Rio2 to merge with Atacama Pacific

Alex Black and his team have built two mines in Peru — La Arena and Shahuindo — and in the process nurtured Rio Alto Mining from a $12-million company in 2009 to a $1.2-billion company at the time of its acquisition in 2015 by Tahoe Resources (TSX: THO; NYSE: TAHO).

Since then the mining engineer has looked at more than 60 projects and companies for his new enterprise, Rio2 (TSXV: RIO), and the president and CEO says he has finally found what he’s looking for in Atacama Pacific Gold’s (TSXV: ATM) Cerro Maricunga gold project in Chile — one of the largest undeveloped oxide gold deposits in the Americas.

In mid-May, Rio2 and Atacama Pacific announced plans to merge their two companies in an all-share deal — Rio2’s first material transaction.

Cerro Maricunga, in the northern end of Chile’s Maricunga mineral belt, is 20 km south of Kinross Gold’s (TSX-K; NYSE: KGC) La Copia silver-gold mine.

“What we see here is a project that is analogous to what we built in Peru at La Arena, a low-grade, disseminated gold deposit,” Black says in a telephone interview from his home in Lima, where he has lived for the last 18 years. “This deposit is much bigger and should be a more lucrative asset than La Arena looked like at the beginning.”

Both deposits have a similar grade of 0.4 gram gold per tonne, but at La Arena, Black and his team started with a resource of just under 900,000 oz. gold, while at Cerro Maricunga they will start with more than 3 million oz. gold in resources (based on a 2014 prefeasibility study by Atacama Pacific).

“We’ve got a good base to start from, and it ticked all the technical boxes in our due diligence,” Rio2’s Black says. “What the Rio2 team is good at is starting mines very cost effectively, with a focus on minimizing capex. The big guys all look at multi-hundreds of thousands of ounces per annum and try to bring up the biggest possible project and inevitably come up with huge capex — that’s not us. We’ve been successful at starting projects small, and then financing expansion through cash flow.”

A drill site in the Lynx zone – with the Phoenix zone in the background – at Atacama Pacific Gold’s Cerro Maricunga gold project in Chile. Credit: Atacama Pacific Gold.

A case in point is Shahuindo, which was a much larger project than La Arena. Black and his team kick-started that project and brought it into production as a run-of-mine producer. When Tahoe took it over it built a staged crushing, agglomeration heap-leaching scenario.

Black says the project Rio2 builds at Cerro Maricunga will differ from the 2014 prefeasibility study, which was based on a gold price of US$1,350 per ounce. That study estimated annual production of 281,000 oz. gold over the first eight years and US$683 per oz. life-of-mine cash costs, and US$941 per oz. all-in sustaining costs. Capex of US$399 million could be paid back in three years.

“The prefeasibility study [PFS] numbers need to be looked at as just a snapshot at that time,” Black says. “We plan to review and optimize the PFS numbers post-closing of the transaction — we’ve already done that internally as part of the technical due diligence for the asset — and we hope to show a very, very strong project.

“Cerro Maricunga is a great project and it will look completely different in our hands,” he continues. “It will be the next gold project built in the Maricunga region — ahead of any other projects belonging to majors in the area.”

Carl Hansen, Atacama Pacific’s president and CEO, describes the proposed business combination as a “perfect match” for the two companies.

“We are explorers and we’ve been very fortunate to have discovered Cerro Maricunga,” he says. “Rio2 brings an experienced management team that has a proven history in building and operating heap-leach mines in South America.”

Alex Black, Rio2 president and CEO, with gold from the La Arena mine in Peru after its first pour. Credit: Rio2.

Rio2 will take a hands-on approach to optimizing the project in terms of capital requirements and on the operations side, Hansen says, noting that Atacama Pacific’s game plan was always to bring in a build team.

“We’re quite pleased. They have a very strong and dedicated management team that takes a realistic and practical view to mine development.”

Hansen’s 25-year career as a geologist includes cofounding Andina Minerals in 2003 with Albrecht Schneider, Atacama’s executive chairman.

“When we were forming Andina, Albrecht identified an opportunity and negotiated the agreement to acquire the Volcan property, which at the time was essentially just the small East Zone, which had been drilled by Homestake,” Hansen says. “A year or two later our group discovered the major West Zone.”

Andina was acquired by Hoschild Mining in 2012 for US$103 million in cash.

As for Cerro Maricunga, Hansen says, there is a large alteration system around it that looked quite attractive, so when another company dropped the concessions, Schneider staked them and started a sampling program.

“Initial results were very disappointing and there were thoughts of dropping the property,” Hansen recalls. “But first, Albrecht directed the geologists to go to the top of Cerro Maricunga — and as they were walking up, well almost climbing, as it’s quite steep — they started seeing grey-banded, quartz-vein float, and at the top, eventually found the source of the veining. That was the discovery.”

Atacama Pacific has a history of exploration in Chile, and several members of its management team — including Hansen and Schneider — worked with TVX Gold, which owned the La Coipa mine before it was sold to Kinross.

Atacama went public in late 2010 and has completed over 105,000 metres of drilling on the project.

In Atacama Pacific’s case, Black says, you’ve got a junior company “run by some very good exploration geologists who discovered the deposit many years ago, but don’t have any way of determining how to get Cerro Maricunga into production.”

A lot of junior companies rely on consultants to tell them what mine to build, and that’s not ideal because consultants are only as good as the people they have working for them, Black adds.

“This project has been around a long time, and what we’re going to do is relaunch and reposition the story on the basis of the fact that this will be one of only a few new gold-development stories in the market,” Black says.

“One of the challenges we see is that the gold business is being pummelled, not necessarily because of metal prices, but because of the poor performance of most gold companies and the low rates of return they’ve given shareholders over many years, so it’s kind of nice being a new player in that market and offering a real value opportunity.”

Management will also have skin in the game, he says.

Once the transaction closes, management and directors will own 33% of Rio2.

Under the terms of the proposed business combination announced on May 14, each Atacama Pacific shareholder will receive 0.6601 shares of the combined company for each Atacama Pacific common share held, and each Rio2 shareholder will receive 0.6667 shares of the combined company for each Rio2 common share held.

Atacama Pacific Gold’s Cerro Maricunga gold project in Chile. Credit: Rio2.

The exchange ratio represents consideration to Atacama Pacific shareholders of 95¢ per Atacama Pacific common share based on the closing price of Rio2 common shares of 96¢ per share on the TSX Venture Exchange on May 11. That value implies a 58% premium over the May 11 closing price of Atacama Pacific’s common shares of 60¢ and a 45% premium calculated on the 20-day, volume-weighted average price of each respective company.

Once completed, (and after a concurrent $10-million private placement arranged by Rio2), the combined company would have 102 million basic common shares outstanding. About 42.5% of the fully diluted, in-the-money shares of the combined entity will be held by former Rio2 shareholders, and 57.5% will be held by Atacama Pacific shareholders.

“Cerro Maricunga will form a strong base for the company, as we continue to look at other possible acquisitions,” Black says. “This is a great project. It suits our company very well, and it’s a good stepping stone to transforming Rio2 into a multi-asset, precious metals company.”