FREE

RIO: Acquires Peruvian Copper Producing Operation

What you need to know:
• Rio2 announced that it has entered into a definitive agreement with Southern Peaks Mining L.P. (a private company) to acquire its 99.1% interest in the Condestable underground copper mine, located in Peru.
• Condestable is forecasted to produce 27Ktpa CuEq or ~80Koz AuEq, has a reserve mine life of over 10 years, and has expansion potential.
• On closing, Southern Peaks will receive an upfront consideration of $180M, including $80M in cash, $65M in vendor debt financing, and ~$35M in common shares of Rio2. Another $37M will be in a deferred payment.
• We remind readers that RIO’s Fenix Gold project is expecting its first gold in just a matter of weeks, marking a key milestone.

Yesterday, after market close, Rio2 (RIO:TSX, RIOFF:OTC) announced that it has entered into a definitive agreement with Southern Peaks Mining L.P. (Southern Peaks) to acquire its 99.1% interest in the Condestable mine, located in Peru. The Condestable mine is a well-established underground copper operation that is forecasted to produce ~27Ktpa CuEq or ~80Koz AuEq, materially growing Rio2’s production profile (more information on the operation on page 2). The total acquisition value implies ~$241M when including the assumption of $24M in debt and $37M in deferred consideration. To fund the acquisition, RIO has secured a $191M package made up of $65M in vendor debt and a C$166M bought deal equity raise. Rio2 stated that at consensus metal prices, the operation is expected to generate an average annual EBITDA of ~$110M, valuing the acquisition at ~2x EBITDA, a steal in our view. We are maintaining our BUY rating and increasing our target price to C$4.00/share (prev. C$3.30/share) on Rio2.

Transaction Highlights & Concurrent Bought Deal Financing
The transaction combines cash, shares, and vendor-supported debt to minimize upfront dilution while securing a cash-flowing asset. The C$166M bought-deal, led by Raymond James, Stifel, and BMO, will fund the cash component of the acquisition, while the $65M vendor debt provides additional flexibility through a six-year term and six-quarter principal grace period. A separate C$14M private placement in Latin America offers further balance sheet capacity, although not required for closing, it strengthens Rio2’s balance sheet as it adds Condestable to its portfolio.

Valuation Update
We have updated our valuation methodology to include the Condestable operation and are valuing this portion of the business on an EBITDA multiple valuation. We use a 5.0x multiple on the forecasted $110M 2026 EBITDA for the project to derive a valuation of $548M or $1.01/share. This highlights the substantially accretive nature of this acquisition, which we believe the multiple should only scale further in the hands of what will be a multi-asset and multi-jurisdictional, Latin American gold-copper producer (with growth on the horizon). We believe the 5.0x EBITDA multiple is conservative, given junior gold and copper producers are trading at ~6.0x EBITDA; however, we will use 5.0x until more information comes out on the operation and we see a quarter or two of steady production.