Red Rock is a company that has expertise in exploration and advancing projects. “But we aren’t necessarily a company that will take a project from discovery into production”, he tells Proactive Investors.
“For any project there are two points at which a company can add the most value – right at the beginning when it is first discovered, and you’re able to establish a resource out of nothing. And secondly when the mine is built, production starts and everyone suddenly believes your story.”
“The difference is in the amount of capital you have to deploy to add this value.”
“To get that first major increase in value the amount you spend is very little, while the amount you have to spend to capture that last rise in value is in the hundreds of millions (or more).
“Clearly, we are more likely to be involved in those early stages. That is where we fit into the ecology of the mining industry.”
At a glance the lay investor could mistake the Red Rock portfolio of sporadic collection of interests, seemingly lacking obvious share price catalysts.
But that would greatly underestimate the business’ value adding role in the sector says Bell.
“Really we never have more than three projects on the go at once. Yes, we have other assets but generally they are passive investments, minor in scale, where we have already begun the process to realise the value we’ve created, or which are sitting in the ante room while we get to know them.”
Bell’s goal is identify new opportunities that can be quickly assessed and shaped with early stage exploration work – typically using small teams of geologists and cheaper forms of drilling equipment.
Once this initial phase of exploration is complete, ideally after a resource estimate has established a material value for the asset, Bell is more than happy to pass on some of the project up the food chain.
“Everything is a cycle. We buy a project, add value and we sell. Really it is the same as any type of business.
“And I’m not bothered if we end up selling on some of our interests quite quickly. It seems to me a very good way of reducing risk and realising the value that we’ve created.
“We have to maximise our leverage at the point at which we can get the best return for the least risk and lowest cost.”
The Mount Ida project is a prime example of the Red Rock blueprint.
In 2005 the Red Rock team unearthed a number of iron and manganese prospects within a group of tenements in the Yilgarn district of Western Australia, and in the years after these prospects were sold to ASX quoted Jupiter Mines for fairly modest cash payments, a royalty, and an equity stake.
Several years later, Jupiter is now on the cusp of developing the Mt Ida project into a mine, triggering the royalty.
Also in 2010, Jupiter scooped up a stake in the Tshipi manganese project in a deal with South Africa headquartered miner Pallinghurst.
The project is expected achieve first production later this year and be in operation as one of the world’s largest manganese producers for decades to come.
Red Rock currently holds a 4 per cent stake in Jupiter. And it will also receive a 0.75 per cent revenue share from Mt Ida once it starts producing (a feasibility study is due at the end of this year).
And it is also possible that Red Rock may see a return earlier than expected – it sold half of its royalty (0.75 per cent) for US14 million in May and Jupiter rejected an approach for one of its projects in June, believed to be Tshipi, though it did not disclose which one.
While Red Rock’s emphasis is on exploration the company is not afraid to deviate from this blueprint if the right opportunity presents itself. This can be seen by RRR’s involvement in the El Limon mine in Colombia.
El Limon was not an untested green field site. But with an opportunistic move Red Rock acquired a stake in the reopening gold mine in the summer of 2010.
The deal was basically done via the backdoor. Red Rock helped the operator secure funds to refurbish the mine through a $2 million loan. And as a result the company subsequently took a 50.5 per cent controlling stake in the operation.
The investment appears to have paid off as the mining operation and plant were re-established at the start of last year and despite teething problems are now producing at somewhere near 100 tonnes per day and getting control of availability and cost variables. “Improving grade control is the next task” says Bell.
And earlier this month RRR began talks over a potential sale of the mine that Bell says will lock in an ‘attractive’ cash return.
“All our assets are for sale at the right price; if someone comes to us and makes us an offer that provides us with a good profit we’ll negotiate. That is the business we’re in.”
“We were approached; we didn’t go out looking for a sale. They (the potential buyers) already know the project and while they’re doing due diligence they probably know as much about the mine as we do.
“That said, we wonder whether at this stage of our development we should be in the deep mining business other than as a short term trade so we were very ready to listen.
“It is relatively encouraging. I must add they are not the only ones to have suggested they might want to buy the mine, but this is a cash offer and it is attractive to us.”
The proposed sale is perhaps a fortunate turn of events as the refurbishment project wasn’t nearly as simple as RRR expected when it first got involved and the company had to devote a great deal of energy and time to solving the operational challenges.
This included eventually taking control of the day to day running of the mine.
But Bell has a different perspective.
“Some people may be looking for evidence the project was a failure. That we just wanted to get out or are selling at a loss. But none of those theories are true.
“For us, it is simple. There are good reasons for us to take a profit. And in this difficult market, showing you sell an asset for a profit and bring in cash can’t be a bad thing.”
While a sale may be on the cards in Colombia, Red Rock is also exploring its options for its Kenyan gold assets, which it sees as a major growth point.
The company’s interests in this project are held indirectly and may appear a tangled mish-mash as they were accumulated in several stages.
But, put simply, it is the major stakeholder in a series of projects in south west Kenya. And in April it hired advisers to help consolidate its holdings and rights and put a more straightforward structure in place.
Bell believes that a simplified ownership structure will clear the way for RRR to add more value to the Kenyan portfolio - one way or another. This could take the form of an increase in percentage held, an asset sale, a farm-out or perhaps the spinning out of a new vehicle to advance the gold project.
It is feasible that in the not too distant future Red Rock’s plate could have cleared significantly – as any or all the assets discussed so far could be sold.
So what would be left then? As anyone following Bell’s companies will know, there is always another project and perhaps another deal on the horizon.
As far as we can tell Red Rock’s next focus is on iron ore. More specifically a group of early stage iron ore projects on the fringe of the North Pole.
Assessing projects in north Northern Canada, in the Baffin Bay area, Bell and his team surmised that the large area of mineralisation was likely to extend across Baffin Bay into Greenland.
In 2011 Red Rock secured the land, through a farm-in deal, and after the frozen sea thawed Red Rock deployed a team of hardy geologists for the first wave of exploration.
This returned good enough results for a much larger expedition this year, with a base camp set up and a logistical team led by a former Polar explorer. The drills have been turning for the past two months.
Results so far have been encouraging and Bell believes RRR is well on its way to an iron ore resource estimate this year.
Investors will have a keen eye on how this latest venture will progress, and how Red Rock guides it through the development cycle.