Rio Narcea trims hedge book

Financially stronger and bullish on gold, Rio Narcea Gold Mines (RNG-T) has sold all of its call options maturing in 2003 onwards.

In late 2000, Rio borrowed US$24 million to replace existing loans that were arranged three years prior to complete construction of the El Valle mine in Spain. As part of the deal, the miner had to protect 70% of futre production at an average floor price of US$280 per oz. and 50% at an average ceiling price of US$365 per oz.

The recent restructuring eliminates 58,244 ounces of the remaining calls, leaving the company with 20,778 ounces to settle by the end of the current year. Puts on 111,014 ounces of future production through to 2006 remain on the books, as does 14,255 ounces in forward sales at an average price of US$301 per oz.

In addition to El Valle, Rio operates the Carls mine in Portugal. In 2001, the mines produced a combined 124,363 ounces at a cash cost of about US$190 per ounce.

In 2002, Rio expects the mines to crank out 155,000 ounces of gold at less than US$150 per oz. This is better than previously forecast, reflecting record production in May, owing to higher grades in El Valle’s Charnela zone. Combined with higher bullion prices, this should translate into higher cash flows and other financial benefits for the miner.

Rio also is making headway at two in southwestern and northwestern Spain, with an independent bankable feasibility study nearing completion at the Aguablanca nickel-copper project and another having begun at the Corcoesto gold project. Both studies are being carried out by MDM of South Africa.

Using a cutoff grade of 0.2% nickel, previous operators had pegged Aguablanca with a resource of 28.4 million tonnes grading 0.67% nickel and 0.49% copper, plus platinum group metals, gold and cobalt. According to Rio, the resource can support an open-pit mine for 11 years at an annual milling rate of 1.5 million tonnes.

Capital expenditures are expected to ring in at around US$52 million and cash costs at US80per lb., net of byproduct credits. These translate into an internal rate of return of 35% and a net present value of US$97 million, inclusive of taxes and assuming at a 5% discount rate.

The economic projections are based on an average nickel price of US$2.70 per lb. and an average copper price of US77 per lb. Recent spot prices for the former are considerably higher, but slightly lower in the case of the latter.

At Corcoesto, in the centre of the Malpica gold belt, 215 km northwest of El Valle, measured and indicated resources stand at 3.9 million tonnes averaging 1.54 grams gold per tonne. Another 3.7 million tonnes grading 1.53 grams is classified as a resource.

An internal scoping study envisages an open-pit, heap-leach operation that transports loaded carbon to El Valle for refinement into dor bars. The plant also refines ore from Carls, which will become the smallest of the three operations with the addition of Corcoesto.

Annual production is projected at 30,000 ounces and cash costs at US$179 per oz. This may be achieved with a capital infusion as little as US$6 million.

Gold mineralization at Corcoesto is spread among five zones hosted by a well-developed, sheeted quartz-vein system that formed large silica-rich envelops in altered metamorphic rocks. Recoveries from clay-free material are expected to average 76%.

The deposits are defined by 16.3 km of trenching and 15,481 metres of drilling in 127 core holes. Three-quarters of the drilling was carried out by previous operators.

Final environmental and mining permits are pending.