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Summary

  • Rio Alto reported that its Q2 production at La Arena increased 12.5% year over year and reaffirmed its guidance.
  • While this is good news keep in mind that the company's gold mine has a short--5 to 6 year--mine life, and it doesn't justify the company's valuation.
  • As I recently argued investors should wait for the results of the company's feasibility study for the copper portion of the La Arena Project before taking a position.

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.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Update: Rio Alto Reports Strong Gold Production Figures