Pitt Street tips Resouro to take off

Pitt Street Research says Resouro is significantly undervalued compared with peers in the Brazilian rare earths sector

Research house says it would be reasonable to put Resouro’s market cap at $100m, up from current $40m, equating to 133% lift in current share price

Report sets out nine reasons for rerate potential based on features of flagship Tiros project and company management

Special Report: Capping off a big week of news for Resouro Strategic Metals, Pitt Street Research has released a report finding the company is significantly undervalued compared with its peers and a rerate of more than 100% could be warranted.

In its 29-page report, the research house said it would be reasonable put Resouro (ASX:RAU)’s market capitalisation upwards of $100 million – more than double the current $40 million. That would equate to a share price of 91c – a 133% increase on the current 39c.

Pitt Street says although it is too early to value the emerging rare earths and titanium producer via a discounted cash flow (DCF) or enterprise value (EV)/resource methodology, it set out nine key reasons investors should look more closely at the company, noting the exceptional grade of its flagship Tiros project “is just the beginning”.

“Even though it is too early to model the project economically, we observe that its peers trade at market caps over $200 million, even some that are multiple years prior to production,” the report says.

“We foresee shareholder value being created as the company proceeds into later stages of development, particularly scoping and feasibility studies and as the company undertakes exploration work at areas not … covered by the current estimate.”

Reasons to look at Resouro

With a maiden mineral resource estimate of 1.7 billion tonnes, the Tiros project is the largest JORC combined REE and titanium deposit of its type known in the world.

Pitt Street notes the closest JORC Resource amongst ASX companies is Meteoric Resources (ASX:MEI) which has 619 million tonnes and at a lower grade of 2538ppm total rare earth oxides and 600ppm magnet rare earth oxides.

While it’s easy for some companies to spruik deposits on the basis of specific higher grade drill holes or domains, Resouro has found the Tiros deposit to be homogenous, with consistent high-grade results from the 102 holes drilled so far.

Within the Tiros Central Block there is one ultra high-grade domain of 120 million tonnes at 9000ppm TREO, 2400ppm MREO and 23% titanium.

“This provides hope that even in the absence of feasibility studies, there is a realistic prospect that the eventual extraction of this resource will be not merely economically feasible, but lucrative,” Pitt Street says.

The current JORC Resource is from only 7% of the total tenements comprising the total Tiros area of 45,000-plus hectares.

There’s also potential for resource growth within the current MRE area, which remains open laterally – in other words, Resouro is still not sure how far the current resource extends despite 4766m of verification drilling so far.

Testing the waters

Metallurgical test work released this week on a representative 50kg sample of Tiros ore has indicated that Resouro and partner Altilium have the potential to achieve the highest rare earth extractions known across the industry.

One of the results achieved the highest rare earth extractions known to date, including 96.2% of the high-value magnetic rare earth elements.

Metallurgical testing is continuing with Altilium, which is a global leader in innovative non-conventional rare earth test work, as well as more conventional options.

Although production is a few years away, Tiros is ideally placed for its development as it’s close to major federal highways, rail infrastructure and high voltage power lines.

Pitt Street also notes that Brazil is a well established mining jurisdiction with a reputation aided by the long-term operations of major miners including BHP (ASX:BHP), Anglo American, Rio Tinto (ASX:RIO) and South32 (ASX:S32).

Tiros is also well placed to help fill the growing demand for non-Chinese sources of rare earths. To capitalise on its substantial reserves Brazil has taken some key steps to forge a domestic supply chain.

“These include establishing a government fund for rare earths projects and building Latin America’s first magnet factory that could be a future offtake partner for companies such as Resouro,” Pitt Street says.

Brazil is also building a large-scale renewable energy industry and has a growing electric vehicle market, both of which will require a growing rare earths sector.

The analysts say that like many commodities, rare earths have endured a bearish 18 months, largely driven by the slowdown in EV sales growth. But given rare earths are essential for the clean energy transition, consumer electronics and defence, prices are not expected to be at current depressed levels for long, and the forecast turnaround will boost investor sentiment in the sector.

“But even at current prices, many peer projects remain profitable,” Pitt Street says.

Finally, Resouro has a quality leadership team “with significant skin in the game and experience”.

Founder and President Christopher Eager owns more than 18 million shares in the company and has a proven track record of unlocking value in resources projects. Among his achievements is co-founding Monterrico Metals that developed and then sold the Rio Blanco copper project in Peru for US$200 million.

This article was developed in collaboration with Resouro Strategic Metals, a Stockhead advertiser at the time of publishing.

This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.