Not so often that you get a Canadian brokerage analyst sticking such a high upside target on a gold stock, but that's what happened today with George Albino of GMP (along with associate Matthew Sheppard). The stock is Rio Alto Mining (RIO.v) (disclosure, your humble scribe is long RIO.v so generally agrees with the call) and Albino says it's going to $5.75, which represents an upside of 151% to the $2.29 of right here right now.
You can read the whole analysis note by clicking here and downloading your copy, but here's the front page blurb to get you in the mood. DYODD, dudettes and dudes.
Home Team Advantage at La Arena
Rio Alto’s key asset is the La Arena gold/gold-copper project in northern Peru – it is located in a highly mineralized area which includes Barrick’s 1mm oz/yr Lagunas Norte mine - Rio purchased the property from IAMGold.
We believe that RIO, as a brand new producer, represents a de-risked development story trading at early development-stage multiples. In our view the company’s current market valuation is supported by the base case oxide dump leach project (which poured its first gold on May 6).
We see 3 principal sources of upside - the potential for significantly higher grades in the oxide deposit, development of the deeper copper-gold project and the significant exploration targets elsewhere on the La Arena.
La Arena – already producing with tonnes of porphyry potential
La Arena is located in northern Peru - infrastructure is outstanding and the mine lies immediately on a (mainly) paved road that links the mining town of Huamachuco. A major power line crosses the mine property within a few kilometers of the La Arena pit – there is sufficient capacity on this line with low (probably <$0.06/kwh) costs.
At the 24k tpd rate and at the average reserve grade of 0.44g/t, gold production is expected to average 100k oz/yr. Production guidance for calendar 2011 is for 75k oz. LOM production, based on current reserves, is projected at 640k oz.
Past work by Rio Alto suggests that grades obtained by diamond drilling may significantly understate actual in situ gold grade. During the early years of production at its nearby Lagunas Norte mine, Barrick indicated that actual mining grades were often significantly higher than reserve grade.
The porphyry copper-gold deposit provides, in our view, most of the value at La Arena. The company expects to complete a feasibility study by year-end 2012, and anticipates production beginning in 2015. The PFS study by Coffey Mining examined a 24k tpd project that is expected to cost approximately $300mm to build and would give annual production of 60m lb/yr copper and 31k oz/yr gold over 21 years mining a 180m tonne deposit with an extremely low 1.1:1 stripping ratio.
We reiterate that, in our opinion, the oxide project alone supports the current market cap of the company and that the real driver of the share price is in the copper-gold project. We also believe the election in Peru will end speculation on the potential impact of a socialist incumbent. We initiate coverage of Rio Alto with a BUY rating and a $C5.75 target price representing 75% of our NAV6% using GMP commodity prices.