Rio2 (RIO) - No Bullsh*t Gold Mining

October 21 2020, 08:17 GMT+01:00


  • TSX-V: RIO
  • Shares Outstanding: 181M
  • Share price C$0.67 (19.05.2020)
  • Market Cap: C$102M

There are too many gold juniors to count right now, as they all try to capitalise on a gold price that has risen substantially over US$1,700/oz.

However, while all of them want your hard-earned money, not all of them will succeed. One of the most important green lights, and sadly one of the rarest when it comes to investing, is honesty.


While it's fashionable and often sensible to approach investment decisions from an analytical standpoint, Crux Investor has always been of the opinion that the fundamentals of a business are equally significant in your due diligence.

One crucial component is honesty: if investors know truthfully what they are getting themselves into, they will be a lot less surprised and angry if it goes wrong. Mining is mining, and there are never any guarantees, but as long as we are given all of the information and everything is transparent, we can have no complaints if we decide to invest and it doesn't pan out perfectly.

One company that is a perfect example of this phenomenon is Rio2 Ltd. We've previously discussed the value proposition on this platform.

We recently sat down for an interview with the CEO, Alex Black. It immediately became apparent that he was a candid, straight-talking executive; it's little surprise he's an Aussie. He seems to genuinely want to make money for Rio2 shareholders.

We'd love if all interviews started off the way our interview with Black did. Just a few minutes in, before we had the chance to even ask a question, Black immediately spoke about Rio2's remuneration practices. He stated that he wanted to set a precedent. It's about time CEOs started understanding this: they are working for shareholders, not the other way around.

For a company of its size, Black's remunerations package is encouragingly modest. Black holds c. 15M shares (from around 181M total). He paid for all of them and has invested a total of C$2.5M of his own money. Black is paid US$300,000 pa, and he doesn't sit on any other boards or advisory committees. If you compare Black's annual salary to the amount of money he has already invested, it becomes clear that Rio2 is the furthest thing possible from a lifestyle company. Black has a lot of skin in the game and is aligned with shareholders in a way that is becoming increasingly uncommon.

Mining investment is a game that is so often rigged out of their favour; it's the reason Crux Investor started up in the first place. We want to tilt the balance of knowledge back to more favourable terms for investors, and with CEOs like Black, this becomes a lot more accomplishable.

A Cruel Market

With such a degree of honesty, investors might be surprised that Rio2 has struggled when it comes to its market perception.

While the share price has rallied recently and Rio2 appears to be gaining some traction, it has been fairly stagnant for much of the last year.

The market punished Black for being pragmatic. He inherited a large feasibility study plan for the Fenix Gold Project when Rio2 and Atacama Pacific Gold Corporation agreed to merge in May, 2018. After conducting an updated pre-feasibility study on Fenix, the resource halved in size. The market winced.

This blow was compounded by water permit concerns in Chile, and the share price fell further. Black also believes wholeheartedly that Rio2 has been the victim of naked shorting after conducting an internal investigation, and this has had a further detrimental effect, but that will be explored in a future article...

The water issue has since been solved via a temporary workaround in the form of trucking water in from the nearest regional centre 140km away. During our interview, Black is clear to emphasise that this solution works. A 30t tanker truck leaving the centre every 20 minutes should satisfy Rio2's thirst. Is this an "elegant solution" for a "complex process" as Black claims? the trucking fix should see Rio2 through the start of production comfortably until full water permits can be obtained. It appears to be a dexterous workaround. The costing in the PFS is US$14/t of water, which is baked into the US$1000/oz AISC.

Punishing Pragmatism

While the market can spend a lot of its time dreaming of 20 baggers, sensible investors will recognise the attractiveness of stable, secure, de-risked returns as the base of their portfolio.

Rio2's move was never going to be appreciated by everyone. It seems strange that the market appears to lack faith in Black's ability to deliver this project considering that Black and his team have already demonstrated they can make investors money: his experienced management team built Rio Alto from a C$12M company in 2009 to a C$1.2Bn company in 2015 at the time of the acquisition by Tahoe Resources Inc.

The reality is that by reducing the size of the plan, Black will be able to finance the CAPEX much more easily. It has fallen from a sizeable US$400M to just a smidgen over US$100M today. Also in the updated PFS, the strip ratio is lower and the IRR is marginally higher, and while the AISC has increased, future optimisations could well bring it down once the ball has started rolling. Rio2 will now get into production much more quickly and will finance this with relative ease. The company can start taking advantage of an elevated gold price by throwing off cash flow. This cash flow will give the company options and will allow it to consider expanding the resource back to its original level, exploration, and M&A. It's a smart business strategy that the market now appears to be cottoning on to.

Fenix Gold Project

Investors need to appreciate this operation for what it is: a low-grade, bulk-tonnage gold operation.

Do not sniff at the grade. Focus on the margins, the management's track record, and the significantly reduced level of risk. What Rio2 has at the Fenix Gold Project is, quite simply, the largest undeveloped gold heap-leach project in America, with 5Moz gold in M&I resources.


Investors will now want to know what sort of timescale they are looking at for the first shovel in the ground at Fenix.

Rio2 has been aiming to construct the mine as quickly as possible to accelerate getting into production. Once in production at an initial 100,000oz gold per annum, Rio2 aims to ramp up to a mid-tier production level of 200,000oz gold pa. The commencement of construction is guided for Q4/20: it seems little surprise the market has been getting increasingly excited.

Making It Happen

Rio2 finished up last year with working capital of c. C$16M.

This should be more than enough to carry the company through to the end of Q2/21. Rio2 has recently filed its Environmental Impact Assessment (EIA), which was completed from scratch: no mean feat.

The process of obtaining an environmental permit should be finalised by Q2/21; then, finalising mining permits will move into the centre of Rio2's vision. Black expects to receive the final construction permit in October 2021. At this moment, it will be time to roll his sleeves up and get gold mining!

Financing the significantly reduced CAPEX at Fenix should be relatively simple, and the process has started, with conversations taking place. Black is very confident there won't be any bumps in the road. The financial plan should hopefully become transparent by the end of 2020. Until then, investors will want to see Black focus on continuing to drive the share price up while getting the story out to new investors in an exciting fashion.


As I have mentioned in many previous articles, I am a staunch believer in uncovering small, undervalued mining companies and getting in early before the market has recognised their value.

In this instance, I think there is the possibility that there could be a major value discrepancy at Rio2, which could have been caused by the issues previously mentioned combined with ineffective marketing practices. The market's value doesn't seem to match up to the mid-tier production prospects on display.

I've reviewed other examples of potentially undervalued companies in recent months. Feel free to check out the articles if you have a spare moment. You could be onto a winner.

To find out more, go to the Rio2 website.

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