BASE METALS SPECIAL — Rio Algom launches 3-pronged growth strategy

The new president of Rio Algom (RIO-T) has launched a 3-pronged growth strategy for the diversified producer and distributor of base metals.

“We will look like a different company one year from now,” Lawrie Reinertson told a group of Toronto mining analysts.

Before outlining plans for the future, Reinertson acknowledged the performance of previous managers who led the company into new areas of growth beyond its 1950s roots in uranium mining at Elliot Lake, Ont.

Even so, the company’s somewhat stodgy image has masked the revitalization and growth that took place, particularly after former parent RTZ sold out its stake in 1991. Since then, the company has doubled base metal production and branched out into other parts of the world. Last year, it gained access to the U.S. debt market for the first time, borrowing US$150 million to fund new projects.

Currently, 62% of the company’s operating profit comes from mines. These assets include: a 33.6% interest in the huge Highland Valley copper mine in British Columbia; the Cerro Colorado copper mine in Chile; the Stanleigh uranium mine at Elliot Lake; a 29.1% interest in the Bullmoose coal operation in British Columbia; and a 25% royalty interest in the Polaris zinc mine in the Canadian Arctic.

About 38% of operating profit comes from the metals distribution business.

The uranium mine at Elliot Lake is closing this month, though Rio Algom plans to stay in the game through its wholly owned, fully permitted Smith Ranch property in Wyoming.

This deposit contains more than 60 million lb. of uranium reserves and resources, and startup is expected in September 1997. The US$47-million project is targeted to produce 2 million lb. per year at cash costs under US$11 per lb. Sales contracts are already in place for about half of the first two years of production, at prices in the range of US$17-20 per lb.

In 1995, the company’s net earnings grew by 76% to $132 million, compared with $75 million in 1994.

Looking ahead, Reinertson said the next phase of growth will continue to be global in scope, driven by increased emphasis on exploration, new acquisitions and, possibly, an expansion into smelting and refining operations. But don’t expect major changes in the commodity mix.

“Our roots will remain in uranium, zinc and copper, with an increased contribution expected from gold,” Reinertson said. “We will be intensifying our efforts in traditional areas, but with less-than-traditional methods.” Rio Algom’s gold production will mostly come from its 25% interest in Bajo de la Alumbrera in Argentina, one of the world’s largest undeveloped copper-gold deposits.

The company acquired its interest last year, and is now working to finance its share (more than US$170 million) of the estimated cost of US$798.4 million required to bring the project into production. This figure climbs to US$915 million when interest and contingency are taken into account.

Construction is already under way.

Alumbrera has reserves and resources of 766 million tonnes grading 0.5% copper and 0.3 gram gold per tonne.

Average annual production, starting in late 1997, is expected to total 180,000 tonnes of copper and 640,000 oz. gold, of which Rio’s share will be 25%. The gold will be 50% dore, and 50% from copper-gold concentrate containing 30% copper and 15 grams gold.

Gold production will be even higher in the first four years, when a higher-grade starter pit is expected to be mined. Copper and gold output will be 190,000 tonnes and 730,000 oz., respectively, with Rio’s share of gold output being 180,000 oz.

In nearby Chile, Cerro Colorado turned out more than 80 million lb. of copper cathode in 1995 using the thin-layer leach and the solvent

extraction-electrowinning process.

Production capacity was recently expanded by 50% at Cerro Colorado, and this year the operation is expected to produce in excess of 125 million lb. The US$49-million expansion is expected to reduce cash costs to US54 cents per lb.

Cerro Colorado contains 188 million tonnes grading 1.08% copper, enough for a 30-year mine life at current production rates. This year, the company intends to study the economics of a further expansion to increase annual production by 130 million lb.

Closer to home, exploration last year at Highland Valley identified a possible resource of 200 million tonnes grading 0.4% copper at depth, adjacent to the current Valley pit. The resource will be examined this year to determine its potential.

Rio Algom is involved in zinc production through its interest in the Polaris mine. A 25% royalty in the project generated cash of about $8 million in 1995. The company is also involved in a joint venture to develop a zinc-copper in Wisconsin, which is targeted to produce 175,000 tons of zinc metal in concentrate annually. The project has attracted environmental opposition despite more than 140,000 hours of environmental testing and sampling, and it may take up to 18 months to obtain all necessary permits.

Regarding acquisitions, Reinertson said opportunities are being sought independently and with partners. He refused to comment on speculation that Rio Algom is interested in taking a run at Inmet Mining (IMN-T), a base metal company with a growing presence in gold, but he acknowledges that the company itself may become increasingly attractive to some acquisition-hungry mining companies. “I suppose we would be bite-size for a few groups out there,” he said.

Over the next 18 months to two years, Rio Algom will continue efforts to double its base metals output, while increasing its presence in the gold mining sector. It also plans to investigate opportunities that would allow it to gain a stake in the smelting business.

“We don’t do any smelting now,” Reinertson said. “We have a new growth strategy, and implicit in that is that you don’t cut the process off at the concentrate-producing side.”