Revised valuation of White Rock Minerals implies heavy upside

DJ Carmichael analyst, Paul Adams, has updated his valuation of White Rock Minerals (ASX:WRM), taking into account the group’s Australian Mt Carrington gold-silver project, as well as its Red Mountain VMS polymetallic project located in Alaska.

The timing of this report couldn’t be better with the gold price increasing sharply between July and September, and base metal prices delivering sustained upside. The Red Mountain project provides investors with strong exposure to zinc, which rallied 3% overnight as it pushed up to US$3115, not far off the 10 year high of circa US$3190 struck at the start of September.

In completing this latest report, Adams has upgraded the company’s valuation from 6 cents per share to 8 cents per share, an increase of more than 30%. It is worth noting that this implies significant upside relative to WRM’s current share price of 1.3 cents.

However, broker projections and price targets are only estimates and may not be met. Those considering this stock should seek independent financial advice.

Advanced nature of Mt Carrington significantly derisks production estimates

Importantly, the company’s Mt Carrington project which has been previously mined and is already pre-stripped with exposed orebodies is valued at 2 cents per share. Given the highly progressed nature of this asset, as well as the benefits of existing infrastructure, investors have a significant degree of material evidence supporting Adams’ valuation of 2 cents per share, with its valuation alone implying upside of circa 50% to the company’s current trading range.

Not only has Mt Carrington been the subject of numerous scoping studies, it is being upgraded and optimised while the project undergoes a number of approvals and permitting processes. Previous scoping studies have focused on just mining the gold deposits and also a second stage where the silver deposits are being mined.

Based on this scenario pre-tax valuations have ranged from $15 million to $61 million using Australian dollar gold prices ranging between $1400 and $1600. Notably, the current price is approximately $1640.

The silver price was broadly in line with the current spot price. Using these metrics, studies implied internal rates of return ranging between approximately 50% and 100%. It is difficult to identify any unpredictable negative factors surrounding this asset, and upcoming newsflow particularly in relation to the prospective resource upgrade and revised Prefeasibility Study (PFS) have the potential to trigger a positive rerating.

Broker sees Red Mountain project as substantially undervalued relative to its peers

In assessing the Red Mountain project, Adams highlighted the fact that its resource estimate is already one of ‘global significance’ and on par in terms of size to the Australian based Thalanga and Woodlawn deposits currently being brought into production by Red River Resources (RVR) and Heron Resources (HRR) respectively.

Interestingly, RVR’s share price has reflected its progress, as well as the strong performance of related base metals, gaining 50% since May.

Of course share trading patterns should not be used as the basis for an investment as they may or may not be replicated.

Despite WRM delivering an impressive maiden JORC 2012 resource estimate of 16.7 million tonnes grading 8.9% zinc equivalent, containing a high-grade resource of 9.1 million tonnes grading 12.9% zinc equivalent the market has failed to attribute a valuation commensurate with the size and quality of the resource.

Adams highlighted the fact that WRM holds 143 square kilometres of highly prospective ground that has not been the subject of modern exploration. Furthermore, the company has 30 individual undrilled volcanic massive sulphide (VMS) targets where there is good potential for additional discoveries.

Exploration success and resource expansion could drive share price rerating

Should WRM’s exploration campaign result in an increase in the resource base this should provide further upside to Adams’ valuation. It could also provide the platform for WRM to assess the economic viability of the project. The completion of scoping and feasibility studies would arguably bring the company under the spotlight eventually resulting in a rerating.

It is worth noting that developments such as this can occur relatively quickly. For example, shares in RVR have increased more than 200% since 2016, largely on the back of exploration success and resource increases.

DJ Carmichael is expecting the zinc price to continue to hover in the vicinity of current levels based on supply/demand dynamics. The following charts highlight the performance of zinc over the last five years, as well as providing an insight into the pronounced impact of diminishing supply, a factor that should continue to support the zinc price with little new supply coming on stream.