Rio Alto Mining Valuation

Estimating Rio Alto Mining Fair Market Valuation

By Dennis Boyko
Created on: February 5, 2010
Current version: 0.31 (February 12, 2010 -- added a map image and project document links)

Fair Market Valuation Summary - 2010-Mar-11

Projected fair market stock price for Rio Alto Mining Limited at the close of trading on 2010-Mar-11 was C$2.13. The actual closing stock price was C$0.6.

At the close of trading, the current and projected Market Capitalization per ounce of Gold Equivalent for Rio Alto Mining Limited, were:

• current market valuation: US$5.04 per ounce of Au Eq.

• projected fair market valuation as a gold producer: US$50.11 per ounce of Au Eq.

  • Rio Alto Mining Limited in situ metal value is approximately 32.6% from gold with the rest from copper.

  • The projected fair market capitalization per ounce of gold equivalent has been set at 36% of valuation on the Gold Producer Valuation line to discount copper metal values. That is, I am valuing the gold and treating the copper as a credit towards the cost of producing gold.

Projected fair market stock price for Rio Alto Mining Limited is derived using the projected fair market valuation at start of production of US$50.11 per ounce of Au Eq (as derived above) and the applying the following factors:

• Capital Expenditure: US$316.55M total capital expenditure which is estimated as follows:

  • US$38 is the amount estimated to bring the oxide deposit into production by end of 2010. Spending this amount allows Rio Alto to earn 38.7% interest in the La Arena Project.

  • US$48.55 is the amount Rio Alto needs to pay IAMGold to gain 100% ownership of La Arena. These payments can be made from the cash flow from the gold oxide production.

  • US$230 is the estimated capital expenditure to bring the copper gold sulphides deposits into production. This estimate is based on Table 18.15_3, La Arena Project Capital Cost Comparison on p. 132 of 156 of La Arena Project, Peru, March 31, 2008. The costs associated with the oxide deposit processing are shown separately above.

• Risk Premium: 10% applied to the total capital expenditure. A relatively low risk premium is set in this case because the initial expenditure is limited to US$38 for a basic low risk heap dump oxide gold processing setup. Also applying a risk premium on the US$48.55 is not appropriate since it is a fixed fee not subject to change and which can be paided from gold oxide production cash flow.

• Discount Factor: 25% -- set to cover the time gap between now and the start of oxide gold production plus the time gap between now and the start of sulphide gold production.

  The discounting of the future gold metal prices after the start of production are already fully accounted for in the Gold Producer Valuation Line which is derived from current day market prices and company fundamentals.

Discussion

The supporting model and the calculations used to produce the projected fair market stock price are detailed in Fair Market Price Calculations.

The discounting applied to Rio Alto Mining Limited is consistent with the discounting the current market is effectively applies to Yamana Gold (YRI on the valuation chart). Yamana's in situ metal value is approximately 33% from gold and the rest from copper and other base metals. As a result, Yamana (YRI) falls well to the left of the Gold Producer Valuation Line in the current market.

Applying the estimation methodology used in this blog to Yamana Gold produces a very good estimate of Yamana Gold current market pricing.

The projected market capitalization per ounce of gold equivalent set for Rio Alto Mining Limited is more conservative that the value used for Yamana Gold even though Rio Alto Mining Limited has a higher percentage of its in situ metal value from gold.

This estimate should be updated once Rio Alto Mining Limited releases an updated Feasibility Study (rumored release date is end of Q1 2010).

Barring availability of new fundamental data, this estimate of a fair market price for Rio Alto Mining Limited will fluctuate on a day to day basis as the gold and stock market prices change.

This blog does not assign any value to the Mexican Silver properties held by Rio Alto.

Gold Explorer-Producer Valuation Hypothesis

Each company on the above chart is represented by its TSX trading symbol. The lower left hand corner of each box on the chart marks the company's Average Ore Value per tonne versus Market Capitalization per ounce of Gold Equivalent.

The Gold Explorer-Producer Valuation Hypothesis is based on the data driven observation that a company's market capitalization per ounce of gold equivalent tends to rise based on the current valuation of the metals contained in an average tonne of ore. For developer/explorers, it is also assumed that the true Explorer-Producer Gap should be large enough (but no larger) to cover the expected future capital expenditures, risk premiums and time discounts.

The original motivation for the Gold Explorer-Producer Valuation Chart was developed in Junior Gold Explorer Valuation Observations. Application steps and the generic factors that need to be considered in applying this valuation method are further described in Gold Explorer-Producer Valuation Exceptions.

Updates

The Gold Explorer-Producer Valuation chart is updated after the close of trading using closing stock prices, closing spot market metal prices, fully diluted share counts, and NI 43-101 resource and reserve disclosures.

Last update was for the market close on 2010-Mar-11.

Caution

This GoldMinerPulse blog is presented for the sole purpose of illustrating how GoldMinerPulse per company metrics may be useful in judging valuation of individual gold and silver mining stocks. This blog should not be considered as investment advise. Anyone using this blog should become familar with the GoldMinerPulse metrics and the underlying assumptions to access their usefulness.

The Major Gold Producer Valuation Line is shown to be linear with respect to increasing ore value. From available data, this assumption appears sound for evaluating Rio Alto Mining Limited .

Research Links

• Rio Alto Mining web site.

• Rio Alto Mining NI 43-101 Metal Valuation Report for the company metrics derived using the last close of trading data.

• If it looks too good to be true Bob Moriarty, 321gold, likes the La Arena story and is buying Rio Alto shares at this point.

• Canadian Insiders for insider trades on the TSX

• StockHouse for a discussion forum.

• StockCharts.com for price charts.

• Sedar for all TSX regulator filings. Sorry but you'll have to navigate the Sedar site as they do not allow direct links to company specific lists of document filings.

• Google News on Rio Alto and La Arena

About Links

I have listed the best of links for anyone interested in researching Chesapeake Gold further. If you have a blog or site with Chesapeake Gold specific pages, please send me the link for review and I will include your work in the link section as appropriate.

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