Stock pick: Rio Alto Mining Ltd. (RIO) could rise after Sulliden merger

Close proximity of Peruvian projects suggests cost synergies

Chart showing trailing 12-month stock performance of Rio Alto Mining

Many investors have been avoiding the mining sector over the last year as falling commodity have hurt a number of companies in the industry. Whether or not now’s the right time to get in is still up for debate, but that doesn’t mean you should completely sit on the sidelines.

For those investors who can stomach some risk, one company to consider is Rio Alto Mining (TSX: RIO), a $336 million market cap junior minor out of Vancouver. On May 26, Adam Low, an analyst with Raymond James, reiterated his outperform rating on the company because of a $300 million deal it made with Sulliden Gold, another junior minor, on May 21.

The acquisition was, mostly, a good move because Rio Alto’s La Arena mine in Peru is just 30 kilometers away from Sulliden’s Shahuindo mine, writes Low in a report. The proximity of the two mines is a major plus for Rio Alto.

“(This) should enable Rio Alto to benefit from numerous synergies, most notably applying its experience and success in permitting, constructing and operating a mine in northern Peru to realize the full value of the Shahuindo project,” he says.

Low also says that by buying Sulliden, Rio Alto boosts its gold exposure and can therefore achieve a valuation multiple that’s in line with other junior gold miners.

There are some drawbacks to the deal. Sulliden shareholders will receive about half a share of Rio Alto equity, which then dilutes the stake of current Rio Alta investors.

Low also feels that the purchase price was expensive and there’s still a risk that Sulliden’s mine, which is not yet in production, could run into permitting, construction and financing problems.

However, with Rio Alto’s strong management team — they’ve been able to extract more value from the La Arena mine than expected, says Low — and the potential synergies, this should ultimately benefit the company.

“If they are able to repeat their performance (with La Arena) at Shahuindo, the acquisition may turn out to be more accretive than we currently assume,” he writes.

The stock is currently trading at $1.90, but Low expects it to hit $3.50 over the next 12-months.