Rio Alto keeps its profit and cuts costs

Rio Alto Mining's La Arena gold mine in Peru, 480 km northwest of Lima.  Credit:  Rio Alto Mining Rio Alto Mining's La Arena gold mine in Peru, 480 km northwest of Lima. Credit: Rio Alto Mining

Rio Alto Mining (TSX: RIO; NYSE: RIOM) may have missed its earnings estimate, but it still showed the market it could turn a profit in a lean gold-price environment.

Last year the company generated a $30.8-million net income, or 17¢ per share, with the all important cash flows from operations coming in at $77.4 million. In last year’s fourth quarter, the company tallied $10 million of net income, or 6¢ per share, and cash flow from operating activities of $16.6 million.

The gold price was down 20% last year — but the Street wanted more. 

The numbers missed Scotiabank analyst Mark Turner’s 10¢-per-share earnings estimate and the Street’s consensus of 13¢ earnings per share.

“The miss here appears to owe primarily to lower-than-estimated realized gold price in the quarter,” Turner writes in his research note.

The company reported an average realized gold price of just US$1,237 per oz. against Turner’s US$1,276 per oz. estimate.

It wasn’t, however, all disappointing news: fourth-quarter cash costs came in at just US$567, beating the Scotiabank forecast of US$601 per oz.

The after-tax, all-in cost — a more accurate measure of real costs faced by miners — climbed to US$1,183 per oz. Rio Alto expects the declining cost trend to continue this year due to a reduced mining fleet size that will make for lower mine maintenance and contractor-fee costs.

Another thing that investors and analysts can get behind is the improved production guidance that was released along with the financial results. Rio Alto boosted guidance for the year to between 200,000 and 220,000 oz. gold from the previous forecast of between 190,000 and 210,000 oz.

The increase comes on the back of an updated gold-oxide reserve calculation released in February. The update lifted the gold oxide reserves by 22% to 1 million oz., after mining was depleted by more than 260,000 oz.

The company expects to mine 17.5 million tonnes of ore in 2014 at an average gold grade of 0.45 gram per tonne.

Rio Alto also impressed on its cost guidance, as it expects all-in after tax costs to be in the US$1,004 to US$1,105 per oz. range using an average realized gold price of US$1,200 per oz. Those numbers, if achieved, would continue the company’s growing trend of delivering declining costs. It plans to get there this year by reducing its mining fleet size. Such a move will make for lower expenditure on mine maintenance and contractor fees.

A bullish forecast, however, couldn’t bolster the company’s fortunes on the market for March 28 — the day the results were released — as its share price was down 3%, or 6¢, to $2.24 per share. 

But Scotiabank’s Turner was impressed by ongoing savings at the company’s La Arena mine — 480 km northwest of Lima, Peru — as well as the increased production guidance.

Rio Alto plans to release the second phase of a sulphide resource and reserve estimate later this year along with a feasibility study, which is planned for completion before October.

Turner rates the stock as a “sector outperform,” with a $3.80 price target.


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