associate [phone]
VALUATION
We have valued Rio Alto using a 5% discount rate for the oxide gold project, a 10% discount
rate for the Cu-Au project and long-term copper and gold prices of US$2.25/lb and US$1000/oz.
We note that our 5% discount rate is conservative for a near-term gold producer and the potential
upside in head grade and metallurgy for the oxide Au & Cu-Au projects respectively has not
been assumed in our valuation.
US$ millions C$ millions Per Share
OPERATING ASSETS
La Arena oxide-Au (5% DCR) $305.8 $318.1 $2.36
La Arena Sulphide-Cu (10% DCR) $85.5 $89.0
.66
Total $391.4 $407.0 $3.03
OTHER ASSETS
Working Capital (of which cash = C$5.7m) $5.8 $6.1
.05
Exploration Properties
.0
.0
.00
Cash from Exercise of Warrants/Options $9.5 $9.9
.07
Other Investments
.0
.0
.00
Total $15.3 $15.9
.12
TOTAL ASSETS $406.7 $423.0 $3.14
LIABILITIES
Red Kite $28.0 $29.1
.22
Capital Lease Obligations
.0
.0
.00
Environmental
.0
.0
.00
Total $28.0 $29.1
.22
TOTAL LIABILITIES $28.0 $29.1
.22
NET ASSET VALUE $378.7 $393.8 $2.93
Long Term Exchange Rate Shares Outstanding
US$1.00 =C$ 1.04 Basic 122.49
Options 4.36
Warrants 7.66
Fully Diluted 134.51
Source: Rio Alto Mining Limited, Clarus Securities Inc.
We are initiating coverage with a BUY recommendation and a 12-month target price of $3.00
per share.
Rio Alto Mining Limited
October 19, 2010 / p.16 Mike Bandrowski [phone]
Robert Tuerke, Associate [phone]
INVESTMENT RISKS
Currency & Commodity Price Fluctuations – The greatest risks facing the Company are
fluctuations in currency and commodity prices. Rio Alto does not have any gold or copper
hedges in place leaving it with limited downside protection.
Operational Risk – Rio Alto will be a single mine operation; we feel this increases the
Company’s risk level compared to many of its peers that produce at several operations.
Political Risk - Political risk in Peru is elevated when compared to Canada and could be further
exacerbated with a presidential election looming in April 2011 and regional elections in October
2010. However, we still view Peru as a pro-mining jurisdiction. Peru ranks 45th on the 2010
Economic Freedom Index.
Environmental – La Arena is a Greenfield site with no pre-existing liabilities associated with it.
Appropriate measures have been taken by qualified engineers and authorities to mitigate any
potential environmental issues.
Reserve/Resource – Resources and reserves are reported under National Instrument 43-101 and
therefore, we feel this aspect of the Company has relatively low risk.
Infrastructure – While the Company has sufficient water and power for the oxide gold project
additional power will be required to bring the sulphide project into production.
Rio Alto Mining Limited
Mike Bandrowski [phone] October 19, 2010/ p.17
Robert Tuerke, Associate [phone]
APPENDIX A: OXIDE GOLD FLOWSHEET
Source: Rio Alto Mining Limited
Rio Alto Mining Limited
October 19, 2010 / p.18 Mike Bandrowski [phone]
Robert Tuerke, Associate [phone]
APPENDIX B: SULPHIDE COPPER FLOWSHEET
Source: Rio Alto Mining Limited
Rio Alto Mining Limited
Mike Bandrowski [phone] October 19, 2010 / p.19
Robert Tuerke, Associate [phone]
APPENDIX C: DIRECTORS AND MANAGEMENT BIOGRAPHIES
Dr. Klaus Zeitler, Chairman of the Board of Directors - Dr. Zeitler received his professional
education at Karlsruhe University from 1959 to 1966 and obtained a PHD in economic planning.
Dr. Zeitler is a member of the Canadian Institute of Mining and Metallurgy and the Prospectors
and Developers Association. Dr. Zeitler financed, built and managed base metal and gold mines
throughout the world (Europe, Africa, North America, South America, and Pacific Region) with
a total investment value of $4 billion. Dr. Zeitler was a managing director of Metallgeschaft AG,
a German metals conglomerate and in 1986 founded and was a director and CEO of Metal
Mining, later Inmet, a Toronto Stock Exchange listed company with assets of over $1 billion and
base metal and gold mines in different parts of the world. After having been a director of Teck
and Cominco for many years, Dr. Zeitler joined Teck in 1997 as Senior Vice President and had
responsibilities for the exploration and development of mines in Peru, Mexico and the USA.
Since his retirement from Teck Cominco in 2002, and in addition to being President and a
director of Amerigo Resources Limited, Dr. Zeitler has been actively involved as a director in
various junior base and precious metal companies.
Alex Black, President, COO & Director - Alex Black lives in Lima, Peru and has 28 years
experience in the mining industry. Mr. Black holds a BSc in Mining Engineering from the
University of South Australia and is a member of the Australasian Institute of Mining and
Metallurgy. Prior to moving to Peru in 2000, Mr. Black was the founder and Managing Director
of international mining consulting services group Global Mining Services from 1994 to 2000. In
1996, Mr. Black also founded and was Chairman of OFEX listed AGR Limited with exploration
projects in Ghana and Mongolia. In 2002, Mr. Black took control of Chariot Resources Limited
as a listed TSXV shell and played a key role in the acquisition of the Marcona Copper Project
and formation of the Korean joint venture with Chariot Resources. Upon his resignation as
Chairman & Executive VP of Chariot Resources in 2006, Mr. Black returned to Peru and
founded the Peruvian registered Rio Alto S.A.C. Mr. Black was the Chief Executive Officer,
President and a director of Rio Alto prior to the acquisition of the company by Mexican Silver
Mines (since renamed Rio Alto Mining Limited).
Anthony Hawkshaw, CFO & Director - Anthony Hawkshaw is a Chartered Accountant and
holds a Bachelor Degree in Business Management from the Ryerson University in Toronto.
From 2005 to 2007, Mr. Hawkshaw was the CFO of Grove Energy Limited, a London and
Toronto listed oil and gas development company. In 2004, Mr. Hawkshaw was the CFO of
Chariot Resources Limited for a period of 12 months. Prior to Chariot, Mr. Hawkshaw was CFO
of Pan American Silver Corp. from 1995 to 2003. With more than 25 years experience in the
mining industry in countries including Canada, the United States, Mexico, Russia and Peru, Mr.
Hawkshaw has extensive experience in the marketing of metals in refined and concentrate form
throughout the world and in metals trading. He has arranged numerous debt, equity and
convertible debt financings with institutional investors, commercial banks and multilateral
lending agencies. Mr. Hawkshaw is also a director of TSXV listed Statesman Resources.
Rio Alto Mining Limited
October 19, 2010 / p.20 Mike Bandrowski [phone]
Robert Tuerke, Associate [phone]
Drago Kisic Wagner, Director - Drago Kisic Wagner holds a B.S. from Pontificia Universidad
Católica del Perú and a Masters degree (B-Phil) from Oxford University. As a founding partner
and current Director of MACROCONSULT and MACROINVEST, Mr. Kisic advised the
Government of Peru during the privatization of Centromin, Minero-Peru, Hierro-Peru and Peru’s
telephone and telecommunications companies CPT and ENTEL-Peru. Mr. Kisic is a member of
the board of SIA (a cement company); Mapfre and Mapfre Peru Vida (insurance companies);
Haug (a steel contractor); Corporación Rey and Teditex (textile related companies); and Banco
Financiero (a commercial bank). Currently, he is President of the Peruvian Institute of
Economics and Politics and Bodega San Nicolás and is a member and former President of the
Peruvian Center for International Studies (CEPEI) and the Peruvian Institute of Business
Management (IPAE). Drago was advisor to the Executive Director of the World Bank, and was
President of CONASEV (the Peruvian securities and companies’ regulatory authority) and Vicepresident
of the Lima Stock Exchange (BVL). Mr. Kisic was the former head of the Economic
Office and Manager of the Balance of Payments & External Sector Bureau of Peru’s Central
Reserve Bank and a former member of the Advisory Committee of the Ministry of Foreign
Affairs. He was also the Head of the Border Integration Team during the peace negotiations
between Peru and Ecuador, ten years ago.
Feisal Somji, VP Corporate Development & Director - Feisal Somji has more than 13 years
experience in the mineral exploration and development business and has been involved in early
stage, late stage and mine development projects around the world. He provides expertise in areas
of Corporate Finance and Corporate Governance, as well as mineral exploration management.
Mr. Somji has had experience as an officer and director for several public companies involved in
diamond, gold and platinum group element assets in Canada, Mexico, Brazil and Africa. He has
also run his own private companies providing mineral exploration services to other companies.
Mr. Somji holds a Bachelor of Science degree from the University of British Columbia and a
Master of Business Administration from Queens University.
Dr. Roger Norwich, Director - Roger Norwich is a dual graduate of Manchester University
having studied geology in the early 1970s and medicine in the 1980s. He worked for the major
American oil producer/explorer Texaco after graduation. He has worked in the UK North Sea, in
particular on the Brent oilfield. In addition he was based in Midland Texas gaining experience of
the Permian Basin. He is also a director of Nighthawk Energy plc, an AIM listed energy
company working in USA.
Daniel E. Kenney, Director - Daniel Kenney is a partner in the Calgary office of the law firm of
Davis LLP. Mr. Kenney's practice is focused on securities and corporate finance transactions,
mergers and acquisitions and corporate governance matters. He has extensive experience with
public and private offerings of securities, including initial public offerings, business
combinations and restructurings through asset and share acquisitions, plans of arrangements and
take-over bids. He also has considerable experience in all dealings with securities regulators
Rio Alto Mining Limited
Mike Bandrowski [phone] October 19, 2010 / p.21
Robert Tuerke, Associate [phone]
including stock exchanges and securities commissions. Mr. Kenney acts for a broad range of
issuers listed on the Toronto Stock Exchange, the Alternative Investment Market (AIM) and the
TSX Venture Exchange as well as for investment dealers in connection with financings and
corporate restructuring transactions.
John Fong, Vice President Finance - John Fong is a Certified General Accountant and has 10
years experience in the mining and oil and gas industry and has extensive experience in financial
reporting, internal controls and accounting systems. Prior to joining Rio Alto, Mr. Fong was the
Controller for Grove Energy Limited, a London and Toronto listed oil and gas exploration
company. In addition to his role as Vice President, Finance of Rio Alto, Mr. Fong is also the
Controller for Statesman Resources Ltd., a TSX Venture listed oil and gas exploration company.
Alejandra Gomez, Manager Investor Relations - Alejandra Gomez, Trad.a./C.Tran. has 20
years experience as an English-Spanish translator specializing in the areas of securities and
natural resources in South America. She is a Certified Member of the Society of Translators and
Interpreters of British Columbia and Certified Member of the Canadian Translators and
Interpreters Council by affiliation. Mrs. Gomez has worked for Canadian oil and gas and natural
resources companies since 1998. She was Regulatory Filing Officer for Grove Energy Limited
from 1998 to 2007 and is currently Corporate Secretary of Statesman Resources, an oil and gas
company listed on the TSXV.
Jaime Soldi, General Manager – Peru - Jaime Soldi, has been General Manager of Rio Alto
subsidiary, Rio Alto S.A.C since 2008. Prior to joining Rio Alto, from 2003 to 2008, Mr. Soldi
was a director and General Manager of Andes Resources Cia. Minera S.A.C. and Marcobre
S.A.C., both Peruvian subsidiaries of TSX listed Chariot Resources Limited. From 1994 to 1998,
Mr. Soldi was the Administrative Manager of Phelps Dodge Exploration in Peru, and
subsequently became corporate advisor for North Limited of Australia, IMA Exploration of
Canada, and in 2002 was a founding member of the team that established Chariot Resources
activities in Peru. Mr. Soldi has also been a consultant to international institutions such as the
World Bank and the Inter-American Development Bank on matters related to environmental
legislation and politics related to the mining industry in Peru and other countries in South
America.
Max Schwarz, Project Manager - La Arena - Max Schwarz is an industrial engineer and
graduate of the University of Lima having specialized in technology for the environment and
management of industrial security. Max also has completed a post graduate degree in Industrial
Engineering with a major in Planning and Business Management. Mr. Schwarz possesses 15
years of varied experience in the sectors of mining, petroleum, fishing and industrial chemicals.
Mr. Schwarz was previously General Field Engineer (GFE) for Latin America for Earth
Corporation Inc., Environmental Consultant of SGS (SGS EcoCare) and Manager of Security,
Health and Environment (SSMA) of Hochschild Mining PLC (HMPLC). Mr. Schwarz provides
a variety of project and support management services to the La Arena project via his consulting
company B&G Engineering S.A.C.
Rio Alto Mining Limited
October 19, 2010 / p.22 Mike Bandrowski [phone]
Robert Tuerke, Associate [phone]
Juan Rodriguez, Manager Operations - La Arena - Juan Rodriguez is a mining engineer with
extensive operational experience in Peru. Prior to joining Rio Alto in 2008, Mr. Rodriguez was
Manager Operations for Compania Minera San Simon S.A., the owner of the La Virgen gold
oxide dump leach mining operation located 10km south of La Arena. At La Virgen, Mr.
Rodriguez was responsible of all mining activities and the incremental expansion of production
over 3 years from 3,000 tpd ore to pad to 24,000 tpd ore to pad, the current throughput of the
mine. Prior to joining Comania Minera San Simon S.A., from 1988 to 2002, Mr. Rodriguez
worked in various operational capacities for Sociedad Minera El Brocal S.A.A. at its El Brocal
open pit polymetalic mine in central Peru.
Rio Alto Mining Limited
Mike Bandrowski [phone] October 19, 2010 / p.23
Robert Tuerke, Associate [phone]
APPENDIX D: SUMMARY
Rio Alto Mining Limited (RIO-TSX.V)
Previous Close C$ $1.31 12-Month Return 129%
Target Price C$ $3.00 Rating BUY
All figures in C$, unless otherwise stated
CAPITAL STRUCTURE FINANCIAL SUMMARY
Fiscal Year (May 31st) 2010A 2011E 2012E 2013E
Shares Outstanding 122.5 Production
Options 4.4 Oxide Gold (000 oz.) 0 44 119 120
Warrants 7.7 Sulphide Copper (mm lbs) 0 0 0 0
Fully Diluted Shares 134.5 Sulphide Gold (000 oz.) 0 0 0 0
CLARUS PRICE DECK Income Statement C$MM
Calendar Year 2010 2011 2012 2013 LT Revenue
.0 $58.5 $159.4 $126.1
Copper (US$/lb) $3.37 $3.75 $3.25 $2.75 $2.25 Operating Expenses
.0 $19.2 $53.9 $51.7
Gold (US$/oz.) $1,200 $1,300 $1,300 $1,000 $1,000 Depreciation
.0 $6.4 $20.1 $21.6
Foreign Exchange (C$/US$) $1.04 $1.04 $1.09 $1.10 $1.10 Net Income -$13.4 $21.4 $53.5 $31.8
NET ASSET VALUE Discount rate C$M C$/share Basic Shares Outstanding (M) 122.5 122.5 122.5 122.5
La Arena Oxide Au 5% $318.1 $2.36
La Arena Cu-Au 10% $89.0
.66 EPS -
.11
.17
.44
.26
Working Capital $6.1
.05 P/EPS nmf 7.5x 3.0x 5.0x
Total Assets $423.0 $3.14 Target/EPS nmf 17.2x 6.9x 11.5x
Debt $29.1
.22 CFPS -
.03
.22
.63
.46
Environmental
.0
.00 P/CFPS nmf 5.9x 2.1x 2.8x
Total Liabilities $29.1
.22 Target/CFPS nmf 13.5x 4.8x 6.5x
Net Asset Value $393.8 $2.93
Management & Directors Catalysts
Dr. Klaus Zeitler, Chairman Hire Head Geologist - Q4 2010;
Alex Black, COO & Director Initial gold production - Q1 2011;
Anthony Hawkshaw, CFO & Director Commence exploration at heavily underexplored La Arena Property - 2011.
Drago Kisic Wagner, Director
Feisal Somji, VP Corporate Development & Director
Dr. Roger Norwich, Director
Rio Alto Mining Limited
October 19, 2010 / p.24 Mike Bandrowski [phone]
Robert Tuerke, Associate [phone]
Clarus Securities Equity Research Disclosures
The analyst has visited the La Arena Project in Peru; partial payment was made by the issuer for some of the associated site visit travel
costs.
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Equity Research Ratings
Buy: Attractively valued and expected to appreciate significantly from the current price over the next 12-18 months.
Speculative Buy: Expected to appreciate significantly from the current price over the next 12-18 months. Financial and/or operational
risk is high in the analyst’s view.
Accumulate: Attractively valued, but given the current market price, is expected to appreciate moderately over the next 12 -18 months.
Hold: Fairly valued and expected to trade in line with the current price over the next 12-18 months.
Sell: Overvalued and expected to decline from the current price over the next 12-18 months.
Under review: Pending additional review and/or information. No rating presently assigned.
A summary of our research ratings distribution can be found on our website.
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For additional disclosures, please visit our website. © Clarus Securities Inc. 2010.
Rio Alto Mining Limited
Mike Bandrowski [phone] October 19, 2010 / p.25
Robert Tuerke, Associate [phone]
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Rio Alto Mining Limited
October 19, 2010 / p.26 Mike Bandrowski [phone]
Robert Tuerke, Associate [phone]
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Rio Alto Mining Limited
Mike Bandrowski [phone] October 19, 2010 / p.27
Robert Tuerke, Associate [phone]
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