Red Rock Resources – fundamentally undervalued! (LSE:RRR)

At 0.6p, Red Rock Resources (LSE:RRR) is worth £2.8million. By any measure, this is cheap when you look at the asset portfolio the company has.

The jewel in Red Rock’s crown has to be its 1.2% stake in the privately held Jupiter Mines (27.3million shares), which owns the Tshipi manganese mine in South Africa. All too often in the Resource Sector on AIM the words “world class asset” get bandied about, with very little substance to support the exaggerated claims. In the case of Tshipi, this is a bona fide globally significant asset. Already one of the top three manganese producers in the world, Tshipi is the only one which has a greater than the 100-year life of mine projected.

Better yet and Jupiter is about to pay its first fundamental return to shareholders, through an equal access share buyback programme. This tax efficient method of returning capital to shareholders (as opposed to paying a dividend) will see Jupiter reduce its number of shares in issue by up to 6%, while distributing approximately $55million. Red Rock is due to receive about $660,000 (c.£530,000) as its share of this payout.

When compared to Red Rock’s £2.8million market-cap this sum seems almost too good to be true, but that doesn’t even take into account the projected valuation of the company’s stake in Jupiter. If we use the sums of the share buyback programme, Red Rock’s stake is worth $14.46million (£11.65million). And that is in a privately held company. There is talk that Jupiter’s board is currently considering floating the company. If it does bring it back to the market, what sort of premium might that command? 30%? 50%?

If Jupiter floats this could increase the value of Red Rock’s holding from anything from £15million to £17.3million and that is before the company even trades on the secondary market. It is anyone’s guess what a newly listed Jupiter’s market-cap might rise to, on speculative appeal.

The point is very simple. If we ignore anything else about Red Rock, this company is fundamentally undervalued on a grand scale. If we start to factor in Red Rock’s other assets and the value case becomes even more compelling.

Red Rock recently sold its gold mine in Colombia in a transaction worth $5million. It received $1million in cash and is due the proceeds from a $1million promissory note it issued, which bears a 5% coupon, in 2018. The final $3million will come through royalty payments based on production. The $4million Red Rock is due from Colombia over the next year and a half supports the company’s current market cap on its own.

The other point to note is that with all the free cash flow Red Rock is about to generate, it seems highly unlikely the company is going to need to place again in the foreseeable future. With its portfolio of other assets including its gold licences in the Ivory Coast, its participation in one producing oil well at the Shoats Creek project in the USA and its legacy Kenyan gold asset (which contains a 1.2m/oz AU resource, though is currently going through a legal wrangle) Red Rock offers additional potential upside. Even if one values these other assets at zero, this doesn’t change the basic value play on offer here.

Red Rock’s shares will need to double from here for the company to be valued at anything approaching a reasonable valuation. Of course, if that happens it will mean the market will have woken up by then, so the shares could easily go on to treble or more. 

 

Buy below 0.6p

 

DISCLOSURE: The author of this article owns shares in RedRockResources

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