Red River Resources Ltd (ASX:RVR) improved the operating performance at its Thalanga Operation in Queensland in the March quarter resulting in higher production of zinc and lead concentrates and record copper concentrate production.
The concentrate figures were the result of strong improvements in mine production and mill throughput.
Canaccord Genuity has retain its SPEC BUY recommendation for Red River and expects Thalanga to return to be a positive cash flow operation over CY20.
Following is an extract from Canaccord’s March 2020 quarter research update:
MarQ’20: Exit rates suggest Far West can deliver
- Ore mined (91kt at 9.4% ZnEq. vs CGe 80kt at 10.5% ZnEq.) from Far West was up 50% QoQ, with exit rates from March implying ~400ktpa run rates are achievable. With mined ore predominantly sourced from stopes over CY20, we expect that grade will become more predictable (towards ore reserve of 12% ZnEq.) and dilution will reduce. With ventilation and egress now completed to lower mine levels, we expect sustaining capital will lower to ~$2m per quarter through the Far West LoM.
- Overall production (physicals pre-released) was slightly down on CGe with 4.3kt vs 5.1kt Zn conc, 2.3kt vs 2.7kt Cu conc and 1.1kt vs 1.5kt Pb conc . Pleasingly, Cu recovery continues to trend up (84%, +18% QoQ) as higher grades are processed from Far West.
- Unit C3 costs of US$1.21 vs US$0.79/payable lb Zn were above CGe as higher treatment charges (up $1.4m QoQ) and expensed development costs over Feb’20 impacted site EBITDA of -$2.6m vs CGe $3.2m.
Balance sheet – working capital facility drawn to maintain flexibility
- While closing cash of $12.7m was in line with CGe, we had not modelled the drawdown of US$6m from the existing US$10m working capital facility. This was prudently drawn, in our view, providing flexibility to fund Thalanga operations while at the same time continuing to progress development activities at Hillgrove. With TC/ RCs and development costs reducing, we expect Thalanga to return to be a positive cash flow operation over CY20. We note, however, that RVR will likely require to reschedule the current facility repayments ($9.8m due 30th Sep’20).
- Over FY21E we currently model most capital expenditure will relate to developing the future Liontown deposit (+.1Mt at 12.7% ZnEq). We expect RVR will provide a development update (including permitting and design) over H2’20, which reflects the 36% increase in resource tonnage announced over Mar’20.
Hillgrove: Met results a good starting point
- Met test work has confirmed that the 18koz (indicated resource) that exists on the Bakers Creek can be recovered (60-65% gravity, 20-25% float) suggesting a low risk restart using the existing plant (site visit note here) can be achieved.
- With RVR appointing the former Thalanga GM to Hillgrove, we expect study work will be consolidated over the next six months. Until such time, we model a fiveyear scenario of 40kozpa AuEq at A$1,200/oz for Hillgrove, with the project value (NPV15%) risked 50% to reflect funding and execution risk.
- We have increased mined ore from Far West 10% over CY20E, offset by a delay in first production from Liontown (now Jun’21). The main impact to our estimates has been applying revisions to our LT (from 2024) zinc (-10% to US$/l) and FX (USD:AUD -9% to 0.61) assumptions as per our recent price deck update.
Valuation and recommendation
We have rolled our model forward for MarQ’20 and incorporated the recently drawn debt, resulting in our target price remaining unchanged at A$0.15/sh. We retain our SPEC BUY recommendation.