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Cash flow is king for Red Rock Resources

Red Rock Resources is addressing a dearth of funding in the mining sector by going after cash flow from oil

Andrew Bell

"We’ve made a couple of investments in producing on-shore oil in the US,” says Andrew Bell of Red Rock Resources (LON:RRR).

This seemingly simple statement encompasses one of the final stages in what’s been a radical rethink in the shape and scope of Red Rock’s activities.

The long-term strategic interest in big mining exploration remains, with assets in Greenland, Kenya and Ivory Coast, amongst others.

But these assets are no longer the immediate focus, for a variety of reasons.

Rather, the plan is to get cash flow from oil, and fast.

“We did a fundraising in the spring of last year,” says Bell. “And we’ve done a reconstruction of the balance sheet. Since then we’ve been trying to avoid issuing stock due to the low share price.”

The obvious alternative? – cash flow.

And the best way to achieve this in the resources space is not in mining - where the time lag between exploration, discovery and production can often be upwards of a decade - but oil.

If you hit oil, you can be producing in a matter of months.

And that’s the attraction for Bell in the new North American assets.

“At Shoats Creek,” he says, “the oil is relatively shallow. It’s at a reasonable pressure. And these are cheap wells.”

But is now the right time to be buying into oil, given the weakening price?

“We knew the oil price was going to come right down,” says Bell. “We can honestly say we forecasted it. And if you’re going to make an entry into the sector it’s much better to do it at US$30 oil.”

The Shoats Creek assets in Louisiana in particular look like a good bet.

Red Rock already has an interest in two development wells on the Shoats Creek Field, while the latest acquisition gives the company a 14.4% net revenue interest in a third well that’s already been tested and shown to flow at 340 barrels of oil equivalent per day.

“This well has already been drilled and it’s about to go into production, says Bell. “If you’ve decided you want cash flow, that’s where you get it.  With oil it can be in the blink of an eye.”

The aspiration is that revenues from this well will be forthcoming very shortly, and that within a few months that cashflow will be augmented by cashflow from the other two wells.

What with cutbacks on admin and office costs in London and elsewhere, Bell is hopeful that it will only be a few short months before the oil assets allow Red Rock to move to being operationally breakeven.

But oil and mining aren’t always easy bedfellows, so what is it that’s actually prompted Bell to orchestrate this change?

The answer isn’t just to do with falling share prices.

“The exploration model in mining is broken,” he says.

“For it to work, the model needs there to be upside on the possibility of a takeout or farm-in. But if it only works if you hit something incredible then it doesn’t work. In most cases you’re going to need a mining partner, with a low cost of funds and funding capacity, but the big companies have been restructuring and prices are coming down. Then there’s the other part – the market has to be willing to fund early exploration. But it’s effectively stopped doing that as metal prices continue their years-long collapse. And that means you don’t have any ability to self-fund.”

Such are the vagaries of the bear market.

“So we must have some cash flow, even if we do keep our mining assets,” continues Bell.

“We have to put ourselves in a position where we don’t have to come back to market. And you can do that with oil, as long as it is onshore, not deep, not complicated, and as long as you’re going after unambitious targets, the lower hanging fruit, and not aiming to be stripping the whole tree.”

That in turn has a knock-on effect on how the company is valued by other people.

With cash coming in and no immediate or pressing need to tap the market, the thinking is that investors will now be able to value the mining and other assets inside the company’s portfolio dispassionately, without constantly having to fret about the survival of the holding entity.

After all, it’s not chicken feed. There’s over a million ounces of gold at Migori in Kenya.

The stake in ASX-listed Resource Star, now known as Star Striker (ASX:SRT), has done well and posted a sixfold increase in value in recent months.

The Greenland iron ore project has a recognised JORC resource. And the other gold and oil exploration assets could well deliver real value over the longer term. The trick really, is survival in the short term.

And on that too, the strategy is now clear.




Quick facts: Red Rock Resources PLC

Price: 0.34 GBX

Market: AIM
Market Cap: £2.37 m

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