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Red River Resources Ltd: THE INVESTMENT CASE

Red River Resources' share price upside may be driven by exploration success and production growth

Production at Thalanga is forecast to grow more than 50% between 2018 and 2019.
Red River Resources' share price upside may be driven by exploration success and production growth
The company is trading on a fiscal 2019 PE multiple of 3.5 relative to Hartleys forecasts

Red River Resources Ltd (ASX:RVR) made an impressive start to the year, completing the first shipment of zinc concentrate from its Thalanga Zinc Project in Queensland.

In terms of timing around ramp up to full production and resource size, Red River is considered one of the best emerging zinc stories in Australia.

While the maiden shipment was exciting news for the company, it is still very much an exploration driven play with multiple drilling programs underway.

READ: Red River Resources drill results continue to suggest potential for longer mine life

The deposits currently in the mine plan at the Thalanga operations are West 45, Thalanga Far West and Waterloo.

Management sees potential for mine life extensions

The deposits under exploration are all in relatively close proximity to the Thalanga processing plant.

Management is focused on maximising returns by increasing planned throughput and extending mine life.

Mel Pelancian, managing director, said: “Increasing ore reserves at West 45 combined with the recently announced maiden ore reserve at Far West is an outstanding result for the future of Red River.

“There is also the potential for further mine life extensions at depth and along strike.”

Production helps to self-fund exploration

Red River mined 67,000 tonnes of ore from the West 45 underground deposit during the December quarter at an average grade of 0.3% copper, 2.5% lead and 5.7% zinc.

There were 79,000 tonnes of ore milled at the Thalanga operations grading 0.5% copper, 3.2% lead and 6.2% zinc.

The operations generated cash of $6.8 million for the quarter and the company’s cash balance increased by $7.6 million to $23.2 million.

Commencement of predictable cash flows and the projected increase in cash generation as production increases will provide Red River with the capacity to internally fund exploration.

This is important at a stage where the company is transitioning to profitability, as shareholders should not see substantial earnings dilutive capital raisings.

Multiple catalysts on the horizon

The advanced nature of the project and the derisking that has occurred over the last 12 months has been instrumental in providing strong share price momentum.

The increase from 17 cents in May 2017 to a 12-month high of 41 cents in February represented a gain of circa 150%.

This was largely driven by promising exploration results at the Thalanga project, the establishment of an offtake agreement, and the company’s transition from explorer to producer.

Analysts like the story

Mike Millikan, resource analyst at Hartleys sees the scope for further share price upside as exploration accelerates in surrounding areas.

He has particularly high expectations regarding the high-grade polymetallic Liontown East deposit.

In late January, Millikan said: “Drilling is ongoing, with a hole in progress intersecting strong mineralisation.

“This included more than 15 metres of massive/semi-massive sulphides and excess of 21 metres of stringer sulphides.

“Liontown and Liontown East highlight good potential to come into the Thalanga mine plan over time.”

Potential for production driven rerating

Millikan has a buy recommendation on the stock with a 12-month price target of 64 cents.

This could be achieved if investors are waiting to see evidence management can achieve the proposed production metrics, including cost projections, as the project moves to full capacity.

Hartleys expects production to increase more than 50% from 21,000 tonnes of zinc equivalent in fiscal 2018 to 34,000 tonnes of zinc equivalent in fiscal 2019.

Red River looks fundamentally undervalued

Based On the broker’s projections, this should generate fiscal 2019 net profit of $32 million, representing earnings per share of 9 cents.

These projections are based on a seemingly conservative commodity price assumption.

The broker is forecasting an average zinc price of US$1.10 per pound in fiscal 2019, and its forecasts are based on an exchange rate of US$0.76.

The spot zinc price is US$1.50 per pound, and it hasn’t traded at US$1.10 per pound since 2016.

Liontown East delivers

On the exploration front, it would appear that Millikan was on the mark with further promising assay results from drilling at the Liontown East just coming to hand.

Latest results include 18.15 metres at 8.8% zinc equivalent from 517.25 metres down-hole and 23 metres at 8.25% zinc equivalent from 219 metres down-hole.

Red River is also focused on converting mineral resources into ore reserves at Liontown.

The orebody remains open and the company plans to aggressively continue to define further extensions.

West 45 increase in ore reserve strategically important

An updated ore reserve at the West 45 deposit, part of the broader Thalanga project, also had an impact on the group’s investment merits.

The 10% increase in contained metal on a zinc equivalent basis effectively extended its mine life to at least 2019.

Importantly, there will be a period of simultaneous production from West 45 and Far West in 2018/2019 resulting in increased mill throughput.

Life of mine plan a potential catalyst

In tandem with these developments, an optimised life of mine plan will be released in early 2018 and this is a potential share price catalyst.

While West 45 didn’t represent a substantial increase in mine life, the company has only scratched the surface in that area and management is confident of further success.

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