Red Rock Resources (LSE:RRR) advanced 2.9pc to 0.9p today after announcing that the Bosnian ferrosilicon plant it owns an indirect stake in has entered commercial production. Following the completion of a commissioning progress that began in May, the plant is now running at a rated capacity of 24MW.
The plant’s owner Steelmin, in which Red Rock owns a 22pc stake, expects it to be EBITDA positive in July. Steelmin’splant initially consists of the refurbished Furnace B with capacity for production of 29,000t of ferrosilicon a year, and 5,800t of microsilica. After a planned refurbishment of a second furnace, it will have a combined annual capacity of 48,720t ferrosilicon and 9,700t of microsilica.
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 specialist concrete, refractories and ceramics. Red Rock entered into a financing agreement with Steelminin 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 much higher than last summer, the 22pc stake could be very significant for Red Rock – especially with the cost of the resource looking set to continue rising. Indeed, since late 2016 European produce prices for ferrosilicon have been positively impacted by increasing Chinese export prices.
What’s more, with up to the half of European ferrosilicon production costs rooted in energy costs, Steelman is likely to benefit from its access to cheap, locally-generated hydroelectric power in the nearby city of Jajce.
Andrew Bell, chairman of Red Rock, said: ‘Management at Steelman has delivered an important milestone in achieving stable commercial production from Furnace V. We expect to see progress continuing over coming months.’
Speaking to ValueTheMarkets.com in February, 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 current £4.7m market cap.
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.
Red Rock’s position in Steelminsits alongside its 0.95pc stake in Jupiter Mines, the world’s third largest global manganese producer, which listed earlier this year. 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.