With its own future looking brighter and bullion prices picking up,
In late 2000, the company borrowed US$24 million from Deutsche Bank to finance work at the El Valle and Carls open-pit mines in northern Spain. The loans were arranged in order to replace loans with other banks, which were arranged three years earlier. As part of the deal, the miner had to close its existing hedge book and write a new one to ensure average floor prices of US$280 and E300 per oz. on 70% of planned production. The premiums were offset by the sale of call options representing half of future production and having average strike prices of US$365, or E405.
The recent restructuring closes out all greenback-denominated gold calls maturing in 2003 onward, representing 58,244 oz. Rio still has 20,778 oz. of calls at US$365 per oz. that mature at year-end and 248,994 oz. at E405 per oz. that mature gradually over the next 4.5 years.
Rio’s put options remain unchanged and currently cover 111,014 oz. at US$280 per oz. and 362,024 oz. at E300 per oz. Like the calls, the puts are spread over the next 4.5 years.
Rio’s hedge book concludes with forward sales of 14,255 oz. at US$301 per oz. The gold must be delivered over the same period as the options, which are not subject to margin requirements.
Meanwhile, Rio is making headway in southwestern and northwestern Spain, with an independent bankable feasibility study nearing completion at the Aguablanca massive sulphide deposit and another under way at the Corcoesto gold deposit. Both studies are being carried out by MDM of South Africa.
According to an in-house scoping study, Aguablanca can support an open-pit operation for 11 years at an annual milling rate of 1.5 million tonnes. Roughly 9,080 tonnes nickel and 6,810 tonnes copper-in-concentrate would be produced annually at a cash cost of US$1,762 per tonne nickel, net of byproduct credits.
Capital costs are expected to ring in at around US$52 million, which generates a net present value (NPV) of US$100 million at a discount rate of 5%. The NPV drops to US$61 million when the discount rate is doubled. Both amounts are based on average metal prices of US$5,947 per tonne nickel and US$1,696 per tonne copper. The internal rate of return is 35%.
Resources at Aguablanca are pegged at 28.4 million tonnes grading 0.67% nickel and 0.49% copper, plus platinum group metals. Most of the material is classified as measured and indicated.
The independent calculation is based on a cutoff grade of 0.2% nickel and the results of 32,000 metres of drilling by
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. An additional 3.7 million tonnes grading 1.53 grams are classified as a resource.
Scoping study
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 oz. and cash costs, at US$179 per oz., and Rio expects to have to invest only US$6 million upfront.
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 zones 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.
In the first three months of the year, El Valle and Carls produced a total of 25,117 oz. at a cash cost of US$194 per oz., or US$245 per oz. when depreciation, amortization and reclamation charges are included. The mines are expected to have doubled production in the second quarter, owing to higher-than-expected grades in El Valle’s Charnela zone.
Average recovery rates in the El Valle plant exceeded 96%, well above the average achieved in 2001, when 124,363 oz. were produced at a cash cost of US$185 per oz.
For all of 2002, Rio expects to crank out more than 155,000 oz. at a total cash cost of less than US$150 per oz. Nearly half of that amount was produced in the first five months, when 67,133 oz. were poured.
Higher cash flow
Combined with lower operating expenses and higher bullion prices, Rio says the production increase is translating into higher cash flow and other financial benefits. Cash flow topped US$1.8 million in the first three months of the year.
During the quarter, Rio generated in excess of US$1.44 million in cash to end the perid with $3.25 million, or 81% more than when it began the year. However, working capital remained deficient, with current liabilities exceeding current assets by US$4.47 million at the start of the second quarter.
In late March, Rio raised $7.2 million by privately placing 9 million warrants through Haywood Securities. Each warrant is exchangeable for one share at no extra cost to the holder.
Rio received $4 million of the net proceeds upon the deal’s closing; the remainder was placed in escrow and will be released upon receipt for a final prospectus qualifying the shares for trading. Proceeds are being used for working capital.
Rio has more than 65 million shares outstanding, or nearly 74.6 million on a fully diluted basis. The largest shareholder is NTC Trust, which holds 19.8% and counts Rio Chairman Chris von Christierson among its granters.
Rio has traded as high as $2.05 and as low as 45 over the past year. At presstime, it was trading in the range of $1.61.
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