RCH richfield group limited

rch analysis

  1. 1,057 Posts.
    A World Class Molybdenum Deposit containing 178,000 tonne of Metal Worth $US12.7 Billion in the ground.

    RCH traders this aint for you because you are bound to get bored after reading the first 5 lines. Those that have taken reasonable positions and are interested in the fundamentals of this company, please pay attention to what Im about to tell you.

    You know by now that RCH has got its foot on a 100Mt Molybdenum deposit in Indonesia. From the data put together by Santos and Rio we can see that it is incredibly high grade.

    The Moly business is a high margin, fat profit game, if so long as you can get your project financed(eg $300M to $1.1Billion is the usual range).

    This is no easy feat because there is no forward market to sell future production into and thus give financiers the comfort they require. For this reason, most projects will never get funded unless the grade is high and the payback quick. Moly Metals for example is currently out banging the drum on a $1Billion capex project. Their grade is the standard fare of 0.06% but they will get there because they are a quality outfit. Many will not though and that will keep the growing Moly market tight and prices firm.

    You should also be aware that the current Moly price is $US34lb against the price used in Bankable Feasibility Studies (BFS) of $US15lb. Most Moly Mines tend to boast a cash cost of around $US5lb so if you can get funded you usually get to make a pile of cash.

    Thats a bit of the background, now if you are still awake, this is the main event.

    Statement: Im going to show you what the share market hasnt even begun to understand about RCHs project and why the main players have been telling their purple circle that RCH has a theoretical value of 40 cents.

    It was only after studying a BFS document and several Moly operations and that crappy presentation put out by RCH (what were they thinking?) that the penny dropped for me.

    The Moly miners dont blend their high grade ore with their low grade like gold miners do, they just rip the guts out of the high grade zone first (thats if they can get to it first) and pay the debt off and recoup their investment as soon as possible. Again, as there is no Forward Market you don't know what the price of Moly will be in 12 months time so make hay.

    Now go and have a good look at the Santos numbers from that horrible RCH presentation. You will see 27Mt at 0.29% OPEN PIT. Yep rip out this super high grade zone first and send it down the hill to the plant below.

    Have you any concept of what 0.29% run through a 7.2M tonne pa mill returns you? Well you can see the answer below, but before you do may I draw your attention to the comments made in that same awful presentation about the Assay Grade Errors. They reckon the assay grades are up to 33% understated. This means the grade available in the first 2.5 years may be as high as 0.39% MoS2.

    If this project used a modest size plant of say 7,200,000 tonnes pa mill, it could under reasonable grade and price assumptions make a Net Profit Before Tax of at least $1USBillion p.a (see calculations at end below) for the first 2.5 years. It then adjusts downward accordingly as the grade comes back to 0.15% to 0.2% (depending if you adjust for the assay error).

    Im also telling you here and now that this project could pay off its capex os say $500M in 1 year.

    Are you comprehending this? Mull it over for a minute.

    This is why they can and will do a JV with a bigger company who will give RCH a free carry (China Molybdenum listed in HK would be an really good example wouldnt it? oops).

    Example: They sell 50% of the project to a large company in exchange for that major stumping up the equity component of say 30% of the capex and guaranteeing the 70% debt component. Also lets assume they pay for 50% of the feasibility costs at say $20M. Money out the door for the major? A lousy $170M.

    First year the major partner gets 50% of the Net Profit Before Tax of $500M (yes, I've even expensed depreciation before arriving at this figure), year 2 it banks another $500M and so on for 10 years but at lower profits as the grade drops. Lets say $400M for year 3, then 250M for 5 years, then $100M for last 2 years. Ill work it out later, its not important right now.

    So where is RCH in all this? It owns 75% of 95% so it ends up with 75% of 95% of 50% after a JV is struck with a major(though in reality the minorities will probably sell out rather than stump up any cash but we will assume for now they stay in).

    RCH would receive about 35% of the Net Profit Before Tax and all it has to do is fund half the feasibility study/drilling etc for say $20M (may even get this free carried though).

    Now 35% x Net Profit Before Tax of $1Billion is $350M in years 1 & 2 alone.

    Somehow I dont think they are going to have any trouble raising the $20M do you?

    Where is this share price going when the punters eventually come to grips with this?

    Yep, North big time.

    The purple circle keep saying its worth 40 cents a share. Lets see, 2 Billion bits of paper fully diluted. Lets say they raise $20M at 10 cents (dont laugh this is going to 10 cents soon). So they have 2.4 Billion shares with a theoretical value of 40 cents. Thats a market cap of $960M. Thats not even a P/E of 3 in the early years.

    Whats the downside?

    The Moly price but the world has changed. Moly may come back to the $US15lb feasibility price they all use or have to use in their studies but that impacts 90% of the other Moly operations way more than it would a very very high grade operation like RCHs.

    At $US15lb, the Net Profit is $570M of which RCH gets $200M in years 1 & 2. A PE of 5?. Still no stretch to maintain the 40 cents share price valuation. So the lower grade Moly companies could almost all be squealing in pain but RCH is still banking huge profits. Even when its into its lower grade material of 0.10% it is still operating at 2 times the grade that most in the world are operating at.

    Here are numbers generated out of my industry BFS model. (Ruby Creeks actually and is based on 7,200,000 tonnes milled a year. But I used $500M Capex rather than their $300M to be more conservative).

    Grade 0.39% (for 2.5 years and after adjusting upwards for assay errors of 33%)
    Price $US34lb (current Spot)
    Year 1&2 Net Profit $US1.5 Billion per annum.
    Best Case scenerio and if achieved using a P/E of 3X would value RCHs 35% share of a JV at $1.575 Billion or 65 cents a share. I'm using 2.4 Billion shares after ex of options and a raing of $20M at 10 cents.

    Grade 0.29% (assume no assay errors which is rediculous)
    Price $US34 lb (spot)
    Year 1&2 Net Profit $US1.138Billion
    (This what the Moly companies put in their presentations but not their BFS documents)

    Grade 0.29%
    Price $US20lb (likely long term)
    Year 1&2 Net Profit $US580M
    (The grade is too low and assumes no errors in assays)

    Grade 0.29%
    Price $US15lb (BFS)
    Year 1&2 Net Profit $US380M
    (This is the price they must use in BFS but the grade is too low due to known errors. A very conservative bottom line)

    Grade 0.39% (adjusted for assay errors)
    Price $US20lb
    Year 1&2 Net Profit $US841M
    (This is a realistic position, grade error fixed and a more conservative long term Moly price used. This result equates to a share price value of 37 cents using a PE of 3)

    Grade 0.39% (adjusted for assay errors)
    Price $US15lb
    Year 1&2 Net Profit $US573M
    (This is what the bankers use and such a return equates to 25 cents a share for RCH using a PE of 3. This price of Moly would have Moly producers squealing in pain but not RCH)

    Ive posted the breakdown of the BFS model previously so my numbers can be easily checked if anyone is that motivated.

    So we get to the question of can one actually reconcile the theoretical value of 40 cents a share. Yes is the answer but once the project is operational and then that's only using a conservative PE of 3.

    My prediction is we will soon have a JV partner involved.

    There is accumulation going on in this stock and there is no doubt in my mind about that, its getting slowly sucked dry.

    The buyer/s already understand the above numbers and are taking cheap stock off the uninformed and 5 minute traders.

    I see 10 cents a share as soon as it is evident that a JV is going down. At the moment we just have rumour.
 
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