Baillieu crunches the numbers on White Rock

By Trevor Hoey. Published at Sep 11, 2018, in Small Caps

While commodity diversification is often seen as a positive attribute for both large and small miners, at times it can make asset valuations difficult.

This is very much the case with White Rock Minerals (ASX:WRM) which is developing the Red Mountain high grade zinc polymetallic project underway in Alaska, as well as the Mt Carrington gold-silver deposit in New South Wales.

White Rock is working towards establishing a JORC compliant resource for its Dry Creek and West Tundra Flats deposits at Red Mountain.

While this milestone event is some way off, the exploration grades already suggest that the company is well-positioned to establish a sizeable resource.

Red Mountain base valuation exceeds market capitalisation

Given that the company appears to be trading at a steep discount to its asset valuation, recent analysis conducted by Baillieu Holst’s Warren Edney is worth considering in terms of attributing a share price to the company.

Among other factors, he took into consideration both global and Australian peer comparisons, recent studies, exploration results and potential financing metrics in arriving at valuations for the Red Mountain and Mount Carrington projects.

Using the current zinc equivalent resource for White Rock as a base, Edney estimated that the implied value for Red Mountain is in a range between $28 million and $117 million.

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

This valuation does not consider the economics of development, nor does it include the potential difference in prospectivity between other peers or the resource quality.

Regards the latter, the high base zinc grades and the compelling zinc equivalent grades taking into account silver, lead and gold credits are key distinguishing factors between the Red Mountain project and others that were cited by Edney.

It is worth noting that the base valuation of $28 million is more than double White Rock’s current market capitalisation.

Valuation of $22.8 million attributed to Mount Carrington

White Rock’s prefeasibility study Mount Carrington (PFS) generated free cash flow of $36.7 million and an internal rate of return IRR of 34% for Stage 1.

Using the details provide in the PFS, Edney modelled the cash flow from the development using the broker’s long-term commodity and currency forecasts – gold US$1300/ounce, silver US$20/ounce and an AUD/USD exchange rate of 75 cents.

His analysis generated a pre-tax ungeared net present value (NPV) of $22.8 million ($14.6 million on an after-tax basis).

This could represent a base case given that it does not include Stage 2 but would be a more robust proposition if the mine life was increased.

Consequently, using Edney’s base case metrics White Rock’s assets implied asset valuation is approximately $50 million, indicating that its shares are trading at a substantial discount.

In summing up the group’s prospects Edney said, “A combination of good board leadership, the option value of Mt Carrington and the exploration blue sky in Alaska makes WRM an interesting ASX exploration play and one that may get more attention following Northern Star’s acquisition of the Pogo mine in Alaska.”

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