Chairman’s Statement
Dear Shareholders,
Last year I began this review with the statement that it had been another exciting year. That year’s successor, the year to 30th June 2019, has been by contrast most unexciting, with market conditions providing a difficult backdrop, and the Company’s hopes for operational progress in Kenya and the Congo only partially fulfilled.
Market Conditions
Liquidity developments in major economies, political and geopolitical uncertainties, and the lassitude broken by occasional febrile interludes that resulted, affected both commodities and markets to an unusual degree over the period, in the absence of any strong primary trend. A short analysis of these features may help guide us to an understanding of what may now follow.
The overall FTSE index was down over the year, and even the U.S. Dow index, despite favourable developments in its economy, rose only slightly. The AIM Index performed worse than the broader indices, losing 15.1% over the year, and the resource component of that index showed further weakness. It appears that despite good economic growth, investors were not optimistic about future market conditions. One can adduce various factors; fears of slowing Chinese economic growth, political stalemate in the UK Parliament, an unwinding of the wealth effect as property prices in London and the south fell rather than rose, a bull market that had become tired, or fears of a radical socialist Government coming to power; but it is difficult to tell which of these are excuses for actions taken for other reasons, and which are reasons in themselves. Perhaps the one undeniable influence was the reversal or cessation of monetary inflows to most major economies from quantitative easing, which reduced the amount of money available for investment below that which had been expected, and will have had its greatest impact on less liquid marketplaces.
Against that backdrop the resource sector had mixed fortunes. There were a few areas of strength among the commodities: Iron ore prices rose strongly during the 12 months to June, as did Nickel, while in the first part of the period Manganese also continued its strength, and the gold price was also higher, but against a sluggish economic growth background these rises were mistrusted by markets which feared pullbacks, and so were not reflected in share price movements; in the last six months, post year end, metal price pullbacks have come, but instead of being treated as already discounted in stock prices, have led to further falls in price. Perhaps an additional factor for the sector has been that the mineral sector has been felt to have had investor attention for many years, with generally poor reward, and other sectors now attracted new interest, while the more speculative money flowed towards cannabis and, briefly, hydrocarbons, and flowed away from recently popular sectors such as those involved in electric vehicle batteries.
This then was the environment in which the Company operated. Different metals followed very different paths, every upward price movement was followed by a sharp correction, wave after wave of uncertainty affected sentiment, and the depth of the market for trading in AIM companies was affected by reductions in private client broking capacity. In such an environment it was difficult to capitalise on successes, carry failures through to recovery, or articulate an overarching theme.
The election results on 12 December 2019, and the confidence that now exists that the UK will leave the EU on 31 January 2020, remove some of the uncertainties that were beginning to weigh on investment decisions, and if expectations that money will now come back into the property market are borne out, that factor alone is likely to see liquidity improve across all London markets in 2020. The accumulation of negative factors that affected the market in 2019 will not all exist, and provided global markets see no downturn that is likely to prove positive for the AIM market. The continued regulatory push for electric vehicles to displace petrol and diesel will in time feed through to recovery in the metals used in EV batteries and coils, with greater future visibility of demand a positive investment factor. Continued infrastructure investment in the US in an election year, and a new emphasis on renewing the UK’s ageing infrastructure, will both cushion any slowing of metal demand in China and herald a new willingness to borrow and expand the monetary base at today’s ultra-low interest rates. In this quiet monetary revolution, where orthodox economists have turned from deprecating to urging massive new Government borrowing to take advantage of low long term interest rates, the two leading nations of the Anglosphere may prove to be opinion leaders: liquidity conditions may be about to undergo a remarkable transformation. Relatively less liquid marketplaces such as AIM would benefit from this.
Operations
During the year the Company continued to work to confirm the status of its licenses in Kenya. Two key milestones have been passed. On 22 October 2018 Red Rock was able to confirm that it had reached a settlement in its action for judicial review against the Ministry, and that its priority applications under the new Mining Act would be dealt with expeditiously. Then on 19 September 2019 the Company was able to announce that the Mineral Rights Board had approved the issue of the licenses, and that this was now recorded on the mining cadastre. The final administrative step has been slow in coming, and to Red Rock’s disappointment had not occurred as expected by the time of this report going to print. The directors have therefore taken the conservative decision not to write back in these accounts any part of the £5,280,000 impairment taken in the 30 June 2015 accounts pending resolution of the court case. The Company would naturally revisit this decision as soon as the perfected renewal documents are in its hands.
The Company has worked hard during the year on complying with all the requirements under the new 2016 Mining Act, and has received excellent co-operation and guidance from the Ministry and its officials. Every stage in the process over the last two years has taken considerably longer than Red Rock expected, and the Company remains confident that this final step will soon be completed. At that point the hard work starts again where it was left off in 2012.
In Kenya the Company made the conservative decision to delay the very substantial potential write backs. On the other hand the Company has fully impaired two assets whose poor prognosis was noted in the Statement accompanying the results for the first six months of the year, when a partial provision was made. Bosnian ferrosilicon producer Steelmin Ltd, where the Company was a minority investor, and assisted the recommissioning of the plant with commercial production beginning in July 2018, stopped production in September and did not reopen. Red Rock assisted in efforts to keep value in the plant by mothballing it, and was willing to take a significant role in management, but as the situation developed it became clear that the task was too large and the near-term value too uncertain to justify further involvement. The price of European Emission Allowances (EUAs), each allowing the purchaser to emit one ton of CO2, under the EU’s Emissions Trading System, had tripled in a year to €15.05 by the beginning of the year to 30 June 2019, and rose by a further 77% by the end of it. A significant part of these rises took place around the commissioning period of the ferrosilicon plant, when due to unpredictable output volumes, no long term take-or-pay electricity contract could be entered into. One of Bosnia’s few significant exports is power, 40% of which is hydrothermally generated, and with privileged access to EU markets Bosnia was able to reap the full benefit of exporting at the new higher prices. These prices could not be matched by a ferrosilicon producer. There is no residual value to Red Rock’s interest.
A minority investment in Botswana diamond explorer Amulet Diamond Corporation failed to bear fruit as the decline in the price of run of mine diamonds meant that ROM production would not support the economics of the project, which could only succeed in the unquantifiable event of its finding large stones. London-based diamond producers such as Petra Diamonds and Firestone Diamonds have seen share price drops of over 80% in the last year, and even the more resilient Gem Diamonds has fallen 60%: these are not the conditions in which a new producer can expect to launch successfully.
In the Democratic Republic of Congo successful exploration at the Company’s Luanshimba copper/cobalt license took place, identifying significant 2km by 500m and 1400m by 300m anomalies. The focus then switched to the Company’s main joint venture in the Congo, where the joint venture agreement was formally signed in March 2019. The formation of the joint venture operating company, which Red Rock considers desirable as it more closely defines rights and responsibilities, has been slow to proceed but is pending. The Company was able to carry out some preliminary studies of the historic data at the Musonoi copper-cobalt license including some access to the old core in the Gécamines drill sheds at Likasi. These studies of old drilling and the pit shell when mining ceased indicated the existence of a significant and definable body of unmined mineralised material that at current economic grades and with current technologies would have been mined. A geological model of this mineral potential, which is expandable with drilling, has been produced but requires raising to the standard of the JORC 2012 Code before it can be publicly released. This requires some further access to data, or further drilling, and has been and remains a priority.
The Company expects to carry out further work at Luanshimba early in 2020.
Elsewhere, the Company’s interests in the Tshipi é Ntle manganese deposit, held through its investment in ASX-listed Jupiter Mines Ltd, has been a key contributor to income, with distributions recognised as dividends rising from £243,830 in the year to 30 June 2018 to £750,430 in the year ending 30 June 2019. The strong performance continues: Jupiter has paid in November 2019 an interim dividend for its half year to 31 August 2019 of AUD$0.04, worth AUD$680,996 to Red Rock. The dividend level continues to offer a high return on Jupiter’s current market price of AUD$0.28. This long-life open pit manganese mine is one of the cheapest producers and so resilient to price movements in the manganese market. The expansion capacity and the changing dynamics of the manganese market mean there is further potential in this investment.
Royalty revenues from the El Limon gold mine in Colombia have shown slight improvement, but have not yet achieved their full potential.
Other minor interests, in Ivory Coast, Elephant Oil in Benin, iron ore royalties in Australia, and battery metal explorer Power Metal Resources plc, have made no significant impact during the period, though could prove material were they to see further progress.
Outlook
After a year governed by macro-economic and political factors, the Company should benefit in the coming period from an improving climate on these fronts. Greater certainty, and a new spirit of optimism, may amplify these effects in London markets.
For its real potential to be achieved, the Company requires not just a more benign environment, but achievement of the milestones that will enable Red Rock to seize the initiative in its two major projects in Kenya and the Congo. This is the focus for 2020, as well as exploration at Luanshimba and other highly prospective but earlier stage properties.
From so low a market capitalisation, it will be difficult to disappoint, and the opportunity for progress is considerable.
We thank our staff, business partners and shareholders for their support and faith in us.
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