Cash is King, Cash Flow is Queen



If cash is king, cash flow is queen. As the debt crisis eases management teams in the mining industry can again re-focus on their #1 job – growing the business and creating shareholder value. Since September 2008, companies have been telling their shareholders how much cash they have, what there spending commitments are, how they are preserving cash etc. Now they can go back to talking about cash flow growth, just like every other business!


While there will still be ups and downs, investors are no longer concerned with systemic financial collapse.


Growth growth growth – whose got it? Growth is surprisingly hard to find in the gold sector (and that’s a good reason why the price of gold should remain buoyant for some time to come). My first article in this series on “growth companies” highlighted two intermediates that are well on their way down the path to major status, Red Back and New Gold (see archives at botton of article). Both Eldorado (ELD-TSX; EGO-TSX) and Agnico-Eagle (AEM-TSX) will see production increases of more than 50% over the next 3 years. And Goldcorp is scheduled to increase production 50% over the next 5 years. No surprise here, all of the above companies are good solid growth stories and deserve investors attention.


But I found a growth story that just might surprise.


In my constant ongoing search for growth stories among juniors and intermediates one company came up as a complete surprise – Rusoro Mining (RML.tsx-v: $0.455).


Now I’ll be the first to admit that very few companies have had more bad press than Rusoro recently has in their failed take-over attempt of Gold Reserve (GRZ-TSX) for their 9 million ounce Brisas deposit in Venezuela. 


But what makes Rusoro interesting isn’t all this soap opera negative publicity, but their real progress on the ground which until today has been hidden from potential investors. Rusoro, since purchasing their first production assets in Venezuela in 2008, have consistently increased production and lowered operating costs per ounce.


One of the reasons being they have no problems getting permits, which was a huge source of frustration for both Gold Reserve and Crystallex (KRY-TSX), the other Venezuelan mining companies. This is undoubtedly due to the relationship their Russian chairman, Vladimir Agapov, has with Venezuelan President Hugo Chavez.


Since taking over the Choco 10 mine in December 2007, Rusoro has increased production from 4,000 ounces a month to over 10,000 ounces a month.


Cash costs per ounce have dropped in half, from $800/oz to under $400.  So at the same time their gross production is increasing, so is their profit margin per ounce.


The company’s guidance for 2009 is an average of 14,000 ounces a month production, or 170,000 ounces a year.  Next year they have a new mine, SREP, commencing production, which will take them to 250,000 ounces per year.  SREP is a high grade underground mine, at close to one ounce per ton.


Also in 2009, Rusoro will release the results of a scoping study, outlining the basic economics involved in more than doubling production at Choco 10 to more than 400,000 oz a year.


Free cash flow at Rusoro is showing sustained quarter over quarter improvements, and should continue to do so through this year and next. The cost of the mill at the new SREP project is a low $15-$20 million, and adds 80,000 oz of production a year.  Rusoro just raised $80 million in equity, so there is lots of cash to complete this.


Rusoro has shown they are good operators; probably much better than what the market believes.  Investors just can’t hear the good news because of the noise surrounding Venezuelan politics and the failed Gold Reserve bid.  So far, Rusoro’s Russian connections have helped the company operate in Venezuela, but the low share price says investors remain unconvinced that that means much.


I think it mean’s a lot, I also think Rusoro’s shares are extremely undervalued, but won’t stay that way for long after investors manage to unwrap the wet news blanket covering this exciting growth story. Rusoro warrants further due diligence by anyone wanting to add an exciting growth story to their portfolio.





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Richard (Rick) Mills



Bio - Richard is host of and invests in the junior resource sector. His articles have been published on over 30 websites including - Wall Street Journal, Kitco, USAToday, Safehaven, SeekingAlpha, The Gold/Energy Reports, Gold-Eagle and Financial Sense.




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