Rio2: Development Towards 300,000 oz/yr Gold Production Making An Atacama's Blue Sky Potential

• Rio2 has secured all necessary permits and financing to commence construction of its Fenix Gold Project, a low-cost oxide heap leach mine in Chile's Atacama region.
• Fenix will start as a 20,000 tonne per day operation producing over 100,000 ounces of gold annually. However, Rio2 sees potential to expand throughput to 80,000 tpd within 3-5 years, which would propel annual gold production to approximately 300,000 ounces.
• Fenix benefits from a simple, outcropping oxide gold deposit that is amenable to low-cost, run-of-mine heap leach processing. This straightforward setup is expected to enable a quick ramp-up to commercial production and attractive operating margins.
• Rio2 Executive Chairman Alex Black believes there are numerous undervalued gold projects in Latin America and sees the potential to use Fenix as a platform to consolidate regional projects and grow Rio2 into an attractive takeover target.
• The company's management team have a proven track record of creating value for shareholders, including building Rio Alto Mining from a single-asset developer into a mid-tier producer and selling it for $1.2 billion in 2015. The experiences and success bode well for Rio2 as it seeks to replicate that model on a larger scale.

Rio2 Limited (TSXV:RIO) offers investors an opportunity to gain leveraged exposure to gold through an advanced-stage development project in Chile. The company's Fenix Gold Project is fully permitted, financed and now under construction, with a clear path to first production and cash flow in the near-term. Longer-term, Rio2 aims to organically expand Fenix into a world-class asset while also pursuing consolidation opportunities to assemble a portfolio of gold projects ripe for eventual acquisition.

Blue Sky: Fenix Gold Project Potential

Rio2's flagship Fenix Gold Project is located in Chile's Atacama Region near Copiapó. The project boasts outcropping, oxide gold mineralization amenable to low-cost, run-of-mine heap leaching.  The current resource stands at ~5 million ounces grading 0.48 g/t Au.

In 2023, Rio2 released a Feasibility Study outlining a 20,000 tonne per day operation producing over 100,000 ounces of gold annually at all-in sustaining costs of $1,250/oz over an initial 7-year mine life. The modest scale enables a manageable initial capex of $135-140 million while positioning the project for efficient expansion in the future.

Expedited Path to Production

"We've got our four key permits that we needed to allow us to commence construction," explained Rio2 President & CEO Alex Black. "What we achieved was our four key permits that we needed to allow us to commence construction. We always wanted to get that out of the way before we did the financing. We didn't want to announce a big financing and then go 'well yeah, we're still permitting.'"

Prudent project staging and a proactive permitting approach have allowed Rio2 to fast-track Fenix while many peers languish in the permitting phase. The deposit's natural attributes further simplify and shorten the development timeline.

"It's run of mine gold oxide heap leach," noted Black. "What we have is an outcropping orebody and run of mine means all we're going to do is drill and blast and dig up the rock. We just put it on trucks, take it over to the leach pad and leach it. There's no fines, there's nothing that's going to clog up the leach pad, we don't have to agglomerate, we don't have to do any of that."

Fenix is expected to achieve commercial production approximately 12 months from the start of construction. With earthworks now underway, first gold pour is on track for the second half of 2025.

Organic Growth Potential

While the starter operation is robust on a standalone basis, the real blue sky lies in Fenix's expansion potential. Rio2 sees the project ultimately reaching throughput of 80,000 tpd, which would propel gold output to approximately 300,000 ounces per year based on the current resource.

"Even though we haven't done a study on the expansion project, we can clearly see from internal work that we've done that this project can grow from 20,000 tons a day to 80,000 tons a day," stated Black. "When we get to 300,000 ounces per annum, from one mine, we become a world-class project that somebody else is going to want."

The main hurdle to expansion is securing additional water supply, as the heap leaching process is water-intensive. Rio2 is already laying the groundwork to address this, likely via a desalination solution, with studies planned over the next 12 months in parallel with construction of the starter mine. An EIA and updated technical report would follow.

Interview with Executive Chairman Alex Black

Valuation Disconnect

At a current market capitalization around US$200 million, Rio2 trades at just 0.25x the estimated NPV (5%) of $800 million for the starter Fenix operation. This represents a substantial discount to the 0.5-0.8x NAV multiple typically ascribed to single-asset developers.

The company is fully financed through to production, with over US$60 million in cash against a remaining capex of US$135-140 million, eliminating any perceived funding overhang. And the after-tax IRR of 31% is highly compelling in a rising gold price environment.

Rio2 stands out as exceedingly undervalued relative to its peer group and the underlying value of its asset base, suggesting considerable potential for re-rating as Fenix advances through construction and into operation over the next 12 months. Rio2 is led by an experienced management team with a track record of building and monetizing successful mining companies. CEO Alex Black and his team previously grew Rio Alto Mining from a single asset developer into a 225,000 ounce per year producer, culminating in a $1.2 billion sale to Tahoe Resources in 2015.

"We're not novices at this," commented Black. "We know how to execute and deliver...which is a 7 - 10x bagger from where we are today."

Consolidation Platform

Beyond Fenix, Rio2 aspires to be a consolidator in the fragmented Latin American gold development space. The company believes there are a number of stranded assets in the region that could be unlocked by applying its skill set in permitting, construction and community relations.

Chile in particular is ripe for consolidation. "If you look at the gold mining industry in Chile - Kinross, Gold Fields, Rio2, and Pan American Silver -- Chile last year produced one million ounces of gold," noted Black. "I think there's a consolidation opportunity for Rio2 to consolidate projects and become something that somebody else will walk into and go 'great, we've got an entree and a big base in Chile.'"

While Rio2 is likely to be coveted by growth-hungry producers once Fenix hits its stride, the company appears equally well positioned to build a multi-asset platform that would warrant a premium takeout multiple. Either way, investors stand to be rewarded.

Conclusion

Rio2 offers a unique investment proposition in the junior gold space. The company's Fenix Gold Project is substantially de-risked and on the cusp of construction, providing a short runway to first cash flow. Meanwhile, the asset's expansion potential and organic/external growth options provide multiple avenues to build value over time. With a proven management team at the helm and a compelling valuation disconnect, Rio2 could be a stock to watch.

The Investment Thesis for Rio2

• Imminent Re-Rating: Rio2 trades at a steep discount to peers at 0.25x NPV despite a significantly de-risked, fully permitted and financed project. Expect substantial re-rating potential as Fenix advances through construction in 2023.
• Rapid Path to Production: First gold pour is expected within 12 months, providing near-term cash flow and eliminating financing overhang concerns.
• Organic Growth Potential: Fenix is a robust standalone starter mine, but the real prize is expanding to 80,000 tpd and 300,000 oz/yr in short order. Studies are underway.
• Consolidation Platform: Rio2 aspires to be an acquirer and consolidator of stranded gold projects in Latin America, building a portfolio that would command a premium in an eventual exit.
• Proven Management: CEO Alex Black and team have done this before, building Rio Alto into a 225,000 oz/yr producer and selling for $1.2B in 2015. They know how to build value and maximize returns for shareholders.
• Macro Tailwinds: Gold is in a bull market, recently hitting all-time highs. Producers need to replenish depleted reserves, making near-term developers like Rio increasingly sought after. The industry is ripe for consolidation.

Macro Thematic Analysis

The gold market is in the midst of a powerful bull run, with prices recently surging to all-time highs above $2,700 per ounce. This move has been driven by a confluence of factors, including persistent inflation concerns, geopolitical uncertainty, and a weakening US dollar. Many analysts believe we are in the early innings of a secular bull market in precious metals.

This macro backdrop is highly constructive for gold miners, particularly those on the cusp of production like Rio2. As the bull market progresses, producers will be increasingly hungry to replenish depleted gold reserves by acquiring developers with quality projects. This should lead to intense competition for a limited number of attractive late-stage assets, boding well for Rio2 as it brings Fenix online over the next 12 months.

The gold industry is also ripe for consolidation after a decade of underinvestment. With few new discoveries and even fewer projects being advanced to production, the sector is highly fragmented and in need of rationalization. Rio2 aims to be a consolidator in Latin America, a region Rio2 CEO Alex Black believes is particularly underexplored and rich with opportunity.

With a rising gold price fueling M&A and consolidation, Rio2 appears well positioned to build a portfolio of assets that would command a healthy premium in an eventual sale. Near-term production from Fenix will provide the currency to transact.

Key Takeaway

Rio2 represents a uniquely compelling opportunity in the junior gold sector. The company is significantly undervalued relative to peers despite having a substantially de-risked project that will be in production in short order. With over US$60 million in cash and a market cap of just US$200 million, Rio2 has ample currency to transact and a compelling valuation arbitrage to exploit. As Fenix advances through construction and begins generating cash flow, the company will be well positioned to build an attractive acquisition pipeline.

With gold prices hitting all-time highs and industry consolidation accelerating, advanced-stage projects like Fenix are in high demand as producers race to replenish depleted reserves. Rio2 offers substantial leverage to a rising gold price and M&A premiums. As Fenix de-risks further and the company executes on its strategic vision, Rio2 appears poised for a material re-rating, a unique combination of imminent cash flow, and expansive blue sky in a rapidly evolving gold bull market.