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?
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
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.
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
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