June 6 (Bloomberg) -- Rio Alto Mining Ltd. has rewarded investors with the highest risk-adjusted returns among its global peers in the past three years by bringing its Peruvian gold mine into operation on budget and at grades two times richer than forecast.
Rio Alto, based in Vancouver, returned 34 percent since June 5, 2009 after adjusting for price volatility, data compiled by Bloomberg show. That’s the best performance among 37 gold-and-precious-metals miners and explorers with a market value of $500 million to $1 billion. The stock’s volatility fell 31 percent in the past year, compared with the previous three-year span, as La Arena mine was brought into production with better results than expected.
Rio Alto “is a rising star due to its share price appreciation, and ability to meet company objectives,” Dale Mah, a Vancouver-based analyst at Dundee Securities Ltd. said in a May 14 note to clients. The shares, which closed down 0.7 percent at C$4.62 today for a market capitalization of C$791.3 million ($769.9 million), have climbed 25-fold since June 2009. Mah rates the company buy, with a C$6.50 12-month price target.
While it’s not uncommon for the price volatility of a so-called junior metals producer to drop as a mine’s development risk declines, Rio Alto has the potential to outperform beyond development of La Arena as it examines the viability of exploiting an untapped copper sulphide accumulation below the gold deposit, Christos Doulis, a Toronto-based analyst at Stonecap Securities Inc., said in an interview.
“So far there’s not a lot of value baked into the stock for the sulphide deposit,” Doulis, who ranks Rio Alto buy with a C$6.10 12-month price target, said by telephone. “It still needs a lot of work done to know whether it’s economic or not.”
Rio Alto acquired a stake in La Arena in 2008 from Toronto-based Iamgold Corp. for about $47.6 million before spending about $50 million last year to raise its ownership to 100 percent.
The company’s risk-adjusted return was 1.9 percent over one year and 9.9 percent over two years, beating Reno, Nevada-based Argonaut Gold Inc.’s 1.5 percent return over one year and Vancouver-based Sandstorm Gold Ltd.’s 1.2 percent one-year return.
Alex Black, Rio Alto’s chief executive officer, wasn’t immediately available for comment, spokeswoman Alejandra Gomez said by telephone.
Shares of Rio Alto have risen 25 percent in Toronto since Black said May 16 the company may raise its 160,000-ounce full-year gold production forecast after producing a greater-than-expected 56,000 ounces in the first quarter.
During the quarter, the average ore grade at La Arena was 1.37 grams of gold per ton, more than double the company’s original forecast of 0.69 of a gram, according to a statement on April 17.
“People look at it and say ‘wow,’ they’re one of the very, very few companies that’s actually exceeding their guidance and generating lots of free cash,” Kevin Maclean, a Toronto-based fund manager at Sentry Select Capital Corp., Rio Alto’s largest shareholder, said by telephone.
Maclean, who oversees about C$1.5 billion of Sentry Select’s C$7.4 billion under management, said CEO Black and Anthony Hawkshaw, chief financial officer, have done a good job managing relations with Peruvians who blocked access to the mine for two days in October.
“Those sorts of issues have become extremely important in the current environment where cash-strapped governments and cash-strapped communities sometimes vent their frustration at mining companies,” Maclean said.
Over the past year, anti-mining protests have delayed projects by Newmont Mining Corp., Anglo American Plc, Southern Copper Corp. and Bear Creek Mining Corp. Road blockages near mine developments and anti-government protests have left at least 10 people dead since President Ollanta Humala took office in July.
Maclean, who says he has been adding to Sentry Select’s 26 million shares of Rio Alto in recent weeks, said the stock may double within two years. At the same time, Rio Alto’s potential as an attractive takeover target may hinge on the company’s assessment of its untapped copper sulphide deposit at La Arena.
“When the study comes out, I suspect Rio Alto will be snapped up by a base metal producer who will want to have a multi-decade copper producer,” Maclean said in the interview.
Six mining operations, including Barrick Gold Corp.’s Lagunas Norte, are located within 20 kilometers (12.5 miles) of La Arena, according to Dundee’s Mah. Stonecap’s Doulis said Barrick may be among potential acquirers of Rio Alto.
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