Shares in Red Rock Resources (LSE:RRR) rose today after the firm announced that it has been repaid in full for a €4.3m loan it made to fund the redevelopment of a ferrosilicon smelter located in Jajce, Central Bosnia. In exchange for making the loan, Red Rock has retained a 22pc stake Steelmin, the firm that is carrying out the refurbishment, and it will have one board seat and an observer seat on its board.
Steelmin expects to begin producing from one of its two furnaces at the plant in April 2018, with production capacity initially hitting 29,000t of ferrosilicon per year and 5,800t of microsilica. Refurbishment of the second furnace is expected to begin next year and once it has completed the site will have a combined annual production capacity of 48,720t ferrosilicon and 9,700t of microsilica. The news was welcomed by investors, with Red Rock’s shares rising by 11.1pc, or 0.1p, to 1p.
Ferrosilicon is primarily used as a deoxidising agent and to add electrical conductivity and corrosion to steel while Microsilica is a dust by-product used in the manufacture of specialists concrete, refractories and ceramics. Red Rock entered into a financing agreement with Steelmin in June to fund the refurbishment and acquire an initial 16pc of the company, which could have risen to up to 30pc depending on when the loan was repaid. With ferrosilicon prices currently sitting at over €1,650/t compared with €1,1150 a tonne last summer, the 22pc stake could be very significant for Red Rock – especially with the price of the resource looking set to continue rising. Indeed, since late 2016 European produce prices for ferrosilicon have been positively impacted by rising Chinese export prices. What’s more, with up to the half of the cost of European ferrosilicon production being rooted in energy costs, Steelmin is likely to benefit from its access to cheap, locally generated hydroelectric power in nearby Jajce, Bosnia.
Red Rock’s stake in Steelmin sits comfortably alongside its 1.2pc stake in Jupiter Mines, the world’s third largest global manganese producer, which is currently carrying out a listing in Australia. The Jupiter stake was worth £5.1m as of the end of last year and generated more than £1.1m in cash for Red Rock through share buybacks in 2017 alone.
Speaking to ValueTheMarkets.com, Red Rock chairman Andrew Bell said that, on a standalone basis, he believes Steelmin merits an EBITDA multiple of 7X, which, at an annual earnings estimate of €7m based on mid-2017 prices, is worth around €50m. If this is correct, Red Rock’s 20pc stake would be worth double its current £4.4m (€5m) market cap alone. Going further, Bell believes that if Steelmin were to merge with another plant or get a second operation running, the business would rate a higher EBITDA multiple of as much as 10X. In this case, Red Rock’s 22pc stake looks like quite the steal when one considers how little the business had to pay for it. As Bell put it to us.
‘If we were building the site from scratch then the return might look less attractive. If the loan we made had been equity however then for a refurbished plant we would have made a good investment. However, considering we have got a 22pc stake for no net cost now the loan has been paid back – in fact, we have earned money due to beneficial currency movements – then the return is infinity, which is a good deal for us. The size of the business is significant for a firm of our size. It is especially good when you consider the worth of our other assets; our stake in Jupiter Mines is worth more than our share price by any calculation.’
To fund the Steelmin loan, Red Rock borrowed a partially renewable facility of $4.2m from a group of institutional investors in June 2017. The lending facility was made on a secured basis for a term of one year bearing interest at 13pc per annum.
Once Red Rock has paid back the $3m needed to fully settle its obligations to these institutional investors, it will be left with a handy remaining balance of around $912,000 as well as retaining part of the proceeds in a sterling balance of £976,525.46. On this, Bell said:
‘A lot of de-risking has just taken place. We are left with net cash, we have crystallised our currency gain and the plant is now very well funded. Overall, this has been a good deal for us as we have got in and out in eight months and have been left with an asset worth more than the market cap of the company.’
With Red Rock’s shares currently sitting at just 1p, it could be well worth having a punt on the firm. Especially given that future news flow could be set to trigger further value.
Author: Daniel Flynn
The author does not own shares in the company mentioned in this article