Rio Narcea trims debt (July 05, 2002)

Junior producer Rio Narcea Gold Mines (RNG-T) has taken a small step towards financial freedom by repaying a multi-million credit facility with Deutsche Bank.

The repayment, which comes three years earlier than required, totaled US$4 million and eliminates US$420,000 in annual interest payments that would have been due otherwise. The facility was arranged a year ago for the purchase of the advanced Aguablanca polymetallic project in southern Spain, which Rio expects will soon add nickel, copper and platinum group metals to its production profile.

Rio currently produces gold at its El Valle and Carles open-pit mines in northern Spain. In the first three months of the year, the mines cranked out a combined 25,117 ounces at a total cash cost of US$194 per oz., or US$245 per oz. when depreciation, amortization and reclamation charges are included.

Production was expected to have doubled in the second quarter, owing to higher-than-expected grades in El Valle’s Charnela zone. The increase, in turn, is expected to result in the production of over 155,000 ounces in all of 2002, at a total cash cost of less than US$150 per oz.

According to in-house estimates, Aguablanca can produce 9,080 tonnes nickel and 6,810 tonnes copper in-concentrate over 11 years at an average cash cost of US$1,762 per tonne nickel, net of copper and platinum group metals credits. The projection assumes an open-pit reserve of 17 million tonnes grading 0.7% nickel, 0.5% copper and 0.6 gram platinum group metals, which itself is based on a cutoff grade of 0.2% nickel.

The operation envisaged has a net present value (NPV) of US$100 million, assuming average metal prices of US$5,947 per tonne nickel and US$1,696 per tonne copper, capital costs of US$52 million and a discount rate of 5%. The NPV drops to US$61 million when the discount rate is doubled.

The internal rate of return is 35%.

An independent feasibility study, launched several months back, is expected to wrap up shortly. The study includes results from 13,000 metres of infill holes (16% of the open-pit material was inferred resources; the rest, measured and indicated) drilled by Rio Narcea, plus 32,000 metres sunk by Rio Tinto (RTP-N) between 1993 and 1996.

The recent debt repayment also adds $6.1 million in gross proceeds to Rio Narcea’s account. Deutsche exercised 5.8 million options that were granted as part of the financing terms and has since sold the resulting shares to institutional investors.

Rio Narcea now has just under 71.5 million shares issued and outstanding.

On March 31, the company had US$24.4 million in long-term financial obligations, including straight bank debt, and a working capital deficiency of US$4.5 million. The balance sheet is strengthened by the elimination of the credit facility and related interest payments.