Red Rock Resources - A Complex Choice

http://www.rrrplc.com/
Drifting slowly downwards. Three words that sum up the last twenty months for investors in Red Rock Resources (LSE:RRR). Its fair to say it has been a dreadful ride for investors who purchased at RRR's peak back in late 2010 and some must be wondering whether the company's share price will eventually turn around or carry on its gradual decline, similar to that of Edenville's. Red Rock listed on the London Stock Exchange in July 2005 (on the AIM market) - its operations focus around the exploration and development of minerals including gold and iron ore as well as holding interests and royalty stakes in the Australian listed firm 'Jupiter Mines'. Red Rock currently has a market cap of circa £16m and has just under 930m shares in issue.

As shown in the chart, the downward trend for RRR holders continued into 2012. Whilst the FTSE is fairly flat/slightly up on the year, Red Rock is down by almost 40%. What must be even more frustrating is that of false dawns that the downtrend may be broken such as that in early June. Instead, it followed an almost identical pattern to that of a smaller spike up in January. If this is seen on a normal closing price non-candlestick chart, this becomes obvious. In Q1 2012, volumes for RRR had picked up compared to Q2, Q3 and Q4 2011, but this has since died down, with no huge news based rises to spur investors to life. Perhaps a big obstacle that puts investors off is that of the bid/ask spread which often runs over 5%, and at times can even reach towards 8-9%, thus timing an entry into this share is pivotal as you could find yourself paying over the odds quite easily. The stock is down 41% over 6 months and 74% since this time in 2011. However, with a 91% decrease from peak to the current price, you can only help but feel that any significant news would not only break the downtrend but be the start of a bull run for the company. The charts are favourable as it stands. Of course, the obvious questions are if, and if so, when.

Red Rock has three main projects that it is currently participating in the first of which focuses upon Rare earth elements and uranium. Initially Red Rock pursued this through a stake of ~27% in an Australian listed firm, Resource Star, but in March 2012, Red Rock increased this holding towards 45% to increase exposure through a rights issue. In May it was announced that Resource Star took their interest in the Livingstonia uranium project in Malawi to 100% through buying the 80% share they didn't own from the holder Globe Metals. However, this was turned into an equity swap when Globe immediately purchased Resource Star's 80% stake in the Machinga niobium rare-earth metals project along with respective 1% and 0.7% royalty interests. No cash was settled with the royalty interests differing solely due to the relative levels of each project's advancement. The Livingstonia project has an JORC compliant estimate of six million pounds of Uranium. Through Resource Star, Red Rock also has interests in project in Western Australia and Australia's Northern Territory. Red Rock also has a stake in Ascot Mining which operates in Costa Rica with gold production.

To add to Red Rock's assets is that of its Greenland project known as Melville Bugt (I'll stick to calling it the Greenland project (GP) with a name like that!). The GP targets iron ore covering 1013km2 with an application to increase this by over 50% complete. As per the company's words, "The 2011 reconnaissance program found that banded to massive haematite iron formations were encountered in a number of areas. High-grade magnetite iron formations also identified" . The company also suggested that the geology in the Greenland project may be analogous to that found in a prosperous iron ore mine in Canada. Whilst Red Rock currently has a 25% stake in the project it has an exercisable option to increase this to 60% dependant on fulfilling commitments applicable in 2012 that encompass funding exploration and assigning a resource estimate to the project. Work on the project in 2011 was mainly to get a better feel and sample the geology found through geophysical surveys and 'prospect scale mapping'. Red Rock said that eight targets for future exploration had been mapped out through this program. "Banded to massive haematite iron was encountered in a number of areas, the most promising of which is the De Dødes Fjord area, with the most extensive mineralisation identified to date a series of four linked occurrences with a potential strike length of 7.5 km. Perhaps the most significant discovery has an exposed strike length of 800m on surface, with an estimated true thickness of 100m." Encouragingly, iron composition rates were as high as 69.5% in some places. Currently a 5km-6km drilling programme is being undertaken with an estimated time of completion being early Q4 2012.

Red Rock has also been approached for a possible sell off of its Colombian gold production operations. "Red Rock owns 50.5% of Colombian gold miner Mineras Four Points SA (“MFP”) and retains an option over a further 1%. Red Rock initially lent $2m to, and entered into a consultancy agreement with MFP. The loan and consultancy agreement have a 3 year life. MFP owns and has rightsover two gold mines in Antioquia, El Limon and El Mango (La Aurora). El Limon has a history of high grade production and is over 350m deep covering 7 levels. El Mango has recently started producing ore for production at the El Limon plant. A recently completed refurbishment of the 150t/day plant at El Limon has seen the start of operations, and production building up towards rated capacity." The sell-off is not confirmed however, with the initial approach only being a letter of intent. Value has been created in Colombia through production and increased recovery rates. Due to the success of the Colombian assets, the sale of interest there could generate significant further funds for Red Rock.
RRR's structure of interest in Kenya
Red Rock's final assets lies in Kenya known as the Migori & Mikei gold projects. The Migori project is found in south west Kenya covering 310km2. "NI 43-101 Indicated Resource of 1.2m oz (0.25 g/t cutoff) of gold over the KKM, MK, Nyanza and Gori Maria prospects currently undergoing validation to JORC standard. 577, 000 oz (0.5 g/t cutoff) of gold validated as a JORC resource at the KKM prospect" over 63km of strike.  Red Rock's gold project gives a sense of useful diversity to the company. Should a large scale recession occur, many investors purchase gold as its known as  a relatively 'safe haven' alternative to other securities such as equities thus driving up the price. To an extent this should balance out any potential downturn in demand for iron ore. Positively, the licenses which the prospects are within lie in the Archean Migori Greenstone Belt (AMGB) - an extension to the successful Tanzanian Greenstone Belt to the south. The characteristics of the rocks within the AMGB lead to a buildup of Copper-Zinc-Lead deposits in proximal locations but leads to the presence of gold mineralisation in most strata and vein features of the rock and have also accumulated through alluvial deposits. This leads to the likelihood that stacked gold deposits may exist in the strata.

Skipping to current holders of the stock its interesting that directors are not very large holders as of present with less than £150k held between them. Despite this there is a large number of institutional investors involved (as of last annual report) with 492m shares attributed to them - perhaps a sign of confidence in the stock. The financials of the company also look decent.  Revenues forecast for FY 2012 look significantly better than FY 2011 up to ~£5.85m (digitallook.com) from previously just £940,000 although pre-tax profits are forecast to drop by over two thirds to £4.50m. This drop is associated to he selling of part of Red Rock's shareholding in Jupiter Mines whose share price has suffered as bad as RRR's in recent months. Cash has also been an issue for RRR with numerous fundraisings needing to be undertaken. The revenue growth has been shown through interim data showing £3m revenues. These cash flows will prove significant to the company in funding future operations. The prices forecasts of their main metals is interesting. Gold is selling at a circa 7% discount to its price of last year although it is disputed that the gold price could register another 30% rise in 2013. This would bode well for Red Rock. However, iron ore prices have been crumbling recently, and are now lingering near three year lows following concerns about China's economic state and the state of the global economy. Currently around $100/tonne, some forecasts have said it could hit as low as $80/tonne should the economic outlook further deteriorate. On the other hand, uranium prices are widely expected to gradually increase in 2013 following a shortfall in supply of the metal and dips in its price in 2012 so far.

One solution to Red Rock's cash problem may have already been started through the 0.75% selling of interest in the mt Ida magnetite project in Western Australia with total cash and share based payments totalling $14m. This will be sold to London listed Anglo Pacific. Whilst this was below expectations by around 15% it will crystallise value and allow the money to be spent funding other projects and focusing on specific projects rather than having a less focused view on many. Also, Red Rock will still have a 0.75% revenue stake in production - a big plus. Part of RRR's problem is its holdings in Jupiter Mining (4%) and Ascot Mining, both of whose share prices have been catastrophes of late. Jupiter Mining's share price has dropped over 60% over the last year with Ascot's dropping around 90% over the last year. Whilst this is clearly bad news for RRR, Ascot is looking to list on the AIM (maybe 2012, but probably 2013 following a company update) which would boost investor interest and may be a catalyst for a share price rise. Additionally, Jupiter Mining's Tshipi Manganese mine is expected to come into production in H2 2012 further. GECR noted, "Amongst JML’s assets are the open pit manganese mine at Tshipi, South Africa (in production 2012), a small haematite project at Mt Mason (in production 2013 with expected free cash flow of $82.5 million a year), and the potential 1.3 billion ton Mt Ida magnetite project where, even post the deal with Anglo Pacific, Red Rock will still have a 0.75% royalty, which could generate around $8 million a year for 50 years when/if this project gets the green light." So clearly, upside exists. Also noted was a sum to parts valuation which in July valued Red Rock at 6.0p/share, but now with further dilution would stand at 5.7p/share, still representing an attractive upside (assuming asset values are unchanged).

Considering Red Rock holds a fairly large amount of cash in Jupiter Mining (JML) which has led to cash erosion for RRR over the last year the below chart illustrates where JML's share price may be heading.
Considering JML's Tshipi mine is due to come into production in Q4 2012, this should boost confidence in investors. I expect the share price to break out of the channel within the next 2 weeks. Red Rock said, "We expect confidence in Jupiter to return, as 2012 will see the results of the three important projects on which that company has been quietly engaged over the last year: the imminent completion of the bankable feasibility study on the Mt Mason haematite project, the opening of the large open-pit manganese mine at Tshipi in the second half of the year, and the completion of the bankable feasibility study on the Mt Ida magnetite project at year end." The main reason for the drift is the slow progress of JML's projects over the last 18 months so the start up of production at Tshipi (one of the largest manganese mines) will represent a major milestone. It is perfectly feasible to see JML's share price at 0.25 at year end which would represent a large increase upon the current price and may prompt Red Rock to sell its remaining investment in Jupiter. This would provide Red Rock with circa £12.5m but this is of course on a sliding scale upwards.

So there are numerous sources of funds that Red Rock can tap, the royalty sale payments at Mount Ida for $14m, the royalty interests earned when Mt Ida comes into production over the next couple of years, possible cash from the sale of Jupiter Mining shares. Red Rock also has loan and options in Ascot mining worth a couple of million dollars, a couple of hundred thousand dollars in Red Star Resources and also now holds shares in Uranium Energy following its takeover of Cue Resources initially worth approximately $1.5m, but which has since lost 35% of its value. Red Rock could raise significant further funds through the sale of its Colombian interests. In my opinion, Red Rock would do well to streamline its operations. Despite this, there is clearly cash flows should Red Rock need it in the near future, but also over a longer period of time. Which bears the question, why has so much dilution been necessary? And of course, the answer is, the cash is needed now and it is by far the easiest way to raise funds quickly through equity placings rather than sales of interests.

Now to go onto what news Red Rock has released in 2012. To get it out of the way, red rock has issued a lot of equity. In 2012, Red Rock has already issued 156 million shares most of which were through open placements or through a subscription agreement with YA Global Master SPV down an equity line facility. In total this has raised approximately £4.58 million. This exaggerates why other sources of funding are needed, and which are available. Nonetheless, Red Rock is able to release a continuous stream of news due to its diverse operations.
In late January, Red Rock kicked off its news with bumped up production at its Colombian assets. Ore mined was up by almost 30%, ore processed by 12%, gold sold by 1.5%, but grade recovered declining by 9%. A day later the announcement of Uranium Energy's (UEC) acquisition of Cue resources came through. As mentioned above, a large decline in UEC's share price has dented the value of interests there since. Finally in late January, Jupiter Mining announced a quarterly update on operations. "Jupiter Mining reported that its 49.9 per cent owned Tsipi Borwa manganese project in South Africa remains on track for delivery of first ore in the second half of 2012."

If you're not already perplexed about Red Rock's complex investment side, in February they acquired another 4.94% of shares in Kansai Mining bringing their total interest to 37.96%. Red Rock holds Kansai purely for investment purposes. Also announced was a positive scoping study at its Kenyan operations. It was derived that at 10.5k ounces the Macalder Tailings project could last 4 years. At $1550 for gold, this estimates $5.6m - $6.8m cash flow for Red Rock when in production. In late March the half-year report was released with a major stepping stone being that of an almost £800,000 profit at its Colombian gold project. However, along with this came disappointing value depreciation of its interests in Ascot Mining and Jupiter Mining. Chairman Andrew Bell noted, "As with Jupiter, so with Red Rock, we expect the remainder of 2012 and early 2013 to be a period where the company can show the results, and gain the reward, for many months of solid effort.”

Red Rock's share price rose 5% on news in March following aircore drilling results on its Migori Kenyan project. Analysis showed that five samples spanning three areas had encountered in excess of 1 gram/tonne gold. Further prospects were also delineated all of which had a positive outlook for Migori. One day later and another Colombian production update was issued. Ore mined was up 13% quarter on quarter, ore processed was up 12% and whilst gold sold declined by 19% grade achieved rose by 23%. This further proving the value of the Colombian assets. In mid April a lawyer,(Ariel Partners) was appointed to help simplify holding interests in Kenya. As I noted above, Red Rock's interests are very complex, so this should allow a simpler structure where a single value can be attributed to its Kenyan Migori project. A few days later high grade intersections from the Nyanza prospect within Mikei were found.

"Nyanza is one of five linked deposits within Mikei. The latest drill results include high grade intervals, reaching 43.3 grams per tonne (g/t) gold. The best results from 3 holes included 2 metres grading 14.7 g/t. As well as 2.6 metres at 32.9 g/t gold and includes a one metre interval of 43.3 g/t. The third hole cut 31 metres at 3.91 g/t and included two higher grade assays - 1.5 metres at 27.7 g/t and 7 metres at 9.8 g/t." - (proactive investors)

In early May the first payment from the 50% sale of Red Rocks 1.5% stake in the Mt Ida project was received amounting to $3.9m cash and $2.1m in Anglo Pacific shares (LSE:APF). This $2.1m stake is down 16% since organised. Further news came from Resource Star who had taken full control of the Livingstonia project as mentioned in an earlier paragraph.

In June positive results were found at the Mikei project in Kenya. High recovery rates exceeding 75% were found with up to 90% at Nyanza. A mineral estimate was also underway whilst the Greenland iron project had begun drilling and were targeting a JORC compliant resource estimate. In July, potential for stacked gold ore zones was encountered at the Mikei project in Kenya. The presence of the stacked zones improve the chance of open cut mining. It was in mid July also that initial approaches were made for their Colombian assets. Following the spud of drilling in Greenland, Red Rock announced on the 18th July that thick banded iron formations had been intersected which were in line with expectations and proved the expected geology reminiscent of that in Canada. This reflected our belief that we would be able to declare a new iron ore province based on this year's exploration programme.”

A week later a JORC estimate placed over 1 million ounces of gold at the Mikei project - another significant milestone. On the 15th August, Red Rock also said it had applied for a mining lease for its Macalder tailings project in Migori, Kenya.

Talking to Proactive Investors Andrew Bell commented, “For any project there are two points at which a company can add the most value – right at the beginning when it is first discovered, and you’re able to establish a resource out of nothing. And secondly when the mine is built, production starts and everyone suddenly believes your story.” “Clearly, we are more likely to be involved in those early stages. That is where we fit into the ecology of the mining industry.” “Really we never have more than three projects on the go at once. Yes, we have other assets but generally they are passive investments, minor in scale, where we have already begun the process to realise the value we’ve created, or which are sitting in the ante room while we get to know them.”“Everything is a cycle. We buy a project, add value and we sell. Really it is the same as any type of business.
“And I’m not bothered if we end up selling on some of our interests quite quickly. It seems to me a very good way of reducing risk and realising the value that we’ve created. “All our assets are for sale at the right price; if someone comes to us and makes us an offer that provides us with a good profit we’ll negotiate. That is the business we’re in.”

To see the full proactive interview visit the url below:
http://www.proactiveinvestors.co.uk/companies/news/47242/red-rock-resources-comfortable-with-position-as-value-adder-47242.html


Having very briefly gone through all the significant news for Red Rock this year it is evident that if you are invested in RRR you will probably never be bored of waiting for some more news. Both significant and insignificant Red Rock has released 53 RNS's this year. Taking the 239 days this year so far and discounting a base of 63 weekend days that's 53 RNS's over 175 days, or one every 3.3 days.

I must concede that RRR's structure does not attract me to invest in them due to its complex nature and the amount of attention it requires along with in-depth knowledge of each of the companies it has invested in. However, the share price could rise significantly through a number of avenues, not least if a bid is entered for its successful Colombian operations which could achieve an attractive price amounting to a medium-large portion of its current market capitalisation. The opening of the Tshipi mine by Jupiter Mining in South Africa, further progress in Greenland and more positive results from Kenya could all prove as the catalysts to boost the share price from the doldrums. Through Red Rock's structure it may only take one project to succeed for them to benefit greatly as per the rise a couple of years ago. Despite this, it could be better for a company of this size to narrow its operations, as currently I can't help but feel it has too wide a focus. If I were interested in Red Rock I would buy but only on a breakout as this would act as a precursor to a change in investor sentiment that has failed RRR for a multitude of months.

3 comments:

  1. another comprehensive review.

    :)

    ReplyDelete
  2. well done - excellent review and sensibly written

    ReplyDelete
  3. From 'Atino'

    ...jolly good stuff

    ReplyDelete