Over the last three weeks shares in Red Rock Resources (LSE:RRR) have dropped c.25%. The company has a new major shareholder, highly successful Swedish investor Peter Gyllenhammar, and also announced potential entry into the Democratic Republic of Congo (the DRC) pursuing a cobalt/copper opportunity. One would have thought this news would be a boon for Red Rock’s share price, but the market reaction betrays wider concerns that a corporate battle for the company’s future might be brewing. We’ll see how the situation develops, but in the meantime CEO Andrew Bell has given this exclusive interview to ValueTheMarkets about why he believes taking the company into the DRC might be in shareholder interests. We haven’t pulled our punches
VTM: You have gone on record, saying you would manage Red Rock with minimal dilution pending realisation of value of the company’s stake in Jupiter Mines (JMS). What has changed that you are now considering issuing 75,300,000 shares at 0.65p per share (and potentially a further 125,000,000 shares at 1p if the proposed warrants are exercised) in the event the company completes the deal to acquire a minority stake in a JV seeking to develop a cobalt/copper asset in the Democratic Republic of Congo?
AB: Our consistent position has been that with a liquidity event at JMS that would crystallise value and bring cash imminent (as we thought), we might expect a narrowing of the discount to what we believed to be the true value of the shares. Therefore it would not make sense to issue new shares at current low prices when an unlocking of the discount was so near. We felt it right to reassure the market as to what our intentions might be in relation to what could be (if there were a sale of JMS) a large lump of cash coming our way. Would we anticipate it? Return some of it to shareholders? Spend it?
Our answer was that we were focussed on value per share, and unlocking that. We had cut costs and were beginning to generate revenues, and would continue to be prudent. Our interest as shareholders and option holders was aligned with that of other shareholders. It would not make sense to issue shares (and indeed we had issued none since early August 2016) unless – an unlikely event – we found an investment where the discount to fair value at which we could buy it exceeded the discount to fair value at which we believed the shares to be trading. Since that latter fair value might be a largely cash value whose realisation was imminent, such an event seemed not just unlikely but exceedingly unlikely.
When we got funds we certainly thought it would be right in principle to return some to shareholders.
We expected, and I think some timing indications were deducible from the JMS announcements, that such a liquidity event might occur by July or August. We are now October, there has been no update from JMS, and although that may change after a board meeting mid-month, our expectation must be a bit moderated by the delay.
Clearly the evolving situation in relation to Mining Charter 3 in South Africa has impacted capital values and created uncertainties over the ability to sell of our BEE partner, with whom Jupiter has always acted in solidarity. One might have expected this to be quickly resolved, but the parties have become entrenched and the matter has gone to court.
A solution will emerge, but meantime buyers are unlikely I believe (and I have not seen the last two of the offers from the shortlisted parties) to offer the price which would make it sensible to sell so good an asset. IPO is still on the table as an option, but will suffer from some of the same uncertainties and might involve raising money not needed at a price unrealistically low to get the necessary spread. Other hybrid and creative options have emerged, including one we have ourselves pushed.
We would like to get some return of capital, by means which would not involve dilution of our equity position at current prices; we would like some marketability, and we would like some income. I believe a solution that would give us bits of all three is possible, but we are only one voice, and by no means the strongest.
There will be progress, there will be developments. Meantime the business itself is doing better than we dared hope with the 37% Mn ore price trading over $5 per DMTU FOB Port Elizabeth, and a structural change to part of our cost base. Sales are running at a very high level with over 3mt in the current year looking well within reach. The dividends and distributions coming to us are therefore likely to track above expectations. That makes it better to be holding than selling, as we can only sell at some price reflective of long-term price expectations and probably of scepticism as to the sustainability of our costs and volumes. But we can get a cash flow reflective of current pricing.
So JMS news is good, but instead of taking our meal at one gulp, we may have to eat it decorously course by course.
If so, that effects timing. The one-off liquidity event almost tomorrow may no longer be the central expectation. That in turn would impact value. In the U.S. there have been studies on the discount on restricted stock (shares that for a period cannot be freely traded) and in general a discount to market value of up to 50%+ is to be expected. We know that as a general rule less liquidity equals lower prices. This applies to our view of the discount to notional JMS value at which our stock is trading. Indeed, there might be a dual effect: lower capital value temporarily due to the Mining Charter 3 effect, and lower perceived capital value reflected in our stock price due to the deferral or partial deferral of liquidity events.
The stock would then remain the same in terms of locked in value, but the period over which that is unlocked might be different and the relationship to share price different. The argument that we should remain somnolent, in baulk, for a long period is harder to make, as it would be to wish on us an investment trust discount.
The likelihood is also increased that a given investment might have a discount to fair value which exceeded the discount to fair value at which we believed the shares to be trading. In the case of the DRC investment, provided grades are confirmed in due diligence, that seems very clearly to be the case.
As to the issue price, we fixed the number of shares, and we could have said we were issuing them at 0.8p or some other price. That was discussed, but in the end we decided to call the price 0.65p. As to the point on warrant exercise, this can only occur if we have made a Decision To Proceed. That is, post a BFS, and post a conversion of the license to a production license, we decide in our absolute discretion to go into production. If we do that. It means the value is confirmed and the warrant exercise operates like a milestone payment or a sharing of the benefits that at that stage are identified.
VTM: Given the recent surge in cobalt prices on the back of strong global demand why has no one else picked up this asset?
AB: There was other serious recent interest. I don’t think I can enlarge on that. The rights to the asset have been held by a local group for a while, but there was a force majeure or standstill based on the fact that part of the site was occupied by illegal miners and there appeared to be an overlap or dispute in relation to another license. These issues were recently resolved by the authorities, the area freed of all but a tiny number of artisanals who are not an immediate problem, and renewals were granted in c.July this year.
VTM: Please can you give more background about Red Rock’s relationship with Cobalt Blue and how the deal came about.
AB: Cobalt Blue is an Isle of Man vehicle created by the interests of 1620 Capital Pty Ltd of Perth and Exchange Minerals. Jason Brewer, a key principal of 1620, has been known to one of our NEDs for some years and I believe I have come across him. John Boardman we know less well. The key principal of Exchange Minerals, who introduced the transaction, I have known for perhaps seven years and I have a high regard for his experience and reliability.
We started discussions with Cobalt Blue in early September about the deal. Over the course of the month we exchanged over 150 emails and held numerous discussions. We have also extensively discussed the project internally and with the Nomad.
VTM: What direct experience does anyone employed by Red Rock have of developing and/or running mining operations in the DRC?
AB: The DRC project is just on the Congolese side of the Copperbelt. Our NEDs both have African experience, in one case going back to the 1970s where he worked for some time on the Zambian side of the border, visiting however the Congolese side and familiar with the projects in operation on both sides. The other has visited the DRC recently, dealing with the other major tailings project in Kolwezi (the old Roan tailings, our nearest comparator), and is actively involved with a company providing logistics to the mines there. A former colleague and friend of a director ran Adastra, the listed company in London that held the Roan tailings in Kolwezi up to 2006 (when it was taken over) and had a BFS carried out.
We met at that time and discussed matters including our work on the Kitwe tailings on the Zambian side, where we drilled test drills to check grades but did not find grades sufficient to proceed. We are renewing conversations here, since he is almost certainly the man in the UK who knows the Kolwezi tailings best. We also for a time had and explored as those with long memories may recall a Manganese prospect just by the Zambian border.
Our own efficient drilling of and production of a BFS on the Macalder gold/copper tailings in Kenya (where we have applied for a Mining License) gives us an understanding of the issues involved with tailings. Our co-tenant and office colleague running a mining and contracting company was the hedge fund manager of the Israeli billionaire with extensive interests in the DRC including for a time the Roan tailings, and has been there and given some contacts and advice. Our geology consultant on this from S Africa spent some years living there and will supervise the DD. His firm we have worked with extensively in a number of jurisdictions including Kenya, and many of them have been recently active in the DRC.
Remember that possibly the three smartest men in mining, Ivan Glasenberg of Glencore, Bob Friedland of Ivanhoe, and Mark Bristow of Randgold are now all focussing there and very active. There has been a lot of recent DRC work for the top consultants.
We will initially be focussed on DD. If we proceed we will fast-track a BFS. At that stage, given the size and profile of the project, beside the 1620 staff and local geologists ($10k a month of the budget is allocated to costs of their key in-country personnel), we shall be looking to recruit an internationally experienced specialist to act as our point man on the project.
Let us not forget the opportunities for laying off risk while retaining upside that will arise after – and possibly even before – we established a mineral resource with a known tonnage and grade, which would be shortly after DD.
VTM: Let’s talk about the political/in-country risk of operating in the DRC. It is consistently ranked as one of the most corrupt, least stable countries in the World. At this stage of the cycle are you not concerned entering this jurisdiction might be unnecessarily risky?
AB: The more I have seen, the more I have concluded that more important often than country risk is the stage in a country’s cycle. Whether in Africa, S America or the UK in the North Sea, the cycle is the same. Offer incentives to attract investment, get excited when the first people come, get invited to mining conferences and be given flattering awards, watch as investment comes in, start to wonder whether the incentives were too generous, change the royalty rate, prepare a new mining code, face opposition accusations that you are not taxing enough, change tax regime, see some companies leave, see commodity price falls and investment going elsewhere, double up, realise you have killed the goose that laid the eggs, repeat cycle.
DRC is at a good point for entry on this cycle, which is why some of the smartest people have now gone there. After the ENRC scandal and one or two other incidents, and with some reforms and modernisation, they are currently behaving well, and there have been some real improvements. Tanzania like Ghana and Zambia were socialist post-independence, then with the zeal of the convert they at different points over the last years encouraged mining. Tanzania is currently at a very bad point in the cycle, and persecuting Acacia and others.
Do we mean to be there in the DRC for ever? If we go in, it won’t be for ever. Tailings aren’t for ever. We’ll lay off risk too. Expect to see partners, and creative deals.
But if one’s in cobalt, one can’t pretend that it’s possible not to be in the country with over half the world’s cobalt. And if one believes the cobalt story, which we do, then we can’t not at least look at this project.
As the DRC deal is a farm-in deal we would drive the exploration and be in control of all activities on the ground. Post a BFS, we would have the right to go to 53%. Before concluding a deal, full documentation under English law and contractually governing every aspect of operations would be put in place with an appropriate level of legal advice.
VTM: OK, so assuming investors can see past the in-country risks associated with the DRC, what more can you share about the economics of the project, which might make it attractive?
AB: I have extensive notes I can share about the background to the project and its economics. This is all available in the public domain, so I can provide your readers with links:
The nearby Roan tailings are bigger than our possible project, standing at c.112mt compared with our 22mt, which we believe we can get to 72mt. Adastra which was a very good company run by first rate Brits – Bernie Pryor and Tim Read – was making great progress and had the financing pretty well advanced and were on the eve of releasing their feasibility study (released March 2006) – when First Quantum swooped on them and took over. Later the Government cancelled the license and the same day granted it to a party that sold on to ENRC (run by Kazakhs), so First Quantum sued ENRC and eventually settled for $1.25bn cash (for project opportunities even now not quite in production).
Just from curiosity, I translated that negotiated compensation amount very crudely pro-rata for our project at the current 22mt to give 22/112*(80/65)*1250m = $302m to the foreign partners, so $99m if we had 26.25% and $198m if we had 53%. That assumes like-for-like grades (but see Adastra presentation below and the grades they talk of are very similar to our supposed grades), and that the tailings project was the key asset.
The following links provide more background and projects in the region:
One can speculate all one wants about values, but the fact is that these fundamentally similar nearby tailings were battled over by substantial companies and the BFS and prior studies all evidenced precisely the kind of grades and recoveries we would hope for.
It is possible that we are going in at the right time in the cycle and getting what is likely to be a project at a giveaway price.
VTM: Assuming the DRC project passes due diligence, what are the key development milestones and how long do you anticipate it might take to reach these?
AB: Inferred Resource. Offtake/streaming agreement. Metallurgy. Define Reserve. Completion of Feasibility and sourcing of plant. Conversion of license to Mining license. Civil works. Production. We intend to fast track and parallel process because it will be cheaper and we intend to leapfrog other projects.
VTM: What contact have you ever or recently had with Peter Gyllenhammar, Red Rock’s majority shareholder?
AB: He’s not a majority shareholder (sub-15%). But Peter Gyllenhammar AB is our largest single shareholder. We gave their office a courtesy call after their investment, and have given our contact details including my 24-hour telephone number, and offered a meeting either here or there. We try to be available for all our shareholders, and given the size of their investment will certainly expect to engage more closely with them.