Download EQUITY RESEARCH Red River Resources Ltd (RVR.ASX)

EQUITY RESEARCH
Materials
14 December 2015
Red River Resources Ltd (RVR.ASX)
Ready, Set, Waiting to Go

C3 costs for the LOM of Thalanga are US$0.73/lb, which we estimate to be in the
3rd quartile of the C3 zinc cost curve. Spot zinc price is currently ca. US$0.70/lb.
From our analysis we estimate that Thalanga requires a zinc price of US$0.86/lb
to begin to be NPV positive, while at US$0.95/lb the Thalanga NPV is $36M –
twice the pre-production capex.

While the company awaits a turnaround in the zinc price, it is undertaking an
exploration program which is initially focusing on advanced exploration targets.
Major ones include Far West’s exploration target and up dip extension, Liontown
mining study on JORC Resources and anomaly at Liontown East, and Truncheon
anomaly near the historic Highway-Reward mine. Success at any of these can
materially improve economics of the Project.
Earnings and Valuation:

We have moved to a DCF model of RVR. Our valuation has reduced to
$0.20/share principally on lower commodity price assumptions, which have
reduced in-line with consensus.

We have compared RVR with peers and believe that the recently taken over
Atherton Resources (ATE) is the most relevant comparable given location,
polymetallic nature of deposits, and low capex. Applying the EV/JORC Resource
Contained Zinc and EV/Mining Inventory Contained Zinc multiple implies a
$0.16-$0.45/share valuation range. The upper end highlights the corporate
appeal of a high grade and low capex project.

We forecast the Thalanga project to commence production start 2017 assuming
zinc prices rise over the next 12 months as forecast by consensus. We forecast
a maiden NPAT of $9M in FY18.
Board and Management
Brett Fletcher
Mel Palancian
Donald Garner
Jim Black
Paul Hart
Cameron Bodley
Mark Hanlon
Major shareholders
Donald Garner
Mersound Pty ltd
Share Price Graph
214.7
58.5
19.1
24.3
-6.3
18.0
238
2017e
23.6
2.5
-0.9
0.00
nm
12.9
2018e
69.2
17.3
9.0
0.02
4.1
1.8
Non Executive
Managing Director
Executive Director
Non-Executive
Non-Executive
Non-Executive
Non-Executive
3.6%
3.3%
Share Price
$0.24
$0.22
$0.20
$0.18
$0.16
$0.14
$0.12
$0.10
$0.08
$0.06
$0.04
Volume ('000)
2,400
1,800
1,200
600
-
Analyst
Mark Fichera
[email protected]
Oct 15
The low capex and short lead time enables both a low funding and temporal risk
pathway to production. Market consensus is for zinc prices to increase over the
next few years, mostly due to mine closures (Century, Lisheen, Glencore).
Spec Buy
Buy
$0.20/share
$0.58/share
0.09
0.08-0.23
$0.20/share
DCF
High
Nov 15

Sep 15
Mine life is 5.25 years, with the JORC Resources at West 45, Far West, and
Waterloo to be mined as part of the Project.
Jul 15

Aug 15
Key highlights were the low pre-production capex of $17.7M, and the short lead
time of six months to production following final investment decision.
Jun 15

Apr 15
Red River Resources (RVR) released its Re-Start Study (Study) for Thalanga Zinc
Project (Thalanga).
May 15

Mar 15
Investment Highlights:
Rating
Previous
Price Target (A$)
Previous (A$)
Share Price (A$)
52 week low - high (A$)
Valuation (A$/share) - risked
Methodology
Risk
Capital Structure
Shares on Issue (m)
Options on issue (m)*
Market Cap (A$m)
Market Cap- Fully Diluted (A$m)
Net Debt/(Cash) (A$m)
EV (A$m)
12mth Av Daily Volume ('000)
*Includes options subject to shareholder vore.
Y/e Jun (A$M)
2015a
2016e
Sales
0.0
0.0
Adj EBITDA
-4.7
-6.0
Adj NPAT
-4.6
-6.0
Adj EPS diluted $
-0.03
-0.02
PER x diluted
nm
nm
EV/EBITDA x
nm
nm
Jan 15
Release of Re-Start Study for the Thalanga Zinc Project.
Feb 15

Dec 14
Event:
+61 2 9993 8162
Recommendation:

We change to a Spec Buy (previous Buy) recommendation on RVR with price
target of $0.20/share (previous $0.58), based on our valuation.

The key catalyst for the stock is a rise in the zinc price. Exploration success that
can translate into enhanced economics for Thalanga is also key, as well as a
successful outcome on Liontown mining study.
Foster Stockbroking acted as Joint-Lead Manager to
the $3.9M placement of 36.8M RVR shares at $0.105
per share with a 1-for-2 free $0.15 options in
November 2105. Foster Stockbroking received fees
for the service.
DISCLAIMER: Foster Stockbroking Pty Ltd does and seeks to do business with companies covered in its research reports. As a result, investors should be aware
that the firm may have a conflict of interest that could affect the objectivity of this report. Refer full disclosures at the end of this report.
Red River Resources Ltd (RVR.ASX)
Red River Resources (RVR)
Ful l Yea r Ended 30 June
Profit and Loss A$M
Net sales
Operating Costs
Underlying EBITDA
D&A
2015a
2016e
2017e
2018e
2015a
2016e
2017e
2018e
0.0
0.0
23.6
69.2
Financial Metrics
Sales growth %
nm
nm
nm
193%
-4.7
-4.7
4.0
-4.0
21.1
2.5
51.8
17.3
EPS growth %
nm
nm
nm
nm
0.0
0.0
3.4
8.3
EBITDA margin
nm
nm
10%
25%
Underlying EBIT
-4.7
-4.0
-0.9
9.0
EBIT margin
nm
nm
nm
13%
Net Interest exp / (income)
-0.1
0.0
-0.2
0.0
Gearing (ND/ND+E)
-24%
-29%
26%
17%
Profit before tax
-4.6
-4.0
-0.7
9.0
Interest Cover (EBIT/net int)
nm
nm
nm
376x
Tax exp / (benefit)
0.0
0.0
0.0
0.0
-4.6
-4.0
-0.7
9.0
Average ROE %
nm
-27%
-3%
37%
0.0
0.0
0.0
0.0
Average ROA %
nm
-14%
-2%
20%
Non-recurring items
-4.6
0.0
-4.0
0.0
-0.7
0.0
9.0
0.0
Wtd ave shares (M)
151
203
346
346
Reported NPAT attributable
-4.6
-4.0
-0.7
9.0
Wtd ave share diluted (M)*
171
249
404
404
-0.03
-0.02
0.00
0.02
NPAT before minorities
Minorities
Underlying NPAT attributable
Underlying EPS diluted ($)
Sales and earnings multiples
Cashflow A$M
2015a
2016e
2017e
2018e
P/E x
nm
nm
nm
4.0
EV/EBITDA x
nm
nm
12.9
1.8
nm
1.0
4.1
-0.4
0
0
0
0
A$M
A$/sh
A$M
A$/sh
48.2
$0.19
6.2
$0.02
2015a
2016e
2017e
2018e
-4.7
-4.0
2.5
17.3
EV/EBIT x
Change in WC
0.4
0.0
-0.5
-1.2
Dividend yield %
Tax paid
0.0
0.0
0.0
0.0
Other
0.0
0.0
0.0
0.0
Net interest
0.1
0.0
0.2
0.0
2.4
-1.8
0.0
-3.9
0.0
2.1
0.0
16.1
Underlying EBITDA
Share based payments
Operating Cashflow
Purchase of PP&E
Company Valuation
DCF, WACC 10% nominal
0.0
-8.9
-13.9
-15.0
Acquisitions
-5.0
0.0
0.0
0.0
Capitalised expenses
-2.1
0.0
0.0
0.0
Investments
-0.4
0.0
0.0
0.0
Investing Cashflow
-7.5
-8.9
-13.9
-15.0
Equity issue
11.3
15.7
0.0
0.0
Tax liability
0.1
5.9
0.0
0.0
Debt repayments
-0.1
0.0
0.0
Other
-0.7
0.0
Financing Cashflow
10.6
Segment
Thalanga Project
Liontown & Orient
Exploration
Corporate
Deferred consideration
9.0
$0.04
-9.9
-$0.04
-1.4
-$0.01
-13.9
-$0.05
Cash from options
5.0
$0.02
0.0
Net cash (debt)
6.3
$0.02
0.0
0.0
Company (fully diluted)
49.5
$0.20
21.6
0.0
0.0
Diluted shares (M)*
1.3
8.8
-11.7
1.1
2015a
2016e
2017e
2018e
Cash
1.7
10.5
-1.2
-0.1
Receivables
0.2
0.0
1.9
5.7
PPE
7.9
16.8
27.2
33.9
Capitalised exploration
0.8
0.8
0.8
0.8
Gold US$/oz
Intangibles
0.0
0.0
0.0
0.0
Silver US$/oz
Contingent assets
Other
9.1
9.1
9.1
9.1
A$ US$
0.4
0.8
0.8
2.4
20.1
38.0
38.7
51.8
Accounts payable
0.5
0.3
1.7
4.3
Provisions
0.0
0.5
1.7
Debt
0.0
5.9
Other
Deferred consideration
0.0
Rehabilitation liability
Debt proceeds
253.6
*Includes options which are in-the-money at FSBe valuation of 20cps.
Net Cashflow
Commodity Assumptions
Balance Sheet A$M
2015a
2016e
2017e
2018e
Zinc US$/lb
0.93
0.98
1.04
Lead US$/lb
2.61
2.64
2.70
Copper uS$/lb
0.86
0.88
Prices
1,174
1,178
0.91
1,191
16.90
17.66
18.13
0.73
0.69
0.70
Zinc kt
0.0
16.6
19.4
Lead kt
0.0
6.3
6.2
4.3
Copper kt
0.0
1.1
2.7
5.9
5.9
Gold koz
0.0
0.1
0.9
0.0
0.3
-0.7
Silver koz
0.0
363.5
386.7
1.5
1.5
0.0
0.0
9.1
9.1
9.1
9.1
0.93
0.89
Total Liabilities
11.1
17.3
18.7
22.9
Reserves and capital
21.5
37.2
37.2
37.2
Ordinary shares
Options
Total Assets
Production
C3 costs US$/lb
Capital structure
Retained earnings
-12.6
-16.6
-17.3
-8.3
Minorities
0.0
0.0
0.0
0.0
Total Equity
8.9
20.6
19.9
28.9
Fully diluted
M
214.7
58.5
273.2
Source: Company; Foster Stockbroking estimates
*Fully diluted basis - Assumes issue of conditional options
14 December 2015
Level 25, 52 Martin Place, Sydney, NSW 2000 | +61 2 9993 8100 | www.fostock.com.au
2
Red River Resources Ltd (RVR.ASX)
THALANGA ZINC PROJECT (100% RVR) RE-START STUDY RELEASED

Red River Resources (RVR) released its Thalanga Zinc Project (Thalanga) Re-Start Study (Study)
on October 19th, which the company reviewed internally and comprised contributions from
external consultants and historical work. A summary of key parameters is shown in Figure 1.
Low capex and short lead-time the highlight

We regard the most salient features of the Study to be the low pre-production capital of $17.7M
and short lead time of six months (post any financial investment decision). This is due to the
already existing infrastructure and capital in place – namely the processing plant, offices, and
existing decline development at the West 45 mine – as well as the existence of mining lease.

While C1 costs of US$0.18/lb are low, mostly attributable to the high grade and polymetallic
nature of the ore bodies providing significant credits (Pb, Cu, Au, Ag), the planned underground
mining of the deposits operations means that C3 costs are more relevant, due to the capital
required for the life-of-mine (LOM) underground capital development. C3 costs are US$0.73/lb.

The commodity assumptions used by RVR were based on consensus forecasts, resulting in the
Study’s NPV of A$84M and IRR of 61% for Thalanga.
Figure 1: RVR Thalanga Key Re-Start study Metrics
Parameter
Life of mine (LOM)
Metrics
5.25 years
LOM ave C1 cash costs
US$0.18/lb
LOM ave C3 cash costs
US$0.73/lb
LOM revenue
A$628M
LOM free cash flow pre-tax
A$131M
LOM annual free cash flow pre-tax
Pre-production capex
NPV (8% real)
IRR
Lead time to production
A$25M
A$17.7M
A$84M
61%
Six months
Source: Company; Foster Stockbroking estimates.
PROPOSED MINING OF WEST 45, FAR WEST, AND WATERLOO
14 December 2015

The Study proposes that mining will commence first at West 45, which has an existing 552m
decline down to ca. 100m depth. Mining of this orebody is expected to feed the mill for the first
two years. While being mined, underground development would commence at Far West, such
that this would come on-stream in Year 3, when West 45 is depleted. Waterloo would follow
soon after. Far West and Waterloo should be depleted by end first quarter of Year 6.

Assumptions for mining include cut-off grades of 9% Zn equivalent. Mining method will be long
hole stoping, based on 15-20m sublevels and stope strike lengths of between 20m and 25m, with
average stope widths being 3.5 to 9m across the three deposits, and minimum width of 2m.
Waste rock and cemented rock fill will be used to backfill stopes, removing the need to leave
behind pillars of valuable ore.

Ore will be trucked to the Thalanga mill. Trucking distances to the mill from the deposits are
1.4km for West 45, 0.5km for Far West, and 96km for Waterloo, the last justifying its by the
highest Zn equivalent grade (19.1%).
Level 25, 52 Martin Place, Sydney, NSW 2000 | +61 2 9993 8100 | www.fostock.com.au
3
Red River Resources Ltd (RVR.ASX)

Mining schedules and design were prepared by Mining One. Mill throughput is expected to be
300-450ktpa, well within the 650ktpa rated capacity of the plant.

RVR included all of the JORC Resources of West 45, Far West, and Waterloo as part of the mining
inventory for the Study. Of this material, 28% has been classified into Reserves, 50% Indicated;
and 22% Inferred, based on the sum of zinc, lead and copper metal.
Figure 2: RVR Total JORC Resources for Thalanga Project Study by Classification
Inferred
22%
Reserves
28%
Measured
0%
Indicated
50%
Source: Company; Foster Stockbroking estimates.
DEWATERING OF WEST 45 COMPLETED

We visited the Thalanga Project in October and entered the decline at West 45. RVR had
demonstrated progress in dewatering the decline. Ground conditions were good and stable, and
we observed significant bolting and meshing of rock.

Since the company announced it had completely dewatered West 45, and confirmed that no
serious defects are evident, with ground conditions being good and rockbolts achieving or
exceeding design capacities.
PERMITTING – ONLY MINING LEASE FOR WATERLOO OUTSTANDING
14 December 2015

Part of the reason for short lead time to production is that West 45 already possesses a mining
lease, as does Far West. Only a mining permit for Waterloo is outstanding. We expect RVR to
obtain a mining lease 18 months after submission of EIS and mine plan. This would be before
Waterloo is scheduled to be mined – i.e. Year 4.

Amendments to the plans of operation will be required for Far West prior to production
restarting. We expect these changes to be minor and approved relatively quickly.
Level 25, 52 Martin Place, Sydney, NSW 2000 | +61 2 9993 8100 | www.fostock.com.au
4
Red River Resources Ltd (RVR.ASX)
Figure 3: RVR Total JORC Resources for Thalanga Project by Classification by Deposit
Deposit
Classification
Far West
Study Total
Pb
Cu
Au
Ag
Zn eq
%
%
%
g/t
g/t
-
-
-
-
-
-
Indicated
0.585
8.3%
3.6%
0.6%
0.3
70
15.3%
Inferred
0.006
3.7%
0.8%
0.0%
0.1
15
7.8%
Total
0.591
8.3%
3.5%
0.6%
0.3
69
15.2%
Measured
0.073
5.3%
1.6%
1.8%
0.2
41
13.7%
Indicated
0.494
5.3%
1.6%
1.6%
0.2
40
13.0%
Inferred
0.591
6.3%
2.1%
1.7%
0.3
57
15.2%
Total
1.158
5.8%
1.9%
1.7%
0.2
49
14.4%
Measured
Waterloo
Zn
-
Measured
West 45
Ore
-
-
-
-
-
-
-
Indicated
0.406
13.4%
2.1%
2.7%
1.4
68
24.6%
Inferred
0.301
7.9%
0.9%
0.9%
0.4
27
11.8%
Total
0.707
11.0%
1.6%
1.9%
0.9
50
19.1%
Measured
0.073
5.3%
1.6%
1.8%
0.2
41
13.7%
Indicated
1.485
8.7%
2.5%
1.5%
0.6
60
17.1%
Inferred
0.898
6.8%
1.7%
1.4%
0.3
47
14.0%
Total
2.456
7.9%
2.2%
1.5%
0.4
54
16.0%
Source: Company; Foster Stockbroking estimates. West 45 Indicated includes Reserves.
METALLURGY – BASED ON HISTORICAL PERFORMANCE
14 December 2015

Flotation is the main processing route to be employed by RVR, which is well established and
conventional practice commonly used throughout industry.

RVR have based the metallurgical assumptions the historical performance achieved for
Thalanga’s deposits. A summary is shown in Figure 4. Metwork was conducted in 2008 on West
45 ore and in 2012 Kagara Ltd (KZL) processed the ore in the Thalanga mill. No material
deleterious elements are expected.

Thalanga Copper mines (TCM) also treated ca. 30kt of the adjacent orebody to West 45 - Far
West (Thalanga West) - in the same mill in the late 1990s, providing confidence for its
metallurgical assumptions.

While Waterloo was not mined, metwork was conducted in 2008 and historical records from
across various deposits that were mined nearby, such as Highway Reward, Vomacka, and
Liontown, as well as Far West and West Thalanga, provide some foundations for the
metallurgical assumptions.

The Thalanga mill has been on active care and maintenance since last operated in 2012. It mostly
comprises a three stage crushing circuit; primary and secondary ball mils, regrind plant; separate
copper, lead, and zinc flotation circuits, concentrate thickening and filtration; and concentrate
storage.

Tailings storage facilities (TSF) exist with a current active cell having sufficient capacity for
planned operations after a review by ATC Williams. Also there is the option of the Vomacka open
pit which could be potentially used as a TSF.
Level 25, 52 Martin Place, Sydney, NSW 2000 | +61 2 9993 8100 | www.fostock.com.au
5
Red River Resources Ltd (RVR.ASX)
Figure 4: Recovery Assumptions for Thalanga Project
West 45
Far West
Waterloo
Waterloo
Transition
Primary
Copper concentrate:
Grade Cu
22%
26%
24%
24%
Recovery Cu
80%
80%
58%
80%
250g/t
150g/t
350g/t
300g/t
15%
15%
38%
15%
Grade Au
-
1.0g/t
3.0g/t
2.4g/t
Recovery Au
-
17%
30%
20%
Grade Pb
60%
60%
-
60%
Recovery Pb
80%
75%
-
70%
1,150g/t
1050g/t
-
950g/t
55%
50%
-
50%
Grade Au
-
3.5g/t
-
2.8g/t
Recovery Au
-
30%
-
30%
Grade Zn
56%
56%
52%
56%
Recovery Zn
89%
89%
76%
89%
Grade Ag
Recovery Ag
Lead concentrate:
Grade Ag
Recovery Ag
Zinc concentrate:
Source: Company; Foster Stockbroking estimates.
PRE-PRODUCTION CAPITAL ONLY $17.7M


14 December 2015
RVR estimates pre-production capex of only $17.7M for the Thalanga Project. This figure is
relatively low due to the large amount of supporting infrastructure and development in
place, namely:

Plant: Existing ex-KZL Thalanga mill;

Road: All-weather sealed access road (6km from plant to the Flinders Highway);

TSF, Waste rock dumps, and Evaporation ponds;

Grid Power: On-site substation connected to grid;

Fuel storage tanks;

Offices. Including administration, staff, maintenance, workshops, core sheds and yard,
and met lab.

Water. Exists on site in TSF and the disused Vomacka open pit. To be augmented by
water bore 9km from project.

Decline. Existing West 45 decline.
Most of the $17.7M capex required is for plant refurbishment and a ventilation system
needed for West 45. Mincore advised RVR on estimates. A summary of the breakdown is
shown in Figure 5.
Level 25, 52 Martin Place, Sydney, NSW 2000 | +61 2 9993 8100 | www.fostock.com.au
6
Red River Resources Ltd (RVR.ASX)
Figure 5: Thalanga Pre-Production Capex
Item
A$M
Mine development
5.3
Plant refurbishment
7.3
Mine infrastructure
0.3
Capitalised operating costs
1.7
Other
3.2
Pre-production capex
17.7
Source: Company; Foster stockbroking estimates.

Since the release of the Study, the company has revised down its rehabilitation requirements for
West 45 decline from $0.6M to $0.1M. We understand this shaves $0.5M from pre-production
capex.
OPERATING COSTS – WE ESTIMATE 3RD QUARTILE ON C3 COST CURVE

Besides being blessed with existing infrastructure resulting in low startup capex, Thalanga is
advantaged by close access to a residential workforce and to a port, contributing to low mining
and transport costs. Thalanga’s residential labour will be drawn mostly from Charters Towers
(65km north-east of the project). RVR proposes to operate a daily bus service from Charters
Towers to transport workers to and from site, similar to that operated by Evolution Ltd (EVN) at
its Pajingo gold mine, 80km south of Charters Towers. The mining contractor will supply
underground mine labour.

Concentrates will be trucked to Townsville 200km north-east of Thalanga, trucking being more
competitive than rail for the volumes projected by RVR. Concentrates will be either exported
through Townsville Port through existing berths which handle zinc, lead, and copper
concentrates from other regional mines, and/or supplied to Korea Zinc’s Sun Metals Zinc Refinery
located near the city.

Royalties include both Queensland State Government and that payable to a third party Thalanga
Copper Mines Pty Ltd (4% NSR).

By-product credits that provide Thalanga with low C1 costs, each of the deposits containing lead,
copper, gold, and silver for which value can be realized. To maximise value, RVR will produce
three concentrates – zinc, copper, and lead – with silver and gold reporting to both the copper
and lead concentrates.
Third Quartile of Cost Curve on C3 Basis

14 December 2015
The high credit is offset to an extent by the development capital required as part of underground
mining, resulting in C3 of US$0.73/lb. A full costs breakdown is shown in Figure 6. We estimate
that on a C3 basis, the Thalanga Project lies in the third quartile of the cost curve for zinc.
Level 25, 52 Martin Place, Sydney, NSW 2000 | +61 2 9993 8100 | www.fostock.com.au
7
Red River Resources Ltd (RVR.ASX)
Figure 6: Thalanga Life Of Mine Operating Costs Per Payable Zn
Item
US$/lb
Mining
0.50
Processing
0.22
General & admin
0.10
TC/RC, Marketing, Transport
0.27
Credits
-0.92
Sub-total: C1
0.18
Development capex and royalties
0.55
C3
0.73
Source: Company; Foster stockbroking estimates.
ADVANCED EXPLORATION TARGETS – INITIAL SUCCESS AT FAR WEST

Besides the production story, RVR offers leverage to exploration-rich prospectivity of the Mt
Windsor belt. The company has a number of deposits, targets, and existing JORC resources that
lie outside the Study’s mining inventory and within its 400km2 tenement areas. These have the
potential to be included and potentially extend the mine life of Thalanga for several more years.

The company has segmented its tenements into four groups for the purposes of regional
exploration:

1.
Thalanga Group (includes mill, West 45, Far West, Orient, Jasper Flats)
2.
Highway-Reward (Truncheon, Snake Oil, NRE JV)
3.
Liontown-Waterloo (Liontown, Liontown East, Waterloo)
4.
Ermine (Ermine, Ermine North, Echidna)
We expect the initial focus of the current exploration program will be on Far West, Liontown,
and Truncheon.
Far West - Targeting conversion of Exploration Target to JORC and definition of JORC
Resources at up-dip extension.

14 December 2015
RVR has an exploration target of 0.5-0.75Mt at 10.0%-15.0% Zn equivalent at Far West, lying at
the upper levels of mineralization above current resources. Far West was drilled and discovered
from underground, but initial holes within 100m of surface provide high chance of resources. .
Additionally the Up Dip Extension – for which no Exploration Target exists – has potential to add
to JORC resources given successful historical drilling. Work is starting this month.
Level 25, 52 Martin Place, Sydney, NSW 2000 | +61 2 9993 8100 | www.fostock.com.au
8
Red River Resources Ltd (RVR.ASX)
Figure 7: Far West Resources, Exploration Target, and Up Dip Extension.
Source: Company; Foster Stockbroking estimates.
Liontown - Short lead time and low costs potential to add inventory study.

JORC Resources are currently 2.0Mt at 8.3% Zn equivalent. A scoping study is planned to
determine the profitability of Liontown with a focus on the higher grade areas within the
resource. We expect results to be released by late 1Q/early 2Q CY2016. Also a prominent
anomaly – Liontown East, 800m along strike - exists within close vicinity of mineralised zinc drill
holes. Liontown East could also be potentially an extension of the Liontown orebody.
Figure 8: Liontown Resource and Liontown East Anomaly
Source: Company; Foster Stockbroking estimates.

14 December 2015
Truncheon. Truncheon is 3km from the historical Highway-Reward mine and has a coincident
gravity, IP and geochem anomaly. We expect work will commence at Truncheon in early 2016.
Level 25, 52 Martin Place, Sydney, NSW 2000 | +61 2 9993 8100 | www.fostock.com.au
9
Red River Resources Ltd (RVR.ASX)
FINANCING
Share placement raises $3.9M

In November, RVR raised $3.9M under a share placement of 36.8M shares at $0.105/share.
Additionally the company sold its gold and silver bearing stockpiles for $1M in cash to regional
miner Etheridge Operations Pty Ltd (Etheridge). RVR was unable to economically recover these
stockpiles. We expect also a refund on the company’s contingent rehabilitation liability to be
refunded ($0.9M), making our estimate of pro-forma cash $6.4M. The company is also
undertaking a share purchase plan capped at $1.5M which could further boost cash to $7.9M.
Once zinc prices recover, we expect RVR financing initiatives such as debt and offtake
agreements, in addition to any equity required.
FSBe VALUATION OF THALANGA PROJECT: $48.2M
Foster Stockbroking commodity assumptions vs those of RVR’s Study

We have updated our model of Thalanga from a multiple basis to a DCF following release of the
study. As an initial check of our model, we used the same parameters used in the Study including commodity assumptions, which were based on consensus forecasts – and derived a
similar NPV to that obtained by RVR’s Study. In our base case DCF of Thalanga, we have also
used consensus forecasts, but nevertheless obtained some differences to prices vs those quoted
in the Study. We attribute the differences to the likely different sources used in consensus
forecasts between ourselves and RVR.

Notably, our forecast zinc, lead, and copper prices are 4% to 16% lower than the Study
assumptions. There is less material difference in our gold and silver assumption which range
from 2% higher to 8% lower. Our generally lower prices are partially offset by our lower A$
forecast (2% to 8% lower). A summary of differences is shown in Figure 9.
Figure 9: Comparison of RVR Study and Foster Stockbroking Commodity Assumptions
Metal
CY
2016
2017
2018
2019
2020
2021
2022
Zn
FSBe
0.94
1.04
1.08
1.10
1.09
1.09
1.11
RVRe
1.00
1.20
1.23
1.24
1.19
1.19
1.19
Diff
-6%
-16%
-13%
-13%
-9%
-9%
-7%
FSBe
0.87
0.91
0.93
0.93
0.94
0.97
0.99
RVRe
0.90
0.99
1.01
1.02
1.04
1.04
1.04
Diff
-4%
-9%
-9%
-10%
-11%
-8%
-6%
FSBe
2.62
2.71
2.77
2.89
2.96
3.05
3.04
RVRe
2.80
3.02
3.15
3.24
3.24
3.24
3.24
Diff
-7%
-11%
-13%
-12%
-10%
-6%
-7%
Pb
Cu
Au
FSBe
1,177
1,198
1,206
1,230
1,260
1,294
1,292
RVRe
1,200
1,262
1,300
1,310
1,269
1,269
1,269
Diff
Ag
A$
-2%
-5%
-8%
-7%
-1%
2%
2%
FSBe
17.44
18.27
18.45
18.80
19.10
19.23
19.08
RVRe
17
18.96
19.97
20.39
19.94
19.94
19.94
Diff
3%
-4%
-8%
-8%
-4%
-4%
-4%
FSBe
0.70
0.70
0.72
0.73
0.73
0.73
0.74
RVRe
0.73
0.75
0.75
0.75
0.75
0.75
0.75
Diff
-4%
-8%
-5%
-2%
-2%
-2%
-2%
Source: Company; Foster Stockbroking estimates.
14 December 2015
Level 25, 52 Martin Place, Sydney, NSW 2000 | +61 2 9993 8100 | www.fostock.com.au
10
Red River Resources Ltd (RVR.ASX)
DCF Valuation Of Thalanga: $48.2M


We have constructed a DCF model of the Thalanga Project on a nominal basis, using a long-term
inflator of 2% p.a. and WACC of 10% p.a. Our major assumptions are:
o
Commodity prices as per FSB estimates, based on consensus, shown in Figure 10;
o
Pre-production capex expended 2H CY2016; Production beginning start CY2017.
o
Operating costs in-line with that of Study (C3 LOM US$0.73/lb per payable Zn);
o
Total and pre-production capex as per Study ($17.7M);
o
Initial working capital of $3.9M;
o
Mining schedule, resources inventory, and LOM (5.25 years) as per Study
Our resulting pre-tax NPV for Thalanga is $48.2M. This is lower than RVR’s Study NPV due to
mostly due to our lower commodity price forecasts, and ii) Higher WACC of 10% (albeit our model
is in nominal, not real, terms).
Figure 10: Thalanga Project Cashflows
Y/e December
Commodity assumptions
Zn
Pb
Cu
Unit
2016
2017
2018
2019
2020
2021
2022
US$/lb
US$/lb
US$/lb
0.94
2.62
0.87
1.04
2.71
0.91
1.08
2.77
0.93
1.10
2.89
0.93
1.09
2.96
0.94
1.09
3.05
0.97
1.11
3.04
0.99
Au
Ag
A$
US$/oz
US$/oz
US$
1,177
17.44
0.70
1,198
18.27
0.70
1,206
18.45
0.72
1,230
18.80
0.73
1,260
19.10
0.73
1,294
19.23
0.73
1,292
19.08
0.74
Ore mined
Mt
0
0.151
0.313
0.317
0.481
0.372
0.076
Production (100%)
Zn
Pb
Cu
Au
Ag
kt
kt
kt
koz
koz
0.0
0.0
0.0
0.0
0.0
11.6
4.6
0.6
0.0
272.7
21.6
8.0
1.5
0.2
454.3
17.2
4.3
3.9
1.6
319.0
31.2
5.7
6.8
4.6
494.2
23.3
2.8
4.6
3.3
289.7
8.2
0.9
1.5
1.4
99.8
Cashflow:
Zinc revenues @ 85% payability (A)
A$M
0.0
32.1
61.4
48.3
87.3
64.7
23.2
Mining
Mineral processing
Transport & marketing
TC/RC - Zn
Site
Royalties
Net credits ex-TC/RC by-products
Development capex & other
Total C3 costs
Total C3 costs (B)
US$/lb
US$/lb
US$/lb
US$/lb
US$/lb
US$/lb
US$/lb
US$/lb
US$/lb
A$M
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.0
0.34
0.17
0.23
0.29
0.23
0.14
-0.77
0.32
0.94
29.2
0.39
0.19
0.24
0.27
0.12
0.14
-0.80
0.35
0.91
51.6
0.50
0.25
0.28
0.27
0.16
0.18
-1.21
0.45
0.88
38.6
0.43
0.22
0.27
0.24
0.09
0.17
-1.15
0.25
0.52
41.8
0.46
0.23
0.26
0.22
0.12
0.16
-1.01
0.25
0.70
41.5
0.27
0.14
0.26
0.22
0.36
0.16
-0.98
0.05
0.47
9.9
Chng In Working Capital ( C)
Pre-production capex (D)
A$M
A$M
0.0
-17.7
3.9
3.6
-0.1
5.7
-4.0
-9.1
Pre-Tax Net Free Cashflow (A-B-C-D)
A$M
-17.7
-1.0
6.2
9.8
39.7
27.2
22.4
NPV (10% WACC)
A$M
$48.2
Source: Foster Stockbroking estimates.
14 December 2015
Level 25, 52 Martin Place, Sydney, NSW 2000 | +61 2 9993 8100 | www.fostock.com.au
11
Red River Resources Ltd (RVR.ASX)
FSBe VALUATION OF RVR: $0.20/SHARE

In deriving a valuation for RVR, we have used our DCF valuation of Thalanga Project

For the RVR JORC resources not included in the Study – i.e. those of Liontown and Orient – we
have applied the average peer EV/JORC Resource of Contained Zn multiple of $45 to estimate a
value for these deposits. We value Liontown and Orient at $6.2M using this approach.

An arbitrary value of $9.0M for the rest of RVR’s tenements.

We have not decided to risk the valuation, as we believe the current low commodity prices
already prices in significant risk.
Figure 11: RVR Valuation
A$M
A$/sh
48.2
$0.19
6.2
$0.03
9.0
$0.04
Corporate
-9.9
-$0.04
Deferred consideration
-1.4
-$0.01
-13.9
-$0.05
Cash from options
5.0
$0.02
Net cash (debt)*
6.3
$0.03
48.5
$0.20
Segment
Thalanga Project (Re-Start Study)
Liontown & Orient Resources
Exploration
Future tax liabilities
Company (fully diluted)
Diluted shares (M)**
253.6
Source: Foster Stockbroking estimates.
* Includes $1M for sale of stockpiles to Etheridge and $0.9M GST refund on rehabilitation bond.
**Includes options-in-the-money at FSB valuation of RVR (20cps).
VALUATION SENSITIVITY ANALYSIS
Spot prices make Thalanga NPV negative

We ran a scenario for the Thalanga project at current spot prices being held flat going forward.
Unsurprisingly, the project is NPV negative at this scenario, given the US$0.73/lb C3 costs vs spot
Zn price of US$0.70/lb, plus the pre-production capex.
Project begins to look likely at US$0.95/lb or higher Zn price

14 December 2015
We think the project becomes most likely to go ahead at a Zn price of US$0.95/lb or higher, which
is 39% above spot. This provides an NPV of twice the pre-production capex value, or $35.4M.
This assumes other metals also rise39% above spot and the current exchange rate remains flat.
A summary of various price uplift scenarios and impact of NPV to pre-production capex is shown
in Figure 12. Thalanga needs US$0.91/lb Zn to for NPV to be equal to pre-production capex.
Level 25, 52 Martin Place, Sydney, NSW 2000 | +61 2 9993 8100 | www.fostock.com.au
12
Red River Resources Ltd (RVR.ASX)
Figure 12: NPV as a multiple of Initial Capex Sensitivity to Prices
NPV/Pre-Production Capex
0.0x
1.0x
2.0x
Chng from spot prices
26%
33%
39%
Zn US$/lb
0.86
0.91
0.95
Cu US$/lb
2.62
2.77
2.9
Pb US4/lb
0.97
1.02
1.07
Au US$/oz
1354
1429
1493
Ag US4/oz
17.83
18.82
19.67
0.72
0.72
0.72
A$:US$
Source: Foster Stockbroking estimates
EARNINGS FORECASTS
Earnings to commence in FY18

We forecast RVR to make losses of $4.0M and $0.7M in FY16 and FY17, mostly due to exploration
expenditure. We project earnings of $9.0M and $7.6M in FY18 and FY19 when the company
begins production at Thalanga.
NPV AND NPAT SENSITIVITY

For every 10c move in the zinc price, the valuation of RVR changes $0.07/share, while NPAT
changes by $4M.
PEER VALUATION – ATE MOST RELEVANT FOR RVR

Figure 9 shows RVR’s ASX listed zinc peers, including the recently delisted Atherton Resources
(ATE), due to a successful takeover bid. The table shows the EV/t of contained zinc JORC
resources that each stock is trading on.

While RVR trades on an EV/t of Zinc JORC Resource of $57/t, 30% above the average for the
peers, this is warranted given that RVR is the most advanced of projects, especially regarding
infrastructure and development required.
Capex compares favourably with peers

ATE was bid for on a fully diluted EV per contained JORC Zn metal of A$107/t vs RVR at A$57/t,
suggesting considerable upside for RVR. We note RVR has lowest initial capex: $17.7M vs
$140M-plus for companies such as TZN, IBG, AUQ, and OVR. With the exception of TZN, these
companies trade on low multiples.
ATE most appropriate peer – implies $0.16 to $0.45/share range for RVR

14 December 2015
The bid for Atherton Resources (ATE) which has high grade zinc assets near the Mt Windsor
region where RVR’s tenements are located, and some infrastructure, highlighted the appeal of
low capex production and high grade zinc assets in the market, and is the most appropriate peer
for RVR. We expect RVR to appeal to corporates wishing to obtain quick and low risk leverage
to zinc production.
Level 25, 52 Martin Place, Sydney, NSW 2000 | +61 2 9993 8100 | www.fostock.com.au
13
Red River Resources Ltd (RVR.ASX)
Applying the EV/JORC Resource of Zn for ATE to RVR, a valuation of $0.16/share. However using
an EV/Mining Inventory Resource of Contained Zn Equivalent – the mining inventory based on
ATE’s King Vol Scoping Study - we derive a valuation of A$0.45/share for RVR based on its
Thalanga mining inventory. This highlights the corporate appeal and significant upside in RVR.
Figure 13: ASX listed Zinc Peers to RVR
Company
Code
Terramin
Atherton
Red River Resources
Ironbark zinc
Energia Metals
Herron Resources
Consolidated Zinc
Marindi
Alara Resources
Overland Resources
TZN
ATE
RVR
IBG
EMX
HRR
CZL
MZN
AUQ
OVR
Price
$
0.140
0.200
0.090
0.044
0.034
0.093
0.040
0.008
0.013
0.007
EV
$M
270
58
19
19
18
13
10
7
3
1
Project
Location
Tala Hamza (65%)
Chillagoe
Southern Region
Citronen
Gorno
Woodlawn
Plomosas (51%)
0
Khnaiguiyah (50%)
Yukon
Algeria
QLD
QLD
Greenland
Italy
NSW
Mexico
0
Saudi Arabia
Canada
Resource
JORC Mt
52.3
6.8
5.1
132.0
na
17.4
0.0
3.0
14.8
12.6
Zn grade Contained Zn
%
kt
4.4%
2,290
7.9%
537
6.6%
335
4.0%
5,280
na
na
3.9%
681
0.0%
nq
4.9%
148
3.8%
568
5.3%
668
Average
EV/t
$
118
107
57
4
na
19
na
44
6
2
45
Source: IRESS; Companies; Foster Stockbroking estimates.
BOARD CHANGES

Since our last report, there have been a number of Board changes. These include:
o
Mel Palancian was appointed as Managing Director effective 13 July 2015;
o
Mark Hanlon was appointed Non-Executive Director effective 1 October 2015.
o
Brett Fletcher appointed Non-Executive Chairman appointed 1 May 2015.
Significant Zinc Experience Reduces Development Risk
14 December 2015

We are attracted to the significant zinc experience across management and Board, with that of
the MD and Chairman alone being impressive. We believe this markedly derisks the
development of Thalanga and its subsequent operations.

Mr Palancian’s previous positions included Deputy Operations Director of Gosowong in
Indonesia, General Manager technical Services MMG, Manager Dugald River Development for
Oz minerals (OZL) and Principal Adviser Mining for Zinifex. Mr Fletcher’s experience includes
that at some of Australia’s major zinc mines, including Manager Underground Operations Broken
Hill, General Manager at the Rosebery and Century mines, General Manager of the Hobart Zinc
Smelter as well as Chief Operating Officer of Zinifex, OZL, and MMG.

Combined with the rest of the team including Donald Garner (Executive Director), Karl Spaleck
(General Manager) and Tav Bates (Exploration Manager), RVR have strong zinc and base metals
operational experience.
Level 25, 52 Martin Place, Sydney, NSW 2000 | +61 2 9993 8100 | www.fostock.com.au
14
capex
$M
827
na
na
613
na
140
na
na
257
225
Red River Resources Ltd (RVR.ASX)
ZINC MARKET UPDATE

Zinc has been caught up in the general downturn of metals over the slowdown in China’s
economic growth. Approximately 52% of zinc is consumed in the production of galvanised steel
which has yielded -0.9% YoY growth in 1HCY2015 (CRU).

On the positive side, there has been a number of zinc mine closures or production curtailment.
These have been led by the permanent closures of MMG’s Century (Australia) and Vedanta’s
Lisheen (Ireland) which account for ca. -400kt and -100ktpa, as well as production cutbacks by
Glencore (500ktpa or 3.5% of global supply). Investment banks forecast mine supply will reduce
by ca. 1%, or 135kt of Zn, in 2016 vs 2015, with the market to be in deficit of ca. 500kt of Zn in
2016. Mine growth is mostly forecast to come from China.
RECOMMENDATION – SPEC BUY PT $0.20/SHARE
14 December 2015

We change our recommendation of RVR to Spec Buy from Buy. Our price target is $0.20/share
in-line with our valuation, which has reduced from our previous target of $0.58/share, principally
due to lower commodity price assumptions.

Catalysts for the shareprice include:
o
Increasing zinc price;
o
Exploration success translating into enhanced economics of Thalanga; and
o
Positive results from Liontown mining study.
Level 25, 52 Martin Place, Sydney, NSW 2000 | +61 2 9993 8100 | www.fostock.com.au
15
Red River Resources Ltd (RVR.ASX)
FOSTER STOCKBROKING DIRECTORY
Name
Role
Phone
Email
Stuart Foster
Chief Executive Officer
+61 2 9993 8131
[email protected]
Chris Francis
Executive Director
+61 2 9998 8167
[email protected]
Haris Khaliqi
Executive Director
+61 2 9993 8152
[email protected]
Martin Carolan
Executive Director
+61 2 9993 8168
[email protected]
Mark Fichera
Executive Director
+61 2 9993 8162
[email protected]
Mark Hinsley
Executive Director
+61 2 9993 8166
[email protected]
Marc Kennis
Research
+61 2 9993 8130
[email protected]
Tolga Dokumcu
Execution & Dealing
+61 2 9993 8144
[email protected]
George Mourtzouhos
Execution & Dealing
+61 2 9993 8136
[email protected]
Foster Stockbroking Pty Ltd
A.B.N. 15 088 747 148 AFSL No. 223687
Level 25, 52 Martin Place, Sydney, NSW 2000 Australia
General: +612 9993 8111 Equities: +612 9993 8100 Fax: +612 9993 8181
Email: [email protected]
PARTICIPANT OF ASX GROUP
Foster Stockbroking recommendation ratings: Buy = return >10%; Hold = return between –10% and 10%; Sell = return <-10%. Spec Buy = return > 20% for stock with very high
risk. All other ratings are for stocks with low-to-high risk. Returns quoted are annual.
Disclaimer & Disclosure of Interests. Foster Stockbroking Pty Limited (Foster Stockbroking) has prepared this report by way of general information. This document contains
only general securities information. The information contained in this report has been obtained from sources that were accurate at the time of issue. The information has not
been independently verified. Foster Stockbroking does not warrant the accuracy or reliability of the information in this report.
In preparing the report, Foster Stockbroking did not take into account the specific investment objectives, financial situation or particular needs of any specific recipient. The
report is published only for informational purposes and is not intended to be advice. This report is not a solicitation or an offer to buy or sell any financial product. Foster
Stockbroking is not aware whether a recipient intends to rely on this report and is not aware of how it will be used by the recipient. Investors must obtain personal financial
advice from their own investment adviser to determine whether the information contained in this report is appropriate to the investor’s financial circumstances. Recipients
should not regard the report as a substitute for the exercise of their own judgment.
The views expressed in this report are those of the analyst/s named on the cover page. No part of the compensation of the analyst is directly related to inclusion of specific
recommendations or views in this report. The analyst/s receives compensation partly based on Foster Stockbroking revenues, including any investment banking and
proprietary trading revenues, as well as performance measures such as accuracy and efficacy of both recommendations and research reports.
Foster Stockbroking believes that the information contained in this document is correct and that any estimates, opinions, conclusions or recommendations are reasonably
held or made at the time of its compilation in an honest and fair manner that is not compromised. However, no representation is made as to the accuracy, completeness or
reliability of any estimates, opinions, conclusions or recommendations (which may change without notice) or other information contained in this report. To the maximum
extent permitted by law, Foster Stockbroking disclaims all liability and responsibility for any direct or indirect loss that may be suffered by any recipient through relying on
anything contained in or omitted from this report. Foster Stockbroking is under no obligation to update or keep current the information contained in this report and has no
obligation to tell you when opinions or information in this report change.
Foster Stockbroking and its directors, officers and employees or clients may have or had interests in the financial products referred to in this report and may make purchases
or sales in those the financial products as principal or agent at any time and may affect transactions which may not be consistent with the opinions, conclusions or
recommendations set out in this report. Foster Stockbroking and its Associates may earn brokerage, fees or other benefits from financial products referred to in this report.
Furthermore, Foster Stockbroking may have or have had a relationship with or may provide or has provided investment banking, capital markets and/or other financial
services to the relevant issuer or holder of those financial products.
Specific disclosure: The analyst, Foster Stockbroking and/or associated parties have beneficial ownership or other interests in securities issued by RVR at the time of this report.
Diligent care has been taken by the analyst to maintain an honest and fair objectivity in writing the report and making the recommendation. In November 2015, Foster
Stockbroking acted as Joint Lead Manager to the placement of 36.8M shares at $0.105/share and free 1-for-2 options at $0.15/share to raise $3.9M. Foster Stockbroking
received fees for the service.
14 December 2015
Level 25, 52 Martin Place, Sydney, NSW 2000 | +61 2 9993 8100 | www.fostock.com.au
16