Royalco Resources' (RCO) valuation is underpinned by 2 royalty streams and cash. The exploration and other 8 royalty assets come for free at 50cps. Drill results will be of significant interest to the market going forward as most tenements contains obvious mineralisation. Periodic announcements on the various royalty assets will be made with major developments.
In the case of the Reefton, the royalty is based on the gold price alone, not production levels. It starts at 1,000oz of gold per year irrespective of the production rate. There is an addition 10oz for every NZ$10/oz above a NZ$700/oz gold price. Currently the NZ gold price is NZ$970/oz - this equates to a royalty stream of over A$3.6m per year. The weak NZ$ is key here. After 400koz production (5years) the royalty reverts to a normal 1-3% on revenues (would be 3% at today's gold price). The Reefton royalty is an extremely attractive as it is not subject to profitability, production levels or hedging. The Mt Garnet Royalty is 3% net of smelter revenue - I have only modelled 3 years but recent drill results suggest resource grades (see KZL 19/6 announcement).
I have calculated royalty NPVs using an 8% discount rate - this is very conservative because royalties are forthcoming on gold price (Reefton) and revenues (Mt Garnet), not profits.
Reefton Royalty NPV $14.0m Mt Garnet NPV $3.6m Cash $11m Total $28.6m or 50.1cps
RCO's management is well connected and the majority of the share registrar is top class. My feeling is the stale bulls will abate within a day or two before the quality investors move in. RCO at 50c provides a free option on all exploration, royalty and corporate developments.
