Thursday 4th August, 2011
Realm Resources – share price volatility masks hidden value
I first covered Realm Resources (ASX: RRP, Share Price: $0.12, Market Cap: $19m) in the Daily Bulletin
on 3rd June, when the company’s share price had dipped below $0.10. The company has continued the
share price roller-coaster ride that it’s been on for the past six months.
Whilst many companies in the junior space have been impacted by heightened volatility and investor
unease, Realm has been subject to above-average price volatility, which has seen a pull-back recently of
up to 50% since its peak in November.
Realm’s board has nevertheless continued to push ahead with its plans to transform the company with an
expansion into Indonesian coal. From my perspective the company’s strategic decision to de-risk the
company by moving the project focus away from South African precious metals and into bulk commodities
closer to home, is a sensible one.
The wisdom of realm’s diversification strategy is reflected in the frustrating regulatory delays that are being
experienced in South Africa that have unfortunately hampered the group’s platinum growth strategy.
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Realm has been slowed with respect to its Masedi Platinum and Nkwe Platinum deals. As a result, the
company has minimised expenditure on these properties to a low-cost drilling and mapping program,
whilst at the same time looking at ways of resolving the situation and looking at corporate options.
Let’s now turn our attention to the company’s growing Indonesian coal focus. In my initial coverage in
early June I highlighted the option and share sale agreement with Kalres Limited, a company that has
granted Realm an option to acquire all of its issued capital. The project has the potential to transform
Realm into a thermal coal producer within the next 12 months.
Kalres has the opportunity to acquire up to a 75% stake in an Indonesian coal company, PT Katingan Ria,
which holds the Katingan Ria concession that covers 5,053 ha in Central Kalimantan. The aggregate
consideration comprises US$29.6 million and the issue of 15 million performance rights.
The arrangements are subject to technical, commercial and legal due diligence investigations which have
commenced. As part of this process Realm has undertaken on-site exploration activities comprising field
mapping, validation of previous work and drilling of 20 holes in the Southern Resource area in order to
establish the economic potential of the project.
Realm has so far identified an initial Inferred Resource in the Southern Resource area of 40.1Mt, which is
bounded by an east-west striking fault. Drilling in the Northern area is underway and is expected to
confirm the existence of the main seam, which is seen in outcrop at various locations and mapped at more
than a 6-metre seam thickness. The quality is considered to be a mid-CV, low total sulphur, subbituminous thermal coal, with specific quality details in the table below.
Concept level assessment of the project shows that the relatively shallow-dipping coal with low strip ratios
is amenable to mining with conventional truck and excavator. Due to the site topography, dozer push on
the east and western flanks is also a likely method that can further reduce operating costs.
Whilst minor amounts of drill and blast will likely be required, investigations to date indicate predominately
free-dig conditions. Minimal site infrastructure comprising a ROM pad, water management, mining
industrial area and offices, is proposed at the site. Subject to the satisfactory outcome of a feasibility
study, a development plan is envisaged with potential for first shipments as early as Q2 2012.
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Raw coal would be transported to the barge port location on existing disused logging roads. Upgrade
works consisting of pavement, geometry and creek crossings will be required over the 40km haul. Coal
will be crushed to sub-50mm, most likely at the barge port using a mobile contract crusher.
Following receipt of all regulatory and community approvals, it is proposed to construct a barge loading
facility consisting of simple fixed-loading conveyor and fenders. Initial production will be loaded using a
temporary jetty. Negotiations are in progress for securing the requisite property for this work.
An intermediate stockpile area downstream has been identified. It is proposed to construct this stockyard
for buffer storage of coal in wet and dry seasons and also consolidation of cargos to larger barges for
trans-shipment to the mother vessel. Barge requirements (420 km) have been assumed to be 180 ft from
the barge port to the intermediate stockpile, transferring to 300 ft barges at this point.
Loading of the mother vessel will be done initially via geared vessels and/or contract floating crane
depending on availability. It is intended to upgrade this to a longer term trans-shipment contract once
production is stabilised.
Capital costs in the order of US $41M are expected to build the project including mine development,
offices, community development, barge port and intermediate stockpile. Costs would be phased over the
initial 18 months of operations.
Operating costs in the order of US$40/t FOB (on mother vessel) are envisaged by Realm for Katingan.
This includes overheads, mining and haulage, crushing, barge transport and trans-shipping operations.
Considering the initial inferred resource of 40Mt, and a typical production level of up to 3Mtpa product, a
base-case project life of about 12 years has been considered by the company at this level of evaluation.
The current drilling work in the northern resource area is targeted at the identification of any further
potential for coal in this area.
Whilst a base case of 3Mtpa will be evaluated in the feasibility study for the project, the proposed
production rate and project life will be further reviewed upon assessment of the northern area drilling.
Realm will seek the necessary shareholder approvals to conduct the capital raising and consents for the
proposed transaction and other items at a General Meeting of Shareholders. Realm intends to raise up to
$46 million to fund the acquisition and initial development and working capital of Katingan Ria in a phased
manner. Realm anticipates holding the general meeting in early September 2011.
Andrew Matheson will join the Realm board as an Executive Director to drive the company’s transition and
growth into bulk commodities. He has a 25-year track record in the resources industry including his current
role as CEO of Carbon Materials with the Talbot Group, General Manager of Aquila Resources’ coal
portfolio and various project, engineering, commercial and operational roles with BHP Billiton and GHD.
He has also assembled a team of Indonesian and mining specialists to progress and develop the project.
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In all, RRP represents an interesting situation. With a dual exposure to South African platinum and
Indonesian coal, the company will of course not be every investor’s cup of tea. At the same time it is
cognisant of reducing its risk exposure by diversifying out of South Africa.
The value equation roughly looks like this:
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Cash on hand ~$5m
•
Aluminium dross production in South Africa - $1m p.a. cash flow, worth ~ $4m
•
PGM’s – 50% stake in 7 million oz, worth ~$14m
•
This equates to ~$23m value, with RRP market value currently ~$19m
•
PGM Rooderand option - 50% of 3 million oz for spending $2m – effectively for free
•
Coal option to buy project stake of 75% - $60m acquisition cost and capex equity and debt) to
generate EBITDA p.a. of ~$30m - $45m – effectively for free
Realm Resource is therefore a company that I’ll be keeping a close eye on. I’ll be meeting with
management in the coming weeks, so I will have further news then. It remains a company worth
contemplating from a value perspective for those investors with a greater appetite for risk.
Disclaimer: Gavin Wendt, who is a Financial Services Representative of Summit Equities Ltd ACN 097 771 634, and is a director
of Mine Life Pty Ltd ACN 140 028 799, compiled this document. In preparing the general advice of this report, no account was
taken of the investment objectives, financial situation and particular needs of any particular person. Before making an investment
decision on the basis of the advice in this report, investors and prospective investors need to consider, with or without the
assistance of a securities adviser, whether the advice is appropriate in light of the particular investment needs, objectives and
financial circumstances of the investor or the prospective investor. Although the information contained in this publication has been
obtained from sources considered and believed to be both reliable and accurate, no responsibility is accepted for any opinion
expressed or for any error or omission in that information.
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