Rio Alto Mining Limited RIOAF

Here's 2 price target calcs for RIO for you

[fleeinggrandich]

Gold Miner Pulse's automated valuation calcs have extreme limitations, and Dennis (?) will admit that to you. It's just a very rough guide, something to help you compare stocks and look for reasons why some are undervalued.

----------------------------------------------------------
Let's see what happens when I try to calc a price target for RIO based onreserve and resource numbers. Read the Coffey report for La Arena on SEDAR if you need background.

RIO'soxide deposit has 821koz Au reserves @ 0.44g/t supposing $950 Au, and1.05Moz Au resources supposing 0.4g/t @ $1050 Au. The sulphide has1.7Moz Au reserves @0.3g/t and 3.1Moz I&I resources. Ignore othermetals fer now. Ignore recovery, metallurgy, and everything else underthe sun. This will be a simple "ounces in the ground" calc.

Using $200/oz for reserves (half the value of theaverage major's reserves' per-oz value, or the top end of the range forcompanies operating in a dump like South Africa where there's aconstant scuttlebutt about nationalization) and $90 for resources (aspreviously),

Oxide value = 821koz*$200/oz + 1.05Moz*$90/oz = $164.2M + $94.5M = $258.7M
Sulphide value = 1.7Moz*$200/oz + 3.1Moz*$90/oz = $340M + $279M = $619M

Total = $878M

Someoneon the message board who read the Coffey report would point out thatRIO needs to raise money for capex in 2013 to fund the sulphide operation, so assume you need to dividethe total value by 250M shares.

Value per share = $3.51.
----------------------------------------------------------

And here's my own highly complexified but still back-of-a-napkin method of doing a valuation calc.

Inthis case, I'm taking the Coffey Report p.146, which seems to be wherethey're calculating cash flow for La Arena. But I'm making the followingchanges to their numbers:

1. No sulphide. Apparently RIO doesn't care about it right now beyond the feasibility stage. Therefore neither should the market.
2. IKN's interpretation of (Alex Black's interpretation of) the recent reverse-circ drill holes at La Arena is that the reverse-circ program proved La Arena has a higher grade than the block model suggested (the fluid used in diamond drilling is suspected to have washed a lot of the gold out of the cores before they were collected). I'm going to pull a number out of my butt, 30%, and say the post-leach production will be better by that much due to the higher grade than the Coffey report assumed.
3. Let's say we use constant gold=$1500 instead of Coffey's... whatever? $1000? Looks like it. Gold is in the $1500 range now, and assuming over the next year it goes up rather than down, I hereby assert that RIO's NAV (and therefore share price) should also tend up til it assumes $1500 gold. (If you disagree, get out of gold stocks now.)
4. Since they also have resources that could be added to reserves, and since now they're also supposedly tripping over more and more ore on site, I add about 400koz Au to production starting in 2017, 110koz/y.
5. I added a "Humala factor": I jacked up taxes to 3x from 2011-2014, and a constant $40M/y from 2015-2020; then I fudged up a few other things besides, like cash out.
6. I applied an 8% discount factor compounding per year to the net cash flow in order to sum a NAV.

Idon't know if I managed to properly extract all costs (and tax benefitsor deferments?) associated with the sulphide to make this an oxide-onlycalc.

Anyway.At 8% discount factor, RIO's oxide deposit (with IKN's insider info included) adds up to $590M. With no dilution tofire up the sulphide operation, we divide that by 170M shares, whichgives us a NAVPS(8%) of $3.49.

Now, banker types at PDACasserted to a serious crowd this year (i.e. bank analysts, NOT bulletin board readers) that they actually are happy toapply a much lower discount factor to a mine once it's in operation,even if it's located somewhere worse than Nevada. So, fine... re-run thecalc at 5%, and NAV=$650M. Divide by shares out, and that's $3.97.

Now before either of those prices get hit, I guess RIO would have to

• prove (per the reverse circ drill holes just released) that the grade is higher than Coffey assumed, with a few Q of production; and
• either prove up some more resources, or convert some of what's there now to reserves.

Still,since this number is in the range of my previous $3.51 "ounces in theground" calc (which included the sulphide), and also in the range of IKN's target, it does offer me yet one more reason to accept thatgeneral price target area. In fact, since this target doesn't includeany sulphide, maybe the NAVPS(8%) should be more like $4, giving RIO a50-cent bonus for the sulphide that they don't need/want to mine.