Redhawk Resources RDK/RHWKF
December 31, 2010 - 1:45pm EST by
bruin821
2010 2011
Price: 0.84 EPS NA NA
Shares Out. (in M): 175 P/E NA NA
Market Cap (in $M): 147 P/FCF NA NA
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 127 TEV/EBIT NA NA

Sign up for free guest access to view investment idea with a 45 days delay.

Description

Redhawk Resources is positioned to benefit from the large macro tailwinds and is at a inflection point in their corporate development.  It is a simple story, as Redhawk, a Canadian company owns one asset-the Copper Creek project in Arizona. 
For the past five years the management team has been conducting the feasibility studies, dong the permitting work, analysis of the copper deposits and are now ready to beging production in about 12 month and in about 18 months will be cash flow positive.   However, given the proliferation of M&A among junior copper companies, and the dramatic shortage of copper Redhawk is now an ideal buyout candidate.  We feel that by the end of 2011 either mine production will begin or more likely, the company will be bought.
The company has $21 mm in cash so there is little financial risk.
The price of Copper continues to rise and now trading at all time highs, as inventories decline.  China now consumes 39% of the world's copper production, yet only 6% of the world's reserves so that even modest continued consumption will results in rising Copper prices.  Macguire, one of the leading investment banks for hard assets recently projected copper to rise to $5 from $4.35 current levels.
The Copper Creek project is located in Pinal County, Arizona containing 3.4 billion pounds of Copper Equivalent.  However, only 20% of the 7 square mile project has been tested, and the project is located very near the massive porhery deposits of Resoluion and Stafford.  The company is currently drilling an additional 7 holes to test for mineralization/additional copper.  So far the results of the first two holes have been released and have indicated that there is mineralization there.  The results for the 3rd hold should be released soon.  In addition, there are 11 other pre-collered holes which will be drilled with funds recently raised.
The area is very mining friendly with accessible infastructure and unlike other parts of the world offers political stability. The property also contains approximately 400 breccia bodies on the property with high grades.
Sowhat is the company worth?  In September, CIBC wrote a report on the most attractive junior minds available for acquisition. The Chinese continue to be active buyers of hard assets especially Copper.  Copper is used in a variety of ways including electrical systems and electrical cards.  Not only is Copper in very short supply, but the Chinese are very eager to convert their U.S. debt into hard assets.
The report listed as the most attractive on a valuation scale only using the 3.4 billion pounds of copper that are proven and indicated, giving them no credit for the holes currently being drilled.  CIBC estimated the minimun valuation for the Copper Creek project to be $400 mm which would result in an EV of $2.4 or a 200% premium to the current stock price. 
Importantly, the company recently bought back their NSR (Net Smelter Return) which is a royalty on future revenue streams from a project.  In almost every case, companies only buy back their NSRs if they think they are going to be aquired. Given all of the M&A in the space, the demand for Copper, the relatively small E/V of the company we think there is a good possibility they get purchased by the end of 2011 or simply begin production, most likely with a large JV partner. 

Catalyst

1) Hole 3 drill results should be out shortly.
2) Holes 4-6 drill results in Q1.
3) 11 pre-collered holes ready for drilling.
4 Production of the mine commencing in about 12 months, turing cash flow positive in approximately 18 months.
5 Continued rising Copper prices.
6 Ideal buyout candidate.
    sort by    
      Back to top