When it comes to deal making, Red Rock shareholders have grown used to expecting the unexpected. The successfully completed JV with Pallinghurst proved to be a seminal event for the company, and demonstrated how they could punch well above their weight, whilst landing a significant stake in Jupiter Mines currently worth some £13m (or 2.1p per RRR share).

The latest deal has all of Red Rock’s creative hallmarks, but more significantly, it also marks a major step change for the company and is a clear demonstration of their scope and the Managements ability to seek out and capitalise on some serious value-generative opportunities.

Despite a sharply positive share price reaction to yesterday's news, when it comes to recognition of Red Rocks' true value and growth potential, we still feel that the market is seriously behind the curve.

The agreement is certainly worth further study (we have already gone over this several times and will continue to do so over the weekend), but we thought it would be opportune to ask Chairman Andrew Bell (who is still in Colombia) for his comments and give him the opportunity to expand on the significance of this deal.

As usual, he was only too pleased to oblige:

MM:  In your Chairman’s statement from the half yearly report you stated that Red Rock would be focusing its efforts on Migori and ‘only opportunities that offer exceptional promise and are a strategic fit are being considered’.  Do you feel this transaction represents such an opportunity and if so, could you expand on why this is the case?

AB: First, it is a producing asset with cash flow. It is a step forward for any junior to have regular cash flow, as you know. We have been looking for this for some time. With this project, the combination of interest, advisory fees, and profit share make our revenue stream a proxy for equity earnings initially, while if we exercise our option we have potential control of two producing gold mines with an operating gold treatment plant. We also control our risk by initially participating in the form of a secured loan.

Other exceptional factors include the high grade, and the good quality incumbent management. In the first five months of this year, and before the investment we are funding which will bring the plant into operation and the second mine into production, Mineras Four Points was selectively hand-picking small amounts of ore, quite logically given their lack of finance or processing capacity.  The 2,500 oz odd they produced was at a grade of about 140 g/t. Of course that is not representative of the ore grade: the ore-sharing system they had with their miners at that time incentivised the miners to become extremely good at cherry-picking high grade. But not many mines can produce any ore at that grade: the total vein grade when production ramps up is never going to be above about a quarter of that grade, and possibly much less, but we expect it to be rather high.

As for strategic fit, we have been fairly clear we have been moving towards an increased weighting in gold assets.

MM:  The El Limon mine is currently producing at 108 tonnes per month.  In your announcement you expect to be able to increase this to an initial level of 150 tonnes per day.  How confident are you that this significant increase in production can be achieved and how will this impact on the life of the mine?

AB:150 tpd should be the first objective for the two mines together. Eventual throughput should be raised to 250 tpd, and then 400 tpd, if all goes well. There is no evidence of thinning seam or grade at depth in El Limon. There may be some contrary evidence. Quite possibly the mines will outlast us all.

MM:  Production levels at El Limon are currently 15.3kg of gold per 108 tonnes of processed ore; representing an average of 142 grammes per processed ton.  What are your expectations with regard to achievable grades going forward at higher production levels?

AB:I have an expectation but it would be wrong for me to give it, as it is based on soft data and supporting evidence, not a detailed study. We will soon know.

MM:  You note within the announcement the potential for resource expansion.  Could you elaborate on how this may be achieved?

AB: El Limon is open at depth, and has potential strike extensions. So we can look to continuing mine development and expansion, I think. There is also the Aurora deposit, the second mine. I don’t know if the work to declare a resource will be a priority; after all, we are in production.

MM:  With regard to Colombia what developments and associated news flow can investors look forward to in the coming months?

AB: We hope more good news, both on the corporate and the operating front..

END