Rio2 ( RIO) - EIA Recommendation Explained. Vote is Friday

Rio2 Limited is a mining company with a focus on development and mining operations with a team that has proven technical skills as well as a successful capital markets track record. Rio2 is focused on taking its Fenix Gold Project in Chile to production in the shortest possible time frame based on a staged development strategy. In addition to the Fenix Gold Project, Rio2 continues to pursue strategic acquisitions where it can deploy its operational excellence and responsible mining practices to build a multi-asset, multi-jurisdiction, precious metals company.

Matt Gordon caught up with Alex Black, President, CEO, and Non-Independent Director, Rio2. Mr. Black has over 40 years of experience in the mining industry. He is the Founder of Rio2 and has been the Director, President, and CEO of the company since 2016. Alex is also a member of the company’s health, safety and community committee. Mr. Black commenced his career in the mining industry in Kalgoorlie, Western Australia in 1981. From 1990 to 2000, Mr. Black was the Founder and Managing Director of the Australia-based international mining consulting services group Global Mining Services.

In 1996, Mr. Black also founded and was Chairman of OFEX-listen AGR Limited with exploration projects in Ghana (The Salman Gold Project) and Mongolia (Boroo Gold Project). In 2002, he took control of Chariot Resources Limited as a listed TSX-V shell and played a key role in the acquisition of the Mina Justa Copper Project and the formation of the Korean joint venture with Chariot Resources. Following his departure from the company, he founded Rio Alto S.A.C.

In 2009 after successfully negotiating the acquisition of the La Arena Gold Project from Iamgold Corp, Rio Alto S.A.C. was acquired by Mexican Silver Mines and renamed Rio Alto Mining Limited. In 2014, Rio Alto also completed the successful acquisition of Sulliden Gold and the Sahuindo Gold Project for CAD$300M. Mr. Black, as President and CEO of Rio Alto Mining Limited, and his experienced team built Rio Alto from a CAD$12M company in 2009 to a CAD$1.2Bn company in 2015 at the time of the acquisition by Tahoe Resources Inc.

Company Overview

Rio2 is a mining development, and operations company. The company was founded in 1990 and is headquartered in Vancouver, Canada. Fenix Gold Limitada, Rio2 Exploraciones S.A.C and Lince S.A are the company's subsidiaries. The company is listed on the Toronto Stock Exchange (TSX-V: RIO), the OTC Markets (OTCQX: RIOFF), and the Lima Stock Exchange (BVL: RIO).

Rio2 had planned to publish an EIA (Environmental Impact Assessment) report on the Fenix Gold Project in 2022, however, there was a recent recommendation by SEA (Strategic Environmental Assessment), an Environmental Evaluation Group. A meeting will be held next Friday in Copiapo, Chile where various regional ministry representatives will vote on the recommendation. Notably, all the work related to environmental impact studies and approvals is done at the regional level. Chile decentralised the process years ago, making the analysis, approval, and interrogation of the environmental studies a regional responsibility.

Interestingly, the national body of SEA was brought in at the last minute to oversee the decision made by the Regional SEA. This was a key turning point in the process. SEA National had no involvement in the process for the past 3 years. The entity has made observations outside the observation period. It is important to note that the company had already been through a 3-stage observation period as part of the EIA process. The final decision by the National SEA was made outside of this period and as a result, a recommendation was made to the Regional SEA against the EIA approval.

The company took all the necessary steps including indigenous consultation for the EIA. It also devised an alternate water sourcing strategy where the water would be trucked from Copiapo instead of using the groundwater. There were no objections by the Regional SEA to trucking the water. Furthermore, the agency did not have any objections in relation to the project’s technical aspects either. However, the EIA was stalled due to the chinchillas.

According to the company, the current issue is a result of a 2-year-old incident. Gold Fields had identified a population of chinchillas at the Salares Norte project and the relocation of these animals was agreed upon. Unfortunately, during the move, 2 of the chinchillas died, causing a host of problems. Since this incident, the SEA has been highly sensitive regarding the protection of the chinchilla population. Rio2 believes that this incident has led to the focus of this observation outside of the standard process. As per the company, the current issue is mainly because of the chinchillas and camelids found within the project’s vicinity.

It is important to note that the company had already conducted extensive studies on both chinchillas and camelids and found no significant impact. It finalised the third observation in April 2022, stating that there is no significant impact on the flora or fauna in relation to the project. These findings were a result of the work carried out by the company over a 3 year period.

The EIA Process

In July 2018, Rio2 acquired Atacama Pacific and started working on the project. In November, the company commenced the Impact Baseline Study. The area was interrogated and the impact of the project was analysed. During the process, the company successfully completed a PFS (Preliminary Feasibility Study) in September 2019. Since then, the company has carried out a detailed engineering study, taking the project to the feasibility stage. At this point, the company started working with its bankers and financiers.

The company carried out extensive environment-related work over a 2 year period and filed the EIA in April 2020. Unfortunately, the pandemic hit, and the process underwent a 7-month hiatus as the SEA’s new mandate was to work from home. As a result of this change, the agency did not process new applications for any project. The company had to wait for its application to be processed which was finally restarted in November 2020. Since then, there have been 3 observation periods that were mandated by the process. The EIA Baseline Study was conducted over a 16-month period before the study was completed. At this time, the company did not find any chinchillas in the project’s zone of influence.

During the first observation period, the SEA recommended that Rio2 set up camera traps in the project area and report back. Initially, the company was advised to observe the cameras for a 7-day period, which was later increased to 30 days. The company carried out the observation for 60 days. During this 60-day period, the company did not observe any chinchillas in the project’s area of influence.

In the second observation period, the SEA asked the company to extend the observation outside the area of the project’s influence. The company carried out 30 days of observations outside the area and found one chinchilla in the West Valley. This area featured the company’s truck workshop. Notably, this area lay outside the project’s zone of influence. The entire process was well-documented.

During the third observation period, the SEA Regional did not ask any additional questions regarding the chinchillas. It asked the company to set up additional camera traps. The company observed 19 more chinchillas in the valley outside the project area. This was documented and was included as part of the EIA process.

A chinchilla is a small furry animal that does not live in high-altitude regions. The species is found in protected areas such as valleys and often lives around areas of vegetation. The company’s plant site is located at the lowest point in the project’s area of influence, which is 4,350m above sea level. The pit is located 4,900m above sea level and chinchillas don’t typically go to these elevations. The company did not observe any chinchillas at these elevations within the project area. The chinchillas were found at lower altitudes in an area that wasn’t impacted by the project. This event was covered by Mark Turner from IKN News who wrote several good pieces on the development.

Next, the company started looking for camelids that are known to have a presence in the region. The company’s project is located 3.5km from the Tres Cruces National park that covers the Maricunga Salar towards the east of the project. The project is located close to the Salar where camelids are known to congregate due to the presence of wetlands and water sources. The Salar is 3,750m above sea level, while the project is located at a much higher elevation, between 4,400m-4,900m.

Camelids are migratory animals that are known to pass through places. The company carried out 9 observation campaigns between November 2018 and January 2022. During these campaigns, the company observed camelids. It asked the SEA for advice and was given 2 options, either put a GPS collar on the camelids or visually monitor them.

Rio2 hired a camelid expert and also engaged a chinchilla expert. The expert said that putting GPS collars on camelids is not only challenging but is also stressful for the animal. This might make the animal behave in unconventional ways due to the trauma of being captured and fitted with a collar.

The expert recommended visual monitoring as the best course of action. The same advice was also given by an independent expert recommended by the SEA. As camelids are migratory species, they were seen crossing the access road to the project. The access road is part of the area of influence but not at the project’s location. It is important to note that the project is located at a much higher elevation while the camelids were observed at 4,200m. None of the camelids were seen in the project area.

Through the 9 observation campaigns and expert engagement, the company deduced that there was no significant impact caused to the camelids as a result of the project. Furthermore, the company put its staff members on alert to be respectful and careful of camelids if they are seen along the access road.

During the third observation period, the SEA agreed that there isn’t any significant impact on either chinchillas or camelids. The company was prepared to carry out construction at the project for the life of the mine while continuing to monitor the camelids and report the information to the SEA. Camelids have been widely studied in the area due to the Salar. As a result, there is extensive data available in the public domain and the environmental domain on the animal’s behaviour and habitat.

The company found that there was no significant impact on either flora or fauna within the project’s area of influence. The third observation period was concluded on 25th April 2022. This process led to the June 22 meeting last week where the National SEA made its recommendation.

The Voting Process

Alex Black, the company’s CEO stands by his team and has complete confidence in their abilities. The company did everything that it was asked to do including the engagement of independent experts. The company is currently waiting for the voting among the various parties involved in the process. This includes the SEA, the Ministry of Agriculture, the Ministry of Economy, and the Ministry of Mines. Notably, these entities are involved at a regional level.

Following the end of the third observation period, the National SEA got involved in the process and made additional observations about the camelids and the chinchillas. As per the company, the National SEA was not involved in the process and ended up making a last-minute review. The voting will take place on 7th July 2022. The company has analysed at least half a dozen incidents where the recommendations made by the National SEA have been negative while the voting resulted in a positive decision.

Rio2 is working with its lawyers and consultants to establish whether the precedent has occurred in the past. The company has followed the due process as instructed by the Regional SEA and found that the chinchillas and camelids were not impacted by the project.

During the voting process, Rio2 will be in attendance along with its consultants and legal counsel. All the groups involved in the process will also be present at the proceedings. Notably, the National SEA won’t be present, but the Regional SEA is expected to be present as this is a regional issue. In essence, next week’s vote will be cast by regional entities.

The company anticipates that Regional SEA and the Agricultural Ministry won’t vote in favour as they are directly connected to the region’s flora and fauna. The company is looking to control what it can on the ground and is working with lawyers and independent consultants to put together its case. On the lobbying side, the company has several allies within the Atacama region including the Governor. Although the Governor cannot cast a vote, he is an ally that can still lobby in the company’s favour.

A total of 11 votes will be cast on Friday. There are 2 groups that come under agriculture, namely CONAF (The National Forest Corporation or Corporación Nacional Forestal) and SAG (Servicio Agrícola y Ganadero). The SEA will also cast its vote. Notably, the Governor of the Atacama region, the Presidential Delegate of the Atacama region, and Corproda, a business group within the region are all up in arms about this recommendation.

According to the company, this development has sent shockwaves through the mining industry. There have been no red flags with respect to the company’s project so far, whether it's social, technical, water, or other aspects. According to a recent press release by Rio2, the Regional SEA had reported back and said that the company has done everything needed within the environmental process to be awarded the various permits required for the project. However, the process was interrupted by the National SEA’s observation.

The company is trying to resurrect the issue because Chile has been a favourable jurisdiction to conduct operations so far. The country is a great place for business and has been highly transparent. The company is focusing on making this project a success.

In the best-case scenario, the company is hoping to get 6 votes in favour of the EIA. Once the EIA is awarded, the decision cannot be appealed by the participating government bodies. Individuals can still appeal against the decision but the company anticipates that this is highly unlikely. Notably, the votes will be cast on the EIA in its totality and aren’t based on a specific issue. It is highly unlikely that other groups can raise different issues because the company has already received 8 letters of support from different groups prior to the current development.

If the majority vote is against the EIA, the company has plans to enter discussions with the SEA and address any concerns the governing body has regarding the protection of the animals. The company is still trying to work this out, that there might be an amendment to the EIA to include the requested portion of the report. Following this, the company would need to refile the EIA.

It is important to note that if the company has to refile the EIA, it won’t have to start from scratch. It wouldn’t need to carry out the social and technical studies again. 95% of the process has already been done, it would only need to redo 5% of the process in relation to the fauna. The company is also looking at a middle ground where it might be granted conditional approval which would be subjected to additional work. The company anticipates that the additional work could take a few months.

In the 3 possible outcomes, the company is confident that it won’t need to suspend operations and that the project will continue. Even in the worst-case scenario, the company is open to resurrecting the project in one way or the other, but it is currently awaiting the voting decision. Since Rio2 is a single-asset company, the delays are bound to impact timelines and finances.

Rio2 is fully-financed through to production. The company has a deal with Wheaton Precious Metals Corp. Wheaton is known to fund projects all around the world and has experienced worse cases than the current one. As per Rio2, the team at Wheaton is practical and technical in its approach. Wheaton has been highly supportive of the company.  Rio2 is confident that Wheaton Precious Metals will be supportive regardless of the final decision.

Rio2 is also working with BNP Paribas and SocGen (Societe Generale) on the senior secured debt. The debt will come into place once the company acquires the construction permits, and the companies will not be impacted by the recent development. Both companies have completed the technical due diligence on the project and are satisfied with the findings. The companies are currently working on the project’s financial models.

Cash Position

Rio2 is looking to divert all the funds towards attaining a resolution to the current situation. The company has been in the pre-construction phase and recently finished building a camp which was inaugurated 2 weeks ago. It has also completed the fabrication of the tanks that are required for leaching. These tanks need to be trucked to the project site. The building that will envelop the processing plant is at the company’s infrastructure site at Lindsay.

The foundation for the plant has already been laid at the infrastructure site. The company has carried out extensive work in order to prepare for the project. It would need to stop the spending for the time being until a decision on the observation is reached. It has ordered the required lead items, gensets, and other materials that are currently in transit. It is currently looking to determine the aspects of the project that can be stalled for the time being. The company is looking to figure out the ideal aspects of the project to which it should devote its time and resources. Based on the time period of the decision, the company will also need to revisit the GNA (Good Neighbour Agreement). It would need to carry out the analysis, however, it is currently waiting for the decision. Rio2 currently has $15M in current cash flow.

Following the announcement by the National SEA, Rio2’s stock took a hit and went from $0.55c to $0.22c in a single day. Notably, the company's stock holdings are dominated by retail investors. It has received overwhelming support from people through text messages, and emails. The company has had discussions with all large shareholders including ex-Sprotts. These shareholders have been highly supportive, and are sticking with the company throughout the process.

The sell-off that led to the stock drop was expected. The company was the front runner in Chilean news and it decided to publish the press release the very next day in order to provide an official response to the SEA observation. Due to the governance and regulatory rules, the company is currently in a blackout until the Friday vote is cast. During this time, the company or its insiders cannot buy or sell shares. Notably, there is a lot of work being done in the background on the political and technical side in preparation for Friday’s meeting.

The company expects the technical aspect of the project to be at the beginning of the meeting. It might be asked to leave the meeting at this point. A decision will be made by the end of Friday’s business day. The company will release the results of the voting by Monday. The company is determined to not give up and get the EIA approved either by Friday or through a conditional process.

To find out more, go to the Rio2 website