Rio2 Ltd. (RIO:TSX.V; RIOFF:OTCQX; RIO:BVL) has revealed two Memorandums of Understanding (MOUs) concerning the potential provision of desalinated water for the Fenix Gold Mine. These agreements involve assessing the possibility of expanding the desalination capabilities of two companies by utilizing their current facilities and building a pipeline from their distribution centers.
This development is crucial for Fenix's growth strategy, which aims to boost annual production from 82,000 ounces to over 300,000 ounces, according to Atrium Research analysts Ben Pirie and Nicholas Cortellucci in an updated research note on the company September 24. The management has laid out a five-year roadmap to achieve this goal.
The studies will explore the potential expansion of their desalination facilities at existing plants and the construction of a pipeline and related infrastructure from their distribution centers in Copiapo to the Fenix Project, noted the analysts who said they were maintaining their Buy rating on the stock with a CA$2.40 per share target price.
A Significant Milestone for Co.
This initiative is a significant milestone for Rio2, as it would secure sufficient water resources to support a substantial expansion of the current mining plan. Both water companies are required to conduct a four-month conceptual study on the potential water supply, Pirie and Cortellucci noted. At the end of this period, Rio2 will evaluate each proposal and choose the preferred provider to develop a feasibility study for supplying desalinated water. Once the feasibility study is completed and internal approvals are obtained, Rio2 and the chosen provider will enter into exclusive negotiations for a Joint Development Agreement. Before this, Rio2 will have the exclusive right to include other potential mining partners in the agreement, thereby mitigating risks and costs.
The management has outlined the following timeline for a potential expansion, which will enable Rio2 to increase production to a target rate of 80,000 tonnes per day, achieving at least 300,000 ounces of gold annually for approximately 10 years, compared to the current plan of 20,000 tonnes per day and 82,000 ounces:
- Completion of a pre-feasibility study by Q1 2026
- Mineral reserve and resource update by Q4 2026
- Completion of a feasibility study in the second half of 2027
- Capital expenditure approvals and commitment for the expansion by Q1 2029
- Completion of desalinated water supply works and project capital works in the second half of 2030
- Start of ramp-up to higher production rate in the second half of 2030
On Time, Under Budget
The announcement is particularly significant as it sets Rio2 on a clear course to realize its expansion strategy and lower water costs under the current mining plan, the analysts said.
They also highlighted the long-term vision of the Rio2 team, which has a plan extending to 2030. Water issues have been a common concern among investors, and if Rio2 can proceed with one of these MOUs, its valuation could increase significantly as investors begin to factor in the expansion plan.
"We remind readers that RIO continues to advance project construction, on time and under budget (a feat few companies have achieved)," they noted. "Material has already begun being placed on the pad, and the first gold is expected early in Q1/26. This will mark a major step for RIO as it pivots from a developer to a producer and starts to heavily cash flow as it takes advantage of surging gold prices."
Oncoming catalysts for the company include progress on project construction, completion of the pre-feasibility study and start of Environmental Impact Assessment for Expansion in Q1 2026, initial gold production in Q1 2026, and selection of a desalination water provider and additional updates in the first half of 2026.
Equity Incentive Awards
On August 18, Rio2 announced the issuance of 1.73 million restricted share units to its executive team and board members, along with 400,000 stock options to select executives.
These options can be exercised at CA$1.84 per share, which is a 10% premium over the previous closing price of CA$1.67, and they will expire in five years.
Transition to TSX
On August 29, Rio2 revealed it had secured final approval to move from the TSXV to the TSX, with trading under the symbol “RIO” starting on September 3. The company emphasized this transition as a significant achievement that will increase its visibility, enhance liquidity, and expand its investor base, the analysts said.
Valuation
Pirie and Cortellucci said they continue to assess RIO based on a conservative net present value (NPV) at a 5% discount rate, amounting to US$843 million, assuming a gold price of US$2,700 per ounce. They applied a 0.8x multiple to this valuation, which is slightly below the 0.9x average of its peers.
"We will reiterate that RIO remains one of our top ideas given its catalyst-heavy year ahead and potential for its first quarter of cash flow to largely outperform its feasibility study, which the market is starting to price in," they wrote. "Furthermore, the expansion upside outlined today would more than double NPV, providing further upside for investors."
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