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Andrew Bell on the major upside potential at Red Rock Resources currently being undervalued by the market (RRR)
Like many of its peers in the commodities space, Red Rock Resources (LSE:RRR) has endured a tough 12 months, with a widespread, macro-driven sector downturn pushing its shares from 0.82p to their current 0.5p. However, unlike many of its contemporaries, the £3.4m firm has managed to generate enough revenues over this period to cover its operating costs- thanks largely to its valuable position in manganese producer Jupiter Mines. With Red Rock now looking to build on its solid foundation with major developments at its direct project stakes in the DRC and Kenya, we caught up with CEO Andrew Bell to hear where he thinks shares could go next.
One of Red Rock’s most critical holdings is its long-standing c.1pc stake in Jupiter Mines, a manganese producer that re-listed in Australia last April in an A$240m IPO. Jupiter’s flagship asset is its 49.9pc-held Tshipi Borwa open-pit manganese mine in South Africa’s Kalahari Basin, which entered production in early 2013. Since then, the mine – one of the largest of its kind in the world with a 432Mt resource base - has more than doubled its production and export volumes to over 3Mt of manganese ore annually.
The project currently boasts a maximum capacity of 3.6Mt per annum and a 100-year life of mine – both with the potential for expansion. As well as being one of the only manganese mines in the market, Tshipi also boasts some of the lowest operating costs in its space at a current average of $2.18 per dry metric tonne.
Operations at Tshipi (Source: Company)
Alongside Jupiter’s robust portfolio, the A$744m business offers Red Rock a reliable revenue stream owing to its progressive payout policy. Indeed, Red Rock received income from dividends and share sales totalling A$1.47m for Jupiter’s financial year to 28 February 2019. Meanwhile, earlier this month, Red Rock revealed that Jupiter achieved a payout ratio of 90pc in that year, far exceeding its target ratio of 70pc.
Such payouts look set to continue, as well, with the business recently revealing that sales so far in its current financial year are in line with its last 12-month period, with a ‘healthy dividend’ expected in November. The firm has been somewhat boosted recently by a substantial increase in its share price, helped along by the rise in Chinese steel production in combination with an ongoing fall in domestic manganese production.
In an update released earlier this month when Jupiter had risen 71pc since end-2018 to A40.41 a share, Red Rock revealed that its stake was worth over £4.2m – a premium of nearly a third to its own £3.3m valuation. Bell tells us that the combination of value and income offered by Red Rock’s stake in Jupiter, alongside the opportunity for liquidity, make it something of an insurance policy for the company.
‘The high yields we get from Jupiter are sufficient to cover our overheads, and the value of our stake more than underpins our own market cap. We also have something that can be converted into cash if necessary, meaning we are protected from running out of money – something essential for AIM companies,’ he says. ‘When this is combined with a genuinely world-class asset that has excellent management, low costs, and strong performance in place to back it up, it is a pretty difficult call to sell. We are delighted with Jupiter’s performance.’
Bell also believes that Red Rock’s stake in Jupiter is worth holding due to the growing value opportunity he sees in the manganese market. As alluded to, 90pc of the world’s manganese is currently used as an alloying agent to increase both the strength and flexibility of steel. However, Bell believes that the metal will – like many of its peers – soon enjoy a sizeable boost from the electric battery market.
Manganese is cheaper to mine than many metals currently used in the cathodes of electric batteries like nickel and cobalt. As a result, electronic battery manufacturers are now looking at using more of the metal in their products moving forward. Perhaps most notably, last year saw Reuters report that German chemical giant BASF had revealed plans to ramp up the manganese content in its cathode materials to 70pc and reduce nickel content to 20pc by 2021. It is thought that the move, which prompted a considerable rise in Euro Manganese’s share price, could push costs for battery production down from well over $100 per kilowatt-hour (kWh) to around $40 per kWh.
According to Bell, the benefit of an industry shift towards manganese would be two-fold. Firstly, a substantial increase in manganese demand would push up the price of the metal as supplies run out, and mining companies are forced into higher-cost underground operations to keep stocks topped up.
Secondly, if the metal were to become a stalwart component of all electric batteries, then its exposure to the forecast explosion in electric vehicle (EV) usage would also increase. The world’s fleet of EVs grew by 54pc to about 3.1m in 2017 and is expected to hit 125m by 2030, according to the IEA. Likewise, JP Morgan forecasts that EVs will account for 30pc of all global vehicle sales 2025 – this compares to 1pc in 2016.
This trend has helped many more well-known battery metals like lithium and copper soar in price over recent years. If manganese were to join this group, then Bell believes that Jupiter would be well set to benefit – with the firm claiming that Tshipi alone is responsible for 9pc of the world seaborne market for the metal.
‘Jupiter is a very attractive business over the long term, and my view is that it is currently highly undervalued due to – among other factors - the potential offered by the electric battery market,’ says Bell. ‘As people begin to see that, it might well be that - within a few years- a large company will see it as a strategic acquisition. It wouldn’t be surprising if that happens, and when it does, Red Rock will be very well positioned with its considerable holding.’
Beyond its investment in Jupiter, Red Rock also owns numerous direct project holdings. These include a 50.1pc interest in a DRC-focused joint venture called VUP, which the firm bought in exchange for a $700,000 cash payment and a £490,000 share payment last year.
The JV holds three copper and cobalt prospective exploration licences in the Katanga segment of the Central African Copperbelt, where it is surrounded by active majors like Glencore and FE Limited. The first of these licences is Kamukongo, which covers 5km2 within a structural trend called Kansuki and Kamikongwa – host of some of the most productive high-grade cobalt-copper deposits in the Katanga region. The second is Kasombo South, which lies at the mid-eastern part of the Kasonta anticline where numerous mines have produced considerable volumes of both copper and cobalt in the past.
Red Rock’s licence locations in the DRC (Source: Company)
However, the third and most advanced prospect is Musonoi. Covering part of the ‘Musonoi Super Deposit’, this licence sits in a district called the Kolwezi Klippe that boasts 80 years of mining history and supplies a considerable portion of the globe’s annual cobalt requirements. According to Red Rock, typical grades in the area range from 3-5pc copper and 0.5-1pc cobalt. Perhaps most notably, the region contains Glencore’s Katanga project, which remains the world’s largest cobalt mine despite being due to enter care and maintenance – something that Bell expects to increase cobalt prices.
Musonoi was drilled in the 1930s and 1940s with a cut-off grade of 2.5pc copper. Production took place down to a maximum depth of 105m, and the pit was partially backfilled after production ceased. However, Red Rock believes that high-grade ore, alongside additional orebodies, could remain in place. Its consultant geologists have provisionally identified deposit potential of up to 400,000ts of contained copper and more than 25,000ts of cobalt at Musonoi based on a review of historical work and reports.
This year has seen the VUP JV begin work to build on this potential, creating 3D models and identifying and assessing the old drill core from previous exploration activity. Bell tells us that this work is the first stage of validating the results of historical drilling, something that will allow the JV to bring the existing non-compliant resource to the modern ‘JORC’ standard. More updates are expected over the coming quarters.
As it stands, around two-thirds of the world’s cobalt is mined in the Democratic Republic of Congo. What’s more, the country’s resources don’t appear to be running out any time soon. Indeed, one estimate has valued the nation’s untapped resources of cobalt, copper, diamonds, gold, and other minerals at an impressive $24trn.
In spite of this, the DRC has long been associated with geopolitical uncertainty and human rights issues. Such problems have led many companies to shy away from the country in search of an alternative jurisdiction where they believe they are less likely to face disruption. Bell argues that, while the State does present issues, it is an essential location for a company that claims to operate in the battery metals space to have a footing. Likewise, he adds that – now the country has entered a period of peace following the safe passing of recent elections – historical precedent indicates that it can continue its long-term move towards stability.
‘We do not think you can claim to be in battery metals without being in cobalt or copper as electric vehicles contain significant amounts of both- especially relative to a conventional car. The DRC is a major jurisdiction for both, containing huge prospect with significant grades relative to their cost, so it is really worth approaching from an economic perspective,’ he says.
‘For a long time, the DRC lagged the rest of Africa in terms of development. But there is progress, with a great increase in tertiary education, the introduction of a new mining code, and growth in the number of lawyers. The legal system is not yet perfect, but you can see the progress. All the world has made great strides over the last several decades, and the DRC is not exempt from that. It has just been held back by political issues. In periods of peace, it has been improving. We need to get that message across to investors – what was true 20 years ago is not necessarily true now.’
Value in Kenya
Another critical direct project interest for Red Rock is its 100pc-owned Migori gold project in Kenya. The asset contains an initial 1.2Moz gold resource at 1.3g/t over five areas within its Mikei shear zone, along with significant upside opportunity. Indeed, it is analogous to producing Tanzanian greenstone gold belts and 30km north of Acacia Mining’s North Mara gold operations. In February last year, Acacia announced that it had found ‘one of the highest-grade gold projects in Africa today’ at the site, reporting a 1.31Moz resource at 12.1g/t.
Location of the Migori gold project (Source: Company)
Back in 2014, Red Rock commissioned a preliminary technical and economic assessment for one part of Migori, constituting the first stage of a feasibility study.
However, shortly afterwards, the ministry of mining in Kenya announced plans to terminate the special licences that had been granted to cover the asset. Red Rock fought this ruling for several years before finally announcing the settlement of legal proceedings in October 2018. The company, alongside its local associate, has now applied for the licences to be regranted- something that Bell expects to occur imminently.
‘We hope that, before long, we will be able to announce that we have the licences back,’ he says. ‘We are at the final stages, and we have four or five teams working on the ground just to get proper mapping and landowners consents in place in preparations. Migori is extremely prospective. The 1.2MMoz is just a starting resource, we are looking at work to increase this and whether we should JV with a bigger company.’
Moving on from Red Rock’s portfolio, Bell tells us that the firm is currently generating between $800,000 and $1m a year in revenues – a figure that more than covers operational costs. Bearing this in mind, he argues that the business currently looks undervalued with a current market cap of £3.38m.
‘Firstly, Jupiter is considerably undervalued, and it is still worth about 30pc more than our market cap on its own. Beyond that, if we make progress in Kenya, then the value of that asset on even the most conservative of assumptions is also considerably higher than our market value. Finally, the Congolese assets are potentially powerful. We need to convert those to a JORC resource, but, if we can, it will be truly massive relative to our market cap,’ he says. ‘By coming into our stock now, I think you have three attractive growth assets, the value of which will come over time. Any one of the three alone would make us cheap, but when you put them together, and you assume we are going to keep the company simple and costs down, then many would find it an attractive proposition.’
As Bell states, Red Rock’s three major assets – Migori, its DRC JV, and its position in Jupiter – each present an upside opportunity that outweighs the firm’s current market capitalisation. It is now be down to the firm to deliver on its ambitious plans, with any positive updates potentially presenting the opportunity for a re-rate.
Author: Daniel Flynn
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