Record production powers Rio Narcea turnaround

Paced by record gold production from its El Valle mine in Spain, Rio Narcea Gold Mines (RNG-T) staged an impressive turnaround to end 2002 with net earnings of US$9.7 million.

The earnings translate into US13 per share, and compare with a year-ago net loss of US$3.7 million or 6 per share. Revenue between the two periods soared 63.5% to $55.5 million. Cash flow from operations reversed course to the tune of US$14.1 million to the good, compared with the $916,900 consumed in 2001.

During the year, El Valle churned out a record 177,225 oz. of gold at a cash cost of US$143 each. A year earlier production topped out at a then-record 124,363 oz. at US$219 apiece. The company attributes the increase to higher-grade production from the Charnela zone at El Valle combined with improved mill performance.

During 2002 the plant at El Valle processed 753,411 tonnes of ore with an average head grade of 7.75 grams gold per tonne. That throughput included 97,000 tonnes of ore (running 4.65 grams gold and 0.77% copper) from the Carls open-pit mine. Recoveries climbed to 94.4% from 91.2% in 2001.

The company sold its 2002 production for an average of US$307 per oz., up from US$263 per oz. the previous year thanks to a higher average spot price and a smaller loss on foreign exchange hedging.

For the fourth quarter, Rio’s net earnings tallied to just short of US$2.7 million (or 3 per share), compared with a year-earlier loss of about US$2.2 million (3 a share). Revenues climbed by US$5.3 million to US$15.2 million, and cash flow shot up to US$5 million from US$346,600.

Production during the final quarter of 2002 tipped the scales at 42,405 oz. at US$143 per oz., up from 34,543 oz. at US$166 per oz. a year earlier.

Looking ahead, the company expects to pour more than 155,000 oz. of gold at US$135 apiece during 2003. Plans call for 150,000 tonnes of ore to come from the Carls mine.

On the exploration front, Rio Narcea plans to focus a US$4.4-million program on reserve replacement and resource conversion at El Valle. A feasibility study at Corcoesto heap-leach gold project, west of El Valle and Carls, is slated for completion by mid-2003. The study includes an ongoing 10,000-metre infill-drilling program aimed at converting resources to reserves.

Rio also plans an evaluation of the Lugo gold properties where it has signed on to earn a 70% interest from Outokumpu.

Turning to nickel, the company expects to begin construction at its Aguablanca project in southwestern Spain by the first quarter of 2004. Final mining permits are expected shortly. A long-term concentrate offtake agreement has been arranged with Swiss commodity trader Glencore International.

Over an estimated 10.5-year mine life, Aguablanca is pegged to produce 9,080 tonnes nickel, 6,810 tonnes copper and 25,000 oz. platinum group metals in concentrate annually.

Capital costs are forecast at US$64.1 million; the net present value is US$106 million at a 5% discount rate and a nickel price of US$2.99 per lb.

Construction will gear up once the project loan facility and final mining permits are in hand. Capital expenditures for the year are put at US$62.5 million. Another US$3 million has been set aside for nickel exploration in the region.

Earlier this year, the company further reduced its hedge book by closing out 82,736 ounces covered under gold calls priced at US$437per oz. In the end, Rio was left with 111,418 ounces under calls at the same price through to mid-2005. A small forward sales contract covers 13,647 ounces at US$301 per oz. through 2006.

The company maintains downside protection with puts priced at US$280 and US$324 per oz. on about 70% of the planned production from El Valle and Carls through 2006.

The hedging program is not subject to margin requirements.

At the end of 2002, Rio’s cash and equivalents had grown to about US$7.7 million; its long-term debt had shrunken to US$13.6 million.