Remember the scene in the movie ‘The Life of Brian’, where Reg (played by John Cleese) the leader of the Peoples' Front of Judea (not to be mistaken for the Judean Peoples' Front!) asks his followers the question “What have the Romans ever done for us”? Then, after an exchange where the supporters outlined the many things Rome had provided, he retorts with; “yes but apart from the, sanitation, medicine, education, wine, public order, irrigation public health, etc etc etc, what have the Romans ever done for us”?
So it’s true of Red Rock Resources (AIM:RRR). Despite a period of amazing development the question still persists; “yes but apart from investments worth far in excess of market cap, potentially enormous future royalties, a 1.2million ounce gold JORC in an African gold project near production, etc etc, what have Red Rock Resources ever done for us”?
Here’s the problem (perhaps); the market mistakenly thinks Red Rock Resources is an investment company and that’s a BIG BIG mistake, I think.
In fact it’s that bad that I have an image of Andrew Bell leaning out of his boardroom window at 115 Eastbourne Mews shouting, “We are not an investment company!!” You get the point.
So here perhaps we have a simple case of mistaken identity. Your typical micro cap explorer would never be mistaken for an investment company. They usually operate in a one sector (e.g. gold exploration), in a narrow geographic region and under one corporate vehicle. So the market ticks the box marked “Junior Explorer” and all is well with the world.
But what if your business is a more sophisticated animal and not so easy to categorise? The Market would then need to pay more attention and dig a bit deeper to get a better understanding - but markets move fast and are not exactly known for their application and attention span.
So here’s where you run the risk of being mistaken for your closest look-alike. And in the case of Red Rock Resources (AIM:RRR) that would be a “Mining Investment company”. Which brings us back to Andrew Bell’s big challenge – how to get his message across to the market – RRR is not an investment company – well not as such!
So you have to have some sympathy. Since floating Red Rock off from Regency Mines (
AIM:RGM) in 2005, he has continually been working his proprietary brand of alchemy; identifying exciting mineral resources, driving them up the value curve and then crystallising value by hiving them off into discrete tradable packages whilst retaining a significant/controlling stake.
These entities are spawned, nurtured and grown to the point where they can operate as standalone projects. They are in all the right sectors (steel feed, uranium & gold) and they all have huge growth prospects built into their DNA. Oh, and they also end up in self-funding tradable vehicles, which should the markets permit, will appreciate in value independently of the main business. Does that sound like the remit of your typical mining investment company?? Not exactly!
That’s the business model, or the main part of it. So what does the market think? Well as I said, it really doesn’t know what to think. It looks at the company at any moment in time, scratches its head and just sees the holdings as generic constituents of an investment portfolio. It then fixates on distressed valuations for the component parts, and accordingly attributes the generic discount to NAV.
So, despite a portfolio which includes a 25% holding in an ASX listed Iron Ore company, which alone is worth nearly £11.8 million, Andrew’s company has a total market capitalisation of just £8.2million.
Welcome to the frustrating world of Andrew Bell, Chairman of Red Rock Resources!
The undervalued assets brush is tarring much of the mining and exploration sector right now. But not many can boast a potential 81% discount to NAV (according to the latest
Edison Research update on the companies website). Such extremes make this a most suitable candidate for the value investors slide rule. It must have made an impact as
The Financial Times even picked up on the story last Friday
One thing is certain though; when such micro cap stocks do finally get their message across, they can attract enormous interest and the re-rating process can be quite dramatic.
That said, one area where the company has been recently criticised has been its use of a rather inventive instrument called a SEDA (Share Equity Distribution Agreement). This can be a dual edged sword. It gives the company an effective £3m line of equity funding and cash can be raised on a flexible basis, albeit at a discount to the prevailing market price. Great news if you on the look out for distressed assets, as indeed are Red Rock.
However, as a shareholder one has constantly to run the gauntlet of market sentiment and the latest placing, raising just £120,000 (at 1.3p) for the company and incurring just a 2% dilution, seems to have triggered a mini sell-off which saw the share price fall back from 1.9p a week ago, to just under 1.5p at close on Friday 18th December. This occurred just at a time when the share price looked set to breach the 2p line in the sand. Yes, a week is a long time when you’re a Red Rock shareholder!
The company will hopefully be super cautious about raising more funds through this route in the future, although funds raised to date have purchased some exciting and arguably exceptionally under-priced assets.
So what is so special about Red Rock Resources? Or put it another way “What has Red Rock ever done for us?”
Well let’s break the ‘portfolio’ down (apologies Andrew for repetition of the investment term ‘portfolio’) and try to identify where the current market cap is detached from the inherent value within the business.
You will need to travel back in time to the July 2005 admission announcement to find first details of the company’s options over Mt Ida, Mt Hope and Mt Alfred, three iron ore tenements in the Central Yilgarn area of Western Australia. Thereafter it was a long road of development the salient elements of which are captured below.
Red Rock transferred Mount Ida, Mount Hope and Mount Alfred tenements (and also Oakover Manganese tenements) into Jupiter Mines in a series of transactions that completed in the summer of 09. This provided Red Rock with a 25% holding in one of the larger Iron Ore/Manganese explorers on the Australian Securities Exchange (ASX). Interestingly the other major holders read like a who’s who of the steel feed business and include
Brian Gilbertson's Pallinghurst Resources who own a similar size stake to Red Rock. Korean steel giant
POSCO has a strategic stake and even
Hancock Prospecting’s name has now popped up on the share register (Hancock is run by Aussie Billionairess
Gina Rinehart, daughter of Iron Ore magnate
Lang Hancock).
The current share price of Jupiter Mines stands at 22.5c meaning the 93 million shares owned by Red Rock are worth A$21million or around £11.8million. That alone equate to 2.13p per Red Rock share.
Those with a finger in the steel feed business seem to think that Jupiter Mines is unlikely to contract and in 2010 very likely to expand apace. On this assumption the share price of Jupiter Mines could experience significant upward momentum which would be great for Red Rock where every cent on the Jupiter price adds another half a million pounds to Red Rock’s NAV. Now that’s what you call leverage!
One could say that alone would be enough, but Red Rock has many more goodies in its “portfolio”. On the transfer of Mount Ida and Mount Hope into Jupiter, Red Rock also negotiated 1.5% gross production royalty for all production from the prospects (i.e. 1.5% off the revenue, no deductions – and no buy outs!). Not bad but what does that really mean? Well Jupiter helped us there by recently releasing a
conceptual model showing a conservative estimate of 1.1 – 1.3 billion tonnes of magnetite ore at Mt Ida. This is before the high-grade magnetite areas have been explored and thus is likely to be revised upwards in the fullness of time.
So there appears to be a very substantial ongoing royalty payment that will flow to Red Rock if one assumes production starts at Mt Ida. And, for the sake of clarity, that royalty is on top of the stake Red Rock holds in Jupiter Mines itself!
Just one more thing; on the transfer of Mt Alfred into Jupiter in November 2008 the agreement specified that were Jupiter to define an Iron Ore JORC in excess of ten million tonnes at Mt Alfred, the excess would be multiplied by $2 and the cash amount translated into shares to be split between Red Rock and Pallinghurst. So, say they defined a resource of 50million tonnes, the cash amount would be A$80million which if we assumed at that point Jupiter Mines were valued at 50c per share would give Red Rock another 80million shares. Another good reason why Jupiter should want to see their share price higher than it is right now!
The magnitude of the Jupiter transactions are not easy to quantify precisely, but they certainly point towards enormous upside potential for returns to Red Rock through its direct holding, the royalty from Mt Ida and the bonus option from Mt Alfred.
Brian Gilbertson's Steel Feed Corporation (SFC) strategy in the
Jupiter Investor Presentation September 2009 is well worth a listen
Red Rock currently owns approximately 24% of Resource Star, which, in line with its business model, it originally acquired by hiving off its Uranium Assets into the business.
Originally an online business called Retail Star, Resource Star has taken its time to galvanise and get moving. The global economic crisis and evaporation of funding for uranium juniors was much to blame, preventing the company raising sufficient funds at the time to really make progress.
It seems all this imminently set to change. Resource Star, currently suspended, is due to relist on the ASX in January 2010 and is in the process of raising $4.4million at 20c per share.
The company has Uranium and Rare Earth prospects in Malawi and Australia and has just signed a deal with Globe Metals and Mining (
ASX:GBE) whereby Globe can earn up to 80% of the
Machinga rare earth project in Malawi, subject to certain expenditure and progress commitments, leaving a nice 20% free carry there for RSL.
On relisting, Red Rock will secure an additional 3million shares at 20c each in settlement of outstanding loans and other contractual commitments to Resource Star. That should equate to around 21% (13 million shares owned) of the entire business post fund raising, representing a healthy stake in an ASX listed company in the Uranium and Rare Earth sector.
Cue Resources, a Toronto Securities Exchange (TSX) listed Uranium explorer has a 100% holding in the
Yuty Uranium project in Paraguay. But Cue is more than just an explorer, they have a resource of around 10m lb of uranium in-situ, and significant exploration upside potential, according to
Uranium Investing News .
Known for speculative investing, on 2nd November Red Rock announced they had purchased the thick end of 10 million shares in Cue Resources in a private placement, giving the company a near 16% stake. The placement also carries a 1 for 2 warrant entitlement which, on a fully diluted basis, would increase the stake further.
Shortly after this announcement an interesting development occurred. Red Rocks largest shareholder & parent company Regency Mines announced that they had purchased a further
4.2 million shares in an off market transaction, giving the concert parties between them approximately 23.01% of the capital, on a partially diluted basis and after the exercise of warrants held by Red Rock, approximately 34.50% of the company’s share capital – forming an effective control block..
The holding reinforces Red Rock’s interest in value Uranium plays but also stokes speculators to consider what Red Rock might do with this holding. Perhaps ultimately this is destined for the Resource Star stable or maybe it was just a great value proposition to be held and disposed of when the market better reflects the value of Cue’s assets some way down the road. Either way, Red Rock has secured a healthy stake in another exciting area and ‘watch this space’ definitely applies.
Chiwefwe (Zambian Manganese)
Oh Chiwefwe?? Once the darling of the Red Rock portfolio it has gone very quiet recently.
Talk of a substantial manganese resource a couple of years ago was further supplemented by an eagerness to enter production at Chiwefwe through a processing deal with a local operator. An agreement was struck in August 2008 for further exploration and ground acquisition and at one point all this activity was suggesting material value was being created in the Zambian territory.
However, we haven’t heard much more about Chiwefwe since the Final Results announced in December 2008.
The smoke signals seem to indicate there may be some activity again in this area of the portfolio and, if this proves correct, it could signal a resurgence in the importance of manganese once more in the Red Rock mix. But with other activity in the forefront and Management time at a premium, it would be best to adopt a wait and see approach here.
Migori (Kenyan Gold Prospect)
So apart from Jupiter Mines, Resource Star, Cue Resources and Chiwifwe, what has Red Rock Resources ever done for us? ……well how about adding a nice 1.2million ounce gold resource to the portfolio? This resource, at Migori in Kenya, is quantified at the “indicated” level with some actually “measured”; which demonstrate a higher level of certainty that a resources at the “inferred” level.
Red Rock really have created a nugget of value here. On 17th September 09 they announced the acquisition of 15% of the Migori project and the right to increased that interest to 60% by completing a bankable feasibility study within 6 years.
On 30th November Red Rock announced the purchase of 10 million shares in
Kansai Mining (direct owner of the Migori Licence area), and then on 3rd December announced they had acquired an option over an additional 29 million shares taking their holding up to 39 million shares or 35% of the company’s entire share capital.
It is worth noting that the 35% stake was purchased for just $400,000, which given the size of resource at Migori, has to be considered something of a bargain. As with the Mt Ida transaction Red Rock has also secured a two way interest. In this case it can build up direct project ownership at Migori and also retains a 35% interest in the entire Kansai company.
Going by the company's
23rd December AGM presentation, Migori is set to be in the forefront of activities for 2010. Also worth noting is the stated intention of Red Rock to fast track the Migori project into production at the earliest opportunity. The prospect is considered to be amenable to a low cost open pit mining operation with a low stripping ratio. Initial indication suggests they expect cost effective production to be achieved without too much difficulty.
On 14th January 2010 the company announced an
update on Migori stating that once results are in from the drilling 2009 campaign, (which will also include additional samples taken from the previous operators interrupted program), the company will start to carry out a revision of the
NI 43-101 resource estimate. By carrying out a revised
NI 43-101 resource estimate, the company will be not only targeting an increase in the size of the resource, but also looking to move more of the resource up from the indicated to the measured category.
Whilst Red Rock has to let Jupiter Mines get on with business, the ardent stated focus of the company is now Migori and no doubt there will be further exciting developments to come here.
Many Investors expect 2010 will mark the turning point for Red Rock, where the rewards of Andrew’s hard worked business strategy start to flow back to the company. Until then, his biggest challenge will no doubt be to convince the market that Red Rock is much more than “just” an investment company.
For our part, miningmaven will be following this company very closely in the New Year, and if expectations are met, shareholders will certainly be looking on the bright side of life!
So in summary Red Rock Resources has given us:
- A major stake in Jupiter Mines, a leading Iron Ore and Manganese explorer in Western Australia, currently worth £11.8million or 2.13p per share. Also the potential to increase that holding substantially at no additional cost should Mt Alfred prove up a resource in excess of 10 million tonnes;
- A substantial potential royalty stream from Mt Ida Iron ore production through their 1.5% gross production royalty;
- A 21% stake in Resource Star an ASX listed Uranium and Rare Earths exploration company;
- A 15% stake in Cue Resources a TSX listed Uranium exploration company;
- A stake in Zambian Manganese at Chiefwe (currently under the radar but the latent potential remains);
- A major stake in the Kenyan Migori gold prospect, with a stated desire to enter production at the earliest opportunity;
- A market cap of £8.2million which is at a one third discount to the value of the Red Rock holding in Jupiter Mines.
Example Risks (not comprehensive):
- Exploration work fails to identify economic deposits;
- Country/Regulatory risk;
- Financial risk (sufficiency and stewardship of working capital and investment capital in particular);
- Commodity price exposure;
- Key person exposure (risk of losing key members of the team).
The author owns shares in Red Rock Resources plc.
Note: this summary represents the views and opinions of miningmaven, has been prepared for information and educational purposes only and should not be considered as investment advice or a recommendation All rights reserved. Users may print extracts of content from this blog for their own personal and non-commercial use only. Republication or redistribution of miningmaven content, including by framing or similar means, is expressly prohibited without the prior written consent of miningmaven.
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