Share Talk caught up with Andrew Bell, Chairman of Red Rock Resources this week to talk about the Steelmin loan repayment RNS update
Further to the RNS Red Rock Resources announced on the 21st of February 2018, Andrew Bell talks about what this means for the company and updates that can be expected in the future.
Andrew Bell, Chairman of Red Rock comments: “The successful unwinding of these back to back arrangements leaves Red Rock in a solid financial position. We now hold at no net cost a key stake in an emerging European ferrosilicon producer. We look forward to updating the market on further developments as they occur.”
We published a blog by @rj_allen on his site visit last November and with this week’s new update from Red Rock Resources, we thought this is worth sharing once again.
I took the kind offer up from the company and spent two days last week in Bosnia looking at the Steelmin asset with fellow investors Frank and Sunil, and Red Rock Resources Directors Andrew Bell and Scott Kaintz.
The plant is located in Jajce in central Bosnia, 104km north-west of Sarajevo and was built in the 1970s by Elkem, a major silicon producer. It was closed in 1992 due to the Bosnian war, then brought back online in 2000, before being shut again in 2004 due to increasing exports pressure from Chinese producers. Steelmin acquired the plant in 2011.
Refurbishment works are going really well and should be finished mid to late January. There are some long lead item parts being delivered around Christmas and there is circa 20 days work to fit them and they will then commence production. There were 70 men beavering away finishing various upgrades/refurbishments at the time of our visit. One of the big items left to complete, the re lining of the furnace, commenced on 3rd November 2017.
Discussion inside the furnace. The lining bricks arrived the next day.
Once in production the plant will produce circa 85t/ day of ferrosilicon. We spoke to Steelmin Managing Director Chris McNamee who was confident that offtake agreements would be in place before production starts. They have had lots of interest in the product and several letters of intent.
Red Rock Resources became involved in the project in June 2017. Steelmin required a final tranche of funding to complete the refurbishment of the plant. To fund the loan to Steelmin and earn the initial 16% of Steelmins shares RRR borrowed $4,230,750. Repayments started after 3 months (so October 2017) and 75% of the loan is to be repaid over the following 8 months. By my calculations this is around £350k/ month. The remaining 25% will be due at the 12-month anniversary of the loan.
Looking at the numbers this investment has serious upside for RRR. Year 1 (2018) Projected gross margin is 33% of Eur 35m = Eur 11.665m- see RNS of 23rd June 2017. This is at a projected selling price of EUR 1200/t. I understand the current market price is 10% above this, so these projections currently appear conservative. Early cashflows will be used to refurbish a second furnace, which could add another couple of million of earnings for the plant.
RRR earn an additional 1% interest in Steelmin for every month that the loan remains unpaid. The current interest is 19% (from 1st November) and is likely to go above this by another 3 or 4% as the indication we were given was repayment is likely in January or February.
So, say once in production Steelmin is valued on a very modest 5 times earnings of Eur 11.665m = Eur 58m. This would translate to RRR implied value at 21% of Eur 12.25m (£10.8m) This would assume a 400% uplift on RRR share price (currently £2.7m mkt cap at a share price of 0.6p) for this asset alone.
Steelmin say they think they would be valued at 6-7x EBITDA on one or two furnaces at Jajce: with a second location this would be likely to rise to 10x.
In the future Steelmin might choose to list themselves, which is a logical step as it would make access to finance easier for them. They might acquire other assets which would provide further upside. This would daylight the inherent value of RRR holding.
On top of the possible £10.8 valuation from Steelmin alone, one can then look at value from other assets which RRR holds.
Jupiter mines stake could be valued around £10m to RRR on a valuation event (in the meantime there is likely to be up to $1m a year in dividends from here, assuming distribution policy remains the same).
Colombia – expected higher quarterly dividends, maybe $0.5m+ income in 2018
Kenya – who knows what may happen, but any positive news is upside; the company seems much more confident than it was in recent months
DR Congo (Cobalt) – Watch this space for test results but again there is possible upside and real scale to the tailings dams being tested
Loan book – the surplus of Colombia $750k Note due in Spring 2018 plus the Steelmin net loan balance is already a £1.4m asset to RRR and by year-end will be £2m or over 2/3 the market cap.
I could go on but a future valuation of over £20m for Red Rock on these current assets alone might not be out of the question. PLC costs are Circa £400k/ annum so are more than easily covered by the Jupiter dividends alone. Once the inevitable Steelmin production RNS drops sometime in January the future for this very undervalued stock is very bright indeed.
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