Red River chief fears zinc miner will be snapped up ‘on the cheap’

Barry FitzGerald

Red River’s MD says it would be a “tragedy” if his Queensland zinc miner is hit with a low-ball offer just as cashflow is set to surge and exploration offers much blue sky. Plus, Cassini tipped to bounce back as investors digest Oz Minerals’ deal with the base metals explorer.

Plenty of CEOs think their company’s shares are undervalued. Some have a point, most don’t.

Mel Palancian, managing director of the ASX’s only pure (producing) zinc play, Red River (RVR), is in the former category, and he made his case at the Melbourne Mining Club’s Cutting Edge series during the week.

There was some emotion to it too, with Palancian saying he feared a low-ball takeover bid as he sees a lot more value for shareholders than the current $135m market capitalisation (28c a share) implies.

“To me the downside is we get taken out at $140m. And that would be a real tragedy for my shareholders,’’ Palancian said.

He gets support for the idea that Red River is undervalued by the 51c and 45c share price targets for the stock set recently by Baillieu Holst and Canaccord respectively.

A re-rating of the stock is clearly in the offing. Zinc prices are at 10-year highs, the Aussie dollar is amplifying the bumper prices and the company is now banking proceeds from first concentrate sales from its restarted Thalanga operation in north Queensland, about a 2.5 hour drive from Townsville on the Flinders highway.

Thalanga was picked up by Red River from the administrator of the failed Kagara Zinc in September 2014 for the knock down price of $6.5m and after pulling in $30m from a share placement at the start of this year, Red River got cracking on restarting the project.

Grandiose ambitions - and a dump in metal prices - undid Kagara. Palancian and his management team aren’t about to make the same mistake. Rather than bring back Thalanga as a 650,000tpa processing operation, Red River has brought it back at 325,000tpa.

The reason for that is simple enough. Palancian said that a post mortem on what had gone wrong for the previous owners found that every time Thalanga had focussed on high-grade fresh sulphide ore, it made money. And that is the focus of Red River.

The base case in the restart plan was for a 5.25 year mining life with average annual metal-in-concentrates production of 21,000t of zinc, 3,600t of copper, 5,000t of lead, 365,000oz of silver and 2,000oz of gold.

It makes for 34,200t of zinc equivalent production but more to the point is that Thalanga has come back with life-of-mine average cash costs in the super robust category of US18c/lb, compared with the current price of $US1.44/lb.

Somewhat remarkably given zinc prices are at a 10 year high, Palancian made only scant reference to the price strength. That reflects a confidence in Thalanga’s cost position no matter where the zinc price goes from here.

It nevertheless stands to reason that at current prices, Thalanga is set to throw off a lot of cash (Baillieu forecasts EBITDA of $47m in 2018 and $75.8m in 2019 on its own assumptions).

Palancian said that the cash flow is going to be Red River’s ticket to growth.

While the treatment mill is currently ticking over at 325,000tpa, with plans to ramp up to 400,000tpa, the reality is that Red River can double output without spending any capital on the mill.

But first there needs to be confirming work on a supporting reserve/resource. And that is where the strong cash flow – and Red River’s cash position of $15m – comes in.

The first decent exploration effort since the late 1990s is underway and is already producing the sort of results that suggest Thalanga will be around a lot longer, and at a higher production rate, than envisaged in the base case restart plan.

The restart has kicked off on ore from the West 45 deposit where resource extension drilling is underway and according to Palancian, there is “material potential to increase the ore reserve.’’ An updated estimate is not far off.

A similar story is unfolding at the next deposits to be brought in to production, Far West and Waterloo.

Far West is not actually that “far’’ at all. It is all of 400m from the treatment plant. It was drilled in the late 1990s but promptly forgotten about, with the previous owners not being overly keen on exploration.

A new reserve estimate is expected to be out before the end of the year and the deposit remains open at depth and along strike. Waterloo is on an exploration licence so will take about 18 months to permit.

It will be worth the wait because at 19% zinc equivalent, it is currently the highest grade deposit in the Red river portfolio. It’s shallow, open at depth and along strike.

The real game-changer could come from Red River’s stepped up regional exploration effort. Using more powerful geophysical tools than were available to the previous owner, it is uncovering juicy targets beneath the extensive regional cover.

All up, there are about 130 targets sitting there waiting to be drilled.

Cassini tipped to bounce back on Oz Minerals deal

Spare a thought for Cassini Resources (CZI) with its 7.5c share price and its fully diluted market cap of $22m.

There was meant to be a celebration in the stock when OZ Minerals (OZL) committed to backing the pre-feasibility study on Cassini’s West Musgrave nickel-copper project in WA.

OZ did so earlier in the week, agreeing to spend $19m over the next 18 months to earn a 51% interest, and keeping alive its ability to increase its interest to 70% by spending a total of $36m over three and a half years.

But Cassini shares went backwards, coming off a high of 10c a share earlier this month. That was despite OZ for one thinking the potential for West Musgrave to be become a competitive producer of meaningful amounts of nickel and copper was worth pursuing.

Maybe it was because Cassini is running a bit low on cash or because the base metals complex has taken a bit of a hit in recent days. Maybe it was the capex call on Cassini down the track should the button be pushed on a West Musgrave development.

Either way, the Cassini sell-off is expected to be a short-term affair once the full detail of this week’s “further scoping study’’ is digested.

Hartley’s has already had a crack at that and has placed a 12-month share target on Cassini of 16c a share.


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