Rio Narcea trims debt (July 15, 2002)

Junior Rio Narcea Gold Mines (RNG-T) has taken a step towards financial freedom by repaying a multi-million-dollar credit facility with Deutsche Bank.

The repayment, which comes three years earlier than required, wipes US$4 million of debt off the books and eliminates US$420,000 in annual interest payments that would have been due otherwise. On March 31, Rio had US$24.4 million in long-term debt and liabilities, mostly to Deutsche, and a working capital deficiency of US$4.5 million.

The repayment also adds $6.1 million in gross proceeds to Rio’s account. The bank exercised 5.8 million Rio options, which were granted as part of the financing terms, and has since sold the resulting shares to institutional investors.

Rio arranged the credit facility a year ago in order to buy the advanced Aguablanca nickel-copper project in southern Spain. Some of the proceeds were used to launch a 13,000-metre infill drilling program and concurrent feasibility study.

Between 1993 and 1996, then-owner Rio Tinto (RTP-N) sank 32,000 metres into Aguablanca to outline a resource of 28.4 million tonnes grading 0.67% nickel and 0.49% copper, plus platinum group metals. Most of the material was classified as measured and indicated, and at least 17 million tonnes are expected to be bumped up to reserve status.

According to an in-house study, Aguablanca can produce 9,080 tonnes nickel- and 6,810 tonnes copper-in-concentrate annually over 11 years. Cash costs are expected to average US$1,762 per tonne nickel, net of byproduct credits.

The envisaged operation has a net present value of US$97 million or US$61 million, depending on whether a 5% or 10% discount rate is used. Both projections assume capital costs of US$52 million, average exchange ratios of E1.05-to-US$1 and metal prices of US$5,947 per tonne nickel and US$1,696 per tonne copper. The internal rate of return is 35%.

The independent study, which is expected to wrap shortly, incorporates drill results from both companies (16% of the open-pit material used in the internal scoping study came from the inferred category).

Rio Narcea currently produces gold at its El Valle and Carls open-pit mines in northern Spain, where record quarterly output was achieved in the second quarter. In total, 202,783 tonnes averaging 9.86 grams per tonne were processed into 61,674 oz. of dor — 146% more than was produced in the first three months of the year.

Rio attributes the increase to unexpectedly high grades in El Valle’s Charnela zone and higher recovery rates. Mining of Charnela began in March, and recovery rates averaged 96% in the recent quarter, or 1.9% more than in the first quarter.

Rio Narcea now expects to produce more than 160,000 oz. in 2002, or 10,000 oz. more than initially planned. Operating costs for the second quarter are still unknown; however, for the year, they should come in at less than US$150 per oz., or 6% lower than originally forecast.

Rio now has just under 71.5 million shares issued and outstanding. The largest shareholder is NTC Trust, which holds 19.8% and counts Rio Narcea Chairman Chris von Christierson among its granters.