|Shares Out. (in M):||157||P/E||0.0x||0.0x|
|Market Cap (in $M):||61||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||0||EBIT||0||0|
Last week Redhawk Resource (RDK.to/RHWKF) announced that CIBC has been retained as a strategic advisor by the company due to interest expressed by third parties. This is a key development in the monetization of the asset and given its late stage development, location in Arizona and engagement of a banker we think the company has a very high probability of being acquired in the next few months for a significant premium to its current market cap.
The idea is not predicated on the future of copper prices, economic activity levels in China or any macro bet, as we are fairly agnostic on the price of copper. Clearly copper had gotten ahead of itself and China’s economic growth has slowed to at least some degree. However, while there are concerns on the supply side no one is paying much attention to the demand side of copper. On the demand side, there are less developed nations seizing copper and other mineral mines, demanding much greater economics of many mines and burdening many with substantially more taxes. When we talk to larger copper and mineral producers they are all saying that without question, geopolitical risk is their number one concern. While we are not copper bulls it is interesting to note that recent Chinese data has been firmer and copper inventories have gone down in the last few weeks.
Redhawk’s sole asset is the Copper Creek project in Arizona. The asset is valuable primarily because it is located in the United States making it one of the very few available deposits in the U.S. or other politically free countries. The project is an “early halo” discovery which is often associated with large copper, porphyry deposits.
The mine is approximately two years away from production and vey importantly, surrounded by other copper producing projects. There is very good infrastructure including roads, railroads, power and water.
Copper Creek contains 8 Billion lbs of copper with 4.5 Billions lbs being measure and indicted. If you were to value the M&I copper at a very conservative $.03 per lb in the ground, and the rest at $.01 lb in the ground you would get a valuation of $1.08 ($170mm/157 mm shares fully diluted.)
There is substantial upside to the base case, as of the 35 square miles, only about 5% of the property has been thoroughly drilled, so there is clearly a much larger deposit than the current scoping studies have indicated.
The Preliminary Economic Analysis report (PEA) should be out with the next month and based on the success of the 2011 drilling program should be very positive and a catalyst for the stock.
Interesting, there was very recently an M&A transaction in an Arizona based mine, Capstone Mining announced that it has signed a definitive agreement with BHP Billiton to purchase the Pinto Valley copper mine in Arizona and the associated San Manuel Arizona Railroad Company (which includes a 47km railway dedicated to the mine) for an aggregate cash consideration of US$650m. Pinto Valley is only about 30 miles away from Redhawk’s Copper Creek. The mine is already in production, but the quality of the copper is higher at Copper Creek.
The primary risk is pronounced global economic weakness, especially in China which consumes about 40% of the world’s copper. What happens if the company is not sold? We think that is extremely unlikely, given the inbound inquiries, the uniqueness of the project, it being so close to production and the willingness of a top tier mining project to take the assignment. However, if it not sold the company will do a joint venture with a major producer, exchanging capital for economics in the project. For the longer term investor, this scenario could result in a better investment outcome as the shareholders will participate in the cash flow of the mine at a larger valuation.
Hiring CIBC as Redhawk’s financial advisor is clearly a watershed event in the development of the story. CIBC is one of the largest and leading bankers in the junior space and their willingness to take on RDK is probably a good indicator that an outcome will be successful. This is particularly true with CIBC being hired in response to third party inquiries. Importantly, there is a scarcity of late stage copper projects in the U.S. or other politically free nations that are independent or not encumbered with a strategic partner relationship.
We are estimating conservative, intrinsic value at $1.08, but even taking a significant discount to that, investors should earn a very substantial IRR from current share prices over the next few months.