Mike Jones of T.H. Hoare & Co. has taken a shine to
In a research report, the analyst notes that the open-pit mine, which opened in early 1998, is now Europe’s largest gold producer. He also points out that, after just 11 months, the mine was producing at the rate of 100,000 oz. per year at cash costs well below US$190 per oz.
Production comes from the Boinas West, Boinas East and El Valle Main deposits. Under the criteria laid out by the Australian Joint Ore Reserves Committee (JORC), proven and probable reserves stand at 4.6 million tonnes grading 4.85 grams gold per tonne, equivalent to about 727,850 contained ounces. Reserves and resources weigh in at 18.7 million tonnes averaging 3.72 grams gold, including underground resources beneath the pits.
The opening of El Valle revived a district that had been mined extensively during the Roman era. The operation lies on an anticline dotted by old Roman workings and on which at least five targets similar to El Valle have been developed.
“Regional drilling in the next couple of years could add several more satellites to extend the life of El Valle, or may even spawn another full minesite,” Jones writes. “One deposit, Carles, is already scheduled to supplement the El Valle ore, commencing in 1999 at a rate of about 25,000 oz. per annum.”
Both Carles and El Valle have underground potential that could extend the life of the operation. At El Valle, high-grade zones have been identified beneath the Boinas East pit. Jones notes that the extension of these zones at depth could add “several hundred thousand ounces at grades of between 8 and 10 grams per tonne.” The access drive, ramp and basic infrastructure are already in place and mining underground could begin in about three years.
Jones also notes the presence of two parallel trends “which have been much more prolific in terms of Roman mining than the Rio Narcea trend.” Of these, the Navelgas belt hosts more than 40 occurrences of major Roman mining operations. “This belt and the adjacent Oscos belt hold considerable excitement for exploration,” he adds.
Jones recommends Rio Narcea as a buy, pointing out that its low price is not justified considering its expansion plans and exploration potential. At the time of Jones report, the company’s shares had tumbled to 60 cents from the $2.65-per-share level of its last financing, in late 1998. It has since rebounded to about $1.
The weak gold market and declining share price prompted the Toronto Stock Exchange to drop the producer from its 300 index. Also working against Rio Narcea were: a poor fourth quarter; a downward restating of reserves to the JORC code; an overhanging block of shares; and its debt load.
Jones notes that Rio Narcea’s weak cash position partially reflects accelerated stripping costs last year. However, the US$20 million the company spent on stripping will be offset next year by the reimbursement, through grants, of almost US$7 million.
The company has a debt of US$25 million, which is scheduled to be paid by the fall of 2002 with a grace period of one year. “Discussions regarding the restructuring of the debt are understood to be at an advanced stage, where the repayment schedule will be adjusted to match the forecast cashflow from the mine,” Jones says.
Cashflow from El Valle this year is expected to exceed US$13 million. After factoring in grants, Jones says, only US$6 million will be available for debt repayment (all from grants).
By 2000, however, cash flow is expected to increase to US$14 million as production increases to 130,000 oz. annually. Cash available for debt repayment would increase to US$8 million, or US$10.2 million once grants are included.
Jones expects the Corcoeso deposit, in the nearby Malpica gold belt, to be developed by 2001 as a stand-alone, heap-leach mine capable of producing 40,000 oz. per year at less than US$180 per oz. For an investment of US$7 million, Rio Narcea’s total production would increase to 170,000 oz. per year — a 70% increase over three years.
Looking ahead, Jones sees exploration upside for Rio Narcea. “The high potential historic gold belts of Navelgas and Oscos have hardly been touched for the past 1,800 years, and Rio Narcea’s dominant land position there could allow it to grow exponentially,” he writes.
Jones cautions, however, that Rio Narcea still faces two risks: the restructuring of bank financing during a time of weak gold prices, and the proposed sale of an outstanding block of shares, which may cap any rise in share price.
On the operations side, he warns that dilution and grade control must be kept in check to achieve Rio Narcea’s annual production goal.
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