By Bob Moriarty
Everyone knows that if something looks too good to be true, it probably is. But the key word, the driving force, is the word probably. Notice that I didn't say anything about definitely. Never trust any wisdom that "everyone knows." Everything that "everyone knows" is certainly nonsense.

I went to Peru to visit a mining project last week. I flew to Lima, spent the night at a hotel right at the airport and got up early to fly to Trujillo in the north of Peru to visit the La Arena gold/copper project of Rio Alto Mining. (RIO-V) And my conclusion after a very short visit was it literally looks too good to be true. That's why the company is selling for maybe 25% of what it should be selling for. It looks so good no one wants to believe their lying eyes. But it is just as good as it looks and it's for certain not too good to be true. It's the real deal.

Let me give you a little background so you can put it into context. Cambior discovered the project in 1994 and began to advance it. They spent $30 million to complete a 60,000-meter drill program outlining a 4 million ounce gold resource and an additional 2.9 billion pound copper resource. Cambior was taken over by Iamgold in September of 2006.

To be technically correct, La Arena is more precisely defined as a gold-rich copper porphyry containing about $13 billion dollars of minerals at their gross metal value. That's a fairly meaningless number because they won't mine that much and they won't recover that much but you can use it to compare one project to another. Any $13 billion dollar project is pretty big. Actually any 4 million ounce gold project is pretty big. Any 2.9 billion pound copper project is pretty big as well.

After developing the project to the feasibility stage, Iamgold decided they should sell the project. Iamgold is a $5 billion dollar company. Believe it or not, this is a small project for them from a gold perspective. And they don't want to be in the copper business. Too small for them, in the wrong area, just right for someone else. The project went through a bidding process and by December of 2007 Iamgold agreed to sell La Arena to the then private Rio Alto for the princely sum of $47.55 million.

Things were going just fine until the Global Mining Crisis hit in September of 2008. Like many other companies in mining that were project rich and cash poor, Rio Alto suddenly found themselves without cash even though they had been promised financing for the $47.55 million and $30 million for an open pit, heap leach operation. With their backs against the walls, they did a sort of friendly merger with cash-rich but project-poor, Mexican Silver Mines. The merged company ended up with about 75 million shares outstanding, $5.5 million cash to move forward with the project and management shared across what had been two companies.

Before the merger with Mexican Silver, Rio Alto sat down with Iamgold to renegotiate the deal. The original deal called for all cash terms. Iamgold settled for an option on the project with a $1 million dollar payment in Rio shares, a $30 million dollar work commitment to earn 38.7% and a final payment of $47.55 million US to be paid by December of 2012. A key issue in the renegotiated deal was that Rio Alto was able to get Iamgold to agree to allow Rio access to 100% of the cash flow from production from the gold oxide project. In other words, you build the mine and pay for it out of 100% of the cash flow from production.

That's a deal, that's a hell of a deal. Or course Rio Alto wants to spend the $30 million to earn in 38.7% of the project as soon as possible. They envision a cost of $30 million to have the open pit oxide gold being stacked and leached by Q4 of 2010 at a rate of 10,000 tons per day. First year production will be 50,000 ounces at a grade of about .7 gpt Au advancing to 24,000 TPD in 12 months with annual production of about 100,000 ounces of gold a year for 5-6 more years.

The copper has been leached out of the oxide ore so there will be no copper production until Rio has finished with the 540,000 ounces of gold production from the oxide portion of the mine. By then Rio will have generated enough cash flow to be able to finance a plant doing 10 million tons per year at a grade of .4% Cu and .3 gpt Au. The mill will use a conventional crushing circuit and ball mills combined with a flotation plant to produce a copper/gold/moly concentrate. Rio anticipates production of about 100 million pounds of copper and 60,000 ounces of gold over a 15-year mine life.

Rio Alto's General Manager Jaime Soldi met me in my hotel. We flew up to Trujillo and drove about 4 hours to the project. It's a porphyry project, looking at the core doesn't tell you much but we went over the maps and their plans. The oxide portion of the deposit sits on top of a hill, there will be a low strip ratio and gravity will help save money, as the leach pads are a short distance down the hill in a small valley.

Porphyries are typically very large but low grade. With a starter pit grade of about 1 g/t gold, this is a fairly high-grade system. We would go over the numbers once we got back to Lima the next day. But there are six mines totaling over 20 million ounces of gold within 30 km of La Arena. Barrick's giant Lagunas Norte gold mine producing some one million ounces of gold a year is located only 18 km to the west.

The project has a lot of blue sky. Cambior wanted to define enough gold to make a production decision and they would have but they were taken over by Iamgold who didn't need the project. It's perfect for a junior who has mid-tier expectations.

The project is located at 3,400 meters elevation and since we didn't need the headaches and lack of sleep that accompanies a quick visit to higher altitudes we promptly returned to Trujillo in the late afternoon, had an early dinner and got a good night's sleep. The next day we returned to Lima. Jaime took me to the office of Rio Alto for a technical brief by the consultants working on the project design.

Their figures show a cash cost of production per ton of gold oxide ore of about $4 a ton for the first year, decreasing to $3.50 a ton once production levels of 24,000 tpd are achieved. That's a lot lower than I expect to hear from even a heap leach scenario so I questioned the number. I'm more comfortable thinking in the $6-$8 a ton range.

To save startup costs and management issues, Rio Alto is taking the approach of using contract miners and Peruvian consultants for technical design of the project. They have passed the project numbers by five contracting groups, some of whom are working in the immediate area. The number of $4 a ton is rock solid. Peru has an efficient and inexpensive power grid and they will be buying power for about $.05 a kilowatt-hour.

Metallurgical tests show that Run of Mine (ROM) ore will deliver about 70% recovery over 120 days of cyanide leaching and 76% over the Life of Mine. (LOM) The gold is located in the fractures of the rock so crushing to a smaller size isn't required. That saves energy and capital.

Back of the envelope calculations by yours truly show a gross metal value at today's gold price of about $35 a gram of $24 a ton gold and net revenue of $16.75 at a recovery of 70%. There isn't a business in the world or a mine in the world that wouldn't think a 75% margin is just great. Rio can produce gold with costs of $4 a ton and revenue of $16.75. They think they can produce gold at a total cash cost of about $420 an ounce over the 5-6 year life of the gold oxide project.

If La Arena was the first project in this area, I'd seriously question the numbers. But with production of over a million ounces of gold a year nearby with the same ore and the same issues, I'd call Rio's plan a slam-dunk. They aren't reinventing the wheel; they are using a cookie cutter to do exactly what everyone else in the neighborhood is doing. All of the issues they expect to run into have already been sorted out by others. All they have to do is execute a plan that has been tried and proven.

After the technical briefing I visited with Alex Black, COO and Director so I could sort out all the questions I had. Alex, who lives in Peru with his gorgeous wife, had been President and CEO of the original Rio Alto prior to the merger with Mexican Silver. He was the driving force who was responsible for identifying and picking up the La Arena project.

Rio has done a lot of things really right. While top management is Canadian and Australian, it's a Peruvian run project. Many Canadian juniors come to Central and South America without understanding local issues. From the gitgo, this has been a Peruvian project. They are using experienced contract mining and contract technical people.

They understand they don't need to create an empire, just need to get a simple project into production cheaply. I looked at their G&A figures as part of the cash costs and realized I wasn't dealing with the typical Canadian junior trying to do a stock promotion and surrounding themselves with a highly paid staff of dozens. These guys are miners and they intend to get this into production cheaply and earlier than promised at a lower cost than promised.

Unlike many of the other Canadian juniors operating in Peru, Rio understood the value of listing on the Lima Stock Exchange. That's a really smart move. They were able to do a $6.1 million PP in late 2009 easily on the exchange. It's a good move others would be wise to emulate. The Lima exchange has in the past given a higher value to silver and lead projects than Vancouver. Right now Vancouver is setting the price for Rio Alto shares but I suspect that in the future, Lima will be the market maker and Vancouver will follow. I believe companies who list in Lima will have higher market values than those who don't.  Continued...