RVR.asx Speculative Buy
Red River
29 Jul 2016 Share Price
RED RIVER RESOURCES LTD (RVR)
Base Metals: Explorer / Developer
Hole 1 is a discovery……..Liontown East roars Red River Resources has announced drilling at Liontown East has intersected massive and semi massive sulphide mineralisation including a 7.5m zone of massive and semi massive sulphides from 452m and a 10.35m zone of semi massive sulphides from 472m. Based on field observations, the interval is dominated by sphalerite rich mineralisation. This early success from the first hole into the Liontown East prospect confirms our belief in the significant exploration upside that exists throughout the Thalanga region.
Pipeline of VMS targets to be drilled, more discoveries to come After testing Liontown the Company will look to test a number of other high priority targets within the region. Ermine is a target where re-processing of historic geophysical and geochemical data has identified a significant untested IP and coincident Pb-Zn in soil anomaly. The IP anomaly at Ermine sits along strike from historic shallow high grade zinc intercepts up to 29.2% Zn (similar to Liontown East). Esso’s Waterloo is another high priority target located ~2km east of the Waterloo deposit [707kt @ 19.1% ZnEq] and within the same stratigraphic position which hosts the Thalanga deposits. We continue to see significant potential to discover further VMS-style deposits within the Mt Windsor region.
$0.160
Valuation
$0.43
Price Target (12 month)
$0.41
Brief Business Description: Base metals explorer & developer
Hartleys Brief Investment Conclusion Focussed on restart of the Thalanga operations and becoming Australia's next zinc producer Chairman & MD Brett Fletcher (Chairman) Mel Palancian (MD) Top Shareholders Directors & management
7.7%
Company Address Level 6, 350 Collins Street Melbourne, VIC, 3000 Issued Capital
276.5m
- fully diluted
324.4m
Market Cap
A$44m
- fully diluted
A$52m
Cash (est)
A$10.0m
Debt
A$0.0m
EV
A$34.2m FY17e
FY18e
FY19e
Prod (kt ZnEq)
Prelim. (A$m)
5
24
38
Op Cash Flw
7
35
45
Liontown will be a mine, not currently in the mine plan
Norm NPAT
3
21
36
CF/Share (cps)
2
11
14
With the discovery of massive sulphide mineralisation at Liontown East we have increased confidence that the Liontown orebody will be mined. We see significant potential for the current [2.0Mt @ 8.4% ZnEq] orebody at Liontown to deliver a mineable reserve and the Liontown East prospect could add to the overall tonnes mined at Liontown. We see potential for an open pit and/or underground mine at Liontown which could be a platform to develop the Liontown East prospect (assuming further exploration success)
EPS (cps)
2
11
14
8.1
1.4
1.1
P/E
Mt
ZnEq (%)
Resources
5.5
12.8
Reserves
0.4
15.0
Red River Resources
0.25
12.
Price underpinned by development, exploration upside is real High impact drilling continues at Liontown East with other VMS targets to be tested over the coming months. We see potential for further discoveries within the Mt Windsor region over the coming ~6-12 months. RVR’s current drill program will continue testing some of the best base metals targets we can see in the current market. The current share price is underpinned by a robust development project and with this early exploration success the upside is now real and tangible. We maintain our Speculative Buy recommendation with a price target of 41c, NAV of 43c, spot NAV of 35c.
Fig. 1: Hole 1 is a discovery at Liontown East
14.
0.20 10. 0.15
8.
0.10
6.
A$
M
4. 0.05 2. 0.00 Aug-15
Dec-15
Apr-16
. Jul-16
Source: IRESS Volume - RHS RVR Shareprice - LHS Sector (S&P/ASX SMALL RESOURCES) - LHS
Scott Williamson Resources Analyst Ph: +61 8 9268 3045 E:
[email protected] Hartleys has completed a capital raising in the past 12 months for RVR for which it has earned fees. Hartleys has provided corporate advice within the past 12 months and continues to provide corporate advice to RVR for which it has earned and continues to earn fees. The analyst has a beneficial interest in RVR shares.
Source: Red River Resources Ltd
Page 1 of 10
Hartleys Limited ABN 33 104 195 057 (AFSL 230052) 141 St Georges Terrace, Perth, Western Australia, 6000 Hartleys does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Further information concerning Hartleys’ regulatory disclosures can be found on Hartleys website www.hartleys.com.au
Hartleys Limited
Red River Resources Ltd (RVR)
29 July 2016
SUMMARY MODEL Red River Resources RVR
Share Price $0.160
29 July 2016 Speculative Buy
Key Market Information
Directors
Company Information
Share Price
$0.160
Brett Fletcher (Chairman)
Market Capitalisation - ordinary
A$44m
Mel Palancian (MD)
Net Debt (cash) Market Capitalisation - fully diluted
-$10m
Donald Garner (Exec Director)
A$52m
Jim Black (Non-Exec Director)
EV
A$42m
Paul Hart (Non-Exec Director)
Issued Capital
276.5m
Cameron Bodley (Non-Exec Director)
Options
47.9
Melbourne, VIC, 3000 +61 3 9095 7775 +61 3 9670 5942 www.redriverresources.com.au
Mark Hanlon (Non-Exec Director)
Issued Capital (fully diluted inc. all options)
324.4m
Top Shareholders
Issued Capital (fully diluted inc. all options and new capital)
418.2m
Directors & management
Valuation 12month price target
Level 6, 350 Collins Street
$0.43
1
$0.41
2
% 7.7%
Resource
3 P&L
Unit
30 Jun 15
30 Jun 16
30 Jun 17
30 Jun 18
30 Jun 19
30 Jun 20
Net Revenue
A$m
0.0
0.1
16.3
83.9
133.6
Total Costs
A$m
-4.6
-2.3
-12.8
-50.4
EBITDA
A$m
-4.6
-2.2
3.5
- margin
%
0%
0%
Depreciation/Amort
A$m
-0.7
EBIT
A$m
Net Interest
Mt
Cu (%)
Pb (%)
Zn (%)
Au (g/t)
Ag (g/t)
ZnEq (%)
5.5
1.1
1.9
6.6
0.6
43
12.8
149.9
4 TOTAL 5 Measured
0.1
1.5
1.3
4.6
0.2
30
13.7
-78.6
-88.1
6
Indicated
2.5
1.2
2.2
7.7
0.6
50
14.9
33.5
55.0
61.8
7
Inferred
2.9
1.0
1.7
5.6
0.5
37
11.0
22%
40%
41%
41%
8 West 45
0.6
0.6
3.5
8.3
0.3
69
15.2
-1.7
-2.2
-4.8
-7.0
-8.6
9 Far West
1.6
1.7
2.0
6.0
0.2
53
14.9
-5.3
-4.0
1.3
28.7
48.1
53.3
Orient
0.5
0.9
1.8
7.9
0.2
44
13.6
A$m
3.1
1.2
3.1
1.2
3.1
1.2
10 Waterloo
0.7
1.9
1.6
11.0
0.9
50
Norm. Pre-Tax Profit
A$m
-2.3
-2.7
4.4
29.9
51.1
54.5
2.0
0.5
1.6
4.6
0.8
25
Reported Tax Expense
A$m
0.0
0.0
0.0
0.0
-13.0
-16.3
effective rate
%
0.0%
0.0%
0.0%
0.0%
-25.4%
-30.0%
Normalised NPAT
A$m
-1.6
-1.9
3.1
20.9
35.8
38.1
Abnormal Items
A$m
-0.7
-0.8
1.3
9.0
2.4
0.0
Reported Profit
A$m
-2.3
-2.7
4.4
29.9
38.1
38.1
Minority
A$m
0.0
0.0
0.0
0.0
0.0
0.0
Profit Attrib Balance Sheet
A$m Unit
-2.3 30 Jun 15
-2.7 30 Jun 16
4.4 30 Jun 17
29.9 30 Jun 18
38.1 30 Jun 19
38.1 30 Jun 20
Cash
A$m
1.7
1.7
10.3
19.7
47.9
Other Current Assets
A$m
0.2
0.0
0.0
0.0
Total Current Assets
A$m
1.9
1.7
10.3
19.7
Property, Plant & Equip.
A$m
7.9
6.6
29.4
45.9
51.8
Exploration
A$m
0.8
2.8
5.8
9.8
13.8
Investments/other
A$m
9.5
9.5
9.5
9.5
Tot Non-Curr. Assets
A$m
18.1
18.8
44.6
65.1
75.1
80.7
Total Assets
A$m
20.0
20.6
54.9
84.8
122.9
161.1
20.1 8.4
Liontown Production Summary
Unit
Mill Throughput
Mt
Mined grade
Zn Eq (%)
0.0
0.0
14.1
13.6
13.4
14.2
13.7
Combined Recovery & Payability
%
71.2%
71.2%
71.2%
71.2%
71.2%
71.2%
71.2%
Zinc
kt
0.0
0.0
3.1
13.9
20.8
23.4
20.8
Lead
kt
0.0
0.0
1.2
4.1
4.5
4.5
Copper
kt
0.0
0.0
0.2
2.1
4.6
5.8
4.6
Silver
koz
0.0
0
75
306
361
415
316
80.4
Zinc Eq
kt
0.0
0.0
5.0
24.3
38.2
45.4
39.2
0.0
0.0
Zinc Eq
mlb
0.0
0.0
11.1
53.5
84.2
100.0
86.3
47.9
80.4
Modelled mine Life
yr
6
6
5
4
3
2
53.4
Modelled mining inventory
Mt
2.2
2.2
2.2
2.1
1.9
1.5
1.0
17.8
Modelled mining inventory Costs
Zn Eq (%) Unit
13.7 Jun 15
13.7 Jun 16
13.8 Jun 17
14.0 Jun 18
14.7 Jun 19
15.8 Jun 20
19.4 Jun 21
Cost per milled tonne
$A/t
-
-
256.0
201.4
196.4
195.7
194.7
EBITDA / tonne milled ore
$A/t $A/lb
-
-
70.9
134.0
137.6
137.4
104.6
-
-
1.16
0.94
0.93
0.88
0.90
- ex royalties C1: Operating Cash Cost = (a)
$A/lb
-
-
1.04
0.81
0.80
0.76
0.79
$A/lb
-
-
0.72
0.75
0.76
0.72
0.74
(a) + Royalty = (b) C2: (a) + depreciation & amort. = (c)
$A/lb
-
-
0.84
0.87
0.89
0.84
0.86
$A/lb
-
-
(a) + actual cash for dev. = (d) C3: (c) + Royalty
$A/lb
-
-
13.10 3.26
3.07 1.22
2.28 0.96
2.19 0.86
2.87 0.87
$A/lb
-
-
13.22
3.19
2.40
2.31
2.98 0.99
9.5
9.5
Total cash costs
Jun 15
Jun 16
Jun 17
Jun 18
Jun 19
Jun 20
Jun 21
0.0
0.0
0.05
0.25
0.40
0.45
0.40
4.0
1
Short Term Borrowings
A$m
-
-
-
-
-
-
Other
A$m
2.0
1.5
1.5
1.5
1.5
1.5
Total Curr. Liabilities
A$m
2.0
1.5
1.5
1.5
1.5
1.5
Long Term Borrowings
A$m
-
-
15.0
15.0
15.0
15.0
Other
A$m
9.1
9.1
9.1
9.1
9.1
9.1
Total Non-Curr. Liabil.
A$m
9.1
9.1
24.1
24.1
24.1
24.1
Total Liabilities
A$m
11.1
10.6
25.6
25.6
25.6
25.6
$A/lb
-
-
3.38
1.35
1.09
0.98
Net Assets
A$m
8.9
10.0
29.3
59.2
97.3
135.5
Total cash costs as per P&L
$A/lb
-
-
1.16
0.94
0.93
0.88
0.90
Net Debt (cash)
A$m
-1.7
-1.7
4.7
-4.7
-32.9
-65.4
All in sustaining cash cost (AISC) Price Assumptions
$A/lb
AUDUSD Zinc Lead Copper Silver
Cashflow
Unit
30 Jun 15
30 Jun 16
30 Jun 17
30 Jun 18
30 Jun 19
30 Jun 20
EBITDA
A$m
-4.6
-2.2
3.5
33.5
55.0
61.8
Working Capital
A$m
2.7
-0.3
0.0
0.0
0.0
0.0
Operating Cashflow
A$m
-1.9
-2.5
3.5
33.5
55.0
61.8
Income Tax Paid
A$m
0.0
0.0
0.0
0.0
-13.0
-16.3
Interest & Other
A$m
0.1
1.2
3.1
1.2
3.1
1.2
Operating Activities
A$m
-1.8
-1.3
6.6
34.7
45.1
46.7
Property, Plant & Equip.
A$m
-5.0
-0.4
-25.0
-21.3
-12.9
-10.2
Exploration and Devel.
A$m
-2.1
-2.0
-4.0
Other
A$m
-0.4
0.0
0.0
0.0
0.0
0.0
Investment Activities
A$m
-7.5
-2.4
-28.0
-25.3
-16.9
-14.2
(d) + Royalty
Jun 15
Jun 16
3.09 Jun 17
1.38 Jun 18
1.14 Jun 19
1.03 Jun 20
1.00 Jun 21
A$/US$
0.81
0.73
0.72
0.72
0.75
0.76
0.77
US$/lb
0.91
0.91
1.02
1.13
1.17
1.03
1.03
US$/lb
0.79
0.82
0.86
0.91
0.94
0.90
US$/lb
2.62
2.49
2.66
2.82
2.99
2.84
2.84
US$/oz
15.67
15.96
17.66
18.29
18.98
17.46
17.46
Jun 15
Jun 16
Jun 17
Jun 18
Jun 19
Jun 20
Jun 21
No
No
No
No
No
No
No
Unit
Hedging Hedges maturing? Sensitivity Analysis
-3.0
-4.0
-4.0
Valuation
FY18 NPAT
Base Case
0.43
29.9
Spot Prices
0.35 (-18.1%)
19.7 (-34.0%)
Spot USD/AUD 0.75, Zinc $1.00/lb, Lead $0.82/lb, Copper $2.22/lb, Silver $20.18/oz. AUDUSD +/--10% 0.35 / 0.53 (-18.6% / 22.7%)
22.5 / 38.0 (-24.6% / 27.2%)
Borrowings
A$m
0.0
0.0
15.0
0.0
0.0
0.0
Zinc +/--10%
0.47 / 0.39 (10.2% / -10.2%)
34.1 / 25.6 (14.2% / -14.2%)
Equity or "tbc capital"
A$m
10.6
3.8
15.0
0.0
0.0
0.0
Production +/--10%
0.52 / 0.34 (21.2% / -21.2%)
37.6 / 21.5 (25.9% / -28.1%)
Dividends Paid
A$m
0.0
0.0
0.0
0.0
0.0
0.0
Operating Costs +/--10%
0.39 / 0.47 (-9.4% / 9.4%)
Financing Activities
A$m
10.6
3.8
30.0
0.0
0.0
0.0
Unpaid Capital Year Expires
25.9 / 33.9 (-13.4% / 13.4%) No. (m)
$m
Avg price
% ord
Net Cashflow
A$m
1.3
0.0
8.6
9.4
28.2
32.5
30-Jun-15
0.0
0.0
0.00
Shares
Unit
30 Jun 15
30 Jun 16
30 Jun 17
30 Jun 18
30 Jun 19
30 Jun 20
30-Jun-16
0.0
0.0
0.00
Ordinary Shares - End
175.6
175.6
269.4
269.4
269.4
269.4
30-Jun-17
20.8
2.7
0.13
8%
Ordinary Shares - Weighted
m m
175.6
175.6
222.5
269.4
269.4
269.4
30-Jun-18
27.2
4.0
0.15
10%
Diluted Shares - Weighted Ratio Analysis
m Unit
175.7 30 Jun 15
175.7 30 Jun 16
222.5 30 Jun 17
269.4 30 Jun 18
269.4 30 Jun 19
269.4 30 Jun 20
TOTAL
47.9
6.7
0.14
17%
Cashflow Per Share
A$ cps
-1.0
-0.8
3.0
12.9
16.7
17.3
Cashflow Multiple
x
0.0
0.0
0.0
0.0
0.0
0.0
Earnings Per Share
A$ cps
-1.3
-1.6
2.0
11.1
14.2
14.2
Price to Earnings Ratio
x
-12.3
-10.2
8.1
1.4
1.1
1.1
Dividends Per Share
AUD
-
-
-
-
-
-
Dividend Yield
%
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Tax (NPV future liability)
Net Debt / Net Debt + Equity
%
-23%
-21%
14%
-9%
-51%
-93%
Expected future franking credits
Interest Cover
X
1.8
3.3
na
na
na
na
Return on Equity
%
na
na
10%
35%
37%
28%
Share Price Valuation (NAV) 100% Thalanga (pre-tax NAV at disc. rate of 12%) Other Exploration Hedging Corporate Overheads Net Cash (Debt)
Options & Other Equity Total
0% 0%
Risked Est. A$m
Est. A$/share
164
0.39
50
0.12
0
0.00
-16
-0.04
10
0.02
-34
-0.08
0
0.00
5
0.01
179
0.43 Last Updated: 29/07/2016
Analyst: Scott Williamson +61 8 9268 3045 "tbc capital" could be equity or debt. Our valuation is risk-adjusted for how this may be obtained. Sources: IRESS, Company Information, Hartleys Research
Page 2 of 10
0.90
Hartleys Limited
Red River Resources Ltd (RVR)
29 July 2016
LIONTOWN PROJECT
Liontown was discovered in 1905 and Liontown East was discovered in 2016 by RVR
Liontown Resources (LTR) delineated the maiden resource estimate at Liontown in 2007
The Liontown deposit was discovered in 1905 and historical mining in the early 1900’s focussed on the shallow, high grade Cu-Au mineralisation. Historic underground workings and remnant surface infrastructure exist within the Liontown project area. The Liontown deposit is located ~30km east of the Thalanga processing plant (direct line) and existing road infrastructure via Charters Towers would see a haulage route of ~100km via all-weather roads. The Liontown deposit is a VMS style of mineralisation consisting of two principal south-dipping lodes and some Cu-Au stringer vein mineralisation. The Liontown lode lies within the Liontown horizon hosted by dacite in the footwall and a greywacke-type sediment in the hangingwall. The Carrington lode lies within the footwall sediments about 30m from the Liontown lode. The Liontown and Carrington lodes are predominantly sphalerite mineralisation with minor galena. The footwall stringer mineralisation has an uncertain relationship with the Carrington lode and the Cu-Au mineralisation seems to be poorly understood and underexplored by previous owners. Liontown has a current resource estimate of 2.0Mt @ 0.5% Cu, 1.6% Pb, 4.6% Zn, 0.8g/t Au, 25g/t Ag. The RVR estimate suggests a small portion (~1%) of the Liontown resource lies within an interpreted oxide zone. Of particular interest is an east plunging higher grade core (10-20% ZnEq) open at depth and requiring follow up drilling. Liontown East is an IP anomaly located ~800m along strike to the east of the current Liontown resource. The anomaly is interpreted as a potential extension of the Liontown deposit at depth and to the east. The anomaly consists of a broad zone of high chargeability extending 600m east and 350m down dip. Geochemical anomalism is recorded in historic shallow percussion holes directly up dip of the zone of chargeability. One deeper historic hole aimed at testing beneath the geochemical anomaly failed to test the zone of chargeability. Fig. 1:
Liontown East hole 1 drill core
Kagara acquired Liontown in late 2009
Liontown was mined historically for shallow, high grade Cu-Au mineralisation
Source: Red River Resources Ltd
Page 2 of 10
Hartleys Limited
Red River Resources Ltd (RVR)
Fig. 2:
Liontown East cross section
Liontown East discovery hole 1
Source: Red River Resources Ltd
Fig. 3:
Liontown East hole 1 massive sulphides
Massive Sulphides discovered at Liontown East
Source: Red River Resources Ltd
Page 3 of 10
29 July 2016
Hartleys Limited
Red River Resources Ltd (RVR)
29 July 2016
ERMINE PROJECT
Ermine is ~40km from Charters Towers and ~105km from Thalanga
Significant intercepts include 6.8m @ 14.05% Zn
The Ermine project is located ~40km from Charters Towers and ~105km by road from the Thalanga processing plant. Ermine was identified in 1992 from an outcropping gossan with a coincident airborne EM and stream sediment samples. Historic exploration has identified zinc rich VMS mineralisation at Ermine & Ermine North both with strike lengths of ~300m. The host rocks at Ermine are interpreted to be in the same stratigraphic horizon as the Thalanga deposits. Historical drilling at Ermine includes forty one drillholes for a total of 5,294m, significant intercepts include: ERCD14A; 6.8m @ 14.05% Zn from 20.4m, ERC1; 12m @ 6.08% Zn from 32m and ERC11 4m @ 9.2% Zn from 47m. The drilling has intercepted transported mineralisation in sulphide boulders and the Company is looking to find the source of the debris flow. Mapping in the Ermine area has confirmed that the favourable horizon continues to the north east to the Echidna prospect where strong Cu-Pb-Zn soil anomalies and coincident IP anomalies remain untested by drilling. The Company has identified significant coincident geochemical and geophysical anomalies along strike to the north east which potentially reflect the source of the high grade debris flows identified at Ermine. Fig. 4:
Ermine project IP and geochemical anomaly
Echidna has a strong Cu-Pb-Zn soil anomaly and coincident IP anomalies
Ermine North and Echidna prospects require follow up drilling
Source: Red River Resources Ltd
Page 4 of 10
Hartleys Limited
Red River Resources Ltd (RVR)
29 July 2016
WATERLOO PROJECT The Waterloo deposit was discovered in 1985 by drilling through the Campaspe Formation after BHP Minerals discovered a small outcrop of altered volcanic rock in an adjacent creek. The Waterloo deposit is located ~35km east of the Thalanga processing plant (direct line) and existing road infrastructure via Charters Towers would see a haulage route of ~95km via all-weather roads. Waterloo was discovered in 1985 by BHP Minerals
Waterloo is located ~35km from the Thalanga processing plant (direct line)
Waterloo is a blind deposit located under the Campaspe cover with mineralisation currently open down plunge and along strike. The mineralisation at Waterloo is similar to Thalanga although hosted entirely within the Trooper Creek Formation which is well above the interpreted Thalanga horizon. The VMS massive sulphide lenses at Waterloo develop on or near the contact between the footwall pyrite sericite quartz schist and coarse rhyolitic volcaniclastics which include the quartz eye volcaniclastics similar to the host rocks at Thalanga. In April 2015 RVR announced a resource estimate for Waterloo of 707kt @ 1.9% Cu, 1.6% Pb, 11.0% Zn, 0.9g/t Au, 50g/t Ag [19.1% ZnEq]. Our estimates suggest Waterloo has potential to feed ~150ktpa for ~4 years or more. The Waterloo deposit remains open to the east and possibly down dip, we see potential to delineate further mineable tonnes at Waterloo. The Waterloo resource estimate has a portion (~23%) of transitional ore which is expected to yield a lower metallurgical recovery than the fresh/sulphide material. We believe the higher grade portion of the transitional zone will be economic regardless of the lower recoveries. The Waterloo deposit is a similar style of mineralisation to Thalanga and the Company believes it is appropriate to apply similar metallurgical recoveries. The Waterloo project looks to be an economic and feasible satellite underground opportunity for RVR to progress through to development. Waterloo is located on a granted exploration permit and the Company is looking to convert the tenement into a mining lease.
Waterloo was discovered from a small outcrop in an adjacent creek
The Esso’s Waterloo prospect is located ~2km west of Waterloo and has known economic intersections. The prospect has seen minimal exploration work since it was first identified in the 1970’s. Historic drilling at Esso’s Waterloo consists of ten shallow RAB holes, twelve percussion holes and one diamond hole. A review of existing drilling by RVR has determined the drilling at Esso’s Waterloo focussed on testing immediately below the peak soil geochem anomaly while a large zone of high chargeability exists at depth and remains untested.
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Hartleys Limited
29 July 2016
Red River Resources Ltd (RVR)
VALUATION
We model a 6 year minelife at Thalanga
Our sum of parts valuation for RVR assumes a 6 year minelife at Thalanga with production from early CY17 after a ~6 month development build time. Our modelling of Thalanga assumes a pre-production capex requirement of $20m followed by sustaining capex of $15mpa for the first ~2 years of production while the Company establishes three small, high grade underground mines at West 45, Far West and Waterloo. We model the Thalanga operations in line with the Company’s restart study and some minor additional minelife. We consider the restart study as a base case scenario and see significant potential to extend the current deposits and discover further high grade mineralisation within the region. We assume a nominal $A50m ($0.12/share) value for exploration upside potential. We believe RVR is well positioned for further brownfield exploration success at Thalanga.
Fig. 5: We assume a nominal A$50m for exploration upside potential
Hartleys sum of parts valuation for RVR is A$0.43/share
Hartleys Sum of Parts Valuation for RVR
100% Thalanga (pre-tax NAV @ 12%) Other Exploration Hedging Corporate Overheads Net Cash (Debt) Tax (NPV future liability) Expected future franking credits Options & Other Equity Total
A$m
A$/share
164.4 50.0 0.0 -15.6 10.0 -34.0 0.0 4.7 179.4
0.39 0.12 0.00 -0.04 0.02 -0.08 0.00 0.01 0.43
Source: Hartleys Estimates
PRICE TARGET Our price target for RVR is based on a 6 year minelife at the Thalanga Operations. We model in line with the Company’s restart study. We include weighting for our valuation at spot and consensus pricing.
Fig. 6:
RVR Price Target Methodology Weighting
Price Target Methodology
Hartleys 12 month price target is 41 cents per share
Spot
12 mth out
NPV base case
60%
$0.43
$0.48
NPV base case at spot commodity and fx prices
30%
$0.35
$0.39
Net cash backing
10%
$0.04
$0.04
Risk weighted composite 12 Months Price Target
$0.37 $0.41
Shareprice - Last
$0.160
12 mth total return (% to 12mth target + dividend)
Source: Hartleys Estimates
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154%
Hartleys Limited
29 July 2016
Red River Resources Ltd (RVR)
EV/EBITDA BANDS Fig. 7:
Using Hartleys base case commodity forecasts
Shareprice 1.40 RVR Actual
1.20
Hartleys Target
1.00
8x EV/EBITDA 6x EV/EBITDA
.80
4x EV/EBITDA
.60
2x EV/EBITDA 1x EV/EBITDA
.40 .20 .00
Source: Hartleys Estimates, IRESS
Fig. 8:
Using spot commodity prices
Shareprice 1.00
.90
RVR Actual
.80
8x EV/EBITDA
.70
6x EV/EBITDA
.60
4x EV/EBITDA
.50 2x EV/EBITDA
.40
1x EV/EBITDA
.30
.20 .10 .00
Source: Hartleys Estimates, IRESS
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Hartleys Limited
29 July 2016
Red River Resources Ltd (RVR)
RISKS Fig. 9:
Key assumptions and risks for valuation
Assumption
6 year mine life at Thalanga
Moderate
Risk to valuation if assumption is incorrect Meaningful
Model parameters
Moderate
Meaningful
We have made a number of large assumptions in our valuation of RVR, changes in these assumptions can change our valuation to both the upside and downside
Exploration upside potential
Moderate
Meaningful
We assume exploration upside at Thalanga. Some downside risk to our valuation exists if RVR have no exploration success
Restart / Ongoing Exploration Funding
Low to Medium
High
Orebody Risk
Low to Medium
Meaningful
Moderate
High
Commodity prices Conclusion
Risk of not realising assumption
Comment
RVR is leveraged to the success of the restart of the Thalanga Operations. We model a 6 year minelife in line with the restart study. If the operations vary largely from our modelling our valuation will be at risk
We model conventional debt & equity funding, we believe the low capex requirement should see our modelling assumptions achievable though there is some risk associated with funding in the current environment As with all orebodies there is risk around geology, geotech and metallurgy although with a production history at Thalanga these risks are somewhat negated
RVR is reliant on strong commodity prices although is economic at current spot prices We have made significant assumptions but believe these are achievable.
Source: Hartleys Research
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HARTLEYS CORPORATE DIRECTORY Research Trent Barnett Mike Millikan Scott Williamson Simon Andrew Janine Bell
Head of Research Resources Analyst Resources Analyst Energy Analyst Research Assistant
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Institutional Sales
Director & Head of Corp Fin. Director Director Associate Director Associate Director Associate Director Associate Director Manager
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Wealth Management
Corporate Finance Dale Bryan Richard Simpson Paul Fryer Ben Wale Ben Crossing Stephen Kite Scott Weir Rhys Simpson
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Hartleys Recommendation Categories Buy Accumulate
Neutral Reduce / Take profits Sell No Rating Speculative Buy
Share price appreciation anticipated. Share price appreciation anticipated but the risk/reward is not as attractive as a “Buy”. Alternatively, for the share price to rise it may be contingent on the outcome of an uncertain or distant event. Analyst will often indicate a price level at which it may become a “Buy”. Take no action. Upside & downside risk/reward is evenly balanced. It is anticipated to be unlikely that there will be gains over the investment time horizon but there is a possibility of some price weakness over that period. Significant price depreciation anticipated. No recommendation. Share price could be volatile. While it is anticipated that, on a risk/reward basis, an investment is attractive, there is at least one identifiable risk that has a meaningful possibility of occurring, which, if it did occur, could lead to significant share price reduction. Consequently, the investment is considered high risk.
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Disclaimer/Disclosure The author of this publication, Hartleys Limited ABN 33 104 195 057 (“Hartleys”), its Directors and their Associates from time to time may hold shares in the security/securities mentioned in this Research document and therefore may benefit from any increase in the price of those securities. Hartleys and its Advisers may earn brokerage, fees, commissions, other benefits or advantages as a result of a transaction arising from any advice mentioned in publications to clients. Hartleys has completed a capital raising in the past 12 months for Red River Resources Limited ("Red River") for which it has earned fees. Hartleys has provided corporate advice within the past 12 months and continues to provide corporate advice to Red River Resources Limited ("Red River") for which it has earned and continues to earn fees. Any financial product advice contained in this document is unsolicited general information only. Do not act on this advice without first consulting your investment adviser to determine whether the advice is appropriate for your investment objectives, financial situation and particular needs. Hartleys believes that any information or advice (including any financial product advice) contained in this document is accurate when issued. Hartleys however, does not warrant its accuracy or reliability. Hartleys, its officers, agents and employees exclude all liability whatsoever, in negligence or otherwise, for any loss or damage relating to this document to the full extent permitted by law.
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