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Red Rock Resources looking cheap as value of Jupiter Mining stake comes in at £4.1m (RRR)

Red Rock Resources (LSE:RRR) has announced that its stake in Jupiter Mines will be worth more than £4m if the Australian firm lists next month as proposed. Red Rock reported today that Jupiter, owner of a large stake of Tshipi manganese mine in South Africa, has lodged a prospectus with the Australian Securities and Investments Commission. The world’s third largest global manganese producer is planning to float shares on Australia’s stock exchange in April following an offer between 27 March and 6 April.

As part of this IPO, Red Rock has agreed to sell 4.7m shares, equivalent to a fifth of its 1.2pc stake in Jupiter to ensure the company has an adequate free float post-listing. This agreement will see Red Rock receiving AUD$1.9m (£1m approx) before expenses and retaining a 0.96pc stake in Jupiter. At the current slated listing price, Red Rock said this stake would have a value of AUD$7.4m, or £4.1m, marking a significant chunk of Red Rock’s current total market cap of £5.74m.

Separately Red Rock also announced that it had made more than £350,000 from Jupiter’s latest AUD$51m (£28m) share buyback programme. It has now received more than £1.1m from Jupiter’s share buyback programmes over the last 12 months, gaining a £537,000 windfall in March 2017 and £234,000 in November.

Markets were a little disappointed with the news, perhaps due to the value of Red Rock’s stake in Jupiter falling short of predictions made last year, and its share price had dropped 4.4pc, or 0.05p, to 1.1p at the time of writing. But when you add the value of these buybacks to the amount of Red Rock’s stake in Jupiter and compare it to Red Rock’s current market cap, it almost seems to be good to be true given the firm’s additional operational potential.

Last month, the firm announced that it had 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 providing the credit in the first place, Red Rock has retained a 22pc stake in 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.

Speaking to ValueTheMarkets.com at the time, 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 far more than its 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.

Following the news last month, we said Red Rock looked worth a punt at its 1p share price at the time. Shares have risen to 1.1p since, but with today’s news giving a (relatively) concrete value to Red Rock’s stake in Jupiter Mining that still makes its market cap look cheap, it could still be well worth picking up some more shares.

Disclosure:

Author: Daniel Flynn

The author does not own shares in the company mentioned in this article

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