Update: Rio Alto Mining's Q2 Earnings

| About: Rio Alto (RIOM)


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.

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