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Red River Resources looks cheap if base metal prices hold up: E.L. & C. Baillieu

Red River management has flagged the restart of operations at Hillgrove through the treatment of old stockpiles in late 2020.

Red River Resources Limited - Red River Resources looks cheap if base metal prices hold up: E.L. & C. Baillieu
E.L. & C. Baillieu has maintained its BUY recommendation for Red River

Red River Resources Limited (ASX:RVR) recently increased the mineral resource for Hillgrove Gold Project in northern NSW to 692,000 ounces of gold and 75,000 tonnes of antimony after updating the Syndicate Lode resource estimate.

The Hillgrove resource now sits at 5 million tonnes at 4.3 g/t gold and 1.5% antimony in addition to a substantial JORC 2004-compliant resource, which Red River is systematically converting to JORC 2012 compliance.

E.L. & C. Baillieu, one of Australia's oldest stockbroking and wealth management firms founded in 1889 recently increased its price target for Red River to 17 cents per share from 16 cents per share.

The following is an extract from Baillieu’s research update:

Waiting for Hillgrove’s gold

FY20 better than forecast: RVR’s FY20 NLAT of $6.8m was better than our forecast NLAT of $9.4m, due to a higher tax credit. The pre-tax loss was $12.1m, versus our forecast loss of $12.1m. While the company did book a loss, it did come at a time of low base metal prices, with management able to lower operating costs by around 20% YoY, offsetting some of the revenue impact.

FY21 to benefit from prices and no mining transition at Thalanga: Operations in FY20 saw the depletion of the west 45 mine and the development of Far West, which is only now transitioning to stope ore. Operating cost and production should benefit from having only one source and a greater proportion of stoping ore, rather than diluted development ore. The higher copper content in the Far West ore should also provide a revenue benefit. Over the last one to two months, base metal prices have rallied considerably, with both copper and zinc currently trading above our FY21 forecasts. Our FY21f NPAT has increased $1m, or 13% to $8.3m, while our FY21f NPAT is up 0.4m, or 5%, to $8.4m. Our valuation has increased 2cps to 37cps.

Hillgrove still to be priced in: RVR management have flagged the restart of operations at Hillgrove through the treatment of old stockpiles in late 2020; however, with only an inferred resource on the stockpiles, the ASX precludes the publication of any of the relevant economic criteria on which to judge the economics – all we have been provided is an estimate of $5m in capex for the restart. There is a JORC resource on the underground, some of which is being converted to 2012 standard and will form the basis for a preliminary mine plan to be released in the current quarter, which will provide us with a basis to be included in our earnings and valuation.

Investment View: RVR looks cheap if base metal prices hold up and very cheap if the Hillgrove redevelopment is as successful as RVR management believe it could be in the next 12 months. We believe the issue revolves around RVR needing to pay back the outstanding US$4m in working capital facility in September to Trafigura. Our view is that given the current state of the zinc concentrate market – as evidenced by the currently low treatment charges – the working capital facility will be extended so that the traders at Trafigura maintain their supply. We increase our price target to 17cps, from 16 cps. BUY maintained.

Quick facts: Red River Resources Limited

Price: 0.195 AUD

Market: ASX
Market Cap: $100.97 m

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