Rio Alto Mining (NYSE:RIOM) recently reported strong Q2 gold production figures for its La Arena mine in Peru. The company produced 54,500 ounces of gold, which is a 12.5% increase over last year. The company is also reaffirming its production guidance for 2014 of 200,000 - 220,000 ounces.
While this is good news I still think that Rio Alto is somewhat risky until we see the results of the company's feasibility study for the copper portion of its La Arena mine. As I argued in June, the company generates a lot of cash-flow from its gold production, and this has generated enthusiasm for the stock as of late. But investors forget that the company will need to spend a substantial amount of money developing the copper sulfide part of the mine and we don't know what this figure will be. I think the market is pricing in a relatively positive scenario, and while it may be right, the risk is to the downside.
With this being the case investors need to keep in mind that the strong cash-flow that Rio Alto is generating from current gold production will only continue for a few more years, and unless the company can expand its gold resource investors shouldn't get too used to this cash-flow. This reality puts the above-mentioned news in a different light, and while strong production figures are beneficial, they by no means change the long-term reality of resource depletion.
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