Emerging zinc player, Red River Resources (RVR), announced last week that it had increased the Far West mineral resource by 42% to 1.6 million tonnes, up from 1.2 million tonnes.
This was a significant development given that it also included a 5% increase in grade from 14.2% zinc equivalent to 14.9% zinc equivalent, a comparatively high grade mineral resource when weighing up the company’s prospects against its peers.
Another factor RVR has going for it is that it is relatively close to production with managing director, Mel Palancian highlighting that these results were further confirmation that the broader Thalanga project could be brought into production within six months of making a decision to mine.
In the previous Far West mine plan RVR had to develop down to 350 metres in order to access mineralisation. The most recent data that resulted in the mineral resource upgrade demonstrates that mineralisation can be accessed at 80 metres.
Analysts at Hartley’s were upbeat about this most recent news, highlighting that the updated resource has potential to extend the mine life at Thalanga and reduce the capital expenditure requirements of the Far West underground mine.
The broker’s resource analyst Scott Williamson said, ‘We now model the Far West mine to be incorporated into the Thalanga mine plan during the second year which allows the processing plant to ramp up to 400,000 tonnes per annum much earlier than previously forecasted’.
At this stage Hartley’s is basing its estimates on a six year mine life in line with the restart study conducted by RVR.
As a backdrop, the Thalanga project located in North Queensland was acquired from Kagara Zinc in 2014. RVR was attracted by the high grade nature of the deposit which is believed to be the second-highest compared with other zinc focused Australian projects.
Another attraction was that the assets acquired included 600,000 tonnes per annum for Thalanga processing plant that has been on care and maintenance since 2012. It has the capacity to produce zinc, copper and lead concentrates.
Located near Charters Towers, the project has easy access to sealed roads and an existing rail line, as well as having close proximity to port facilities in Townsville.
While a firm date hasn’t been arrived at in terms of recommencing production, the two key factors to take into account are that it is unquestionably an economically viable project and that the company can be producing zinc within six months of management hitting the start button.
Analysts at Hartley’s are modelling maiden production of 5000 tonnes zinc equivalent in fiscal 2017, generating a net profit of $3 million, equating to earnings per share of 2 cents. This places the company on a fiscal 2017 PE multiple of 6.5 relative to Friday’s closing price of 13 cents.
However, RVR is really a 2018 story with production increasing nearly five-fold which should generate a net profit in the order of $20 million. Analysts at Hartley’s have factored in a capital raising in that period, and consequently the earnings per share accretion isn’t proportionate.
Notwithstanding this dilution, with earnings per share increasing five-fold to 10 cents per share, implying a PE multiple of 1.3, the fundamentals appear attractive.
Hartley’s has a buy recommendation on the stock with a 12 month price target of 36 cents, implying a premium of nearly 200% to Friday’s closing price.
While moving to production will be a key share price driver, Hartley’s highlighted a number of highly prospective exploration targets being pursued by RVR. One of these is the Waterloo deposit (707,000 tonnes grading 19.1% zinc equivalent), once again another potential high grade source of ore.
Zinc’s fundamentals as a base metal commodity are also compelling. Unlike copper and nickel there is little new supply coming on stream and big deposits such as the Century project have been exhausted.
Since the start of the year the zinc price has increased from circa US$0.65 per pound to push up towards US$0.90 per pound and it is currently hovering in the vicinity of US$0.85 per pound. It has by far been the best performing base metal over the last six months, comparing with relatively flat performances by nickel and copper.
A steep decline in London Metals Exchange (LME) zinc warehouse stocks has been instrumental in driving the zinc price. The decline started in September/October 2015 as stocks fell from more than 600,000 tons to 450,000 tons in January/February.
It is worth noting that the kick in the zinc price didn’t start until the back end of this period, indicating the traditional lead time that occurs between a contraction in supply and an increase in price.
Given that the next steep leg in the decline in warehouse stocks only started in the last 60 days with levels falling from 445,000 tons to circa 390,000 tons we could be approaching an inflection point where another rally in the zinc price occurs, particularly bearing in mind the current spot zinc price is broadly in line with where it was 60 days ago.