Rio Narcea Finally Hitting Its Stride
By Michael J. DesLauriers
03 Dec 2006 at 09:22 PM EST
resourceinvestor.com
TORONTO (ResourceInvestor.com) -- Last year at the Denver Gold Forum your correspondent had the opportunity to talk to Rio Narcea Gold [TSX:RNG; AMEX:RNO] to figure out why the company’s share price was taking such a considerable beating - down to the C$1.50 level. It was our conviction that none of the company’s actual and/or perceived problems were insurmountable, and that in conjunction with robust commodity prices, Rio Narcea would emerge as a successful mid-tier producer.
At the time we noted that, “While Rio Narcea seems to be hitting a few bumps along the road to steady cash flow and stable production rates, the market may be overdoing the sell off. If things begin to take shape as the company expects, the market will respond accordingly and take shares higher. Believers in the play may be well advised to place their bets now while the price remains under pressure.”
Rio Narcea closed Friday at C$3.01, off from its recent peak at C$3.43.
2007
Rio Narcea’s nickel business at Aguablanca is finally taking shape and with prices for the metal running north of $15/lb, timing couldn’t be better. The company recently reported operating cash flow of $35 million for the first three quarters of 2006. While that number isn’t terribly impressive in view of the company’s C$500 million market capitalization, the good news is that next years numbers should be a multiple of that. Using a nickel price of $10/lb and taking into account copper sales (still hedged), the company can cash flow north of $150 million at Aguablanca. At current metals prices, the number would exceed $200 million on an annual basis.
The beauty of this play, apart from the fact that RNG is benefiting mightily from metal prices now, having worked all the kinks out of their operation, is the company’s growth profile in the form of the Tasiast gold mine in Mauritania.
Tasiast is being financing with existing cash and debt, and is scheduled to come online in the second half of next year. With a projected production rate of 105,000 ounces a year at a cash cost below $250/oz, Tasiast should add nicely to the bottom line in a rising gold price environment, generating in excess of $40 million in annualized cash flow.
Valuation
There is no question that Rio Narcea still needs to prove itself, but things certainly seem to be taking a turn for the better; particularly in relation to the way the whole situation was looking this time last year.
We believe that maximum value would be extracted for shareholders by spinning Tasiast into a NewCo, as its place within Rio Narcea frustrates the multiple it could be awarded. The idea would be to build around Tasiast and perhaps excite the market with some high impact exploration in Mauritania and/or the addition of near production precious metal assets.
With base metals making up the majority of cash flow going forward, it makes no sense to keep these assets together once Tasiast has moved to production, and all of the money needed to get it there has been spent.
Conclusion
If Rio Narcea succeeds in delivering consistently at Aguablanca, the major cash flow it throws off should open up all sorts of possibilities for the company, in terms of establishing a growth pipeline for its base metal business. We believe that for the above reasons the stock can probably double from here, but at the very least things would appear to be back on the up and up.
Your correspondent generally searches for 4-baggers at minimum; however, for those investors more comfortable in dealing with bigger capitalizations, RNG seems like a reasonable bet. |
