Update: Rio Alto Mining's Q2 Earnings

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 |  About: Rio Alto Mining Ltd (RIOM)
by: Ben Kramer-Miller

Summary

Rio Alto reported earnings of $15.2 million and operating cash-flow of $22.4 million.

This reflects strong production figures, which I pointed out a month ago, but the company's long-term outlook depends on its long-term La Arena mine plan, which has yet to be updated.

With the stock price rising recently despite my concerns, I would continue to be cautious in this name.

Rio Alto Mining (NYSE:RIOM) just reported its second quarter earnings. The company generated $15.2 million in earnings and $22.4 million in operating cash-flow. While the company reported $0.09/share in earnings, this figure is misleading given the new share count after the Sulliden acquisition. The figure should be $0.05/share with the new share count at 311 million. The company is highly profitable as it is producing gold at just $880/oz. at La Arena, and this has generated investor interest.

However, La Arena only has a little more than 5 years' worth of gold resources remaining. The company has plans to transition the mine into a copper/gold sulfide mine, although it has yet to release an economic study of this transition's viability. This means that the company's stock is at risk if management releases a disappointing estimate.

This is an issue that I bring up in my June article, in which I point out that the company's near-term earnings power doesn't reflect the long-term risk that the company's assets will be depleted. I also point out in that article that the company overpaid for Sulliden. Since the company's gold production at La Arena is limited to 5-6 years, the company went out and bought a nearby gold mine - Shahuindo - owned by Sulliden. This is a good move in theory, but Shahuindo is a higher cost mine than La Arena, and as a result it is worth far less than the $328 million that management paid for it.

However, the market continues to ignore these numbers as it looks at the company's near-term production figures, which again are very strong but may not last much longer. I continue to be cautious in this name, and I plan on reevaluating once management releases its La Arena expansion plans.

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.