Rio2 (RIO) - Systematic Gold Development Continues

While many gold players are following a very obvious methodology, some are treading a different path. Let’s take Chilean gold developer, Rio2. (TSX-V: RIO), for instance: with a more-than-quadrupled share price this year, in spite of problems associated with naked shorting and water supply (now resolved), investors might be expecting to hear the management team shouting from the rooftops. This hasn’t happened and some investors are wondering why. 

CEO, Alex Black, doesn’t come across as a typical salesman like some mining CEOs. Instead, he seems like a straight talker who is keen to hit deliverables rather than just talking about them. This perhaps goes some way towards explaining the muted strategy that is currently being deployed by his company. If investors are familiar with the development strategy Black has executed thus far, the lack of publicity surrounding the company will come as less of a surprise.

Black runs Rio2 pragmatically, and it could be argued that this has sometimes been to the detriment of the company’s share price performance. He has been keen to avoid overpromising and underdelivering, but this is never a strategy that is going to appeal to everyone straight away. Rightly or wrongly, some have viewed this pragmatism as a lack of ambition. When Black first took the helm, he halved the size of the mine plan of Rio2’s flagship Fenix Gold Project in its revised Pre-Feasibility Study (PFS). Some investors were left disappointed, having expected to see more gold immediately. Others saw the possibility that this decision could be prudent in the long run. Let’s quickly touch on the initial potential of Fenix, as referenced in the September 2019 PFS (base case US$1,300oz gold):

• Proven & Probable Mineral Reserves: 1.83Moz grading 0.49g/t gold. High grade to leach pad: 81.9Mt grading 0.57g/t gold, and low grade to stockpile: 33.1Mt grading 0.30g/t gold.
• After-Tax Life-Of-Mine (LOM) Cumulative Cash Flow: $222M
• LOM Average AISC: $997/oz
• LOM Gold Production: 1.37Moz. This breaks down into an average of 93,000oz in the initial 13-years, with 50,000oz in the final 3-years.
• After-Tax NPV(5%): $121M. At a gold price of $1,500/oz, this rises to $241M.
• 27.4% internal rate of return ("IRR") (44.3% at $1,500 per oz gold)
• Capital costs of $111M with LOM sustaining capital costs of $95M
• Construction currently targeted for Q4/21 and first gold production in Q4/22
• 16-year mine life at initial 20,000 tpd mining rate with expansion potential subject to additional water options and changes to the gold price

Black's decision to “reimagine” the company was made in an attempt to get Rio2 into production as quickly as possible. With a gold price that briefly exceeded US$2,000/oz and now hovers above US$1,900/oz, he appears cognisant of the fact that this bull environment may not last forever, and he wants to provide investors exposure to these market conditions while they are still here. By reducing the scale of the mine plan by 50%, the CAPEX has been meaningfully reduced and the company’s path to production has been both accelerated and clarified. Black himself is quoted as stating that this move was done in the interests of “shortening the timeline to construction/production, simplifying the approval process and permitting of the project, lowering initial capex, concentrating on higher grades during early years of production and optimally minimizing the initial strip ratio.” In terms of the water supply issue, Black has remarked that Rio2 “thought outside of the box to arrive at an innovative solution of trucking water to the project with the sole purpose of fast-tracking and simplifying the approvals process and permitting of the project.” When the Fenix Gold Project achieves commercial production, “it will be the only gold oxide heap leach gold mine in operation in Chile.”

Once the Fenix Gold Project is producing ounces, Rio2 can finance project expansion and/or M&A via cash flow or by selling the asset to a major. There haven’t been many press releases coming out of the company recently, but the share price has remained steadily accretive. Investors appear to be buying into the reliable progression that Rio2 has so far delivered. Let’s take a look at exactly what the company has been doing over the last few months.

Back mid-May, the company made some key administrative changes. It attempted to strengthen its Fenix Gold Project management team via the acquisition of Flavio Fuentes as Manger, Legal and Permitting, and Edgardo Briones Landauro as Construction Manager. One thing these 2 individuals clearly bring to the company is experience; Oliveres has over 20-years of experience in the mining industry, and Landauro has 20-years of civil engineering and mining experience working on both greenfield and brownfield projects. These optimisations to the management team remain indicative of the wider strategy: gradual, systematic process towards Fenix’s EIA review and eventual construction, which is currently guided for Q4/21.

Effective as of 15th August 2020, Rio2 has implement an alliancing-style commercial framework with 3 lead contractors. This plan is based on the project configuration, mine plan, methodologies and productivity estimate assumptions detailed in the PFS.

HLC Ingeniería y Construcción (HLC) will serve as the process plant/site infrastructure construction contractor, taking responsibility for the design and construction of the primary crushing and stockpile circuit, ADR plant and water facilities, lime dosing and leach pad pumping circuit, workshop, warehousing, onsite offices and dining facilities, onsite power generation and distribution.

Anddes Asociados has been appointed as the leach pad and civil design contractor and will take control of the engineering design for all civil earthworks, including access roads, water controls, infrastructure platforms, leach pad and ponds, waste dump and stockpiles. It is also tasked with providing site-based supervision of all civil works including quality control and assurance.

Lastly, STRACON has been appointed as the civil earthmoving and construction contractor, and will responsible for all earthmoving and associated activities, all road maintenance and construction, building and infrastructure platforms, pad and pond construction, waste dump and stockpile preparation, water controls, water transport for construction purposes and various support services to HLC and Anddes as required.

Investors who actively follow the Rio2 story will be aware that STRACON was already appointed as Rio2’s lead mining contractor back in July, and these new services will be added to their existing responsibilities. Headquartered in Peru, STRACON was founded in 2011 and is a leading provider of contract mining and construction services throughout the Americas. Rio2’s payment model for STRACON includes the reimbursement of 100% of STRACON's project costs plus corporate overheads and profits. It will take the form of a 'KPI-based regime' that provides rewards for strong performance levels and punishes poor performance levels.

To find out more about Rio2, go to the Rio2 website.