Red River Resources Limited (ASX:RVR) has maintained its speculative buy rating from Canaccord Genuity (TSX:CF, LSE:CF) with the 12-month share price target also remaining at A$0.40 per share.
The analyst has updated their model, downgrading FY22E/23E earnings before interest, taxes depreciation and amortisation (EBITDA) by 14% and 6%, respectively.
Red River is currently trading on the ASX at A$0.22 with a market cap of A$111.47 million.
Notably, the analyst anticipates the company finishing 2022 with A$20 million in cash and no debt.
The following are excerpts from Canaccord Genuity (TSX:CF, LSE:CF)’s research report:
The 2021 December quarter was a miss on our production numbers (see below) due to additional ground support requirements that needed to be installed at Thalanga.
This impacted production rates with tonnes mined falling 42% quarter-on-quarter. Hillgrove ceased mining in the 2021 September quarter with the remaining gold recovered from the circuit in the 2021 December quarter and sold 78,000 ounces, beating our estimate by 51%.
RVR settled a royalty dispute in the quarter and has paid A$19.94 million while drawing US$8 million of its available debt facility.
Despite this, it beat our net cash number by A$9 million due to our assumption of A$10 million spend at the Hillgrove development.
We have updated our model, downgrading FY22E/23E EBITDA by 14% and 6%, respectively. Our price target remains unchanged at A$0.40/sh (0.5x P/NAV).
Thalanga's key metrics
- Zinc production of 2,400 tonnes missed our 3,400-tonne estimate by 28% on lower throughput;
- copper production of 500 tonnes missed our 900-tonne estimate by 38% on lower throughput and lower mined copper grades;
- Lead production of 700 tonnes missed our 900-tonne estimate by 24% on lower throughput;
- Gold production of 360 ounces missed our 400-ounce estimate by 9%; and
- C1 cash costs of US$0.58 per pound of zinc missed our US$0.20/lb estimate due to the reduced sales.
Focus is lifting on the Liontown development with permitting, mine design, and scheduling work progressed.
RVR is looking to accelerate the higher grade underground resource, which has a conceptual mine life of 10+ years.
Hillgrove's key metrics
- Produced 500 ounces, in line with our estimate;
- Sold 800 ounces, higher than our expectation of 500 ounces;
- The plant is now being refit for processing antimony rich ore;
- Discussions are taking place with mining contractors for Syndicate development. We had expected development to begin in the 2021 December quarter and have now pushed back to the 2021 June quarter;
- Offtake agreements for antimony are progressing; and
- Close to the edge on cash, but judgment gives certainty on the path forward.
RVR has sufficient liquidity to continue operations following payment of the royalty dispute with A$13.2 million in cash. It has drawn A$11.1 million of its A$20.8 million debt facility and expects to pay it back at a rate of A$2.8 million per quarter over the next year.
We had expected RVR to finish the year with net debt of A$4 million, however, it maintained its position at net cash A$5 million. Despite the debt repayment and Hillgrove capex of A$20 million, we anticipate RVR finishing the CY22 with A$20 million in cash and no debt.
Is 2022 the time for Hillgrove to emerge?
The Hillgrove asset remains a difficult asset for us to call (we risk its valuation by 50%). RVR acquired the asset cheaply, in our view, at the bottom of the cycle, and there is significant sunk cost in the established infrastructure.
However, the ore is largely refractors, contains antimony, the plant is smaller in scale, and requires investment to reach its full potential.
The opportunity for RVR is to add to the 1-million-ounce gold & 90,000-tonne antimony resource in order to scale up and produce at higher rates; we think this requires a significant investment in exploration and a LT processing solution for the antimony.
With 2022 looking supportive for FCF, we will be watching for management's direction with the asset.
Recommendation and valuation
We value RVR using a 50/50 risk-weighted NAV/5yr avg EBITDA with a multiple of 1.5x.
We use LT US$1.20/lb zinc, US$3.50/lb copper, AUDUSD of 0.75, and a discount rate of 10%.