Well, RLD’s price action’s certainly been hectic since I last wrote about this stock in early Feb! One of the stock highlights I mentioned was the share price chart. While I was already fundamentally bullish, I was heartened by the fact the share price was threatening to break out of a long established trading range. This was capped at GBP 10.5p, and I speculated a break of this level might quickly lead to GBP 16.5p. Sure enough, it did, and in little more than three weeks..!
This prompted me to trim my position from an expanded 2.7% back down to 1.8%. I reported this at the time on my blog comments, and Twitter, so please be sure to sign up for one, or both, if you want to keep track of any specific stocks. Note I generally don’t do a new stock write-up until I have substantial new info/commentary to share (and I know you’re tracking news releases just like I am). Soon as I tweeted, Richard Beddard popped up to ask ‘Pourquoi? It sounded so glittery!‘ Haha, a bit tongue in cheek, methinks… Well, the quick 65% gain was pretty glittery too! I couldn’t resist taking it on a portion of my holding (btw I hope to write more shortly about this whole subject).
So what’s happened with Richland since then? Well, as per the chart earlier, the share price has come right back off to GBP 11.75p, but let me focus on actual newsflow:
The last piece of news released is their Q4 Operational & Sales Update. Carats mined for the year were 4.8% shy of my forecast at 2.38 mio carats, but Annual Sales at $20.8 mio were bang on my own prediction. This broadly suggests my other operating metrics and earnings (annualized from H1) are about right too. The only (minor) disappointment was in Bernard Olivier‘s commentary, which included this comment: ‘…despite tanzanite prices remaining under pressure.‘ This is a little puzzling, particularly in light of a good Revenue number. Considering this comment, and a forecast 5% increase in carat production in 2012, this strikes me as a bit of expectations management… With an additional tailwind from the new JV going live (and hopefully a decline in under-mining), I’d hope to see the production target comfortably surpassed.
Even with some price pressure, this hopefully assures us of stable or increasing revenue in 2012, as the company’s projecting. I’m also cognizant of the fact the more expensive gemstone market (for example, diamonds) tends to be the price/trend leader. I monitor other peer companies, including Gemfields (GEM:LN) and Petra Diamonds (PDL:LN), and their recent comments and share price development have been v encouraging. This should be a good indicator for Richland, let’s call it the trickle down effect..!
No particular progress was reported on the Australian Sapphire Project due diligence, or the Tsavorite pilot & bulk sampling exercise. We have two key (and related) events on the near horizon: The Special Mining License expiry in July, and the upcoming Dar Es Salaam secondary listing. There was even less of an update provided about these, but there’s been enough press commentary (and global markets are healthy enough) to presume a listing will go ahead without a hiccup. As far as I can tell, there will be a 20% share issuance, and 5% may possibly be granted to employees (presumably without payment?).
Unfortunately, Richland trades well below its intrinsic value, and it will be some time before the issuance proceeds can be utilized productively. Therefore, despite the cash received, this listing will be dilutive – something I’d usually abhor. In Richland’s case, however, it’s probably the best option…
I previously highlighted I was pretty relaxed about, and was anticipating, a renewal of their Special Mining License. This local listing, the possible employee ‘empowerment‘ initiative, and the recent local miner JV announcement may prove to be master-strokes… Perhaps Richland even has an explicit promise/agreement from the government already – if not, I think it’s certainly implicit at this point that these steps will assure them of a renewal. If this is the case, the secondary dilution is, at worst (I think), a cheap insurance policy – at best, it saves the shareholders from disaster..! Now, the best news for last:
A few days after my original blog posts, Richland came out with a Tanzanite Resource Upgrade! This was marvelous news, and a key driver of the recent rally. The resource is now JORC compliant, which is excellent, but it does remain Indicated/Inferred. However, as I’ve explained before, this is something I’ve learned to usually live with in the gemstone industry (not when I’m personally buying, though…GIA cert. please!). The best news, of course, was the 33 million carat increase (after depletion) in the Total Resource to 105 million carats. This breaks down into an Indicated Resource of 30.6 mio cts, and an Inferred Resource of 74.4 mio cts. It also prompted an increased Life-of-Mine estimate to approximately 30 years, based on an increase over the next 5 years to an annual 2.7 mio ct production.
So, what does all this do for my valuation of Richland?
P/E Ratio: OK, I think it’s still reasonable to assume historic Net Earnings of $3.15 mio for 2011. This corresponded to EPS of 2.72 cts, but now we’re looking at a higher prospective share count due to the secondary listing. So, let’s assume the share count increases from 118.1 mio to 147.7 mio shares, and that the cash raised will have v little immediate/incremental impact on earnings. On the other hand, details of the secondary listing aren’t at all clear yet, and we need to consider the weighted average impact, so I think a simple compromise is to split the difference. That is, let’s use a share denominator of 132.9 mio shares, which gives us a re-based EPS of 2.37 cts.
We’ll still apply a Fair Value P/E of 15, however, which equates to a $0.355 or GBP 22.6p share price.
P/S Ratio: I previously utilized a Fair Value P/S of 2.0, and there’s no reason not to use this again. We should be cognizant, however, of the improved financial strength of the company, in terms of its debt capacity and increased Net Cash. The current annual interest bill’s only $142 K and, if we assume 29.5 mio shares are issued at today’s price (and 75% are paid for in cash), we should be looking at net cash increasing from $0.4 to about $4.5 mio. However, note that any potential corporate acquirer would look at all shares outstanding, not some notional weighted average…
Therefore, I’d estimate this increased strength merits an increased Fair Value P/S of 2.2 which, based on $20.8 mio of revenues and 147.7 mio shares, equates to $0.31 or GBP 19.7p per share.
Asset Value: Be sure to first revisit my previous commentary about my approach to valuing natural resource companies on a reserves/resources basis. I’m using a similar approach as with my previous RLD valuation, and I’ll continue to exclude any Tsavorite resource valuation until we have some greater clarity on mining plans.
We’re now looking at a JORC compliant resource of 105 mio cts. Alternatively, we can look at the implied carat production from the Life-of-Mine estimate. It’s not clear if the 30 year life’s from the beginning of this year, or dates back to the Dec-2010 when the previous 20 year estimate was provided. Let’s split the difference for that year, so we’re looking at:
(2.38 mio cts * 50% * 1 year) + (avg. 2.6 mio cts * 5 yrs) + (2.7 mio cts * 24 yrs) = 79 mio cts total mine production
Average these two totals, and we have 92 mio cts. Again, we’ll haircut this total to reflect the fact we’re still dealing with (indicated/inferred) resources, rather than reserves. We’re dealing with a JORC compliant resource at this point (with a 30.6 mio ct Indicated component), so a 33% haircut now seems sufficiently conservative. Therefore, with a Fair Value of $1 per carat, we’re looking at a resource value of $61.6 mio.
Let’s tot this up with the other key Balance Sheet items, plus the secondary listing cash raised. Inventory‘s at $6.3 million (easy to realize), Adjusted Cash is $4.7 mio (includes $3 mio of Receivables due shortly after their Jun-2011 sales), and an estimated $4.1 mio Cash Raised. Finally, we’ll offset $1.4 mio of Debt, and what do we arrive at?:
(92.0 mio carats * 67% * $1.00) Resources + $6.255 mio Inventory + $4.746 mio Adj Cash + $4.092 mio Cash Raised – $1.371 mio Debt = $75.4 million / 147.686 mio shares = $0.51 or GBP 32.5p Fair Value per share
Averaging a final valuation across the various approaches detailed above still seems the most obvious thing to do:
(GBP 22.62p P/E Val + GBP 19.71p P/S Val + GBP 32.46p Asset Val) / 3 = GBP 24.93p Fair Value per share
One can also look back to peak figures and speculate on a potential valuation if that kind of performance can ever be revisited… Versus the relevant Peak metrics, Richland currently trades at a 2.2 P/E, a 0.5 P/S, and a Dividend Yield of 54%! These are quite extraordinary historical comps..!
Finally, I’m also fascinated to see Ian Harebottle (ex-CEO of Richland) continue to go from strength-to-strength over at Gemfields (GEM:LN). Their recent interim results were warmly received by the market, and GEM continue to broaden their gemstone portfolio. In fact,with the recent rally in GEM’s share price, its market cap now stands at GBP 108.7 mio, almost eight times the market cap of Richland… One of GEM’s objectives for the year is to ‘Leverage Gemfields’ clear strategic advantages within the coloured gemstone sector and look to use these to drive additional organic and acquisitional growth‘. Already having a 10.1% stake in Richland, an actual takeover of RLD would be mighty tempting and a highly digestible acquisition for GEM to contemplate..?!
With the v recent decline in the share price, my trimmed position was down to 1.3%. I’ve now added more RLD shares, to bring my stake back up to 1.8%.
- Mkt Price: GBP 11.75p
- Mkt Cap: GBP 13.9 mio
- P/E: 6.9
- P/S: 1.0
- Tgt P/E: 16.5
- Tgt P/S: 2.8
- Fair Value: GBP 24.9p
- Upside Potential: 112%