Like many of its mining peers, Red Rock Resources (LSE:RRR) has been hit by the global outbreak of Covid-19 in 2020. The resultant sell-off across many metal markets and general damage to investor sentiment have seen shares in the natural resources investment, exploration, and development company decline by 58.8% to 0.175p year-to-date.
However, with investments spanning many metal markets, Red Rock’s chief executive Andrew Bell says the value underpinning the firm’s portfolio far exceeds its current £1.2 million market valuation. So, could the current dip mark an opportune time to invest ahead of the inevitable rebound across wider markets?
Firstly, Red Rock’s portfolio is underpinned by its exposure to ASX-listed resources firm Jupiter Mines (ASX:JMS).
Jupiter is the 49.9% owner of Tshipi Borwa, one of the largest and lowest-cost manganese exporting mines globally, based in South Africa’s world-leading Kalahari Manganese field. The mine exported a company record-breaking 3.51 million tonnes of manganese ore in FY19 and is now preparing a feasibility study to expand production capacity by 50% to 4.5 million tonnes of ore.
Manganese prices have been able to rise to around $3.85 per dry metric ton over recent weeks in the face of continuing, robust demand from the Chinese steel-making industry. As a result, sentiment towards Jupiter has remained positive despite the negative impacts of a 21-day country-wide mine lockdown in South Africa, introduced on 26 March.
As it stands, Red Rock owns 17.02 million shares in Jupiter, representing a stake of around 1%. With Jupiter’s shares sitting at around AUD$0.23 each, this holding is currently valued at around AUD$3.91 million, or, approximately £2.45 million- already twice Red Rock’s current market cap.
However, Bell believes the value of Red Rock’s Jupiter holding has the scope to increase much further. With China accounting for around 90% of Tshipi’s market, he thinks the firm will be favoured by a continuing uptick in the country’s economic activity as it works to return to pre-Covid-19 levels .
“If there were any weakness there it would be feeding into manganese prices, but these have been rising in the last few weeks as China rebuilds stocks and rebuilds its steel production,” says Bell. “There was already a trend towards importing high-quality manganese from South Africa, where Tshipi Borwa is based, and this will continue – the Chinese steel industry requires these products if it is to survive and prosper.”
“Besides the observation that Red Rock’s Jupiter holding already carries a higher valuation than Red Rock itself, there is the question of whether Jupiter, with its 100 year mine life and cheap production cost, is itself too cheap. Jupiter pays out a solid dividend – 7.5c, for a yield of 32% last year, and 4c so far this year. That is a 17.4% interim dividend yield. Even if Red Rock had nothing else in its locker, it is surely underpinned by this value.”
As alluded to by Bell, Red Rock does, in fact, boast more firepower in its war chest. One such example is its ownership of the Migori gold asset in Kenya.
As readers will know, global uncertainty is favouring gold, with the price of the safe-haven metal rising from around $1,450 an ounce to around $1,650 an ounce since December after some well-publicised volatility in March. Bell expects this dynamic – volatility within an upward trend - to extend well into the future, encouraged further by the raft of central bank stimulus packages announced by governments around the world in recent weeks.
For example, the Fed has taken unprecedented action to inject trillions of dollars into American markets, and Congress has agreed to a bill to hand $1,200 to families in a bid to restart an economy that has ground to a halt. Meanwhile, the Bank of England also went all-in, dropping interest rates to 0.1%, the lowest level in the institution’s 300-year history.
“All the controls are off for government borrowing, but that cannot last forever,” says Bell. “It will drive essential growth in this sensitive time, but at some point, it will inevitably result in inflation or the fear of inflation. It is in exactly these conditions that people look at gold as a reliable store of value.”
This timeline suits Red Rock down to a tee.
The company has been working through a licensing issue between Kenya’s Mining ministry and Red Rock’s local partner for some years, stemming from the then Minister’s purported termination of the licences covering Migori in 2015.
In the years that have followed, Red Rock has made significant progress in restoring the licences and is now in the final stages of approval. Regardless of any potential coronavirus-related delays, Bell expects the company to be once again able to progress at Migori this year.
When this occurs, the asset’s 1.2 million-ounce JORC-compliant gold resource base can once again be factored into Red Rock’s market cap. As Bell puts it:
“Part of the reason our market cap came down was that we had the legs of the stool we were sitting on at Migori kicked away from under us, but now we have managed to put them back in place. When we get that official documentation restoring the licence, a 1.2-million-ounce gold resource that has been held back like water behind a dam for six years comes back into play. If we value that at $10 an ounce, the cost it got us to bring the gold into resource status, the asset is worth $12 million without even factoring in its exploration potential. If we were to value this mix of proven indicated, and inferred resource at $20, an arguable and even cheap valuation on some comparison bases, then Migori is worth $24 million before further exploration. In reality, every project is different, and we will have to prove the additional value by what we do.”
The unstoppable rise of electric vehicles
Moving on from gold, another substantial component of Red Rock’s portfolio is its exposure to battery metals.
Specifically, the firm has a 50.1% controlling interest in a joint venture with a local partner that has exposure to three copper and cobalt prospective exploration licences in the Katanga segment of the DRC. Here, it is surrounded by active majors like Glencore and FE Limited. The firm also has a further 80% interest in another JV, where earlier this year it revealed that it had identified two open-ended areas strongly anomalous for both copper and cobalt at one of the licences. It is now preparing a more in-depth exploration programme.
The massive opportunity in the battery metals sector is well-known, with the minerals representing an essential component of the power sources for electric vehicles (“EVs”). The world’s fleet of EVs grew by 54% to about 3.1 million in 2017 and is expected to hit 125 million by 2030, according to the International Energy Agency. Likewise, JP Morgan forecasts that EVs will account for 30% of all global vehicle sales 2025 – this compares to 1% in 2016.
Critically, Bell believes that the electrification of vehicles is a trend that will continue regardless of any disruption arising from Covid-19’s impact of supply chains and consumer sentiment over the short-term.
“Battery technology is really advancing fast now,” he tells us. “For example, just in the last week or so, Toyota and a Chinese auto manufacturer have set up a JV to design and develop all-electric vehicles in China. Toyota is the world’s biggest carmaker, so its display of serious commitment to this electric battery and EV market shows the scale of the enduring opportunity on offer. It immediately alters the kind of projection that we use for long-term EV uptake.
“As a result, I think the EV story will proceed coronavirus or no coronavirus. This means that our exposure to the sector through our DRC assets and our position in Power Metal Resources (LSE:POW) represent excellent opportunities that can add value for shareholders.”
Turning a corner
Like many areas of the market, the damage to mining stocks this year has been all encompassing and unforgiving. However, many remain confident that when the Covid-19 pandemic passes, a recovery rally will come into play.
When this will occur is extremely difficult to predict. However, when it does, Red Rock’s mix of exposure to producing assets – in the form of its Jupiter holding – and interest exploration projects approaching exciting milestones in robust metal markets should serve it well.
As Bell puts it, “In summary, we cannot imagine two better areas to be in within the sector than gold and battery metals, and from this base we will progress”.
Author: Daniel Flynn
The Author does not hold any position in the stock(s) and/or financial instrument(s) mentioned in the piece.
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