By Dr. Michael Green
It appears that some interesting developments happening down under have continued to fly under the radar of commentators and watchers of Red Rock Resources which we believe could have big implications for the stock and the value of its interest in the Mount Ida Magnetite Project.
In late January 2018 news was released that Cleveland Cliffs is planning to close its iron ore operations at Koolyanobbing in the Yilgarn later on this year. Australian media has drawn attention to the concerns about job losses at the mine and also at the Port of Esperance from where circa 11 million tonnes of iron ore per year has been exported. Truth is that some 75% of Esperance Port’s exports come from Koolyanobbing and Clevaland Cliffs intends to meet its contractual obligations. These obligations include take-or-pay contracts to ship a minimum of 7.5 million tonnes of iron ore a year through Esperance Port until 2030 and use 7.5 million tones a year of rail capacity until 2022. Net effect of this is that it looks as there will be a compensation arrangement for Cliffs and there will also be a big advantage to find someone to take up this spare capacity.
Koolyannobbing in fact represents the last operating iron ore mines in the Yilgarn region. There are not really any more on the cards as in recent months, Mineral Resources was refused permission to extend its Carina iron ore operations onto the Helena Aurora Range due to environmental concerns.
Logical conclusion of these developments is that it only leaves Jupiter Mines’ Mount Ida Magnetite Project as the last mine standing and where an Inferred Resource over the Central Zone has been defined of 1.85 billion tonnes with a head grade (15% Fe cut-off) of 29.48% Fe, 45.88% SiO2, 1.10% Al2O3, 0.074% P and 0.201% S. Red Rock has a stake of 1.2% in Jupiter Mines and also a 1.5% gross production royalty over any production from the Mt Ida iron ore project.
The feasibility study was initiated in 2011 when iron ore prices were at US$140/t. Back then these sorts of prices were needed to justify the investment in a new project even using the existing infrastructure. But, without any access to infrastructure, such a project was put on ice. Lower iron ore prices could probably lead to a lot of inflated costs being taken out of project estimates when they are revisited.
Jupiter Mines has enough on its plate with the Tshipi manganese mine and were Mt Ida to be developed it would most likely be funded by external parties with the Chinese being the obvious customers. Chinese engineers could probably find ways to do the project a lot cheaper.
Red Rock actually agreed to halve its Mount Ida royalty to Anglo Pacific Group for US$14 million in 2012, where US$8 million remains outstanding (US$4 million on a formal decision to mine and a further US$4 on commencement of production). So, there is US$8 million (equivalent to 0.57 p per share) that could come. Further, that figure could be bolstered on an annual basis by the Red Rock’s 1.5% royalty.
Looking into the future on quite a simplistic basis, were Mt Ida to go into production and make up the shortfall of capacity (11mtpa) on the railway and at the port, even using the current iron ore prices, this would suggest an annual revenue of US$730 million. On this basis, Red Rock would receive an annual royalty of US$11 million (equivalent to 0.78p per share). That might be seen as a bit of a pipe dream at the moment, but this story could have legs.
When we add in the Steelmin loan repayment and rump equity stake, together with the imminent IPO of Jupiter Mines per our blog here, we continue to believe that there is a material disjoint between the current stock price and the underlying see through value.
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