Red Rock Resources - Turning around?


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I first reviewed Red Rock Resources (LSE:RRR) in late August. I started off the article with: 'Drifting slowly downwards. Three words that sum up the last twenty months for investors in Red Rock Resources (LSE:RRR).' It is fair to say that this can now be extended to twenty-five months with the overall drop from the 2010 intra-day peak increasing from 91% to ~ 94.4%. The share price for Red Rock has decreased from 1.8p in August to 1.13p today representing a further 37.2% decrease. Since the last review 225m more shares have been issued (total number = 1.155 billion) leading to a market capitalisation of £13m. Is a turn-around finally on the cards?

This article is a follow-on from the below posts. For full context and information, read these articles first:
http://www.theel1tetrader.com/2012/08/red-rock-resources-complex-choice.html


The problem I pinpointed with Red Rock in my last review was the lack of transparency within the business model from a shareholders viewpoint. The company is effectively invested in other companies and projects and supposedly makes profit through purchasing, adding value and selling certain properties. I wrote:

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.


courtesy of christine zenino on flickr
The problem since is that none of the projects have produced a sentiment-changing moment and the share price consequently did not break out. However, as per the above chart, the share price may break-out dependent on imminent share price movements - if the price holds above the channel the downtrend will have been broken - this is the first step towards positive share price progress. Since the initial review, the company has started a transition phase whereby its operations may become more streamlined - the following section will cover what has been announced since August at its three projects in Greenland, Kenya and Colombia.

In late August the company announced drilling results from the Melville Bugt iron project in Greenland. The drills uncovered deposits of iron although the RNS was dampened as "difficult drilling and poor weather conditions had continued to slow drilling progress". Red Rock also holds 60m shares in 'Jupiter Mines' - an Australian listed firm which operates the Mt Ida magnetite project. A JORC compliant estimate raised resources by 132% which was above estimates. While this is obviously good news, Jupiter Mines continues to decrease in value as shown via the chart below. As shown in the chart, Red Rock almost appears to be pegged to the value of Jupiter Mines as the two have very similar share price charts. The 60m shares the company owns is equivalent to roughly 5.4m AUD or £3.58m.  Jupiter has zero debt and a fairly healthy balance sheet, but once again it also fails from poor investor sentiment and is still located within a long-term downward channel.

If Jupiter can rise up to 0.14AUD/share in the medium-term this would increase the worth of Red Rock's holding by £1.98m. However, judging by the current JMS movement, a quick sharp rise is unlikely, if gains do materialise it will be through gradual upward movements. With over a third of the market cap in cash, there is certainly scope for rises in Jupiter once the trend changes.

In mid-September Red Rock started adding to their total shares in issue through placing ~39m at 1.7p each. Further updates were released from the company's Migori prospect and an update was given on the disposal of their Colombian asset with the due diligence stage of this being successfully completed. In October the maiden production from Jupiter Mining's Tshipi Mine started which is a significant feat for both companies. Clearly though this failed to reverse the share price movement. This is partly down to the company's continual lack of cash. Due to having fingers in too many pies and with delays in realising cash values, cash flow issues have arisen. The loss for the year exceeded £4m.

Disappointing news was released in November. Jupiter's Mount Ida project was effectively being put on hold hence royalty payments from production are pushed further down the timeline. The announcement noted: "Jupiter cites increased cost estimates, depressed iron ore prices, and a strong Australian dollar. It emphasises that it will continue to meet spend requirements to protect the value of the earlier work for potential future development." 

Another 60m shares were issued in late November at 1p/share to raise more funds for development. However, a few days later Red Rock was pleased to announce that they had had an offer to acquire part of the stake in the Greenland Iron project from 'International Media Projects'. Red Rock owns 60% of the shares of NGL. The offer is as follows. Post Offer, Red Rock would retain an interest in the Project of between 14% and 29% (dependent on NGL shareholder acceptance levels) and would receive a cash consideration payment (gross of any commission payable to IMP) that could vary between $10.7M and $16.1M USD dependent on ultimate NGL shareholder acceptance levels. At the lower end of this, this equates to ~£6.8m. 

Following yet another placement, the company noted:
"These are challenging markets, and although as previously announced, the Company hopes to complete certain substantial asset sale transactions, it is unable to predict the timing of such sales precisely. Therefore deleveraging the business and reducing the exposure to movements in the price of its main listed investment holding is the most prudent course to reduce the overall risk profile. While the Company focuses on the execution of the proposed sales of its iron-ore project in Greenland and Colombian gold operations, along with restructuring activities associated with its holdings in Kenya, it has moved to reduce its corporate debt and overall liability level. In this derisking exercise the exposure to movements in the Jupiter Mines share price was reduced by the October sale, and now debt exposure has been brought to more appropriate levels by a Loan Note reduction of over £1.33m. We continue to focus on execution of the key transactions that will enable us to crystallise shareholder value."    

courtesy of kevinzim on flickr
More complications arose in December following results from Greenland and Kenya. Supposedly Mid Migori Mining had been mining in Kenya illegally although the companies strongly dispute this. Clearly though, any problems such as this are disruptive to both the focus of the board and to further progress. Entering 2013, an update on Greenland was given with the deadline for the sale of the percentage stake extended by a month - relevant shareholders would be consulted during this time to assess whether the sale would go ahead. Furthermore, despite suspending activities at Mt Ida, Jupiter announced further resource upgrades as a result of evaluative work. "The Northern and Southern Zones add a further 615 million tons at 28.86% Fe to the 1.23 billion tons at 29.97% Fe in the Central Zone for a total Resource increased 50% to 1.86 billion tons at 29.48% Fe."

Penultimately, another 60m shares were issued in late January at circa 1p/share. These have kept a lid on the share price as there is likely to be an overhang as some institutions offload stock. Conversely, the disparity between the issue price and the share price has narrowed in recent placings which is a positive. The most recent RNS was issued on January 8 and included the acceptance of the Greenland sale at a level which leaves Red Rock with a 29% interest and gaining a $10.7m consideration.

The question is whether Red Rock is still a complex choice. The answer is yes, although it could become less complex as sales are progressed and completed. Nonetheless, even when these are complete, the company will still have too many projects/investments ongoing in my opinion. Two investments and two projects would probably be adequate and reasonable for a company of Red Rock's size - if too many are pursued, there are many angles that could adversely impact the share price that cannot all be considered or prevented. Regardless of this, the company is only capitalised at £13m. Considering currently £3.58m is in Jupiter and the company likely to receive ~£6.5m from the sale of part of the Greenland stake this values the Colombia sale, the Kenyan assets plus numerous other investments at just ~£2.7m which seems very low. There is the risk of further equity issues until cash flows are sorted and currently there are ~£3m+ in 2013 expiring debts - this does not pose a risk to the share price in my opinion as the borrowings can easily be repaid upon completion of either sale and may lead to a share price increase themselves. The equity issues have also only been used for 'bridging' as opposed to a sustainable strategy so these should be phased out. The question is whether this can be done in a timely manner to prevent further placings. Once cash is received (assuming the sale of both assets), the company is best off deferring any further investments (i.e. create a cash stockpile). This would help maintain a valuation floor in the long-run. With the company already stating that 2013 expenditure will be lower than 2012, the potential for cash injections amounting to a substantial proportion of the market cap plus an improvement in the clarity of the firm, Red Rock looks good value at the current share price, but only upon channel breakout.

Update 26/02/13 - Red Rock has not broken out of the channel. Due to the extended period of time that has passed, RRR has been removed from my coverage. No Rating

6 comments:

  1. A balanced writeup, but contains an error or two.

    "the company is likely to receive £6.8m from the Greenland sale"

    The proposed sale (which isn't yet in the form of a definitive sale agreement) is for 95% of $10.65m, which at 0.63 dollars to pounds, comes to £6.37m. Furthermore provided the sale does complete there may be associated admin/legal fees and a tax charge to come off that.


    "There is risk of further equity issues until cash flows are sorted and currently there is ~£950k debt"

    Agreed on more equity issues, however the debt is higher. The company says "As at mid-Dec 2012 the residual value of the 2013 Loan Notes is £956,654 with repayment date of July 15th 2013, and interest accruing at 14%". Including 7 months interest brings this to -£1,034,800.

    There was also a fully-drawn loan of -$3.3m (-£2,079,000), of which at least £115,000 was repaid in H2 2012 according to news releases. The loan accrues interest at 9% so will likely still be around -£2m. Interim results in a month or so should confirm the Dec 2012 balance, but at this stage they appear to have debt in the region of -£3 million.

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    1. the debt will probably be repaid very soon after the sale.

      Ironicly bought into red rock resources two days ago.

      Craig

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  2. Hi mowgli,

    Thanks for the point regarding the loan - this is longer term than the £956k so if not particularly worrysome, but I will clarify this anyway.

    Regarding the (potential) Greenland payout, the exchange rate is currently a bit closer to .64 which at 95% comes out around £6.5m - I've changed this to meet you in the middle - obviously as you correctly note, some charges will apply.

    Thanks for your comment and best of luck with your investments,

    El1te

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    1. However, provided the Greenland proposal develops to a Definitive Sale Agreement and the terms remain the same, then I would agree the share price should see an uplift.

      Nov 2012: "At this stage there is no assurance the parties will enter into a definitive sale agreement. If a definitive agreement is entered into there is no guarantee that the terms of the offer will remain the same."

      Feb 2013: "Until a definitive agreement is signed, there is no assurance that the offer will close"


      The sale was scheduled to close Jan 10th, then Feb 10th, so has slipped. The Greenland parliamentary elections (March 12th 2013) may now be a factor in further delays.

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    2. looks to have update it mowgli

      Good writeup and i seriously hope the trend is broken. Diabolical share price movement over the last 25 months. Pathetic on every level

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  3. You can add the outstanding loan due to RRR from MFP of $2.25m, They also have investments in RGM 33.9m, Alba mineral resources 2.6m, Resource star ltd 45.9m and Ascot mining 1.3m.

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