Regency Mines: Three Pillars of Value

Benjamin Disraeli once said "seeing much, suffering much and studying much, are the three pillars of learning".  This will no doubt ring true with the management of many a small cap explorer. Identifying exciting projects (before so meone else pegs them!) requires vision. And in the traditional world of resource exploration, this can be as much an art as a science.  But having great projects, or even outstanding ones, is never going to be enough. Developing those projects and driving them towards their ultimate potential also requires capital. And when internal capital constraints are emphasised by the kind of economic collapse we saw in 2008, then all efforts will immediately shift from development to survival.

Seeing much and suffering much seems to be an appropriate way to describe Regency Mines' journey through 2005 to 2009. But, through careful management and diligent application of limited capital, the company has emerged from the crisis with an incredibly strong portfolio of assets which now firmly underpins its current market cap.

And having survived the downdraft, the company looks well set up to embark upon the next stage of its journey along the road in developing those assets to their full potential.

But it's only when one starts to study these assets that one really begins to appreciate just how remarkable that potential could be. And for the patient focused investor, 'who can keep their head, when all around are losing theirs', they could well see their investment, in time, transform from a proverbial molehill into a rather significant proverbial mountain! 

Can such stoicism pay off? Well Regency Mines' Chairman Andrew Bell has already overseen one major value transformational event with associate Red Rock Resources (LON:RRR).

For the best part of 2010 Red Rock's share price languished just below the 2p level (much to the chagrin of investors at the time). Yet even then, the true value was already baked in the cake and staring us right in the face. The catalyst finally struck in September '10 and the share price jolted to life and then suddenly took off….

And now, as we look at Regency, we are getting a distinct feeling of Déjà Vu.  Those same tell-tale signs are all there and we would ask, perhaps boldly, don't you just get the feeling with Regency it's a question of when, and not if??

So here we are, early in 2011, where we feel the Company is on the cusp of significant value generation. We therefore thought it would be useful to highlight and expand on the key elements of Regency's portfolio of operations and investments. That way we can identify this potential in the raw, even if the Market is not quite ready to recognise it - yet!

The Three Pillars!

There are many elements of the Regency portfolio and those experienced in the commodities space will recognise the potential in each case. In the round, these elements can be summarised in three categories - Nickel, Gold +Base Metals and Coal. 

For us, the beauty of this diversification is the protective nature of Gold, the expansive potential of base metals (with the enormous growth in China, India and other emerging markets), and, at a time of burgeoning worldwide energy demands and supply shortages, the enduring security of coal.

Nickel:

Laterites:

For some time the name Regency Mines (LON:RGM) has been synonymous with lateritic nickel exploration, particularly at the company's flagship Mambare project in Papua New Guinea. 

It's relatively rare that a UK stock market tiddler has ownership of an emerging "World Class" nickel project.  What gives it World Class status potential?  Well for one thing Mambare occupies a plateau of some 7km x 20km making it ten times larger than the more highly recognised Wowo Gap project operated by RMC (ASX:RMI) .  For another, and once again contrasting with the neighbours, Mambare is considered to have even better grade and topography than the Ramu nickel project, operated by RamuNico, which is currently under development.

Ten years ago, the then Anaconda Nickel estimated two limonite resource potentials of 630 million tonnes at 0.78% nickel and 200 million tonnes at 1.01% nickel.  Now jumping back to Benjamin Disraeli who also said "there are three kinds of lies: lies, damned lies, and statistics", we have to be careful here.  But doing the maths is a little interesting, because what Anaconda effectively estimated was a total of some 6.934 million tonnes of contained nickel, or 15.25 billion pounds. Adopting the current Nickel price of US$ 13 per pound gives a total potential contained metal value of US$ 198billion. 

Of course this is just a benchmark figure and doesn't reflect the overall profit potential, which is a separate calculation altogether. 

But what it does say however is that Mambare is absolutely huge, and no doubt one of the key drivers for the Joint Venture agreement struck up with Direct Nickel, as announced on 6th November 2009. The JV forms the basis of cooperation between the two companies on the piloting and application of Direct Nickel's advanced cobalt/nickel leaching technology at the Mambare project. 

Andrew Bell goes to great lengths to point out that "technology" was always going to be a key factor in exploiting Mambare's true potential and identifying the right technology partner was therefore a major strategy decision on the part of the Regency Mines.

Lateritic nickel has proven to be difficult and extremely expensive to process through 'traditional' means. So access to DNi's "disruptive" and innovative technology is expected to provide an extremely cost effective way of maximising Mambare's potential. More about Direct Nickel's technology and the JV can be found here and here.

Now the reality is that bedding down this JV has taken some time and required the typical innovation oft shown by Andrew when it comes to deal making.  But furtherance of the deal was achieved with the announcement on 19th November 2010 that improving market conditions and a strengthening nickel price, coupled with geophysics flown over Mambare had resulted in a revised exploration and drill programme and a chunky £1.5million budget to get things moving.

The announcement also details a direct investment by Regency in Direct Nickel in a cross stake-holding deal which ultimately brings the JV partners significantly closer together.

That drill programme is due to commence in April 2011 (as confirmed in the announcement on 26th January) and on 2nd March the company released an update on Mambare which gave some detail of the next phase of exploration with the signing of a contract to drill a minimum of 220 holes on 100m by 100m 200m by 400m grids, for a total of 4,000m of drilling. So Mambare stands ready for a period of intensive activity which is expected to bolstering the knowledge on the ground. Leading, one would expect, to technological applications potentially turning this large and prospective piece of ground into a company maker for both Regency and Direct Nickel.

We would note again Anaconda's estimate of the potential Nickel in-situ, which at $198billion makes it easy to recognise the size of the prize for both JV partners!

A further interesting development was the announcement on 22nd February 2011  that the Regency Mines/ DNi JV has filed an exploration licence application to explore for Geothermal Heat, which could provide cheap, renewable energy for any future mine and DNi process plant at the Mambare Nickel Laterite Project.  

We found this to be a really interesting turn of events. For those who are as yet unfamiliar with the potential for Geothermal as an exciting source of alternative energy generation, it would be really worthwhile listening to the excellent overview given by Ross J Beaty in this recent Financial Sense radio interview   (starts after 28:20 minutes).

Sulphides:

The beauty of Red Rock Resources and now Regency Mines is the depth of their portfolio.  The problem, is that with blockbuster projects in the mix (Mambare for Regency and historically, Mt Ida/Jupiter Mines for Red Rock), some parts of the portfolio may get overlooked.

So we bring the Australian licences held at Lake Tay, Mount Gordan and Kambalda, back into view.  With the attractiveness of nickel sulphides being the easier processing and the additional benefits of potential gold mineralisation, these opportunities should not be forgotten and it is worth spending a few moments on the project section of the company website to find out more.  Equally, it is worth reviewing the exploration update provided by the company on 23 June 2010, supplemented by the MiningMaven Q&A with Andrew Bell covering the announcement.

A subsequent VTEM geophysical survey and related work has identified two specific targets and additional drilling is planned for 2011.

Gold & Base Metals:

Trying to simplify a diverse portfolio can be a little difficult, not least with Nickel being a base metal itself.  However we see two distinct areas of Gold activities; one of which has a substantial and clearly articulated value (the Red Rock investment) and the other, Regency's own projects, which at the present time are less advanced.

Red Rock Gold Exposure:

Firstly, through its holding of 143million shares in Red Rock Resources, Regency has an investment currently worth some £15 million (RRR@10.5p).  Now the expectations would probably be to wax lyrical about how such a huge investment (in a readily traded and liquid listed stock) helps underpin Regency's market cap of £24.5million (RGM @4.3p).  That said, we think the Colombian gold production and Kenyan gold resource & exploration make Red Rock a hugely attractive gold opportunity, and one, if all the ducks line up nicely, which could be worth considerably more - particularly if Red Rocks investment in Ascot Mining also supplements the gold upside!

Not wishing to detract from the gold message it's worth noting that much of Red Rock Resources market capitalisation is underpinned by its holding of 83.7m shares in ASX listed Jupiter Mines, which sees itself as a substantial steel feed corporation in the making. 

Bundarra:

Regency also has its own direct gold opportunity through Bundarra with two licences covering an area of approximately 260 square kilometres.  Interestingly a review of historic exploration conducted since the 1960s indicates limited additional work would be required in order to delineate copper-gold resources at a number of prospects. That in itself is hugely encouraging, but 'digging' deeper, there is the evidence of historic copper mining (from 1800s and on a small scale) providing real historic evidence (at least a hundred years or so ago) of economic potential, that may just carry forward to the present - particularly with the application of modern exploration and mining techniques.

The company considers Bundarra to be prospective for large IOCG (iron oxide, copper and gold) systems of the type exhibited at Olympic Dam and Ernest Henry. 

As with all these things, Management's time limitations mean that progress here may not be as fast as one would like.  However should developments with Regency follow those of Red Rock, as the business grows, the management and operations team should be able to scale up accordingly, thus facilitating a more expansive portfolio development programme. 

Coal:

Coal can often divide opinions. In the UK, with environmental concerns paramount, coal for power generation is steadily being phased out - though more recently, much has been made of promising developments in the area of carbon capture & sequestration.

In the developing world however, where growth in power consumption is ubiquitous, it's a different story. Nuclear power holds the promise of zero emissions and is the favoured solution from a long term planning perspective; but given the timescales required for implementation, it does nothing to alleviate the immediate (and often chronic) supply constraints. 

The consensus of opinion on world oil supplies suggests that around two generations worth (40-50years or so) still remain.  However the estimates for coal are markedly higher, up to ten or so generations (250 years).  So as "needs must" coal is no longer being viewed as the pariah of the energy market; we need it and, despite all historical argument, it can provide clean energy too!

This hasn't escaped Regency's attention and on 12th November 2010, the company announced a strategic investment in Oracle Coalfields in a deal which saw it take a 10% stake with the rights to acquire additional shares when Oracle undertakes its planned listing on the AIM market in 2011, from its current PLUS home. 

Oracle, through its 80% owned subsidiary Sindh Carbon Energy Limited, holds an exploration licence over the 66.1 sq km Block VI of the Thar Coalfield in Sindh Province, Pakistan.  A reported 1.423 million tonnes of lignite coal has been defined in the licence area, of which 371 million tonnes of open-pittable proven reserve has been identified.

Memorandums of Understanding have been signed with the Karachi Electric Supply Company for a Joint Venture "mine-mouth" power station and also with Lucky Cement.  And, on top of all this, a bankable feasibility study (BFS) is currently being undertaken by SRK Consulting.

Oracle recently confirmed that their intended move to AIM is scheduled to take place shortly so excitement is building for Regency's investment here.  The working relationship with Regency should also provide further assistance for Oracle's business development going forward.  As a footnote, Regency subsequently added further shares taking its 'interim' holding in Oracle to 11.26%.

Value Proposition:

When it comes to our own investment criteria, we usually focus on two key aspects in order to determine value.  Namely: "Security and Potential".  Regency scores well with us on both counts.  Nearly two thirds of its current market capitalisation is represented by its shareholdings in Red Rock Resources.

Red Rock, through its own gold interests and the substantial value of its Jupiter Mines holding, is a relatively secure and growing business. So from a security perspective, Regency's value is healthily underpinned.

But what of the potential?

Well, after deducting the value of the shareholding on Red Rock, the remaining £9.5 million or so market cap, in our view, attributes little value to the enormous prospectivity of Mambare, the diverse remaining portfolio or the potential of the Oracle investment. Whether you are a shareholder or not, Regency Mines is one to watch closely!

Regency Mines Investor Presentation 24th March at "The Counting House" in The City.  

Want to find out know about Regency Mines? The Company will be presenting at our next monthly investor network evening on Thursday 24th March at The Counting House in Cornhill in the City. This will give investors a great opportunity to meet with Executive Chairman Andrew Bell personally and put your questions directly to him.

To reserve your place click here, or for more information on our Monthly investor network events, visit the MiningMaven Events section on our website: