Red Rock Resources plc (AIM:RRR) Chairman’s Review

23 November 2017 – A copy of the Company’s annual report and financial statements for 2017 – extracts from which are set out below – will be made available on the Company’s website www.rrrplc.com shortly and at the Annual General Meeting to be held on 22 December 2017.

Dear Shareholders,

Overview

I began last year’s review by repeating the statement we had made several times in 2016, that there had been a significant turning point in the commodity sector and that the multi-year recession in the sector had ended. If I return to this point again, it is only to suggest that our price expectations may still be to some extent conditioned by the extreme price lows seen in late 2015 to early 2016, and the rises in price some commodities have seen may seem substantial only because the levels from which they occurred were anomalously low. 

The recovery is still a young recovery, and two factors in particular suggest that there may be continuing commodity strength. First, that economic growth seems to be picking up in all regions of the world and in almost all large economies. Such a synchronised recovery is unusual and will translate directly into increased commodity demand. Secondly, an electric vehicle and battery revolution is gathering pace, and this will have large but not yet perfectly quantifiable effects on incremental demand for several commodities, including nickel, manganese, cobalt and lithium, as well as copper (at least short term) and possibly vanadium. 

We are fortunate in our involvement as a shareholder in the unlisted Jupiter Mines Ltd, the co-owner and operator of the open pit Tshipi é Ntle Mine in the Northern Cape Province, the world’s third largest producer, we believe, of metallurgical grade manganese. Tshipi is in the exceptional position of having at current levels of production some 100 years of reserves. Since some 95% of current metallurgical manganese production goes to steel making, the impact of battery demand on the supply-demand equation is likely to be large. Current price levels have enabled us to receive a distribution of £538,740 in the Spring of 2017 with another of c.£250,000 due in early December 2017, and a few months ago we might have shared the general expectation that the long-term trend of price was likely to be slightly lower than these levels. The battery use for manganese, and the balanced global recovery under way, make that assumption look increasingly conservative.

We made clear a year ago our focus on cost control, and our desire to avoid financing through equity markets at a time we expected several income streams to develop and when the Company’s market valuation seemed significantly to undervalue its assets. These both remain high priorities, and after external equity financing of £1,153,323 in the year ending 30 June 2016, no further equity financing has been undertaken since a £300,000 placing of stock in early August 2016. 

The development of the income stream from Jupiter distributions has exceeded expectations, while the expected income stream from gold royalties from Colombia has been slow to develop to the expected levels due to delays in installation and commissioning of a ball mill and other factors. It should begin to contribute more significantly from the November 2017 quarterly payment on. Sub-letting income has been as expected, but will end now that we are moving in late November to a new and cheaper office. We are disappointed that we have not yet received any income from our Louisiana oil production participation at Shoat’s Creek. However, we have added a new source of profit likely to start contributing from early calendar 2018 through our equity investment in the Steelmin ferrosilicon plant in Jajce, Bosnia. 

Year in Review

During the financial period to 30 June 2017 our main priorities remained to obtain or develop cash flow-producing assets to give us greater resilience and less dependence on funding from financial markets; to keep costs down meanwhile to minimise dependence on external financing; and consequent on that funding aversion, to wait for value crystallisation or other events that would increase our market valuation before taking any significant initiatives. We considered that as a result of prior years’ actions we were well positioned to gain from the recovery as long as we kept a steady course. 

For much of the year we lived in expectation of a value crystallisation event in relation to our Jupiter holding that would occur at or shortly after the financial year end, since Tshipi é Ntle had appointed financial advisers to look at a possible IPO or sale. We anticipated that any sale or other value crystallisation would show the underlying value of this one investment of ours in Jupiter to exceed the market capitalisation of Red Rock. There were no significant new initiatives taken therefore for much of the year, while we awaited this. 

We did pursue an arbitration case in relation to some unclear points relating to the royalty and promissory note payable on our former Colombian assets, but we were able to settle this at an early stage. As a result of this settlement we received an early repayment of USD250,000 on the promissory note, with the balance of USD750,000 being due in April 2018. 

Shortly before year end, matters changed in relation to Jupiter, when the publication of the plans for Mining Charter 3 in South Africa led to a stand-off between the Minister and the industry, and uncertainty about the conditions under which BEE (Black Economic Empowerment) shareholders would be able to dispose of their shares, it appeared likely that this would impact, at least by way of slight delay, Tshipi’s plans, and we concluded that we should no longer wait if we saw an investment opportunity with a potential for adding very significant shareholder value. The opportunity to fund Steelmin, a company recommissioning a furnace at a ferrosilicon plant in Bosnia, arose at this time, and we were able to structure the investment through a back to back loan structure and receive free equity amounting to 16% at the time (and now 19%). 

We saw the starting and building up of revenues during the year, notably from Jupiter dividends and from gold royalties.

The financial results for the year ended 30 June 2017 show an increase of 41.2% in total equity at 30 June 2017 from £8,627,235 to £12,182,742 during a year in which only £300,000 new equity was raised, after a 14.6% increase the previous year. This largely resulted from the reversal of previous impairments of £4,260,421 at Jupiter. Equity per share therefore rose by 16.4% from 2.20p to 2.56p.

Total assets rose by 61.3% from £10,538,727 to £16,995,015 after a 9.5% increase the previous year as a result of the increase in available for sale financial assets, again mainly Jupiter, and in short-term loans and other receivables following the completion of the back to back arrangements in relation to Steelmin.

Current assets rose by 429.5% to £5,115,974 from £966,118, as a result of an increase in cash and in short-term loans and other receivables. Current liabilities rose to £4,812,273 from £1,911,492 with an increase in short-term borrowings again following the completion of the back to back arrangements in relation to Steelmin.

Following repayments made by Red Rock since financial year-end, the excess of short-term loans made over short-term borrowings has increased to £1.33m. 

The Company’s financial position has thus improved substantially over the year on most metrics. 

This is not however reflected in the consolidated income statement, where a loss of £283,280 has widened to £1,114,213. This reflects an impairment of £1,496,550, essentially the same as last year’s, in the value of Greenland iron ore assets, where we finally took the decision to fully impair the investment, but which was not offset this year by share sale profits or a recalculation of the fair value of a Colombian receivable. 

Current Financial Year

We continue with the prosecution of our judicial review case in Kenya, to protect our interest in the Migori gold asset and its 1.2m oz gold resource, as well as in the old Macalder gold tailings where we had already submitted a feasibility study and applied for a mining licence. In parallel, we are in positive and substantive discussion with the Ministry and other interested parties to agree an early resolution that will enable us to restart operations and bring the tailings into production.

We will then move to address our gold interests in Côte d’Ivoire and our minor oil interests in Louisiana and onshore Benin.

Since year end we have begun due diligence on copper and cobalt tailings in the Democratic Republic of Congo. The DRC produces more than half the world’s cobalt, a material for which demand is rapidly increasing for use in battery cathodes. This appears to be an attractive and potentially Company-changing asset, and in principle we like tailings which are easy to assess, mine and process, but we must await the results of due diligence in a country new to us.

We have recently announced a further, Spring 2018, distribution by Jupiter, expected to be similar in amount to the December 2017 distribution, and we expect rising gold royalties from Colombia and at the profit level a useful contribution from Steelmin. Should Steelmin succeed in commissioning a second furnace, then its EBITDA may be running later in 2018 at an annualised level up to €10m.

We expect in the current year to be net interest recipients on our loan book, and that we will be repaid the loans to Steelmin and the USD750,000 outstanding on the Colombia promissory note.

There is a strong probability of a liquidity event at Jupiter during the year, and a liquidity event could also occur at Steelmin.

Overall, we can as shareholders look to the prospects for the year to 30 June 2018 with considerable confidence. 

Prospects

Our historic preference has been for assets near production where we can get a favourable deal by putting in the last, or the strategic, dollar, as with Steelmin and as previously in Colombia. We also favour pre-digested minerals left in tailings, as in Kenya, and now potentially in the DRC. We also seek to work with first class partners on first class assets, as with Jupiter. We will strive to stick closely to these models in looking at potential new ventures.

We must not however lose sight of the fact that we are in a recovering market, with multiple high quality assets in Jupiter and Steelmin, with revenues, and with a presence or opportunity in some of the most exciting commodities to be in during the sector recovery. This gives us a good platform to take the actions necessary to raise Red Rock to a much higher level, and to recover in the good years all and more of the value lost in the difficult lean years. 

It has been a pleasure to work step by step to ready the Company this year and last for the next stage of growth. Our motivation is to add value for you, the shareholders, and to repay the trust you put in us. 

Results and dividends

Red Rock (the “Parent”) and its subsidiaries made a post-tax loss of £1,114,213 (2016: £283,280).  The Directors do not recommend the payment of a dividend.  The following financial statements are extracted from the audited financial statements which were approved by the Board of Directors and authorised for issue on 22 November 2017.

Andrew Bell
Chairman and CEO
22 November 2017



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