When mining companies invest in properties and explore them, investors often hear impressive claims about location and proximity to other mines. These are good indicators of the project's promise of production.

But Rio Novo Gold (TSX: RN) is going one step further: It's aiming to run entire gold districts, which is an interesting and aggressive play to lock out competitors and cash in on opportunities over a large piece of land. But that's not the only exciting aspect of Rio Novo Gold. Their financial outlook is exciting, given their project's history and its current state of development.

We spoke to David Beatty, CEO and Alex Penha, General Manager of Corporate Development of Rio Novo Gold. Both Mr. Beatty and Mr. Penha worked in the financial markets as mine financers prior to their work with Rio Novo. Mr. Beatty said, "With 25 years in mining finance, I've been underwriting and financing gold companies since Barrick went public.

Mr. Beatty gave us a brief synopsis of the company and its plan: "Rio Novo Gold plans to run simple, high grade, open pit mines with low CAPEX, low operating costs, excellent regional structure, low cost power, and high recovery. We've got an all-star team of experienced staff." Mr. Penha added, "Rio Novo Gold completed its IPO in March. We have prime assets in prime jurisdictions. We don't just have properties; we have two entire gold districts in Brazil."

The first gold district, the Almas Gold project, located in Brazil's Tocantins state, is an 18 kilometer archean greenstone belt with multiple targets. "This is a past-operating mine," said Mr. Penha, "and the previous owner operated it from 1996 to 2001. Our intention is to bring this project into production by the fourth quarter of 2011. So now we are embarking on an intensive drilling program to expand our resources. Then we can deliver a feasibility study by the first quarter of 2011."

With the Almas Gold district project underway, and Rio Novo's timeline clear and set, we asked them how they are progressing and what their assessment of the opportunity looked like. Mr. Penha pointed out the many advantages of mining an existing mine. The first benefit is the availability of infrastructure and staff. "We have power lines, water availability, and the town is close to the operation so no mining camp is needed. And, we have access to equipment that is manufactured right in Brazil. With most other mining projects, a company has to do these things themselves but the availability of all of these things puts us into an enviable position to move quickly."

The second advantage, Mr. Penha pointed out, is the ability to work existing mines and the impact it will have on costs: "Our cash costs will be about $300 to $325 in the first 2 years of operation because we are going to start mining the old leach pad which we believe has about 70.000 ounces of gold. It is already mined; we're just doing more crushing."

The third advantage is that no new permits are needed. "It's a brownfield operation," Mr. Penha said, "it is already permitted. Brazil calls it 'mine under suspension', so we just need to submit a new mine plan and they give back the permit, and that should happen within 6 months."

Their second gold district, the Guarantã Gold project, is a 108,000 hectare region where drilling has revealed numerous opportunities. Gold was discovered here in the 1980's and the region became the fourth largest gold-producing region in the Mato Grosso state.

"Each mine has a 10 year mine life and we'll continue to spend $8 million to $10 million per year to drill because there are that many targets on these properties," said Mr. Beatty.

Rio Novo's management team and board is a strong mix of engineers, geologists, lawyers, and financers, giving experienced direction to the company. The company's president, Julio Carvalho, was the CFO of Rio Tinto Brazil for 33 years. He built some of Rio Tinto's significant operations, including the Paracatu gold mine, now Kinross’ largest operation. Mr. Carvalho built that mine using about80% of local-based staff, a model that Rio Novo will bring to its projects.

The challenges they're facing are fairly standard for a company in their situation: It all comes down to how much gold they find. "Is there just a few hundred thousand ounces or can we find a couple million ounces?" reflected Mr. Beatty. "After that, it's really just timeline and equipment supply." As long as those elements go smoothly, they don't anticipate any larger challenges.

Investors want to know the stock details: At the time of this writing, Rio Novo Gold was trading almost exactly at the mid-point between its 52 week high of $1.55 and its 52 week low of $1.15. Investors will be particularly excited about Mr. Beatty’s stock valuation estimation: "We currently trade at less than 1 times our cash flow while we're building these two mines. It will cost us about $125 million and take about 2 and a half years to do. The payback should be less than 10 months and we'll be left with $140 million to $150 million dollars of free cash flow per year, which should be worth 6 times."

Investment Merits:

•         ~200,000 oz pa production by Q4 2012

•         High grade 1.65 g/t, open pits with good metallurgy

•         Expected low CAPEX at about $125mm

•         Lowest quartile costs – sub-$350 per oz.

•         7 rigs drilling 40,000m by Nov'10 - 10x news releases in next 10 months – "district-sized plays"

•         Experienced Management & Proven Board

•         Well capitalized - $38MM Cash, no debt

•         Compelling Valuation – Less than 1.0x cash flow exiting '12 or $US600 per annual oz - two years out

Along with current production, the company also has plans for growth, but they are wisely limiting their expansion to areas in which they have some experience and vision: "We're also considering advanced stage development projects, either in Brazil or Columbia," said Mr. Beatty.

Mr. Beatty summed up the opportunity perfectly: "We're serious mine builders and proven gold finders starting a new growth intermediate with a Brazilian based platform."

Value Creation Proposition

•         Prime Assets In Prime Jurisdiction: Two proven and underexplored gold districts in mining-friendly Brazil – one of the world’s leading jurisdictions for mining investment (Fraser Institute)

•         Fast-Tracking To Production and Cash Flow: Existing permits for Almas to be reactivated – production expected by Q4’11

•         Low Capex: Close to town – no mining camps needed; Power - transmission lines on top of properties; Ease of access through paved roads; Water availability; Access to equipments – local availability

•         Low Cash Operating Costs: Low cost power, water and pool of skilled professionals; Favorable and simple metallurgy - high 90’s recovery; Lean G&A

•         Organic Growth: Existent resources open along strike and at depth; Significant exploration program at multiple identified targets, many with historical artisanal mining work – over 150,000 ha of exploration licenses; 40,000 metre drilling program in 2010

•         Growth Through M&A: Active assessment of accretive transactions in Brazil and Colombia

•         Corporate Citizen: Committed for the highest standards on safety, environment, training and community relations

•         Government and Community Support: Projects located within priority development regions with favorable tax system

•         Execution: Experienced Management & Strong Board with outstanding track record in financing, exploration, development and production with comprehensive and operational success in Brazil

Reference

http://www.rnovogold.com/

Rio Novo Gold Inc.

155 University Avenue, Suite 1410

Toronto, Ontario M5H 3B7

416-368-8288

info@Rnovogold.com