Over the past 2 years, the share price of Red Rock Resources (LON:RRR) has been at all time lows. Over the past 2 years, the share price has traded roughly between 0.3 p and 1.0p, with the valuation seldomly topping £5 million. This is in stark contrast to 2011, when the share was on cloud nine and soared to 90 pounds; heights that are now a distant memory for investors. It’s hard to believe that the share price could have sunk so much over the years, but could RRR have a resurgence?
Red Rock Resources is a natural resources development company that was founded in 2004. Its project portfolio is well varied, and the company has interests in manganese, gold, oil and gas. These projects are distributed around the world. A summary of the company’s current projects are below:
Summary of projects:
Jupiter Mines
Country: South Africa
Mineral: Manganese
More info: 3rd largest manganese producer; RRR owns 1.19%, current valuation (as at Dec 2017) of £5.1 mil; could potentially be higher when Jupiter goes public (expected in Q1) . The £5.1 mil valuation excludes future dividends.
Steelmin Ltd
Country: Bosnia
Mineral: Ferrosilicon
More info: RRR owns 20% stake, production is expected to start early this year with EBITDA of 7mil euro
At a 20% stake, at 10X multiple, could be valued at 7*0.2*10 = ~14 m euro = ~£12m
Migori Gold Project
Country: Kenya
Mineral: Gold
Info: 75% project interest, Expected US $95 million in sales for the life of the mine. However, legal issues around licensing has halted progression of the project. The company is aiming for restoration of gold licenses in Q1, and is looking to secure a joint venture with significant partner but as of now, the Migori project is on pause.
Ivory Coast Gold Project
Country: Ivory Coast
Mineral: Gold
Info: owns 100%, early stage with significant potential
El Limon
Country: Colombia
Mineral: Gold
Info: Most of this project has been sold off. However, RRR expects US$3M in royalities and a $1 million promissory note = ~£2.85 m
Shoats Creek
Country :USA
Mineral: Oil & Gas
Info: 20% working interest, Already partnering with Mayan Energy and Gulf Coast Western
Elephant oil
Country: Benin
Mineral: Oil and gas
Info: owns 4.76%, early stage development
Regency mines – owns only 1.63 million shares, value is negligible at Regency mines’ current valuation
Now that I’ve listed the projects RRR is involved in, it’s a good time to state the current market capitalization of the company:
£4.62 million
Positives
From the projects above, it’s clear that Red Rock Resources’ projects cover a large footprint in several countries. Potentially, any of the company’s investments could come good. The Jupiter investment alone is valued at £5.1m and is more than the current market capitalization.
Over the last couple of months, the Jupiter investment was at risk given that the shares were used as collateral for funding that was used for a loan to SteelMin Ltd. However, this loan was paid back a couple of days ago and the risk of those shares being handed over to other investors as a result of a default, is now gone. RRR is now truly positioned now to realize the value of its holding from Jupiter’s upcoming IPO.
Director purchases
There were significant director purchases recently (in Dec 2017 ). The chairman spent over £100K on shares. Normally, significant purchases by directors signal confidence in a company’s future and could indicate that the company is undervalued.
FY2017 Balance Sheet
Net assets in the FY2017 report were valued at about £12M, much higher than the company’s market capitalization, suggesting even further that the company is undervalued.
Negatives
No dividends, long wait for investors
Although the company has received cash previously from its investments (e.g $5 million from sale of gold assets from El Limon), RRR has not paid any real dividends to investors. This is unfortunate and the company would probably argue that they believe that the cash is better spent in further investment, in order to generate even more value for shareholders. For me, it seems like investors have been waiting on value creation for quite some time, and have not been rewarded.
Many projects still early in the development cycles
RRR has some projects that can already bring in some sort of revenue (Jupiter, El Limon), and other projects that have near term upside (SteelMin). However, for many of their projects, it’s just too early to say whether or not the project will be a success.
Summary
In summary, given the company’s current valuation of £4.62 mil and the valuation of the Jupiter stake (£5.1m) + the royalties of El Limon (£2.85m), RRR looks to be undervalued. Furthermore, the balance sheet of the company confirms that RRR is undervalued. If SteelMin Ltd. turns out well, it could significantly increase the valuation of the company.
However, although RRR’s other projects all have potential, many of the projects are early stage and all carry a high level of risk. I think it’s prudent not to assign any significant value to these projects at this time.
As always though, please do your own research before buying/selling this share; the opinions above are only my personal views.
