IKN Flash UpdatePremium

George Albino Associate: Oliver Turner
[email protected] [email protected]
416-943-6187 416-941-0243
October 29, 2012
Rio Alto Mining Ltd.7,8
(RIO-V) BUY
Last: C$5.56 Target: C$8.00↑
WHAT'S CHANGED
New Old
Rating NC BUY
Target C$8.00 C$6.25
Gold production 2012E (k oz) 187 180
Gold production 2013E (k oz) 179 164
Gold production 20124 (k oz) NC 194
5.56
SHARE DATA
Share o/s (mm, basic/f.d.) 173.6/184.8
52-week high/low C$5.75/C$2.81
Market capitalization (m) C$965.0
Enterprise value (m) $902.2
Net debt (m) ($66.2)
Projected return 44%
NAV0%/share $18.08
NAV6%/share $10.47
P/NAV0% 0.3
P/NAV6% 0.5
FINANCIAL DATA
2012E 2013E 2014E
Gold production (k oz) 187 179 194
Cash costs ($/oz) $381 $494 $529
Capex (m) $30 $32 $51
Free cashflow (m) $106 $70 $52
EPS $0.66 $0.47 $0.47
CFPS $0.74 $0.55 $0.55
P/E 8.5 11.8 11.8
P/CF 7.6 10.1 10.0
EV/EBITDA 4.4 5.4 4.6
Fiscal year ending December 31st
All figures in US$ unless otherwise noted
RIO-T
$7.00
$6.00
$5.00
$4.00
$3.00
$2.00
$1.00
$0.00
Prepared by GMP Securities L.P.
See important disclosures on the last page of this report
11/11/11 11/51/21 21/32/10 21/72/20 21/03/30 21/40/50 21/80/60 21/31/70 21/71/80 21/12/90 21/62/01
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12.0
10.0
8.0
6.0
4.0
2.0
0.0
snoilliM
ni emuloV
Delivery, Sustainability, and Growth – site
visit to La Arena
We have just returned from a visit to Rio Alto’s La Arena mine in northern
Peru – we were last there in December 2010, during mine construction. Since
then the mine has produced over 200k oz from ore that has significantly
exceeded modeled grades. RIO has also successfully expanded La Arena
from 12k to 24k tpd, and is almost through a move to 36k tpd.
Through 2012 RIO has drilled aggressively at the project – by year end we
expect at least 110k meters of core and RC drilling, with a slight majority
(±60k) going to the copper-gold porphyry and 50k meters of oxide drilling.
While these data haven’t filtered through to updated resources and reserves,
we do believe that the gold oxide deposit has grown, and that a well-defined
“starter pit” area has emerged at the porphyry.
Even with additional drilling (including close-spaced grade control holes) and
production (including large-diameter blasthole drilling) the company continues
to see grade come in above expectations – locally very high-grade structures
(some with grades over 100 g/t gold) likely play an important role in this.
We are revising our models for both the oxide heap leach and the copper-
gold mill deposits. We are increasing our assumed heap leach “reserve” to
approximately 2mm oz at a grade of approximately 0.5 g/t gold at a stripping
ratio of 1.55:1, providing production through 2021.
For the copper-gold project we are now following a “start small then grow”
approach, with an 18k tpd project beginning in mid-2016 then expanding (to
54k tpd) in 2022. Only a portion of the very large sulfide resource is mined in
this scenario but the project maintains a robust IRR (27%) even with our
conservative long-term copper price ($2.25/lb). Importantly, neither the initial
nor the expanded project would require any outside funding.
Valuation
Our NAV6% increases marginally from $10.00/sh to $10.47/sh as we change
our approach to the size of the heap leach reserve and to the copper
development. With a lower risk approach, we are now willing to apply a
higher multiple on NAV and cash flows.
We are maintaining our BUY rating, but increasing our target to C$8.00/sh
from C$6.25/sh. Our new target represents an increased 0.8x P/NAV multiple
as well as an average P/CF of about 12x through 2016 (before the copper-
gold project kicks in). Given the (self-funded) growth we feel these multiples
leave room for even further upside.

George Albino Associate: Oliver Turner
[email protected] [email protected]
416-943-6187 416-941-0243
SITE VISIT TO LA ARENA
Last week we toured Rio Alto’s La Arena project located in Libertad Department in northern Peru. We
had previously visited La Arena in December 2010, as the project was being developed (initial
production came in May, 2011). At that time we focused on the company’s status as a near term
producer with multiple sources of upside, including the potential for grades better than modeled, growth
in the Phase 2 copper-gold project, and additional high-potential exploration targets. Since that time
RIO has more than delivered on its startup (one of the cleanest we can remember) including a
significant upside surprise in grades. The copper-gold project has taken clearer shape, and later this
year we should see the first (and highest priority) exploration project tested.
One of the consequences of the aggressive fast tracking of the development is that the mine plan
remains fluid as RIO has had to work around minor delays in infrastructure development (both leach
pad and waste dumps) – on the trip we saw how the company has coped with these challenges as the
new waste dump is now up and running, and the pressure on leach pad space should abate in about 12
months. At that point the mine planners should be able to relax a little.
They will be busy for the next few months planning for a major pushback of the Calaorco pit’s west wall
for 2013. The timing of this pushback was delayed somewhat by the availability of the new waste dump
and we expect that RIO will likely bring in additional contract mining capacity early in 2013 to drive this
cutback into higher grade ore as quickly as possible. The ability of the company to access this ore will
influence 2013 production – we are assuming approximately 180k oz in 2013 which we feel is
compatible with the reserve – if grade surprises continue there may be upside to this projection.
Nonetheless we expect that 1Q13 will be affected by the diversion of mining focus to this major waste
moving phase.
What may also keep the mine planners working at full bore over the longer term, however, is the fact
that RIO continues to find oxide mineralization outside the resource boundary. The positive grade
reconciliation experienced to date also means that the company is working hard to get a handle on just
how to model the deposit – this will have an impact on what part of the resource does indeed make it
into reserve. We believe that grades will be higher as the models are refined – we would also point out
that the grade of the indicated resource at the project is almost double that of the inferred resource –
we believe this is mainly a data issue and that as resource conversion take place that grades will climb.
While we were on site a number of consulting geologists involved in resource modeling were also there
– one point we took away was that no matter how the modelers work with the data, there always seems
to be more gold than indicated by the drill. A factor that may be driving this is the presence of some
extremely high-grade albeit narrow structures. One NW-trending example which has been traced from
surface to the current mining bench (named Tilma) has consistently assayed +100 g/t gold over 15-
20cm. Even with such a narrow vein these grades can contribute meaningfully to the overall gold
content of the deposit.
There is a second set of ENE-trending breccia veins which also host elevated grades. From our visit to
the pit these seem to be a common feature through the deposit.
The other area where essentially all news has been good news is on the metallurgical front. With
feasibility work suggesting ±86% recovery, it seemed almost too good to be true for a run of mine
leaching (dump leach) scenario. To date, however, it appears that actual results have been somewhat
better, closer to 90% - with the grade reconciliation issues proving these elevated recoveries is

George Albino Associate: Oliver Turner
[email protected] [email protected]
416-943-6187 416-941-0243
challenging, but the company has excavated and sampled spent ore in several locations, and found
extremely low (0.01 g/t) residual grades, supporting these very high recoveries.
In order to have better control RIO has recently completed a permanent facility for column leach testing
on an ongoing basis. The company plans to set up column tests for each cell on the leach pad, which
will improve the quality of the mine to pad reconciliation. One other positive factor for the leaching has
been the very low (slightly over 0.1 kg/t) cyanide consumption at La Arena. These results are in line
with the pre-production test work, but the company had frankly not completely believed those results.
With cyanide in the $7/kg range this is a good help on costs.
In terms of oxide exploration success, there are several areas worthy of mention. The first one is what
we would call the deep west wall zones. These are essentially the down-dip continuation of what is
currently being mined in Calaorco, but below the limit of reserves. These zones remain open at depth.
A second area is the location of what appears to be a structure linking the main Calaorco pit with the
smaller Ethel orebody (to the north). Work this year has found a “connector” zone where 1 g/t range
mineralization over +20m widths appears to extend for several hundred meters on strike. This is
potentially quite significant. We also heard discussions about mineralization located south of the
planned Calaorco pit. There are limited data to this point, as a public road crosses the zone. As
moving this road is part of the plan to develop the copper-gold deposit, this zone should be freed up for
eventual mining (assuming a sufficient volume of ore is located).
Bundling all this together we have modified our model to include mining an approximate 2mm oz from
2013 on (our prior model incorporated 1.26mm oz). We assume an average grade of 0.56 g/t gold
(including grade upside) and a strip ratio of 1.55:1 – given the reconciliation to date of very much higher
grades but fewer ore tonnes we may be underestimating the grade and the strip. We have also
increased unit mining costs as the pits are deepened.
The result is a mine that shows material production through 2021 and averages just less than 180k
oz/yr over that period with cash costs in the mid-$500s.
SULFIDE UPDATE
The company will have drilled approximately 60k meters this year to better define the copper-gold
porphyry orebody. We do not expect the overall resource to change much from the January 5th update,
but would bet on a significant conversion of Inferred to Indicated resources. The company will be
submitting a development plan as part of its permitting but we expect the next public update on the
project reserves and engineering to be in 2Q13. This is likely to take the form of a definitive feasibility
study (DFS) describing a step-wise development similar to what has been done with the gold heap
leach.
This approach has positive implications for financing and for permitting – for financing we model (with a
good degree of confidence) RIO being able to deliver the project in 2 stages without recourse to
external funding (assuming our metal price forecasts hold). In terms of permitting, the Phase 2a project
will require no permitting outside the current EIA footprint. Phase 2b will require the addition of a small
area “outside the fence” for tailings, with the ultimate project requiring additional land to be permitted for
both tailings and waste dumps.
By taking this route we believe the risk on startup timing is materially decreased – we assume Phase
2a/2b starts up at 18k tpd in mid-2016 on a high-grade starter pit. This subset of the large resource
comes in two zones and should allow mining at 18k tpd for 6-7 years at grades in excess of 0.5 g/t gold
and 0.5% copper (possibly significantly higher in the first couple years). The final part of Phase 2 will

George Albino Associate: Oliver Turner
[email protected] [email protected]
416-943-6187 416-941-0243
come on stream (at 54k tpd) in 2022 in our model, with lower grades being offset by much higher
throughput. The plan for Phase 2a would, in the company’s view, be deliverable for less than $350mm
– we assume somewhat higher costs.
We note several capex advantages enjoyed by the project: 1) it’s really an expansion/extension, so
little new infrastructure is needed; 2) the low stripping ratio (less than 0.5:1 to start) reduces fleet
requirements and therefore lowers all related costs; 3) the ore is VERY soft such that the mills required
for 18k tpd will be smaller than one normally thinks of for such a milling rate, and; 4) infrastructure is
excellent with a major 240kV power line within sight of the pit, which is also located to the major
highway on the region providing direct access to the port of Trujillo.
CHANGES TO OUR MODEL
The figures below summarize the impacts to production/costs and EPS/CFPS from the model changes
discussed above. In the near term we see higher oxide production (which goes on for longer) while
sulfide production is pushed back a year. In the long-term peak production is lower as we factor in a
smaller copper-gold project, but we highlight the significantly reduced operational, financing, and
permitting risk.
Our NAV6% at GMP metal prices goes to $1.93bn ($10.47/sh) from prior $1.84bn ($10.00/sh). We
highlight that using GMP metal prices (including a long-term copper price of only $2.25/lb) we see a
project with an IRR in the mid-20%’s under this scenario. Given the market’s distaste for projects with
big NPV (at low discount rates) but low returns, we see this as a “market friendly” approach but one
which would not stop someone from eventually building a much bigger copper-gold mine at La Arena if
they so chose.
Below we demonstrate the impact of the adjustments made to our model on production, cash costs,
EPS and CFPS
Figure 1 – Impact on our production profile
400
350
300
250
200
150
100
50
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1102 2102 3102 4102 5102 6102 7102 8102 9102 0202 1202
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$600
$400
$200
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($200)
($400)
($600)
($800)
($1,000)
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Production Prior_Production TCC Prior_TCC
Source: GMP

George Albino Associate: Oliver Turner
[email protected] [email protected]
416-943-6187 416-941-0243
Figure 2 – Impact on our EPS and CFPS estimates
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
($0.50)
)hs/$(
SPE
1102 2102 3102 4102 5102 6102 7102 8102 9102 0202 1202
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
($0.50)
)hs/$(
SPFC
FD EPS Prior_EPS FD CFPS Prior_CFPS
Source: GMP
EXPLORATION
Rio Alto also has completed surface rights acquisition at La Colorada (formerly La Florida) as well as
detailed geochemical sampling and IP surveys. These provide clear drill-ready targets to supplement
the prior positive results obtained there by Cambior. This has the potential to develop quickly into a
satellite operation (assuming good drill results of course), which would provide upside to our production
estimates.
There are numerous other high-quality exploration targets on the large property, but RIO has learned
that it is best to buy the surface before going too far in terms of discovery.
CONCLUSION
Rio Alto has done a great job getting La Arena up and running, and has seen many of the hoped for
upsides come to pass. We believe that the success in locating additional oxide gold mineralization will
result in a much larger reserve (over the long term) and high levels of production for the better part of
ten years.
The development of the copper-gold sulfide project should follow a familiar path – get into production,
and then worry about maximizing NAV later. Reducing both financial and permitting risk comes from
this approach.
We are maintaining our BUY rating, but increasing our target slightly to C$8.00/sh from C$6.25/sh. Our
new target represents a 0.8x P/NAV multiple.

George Albino Associate: Oliver Turner
[email protected] [email protected]
416-943-6187 416-941-0243
Rio Alto Mining Limited RIO CN C$5.56 Rating:BUY Target: C$8.00/sh
Metal Prices 2011 2012e 2013e 2014e
Balance Sheet 2011 2012e 2013e 2014e
Gold Price $/oz $1,570 $1,613 $1,575 $1,575
Silver Price $/oz $36.83 $33.09 $35.00 $35.00 Working Capital m $35 $141 $211 $613
Long-Term Debt m $3 $0 $0 $350
Operating Statistics 2011 2012e 2013e 2014e Net Debt m ($23) ($132) ($202) ($254)
Total S/H Equity m $115 $240 $327 $414
Annual Production (Au) K oz 51 187 179 194
Total Cash Cost (Au) $/oz 410 381 494 529 Financials 2011 2012e 2013e 2014e
Production Growth Δ nmf 264% (4%) 8%
EPS (adj) $/sh ($0.00) $0.66 $0.47 $0.47
CFPS (adj) $/sh ($0.12) $0.74 $0.55 $0.55
Profit & Loss 2011 2012e 2013e 2014e
NAV 0% m $3,340
Revenue m $0 $279 $247 $276 $/sh $18.08
Operating Margin m $0 $207 $158 $173 NAV 6% m $1,934
EBITDA m ($8) $188 $139 $154 $/sh $10.47
G&A/Exploration/R&D m $8 $19 $19 $19
Net Interest Expense m $0.0 $0.0 $0.0 $14.0
Pre-Tax Earnings m ($1) $173 $125 $125 Valuation 2011 2012e 2013e 2014e
Tax Expense m $0 $52 $37 $37
P/E x nmf 8.5 11.8 11.8
P/CF x nmf 7.6 10.1 10.0
Reported Earnings m ($1) $121 $87 $87 EV/EBITDA x nmf 4.4 5.4 4.6
Adjusted Earnings m ($1) $121 $87 $87
Shares Outstanding m 169.0 173.6 173.6 173.6 P/NAV 0% x 0.3
Fully-Diluted Shares m 184.8 184.8 184.8 184.8 P/NAV 6% x 0.5
Cashflow Analysis 2011 2012e 2013e 2014e Company Statistics
Cashflow from Operations m ($23) $136 $101 $103 Potential Return: % 43.9%
Cashflow from Investments m $8 ($30) ($32) ($51) 52 Week High C$/sh 5.75
Cashflow from Financings m $29 $0 $0 $350 52 Weel Low C$/sh 2.81
Net Chg in Cash/Debt m $14 $106 $70 $402 30-Day Average Volume m 0.900
Current Book Value: $m $184.5
Market Cap: C$m $965.0
Last Updated: as of 29-Oct-12Source: GMP Research 2012
NAV Sensitivity Financial Sensitivity
0% Discount 6% Discount EPS CFPS
M$ $/sh M$ $/sh 2012e 2013e 2012e 2013e
$1,000 $/oz $3,339.1 $18.07 $1,725.4 $9.34 $1,000 $/oz $0.29 $0.14 $0.37 $0.21
$1,250 $/oz $3,928.9 $21.26 $2,089.6 $11.31 $1,250 $/oz $0.44 $0.28 $0.52 $0.36
$1,500 $/oz $4,518.8 $24.46 $2,453.8 $13.28 $1,500 $/oz $0.59 $0.43 $0.67 $0.51
$1,750 $/oz $5,111.3 $27.66 $2,820.5 $15.27 $1,750 $/oz $0.74 $0.58 $0.82 $0.65
$2,000 $/oz $5,704.7 $30.88 $3,188.1 $17.26 $2,000 $/oz $0.91 $0.72 $0.98 $0.80
$2,250 $/oz $6,298.1 $34.09 $3,555.6 $19.24 $2,250 $/oz $1.07 $0.87 $1.15 $0.94

George Albino Associate: Oliver Turner
[email protected] [email protected]
416-943-6187 416-941-0243
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