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11/29/12

GMP pumping Rio Alto Mining (RIO.to) this morning

And here's how they're doing it below, a mailshot pumpo to clients. Note the use of bold type, exclamation marks, caplock etc. All good rahrah stuff.

Disclosure: I'm Long RIO.to (have been since 69c and have bought several times since then, for what it's worth) but what follows below is copypaste of the GMP note, not my opinion.

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We had a nice little drubbing in the gold and gold equities recently so a few opportunities are available.  Rio Alto (RIO-TSX) is the name I would buy here in the intermediate producer segment of the gold space on this pullback. Attached are our recent research notes on Rio Alto for your perusal.
GMP has BUY rating at C$8.00 TP which is upside of 63% from last trade of  $4.90.


Here’s why:

Rio Alto checks all the boxes I’d want to see for investors in gold equities:

·         Good mining jurisdiction (Peru, 18km from Barrick’s Laguna’s Norte project), with excellent infrastructure
·         Simple project,  straight forward metallurgy, less technically complex means – less chance of blowing up.
·         Strong insider ownership of stock ...not just options....management owns about 9% of the stock.
·         A track record of bringing mines on time on budget and surprising to the UPSIDE once in production.
·         STRONG EXECUTION (for $100 million they brought La Arenas on first gold pour in 10 month after their EIA and it is now producing about 200k oz of gold!)
·         Low cash (all in) costs of about mid $600/ oz that translates into a ~$1000 / oz EBITDA margin at current level!
·         Ability to expand throughput on current assets that doesn’t require large capex spends (going from 24ktpd to 36k tpd by year end)
·         Ability to FUND GROWTH THROUGH INTERNALLY GENERATED CASH FLOWS
·         Big exploration upside on 27k ha land package that is generating a lot of targets on site that management is only now starting to address given the FCF generation.

Other reasons I care:

·         Firstly, in the gold space, I want to own gold names that PRODUCE and are in the 100k – 1 million oz range that have simple “un-sexy” projects that can ramp up, expand and allow the companies to  grow from a smaller base without the overhang of a massive capex given the state of the markets.
·         My analyst, George Albino, just came back from a site visit at  La Arenas and his main takeaway was that reserves will grow (2 years ago was ~600koz, 1.1 million currently) and we think by February, it will come in more like ~2 million oz so bottom line, La Arena could sustain the ~200k oz level of production before meaningfully trailing off that production level for probably 5-7 years instead of 3-4 years.  Again, other assets will come on stream by 2015 -2016 but this keeps the “cash register” going stronger for longer and is the source of funding for all future development projects. This reinforces our view that there is mineralization and resource upside all over their land package to exploit.
·         Rio Alto, at $1650 gold, will throw off ~$200 million in EBITDA, on a market cap of ~$800 million.  Call it $120 million of FCF which is a 14.5% FCF yield! This is a CASH MACHINE.
·         BALANCE SHEETs matter!! Rio Alto has NET CASH on balance sheet of $66 million and can use CF to fund development of La Colorada and the Cu/gold sulfide development projects.
·         In English – Rio Alto is running at ~200k / oz of production in 2012 and is now a CASH MACHINE with low mid $600 all in cash costs and a $1000 ebitda margin and unlike a lot of gold names, RIO CAN SELF FINANCE GROWTH of their development projects which means NO DILUTION and gold leverage for shareholders.
·         Think about this...If they don’t grow, at this run rate of about $200 million of EBITDA, they will equal their market cap in ~4 years!
·         Blue sky – We think that with assets they have in hand, looking out 5 years I think they can grow from 200K oz/ to 400k oz (excluding any acquisitions) so all else equal, the company can double in size in 5 years without having to dilute, buy anything or stretch beyond the asset base they already have.
·         Stock is not expensive – off metrics I understand like P/Cf and P/E, on consensus 2013 estimates, it is trading at 6.50X CF and 7.5x EPS

Switch Idea:

·         For comparison purposes, or as a  SWITCH idea, Alamos is a $2.2 billion market cap company that produces 200k oz and trades at 13.4x CF....whereas RIO is a $850 million market cap, produces 200k oz and trades at 6.5x CF! Cash costs at both companies are very similar as well....