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Regency Mines – Initiating coverage with a recommendation of Speculative Buy at 7.9p with a 9.5p target price

Regency Mines has a twin strategy of exploration and deal making which led to the creation of Red Rock Resources, where the company owns a 20.96% stake which, on its own, underpins close on 60% of Regency’s current market capitalisation. The undoubted success of Red Rock Resources has attracted the attention away from Regency where the board has assembled an impressive portfolio of nickel, copper and gold licences which now begs attention. These projects are starting to produce strong newsflow; and show that Regency is a lot more than a cheap way into Red Rock Resources. The coming twelve months could see the Board monetising some of these interests which will allow the hidden value in these projects to be highlighted for all to see.

On Friday 12th November the company announced that it had taken a 20% strategic stake in PLUS-quoted Oracle Coalfields by investing £1.02 million at 5.5p per share. Since its flotation in 2007, Oracle has made good progress with its coal project in Pakistan and is seeking a move to AIM in the first half of 2011. Oracle already has a JORC compliant resource at its Block VI of the Thar Coalfield in Sindh Province in Pakistan where its lignite coal has been shown to be highly suitable for power stations and industry. In 2011 we expect a bankable feasibility study and a move to the AIM market with mine development and production planned for 2012. Oracle’s future looks a lot brighter than it did with entrepreneurial Regency’s involvement and cash. A move into coal makes strong strategic sense for Regency which has taken a decent stake in Oracle jus t as this company begins to climb the value curve.

When metal prices were depressed in 2008/09, Regency was able to mop up some highly prospective licences relinquished by cash-strapped explorers. New licences gained In the Lake Tay area in Western Australia, see the company exploring for nickel sulphide and gold. This area is part of Lake Johnston greenstone belt which consists of some of the oldest rocks on the planet which due to changes in heat and pressure has resulted in the formation of large ore bodies. The licences include an area where this greenstone belt is bisected by the Jerdacuttup fault. This fault seems to be highly important as it’s seems to host the substantial Trilogy nickel discovery to the south west; whilst 500 kilometres north lies AngloGold Ashanti’s five million ounce Tropicana gold deposit. Exploration results have been well received and seem to have led to competitors such as Trilogy quickly pegging substantial amounts of the surrounding area.

Copper will become a more important metal for Regency going forward which will make for a better diversified portfolio of properties. A sizeable exploration budget has been assigned to Bundarrra which has been the site of a lot of copper mining activity in the past around the rim of a caldera. It seems that the old timers were mining the surface expression of what could be a substantial porphyry structure which is still yet to be discovered.  In the 1970s a line of seven holes was drilled which encountered intersections of between 2.1% and 2.2% copper. Regency will be following these holes up in the coming exploration season. Bundarra could become a focus of investor attention over the coming months as Regency chases up significant copper and gold anomalies in this project area. The work both on the Australian nickel and copper properties and a beefing up of the team on the ground down under has created a structure which could allow for Regency Mines Australasia to be spun-off into its own quoted vehicle.

At the Mambare Plateau in Papua New Guinea, the company has what is fast becoming perhaps one of the biggest laterite nickel cobalt projects to be discovered in recent decades. Ground penetrating radar expert Jan C Francke likened the potential of Mambare to Onca Puma, Vale’s vast nickel laterite project in Brazil. Nickel laterite deposits need buoyant nickel prices to be economic and this is due to the current processing technology. Regency has chosen Direct Nickel Pty Ltd (DNi) as its technology partner and the pair will be vending processing technology and its licence interests into a joint venture company to be floated off in its own right and are now together funding further exploration of Mambare where £1.5 million will be spent on drilling.

Our analysis has placed a valuation on Regency Australasia and the Mambare nickel-cobalt project using peer group comparisons. Giving a valuation for Regency of £48 million which equates to 9.5p per share. We recommend the shares as a Speculative Buy at 7.9p. It must be pointed out that every 1p increase in the share price of Red Rock Resources (now 16p) would add £1.42 million to our valuation of Regency Mines and 0.28p to our 9.5p target price.

Forecast Table

Year to 30th June	Sales (£000)	Pre-tax Profit (£000)	Earnings per share (p)	Price Earnings Ratio (x)	Dividend (€)	Yield (%)
2008A	0	(472)	(0.24)	NA	0	0.0
2009A	0	(717)	(0.27)	NA	0	0.0
2010E	0	1,000	0.20	39.5	0	0.0
2011E	0	1,200	0.24	32.9	0	0.0

Background

Regency Mines Limited was incorporated in September 2004 and subsequently was re-registered as a public company under the name Regency Mines plc. The company started trading on AIM in February 2005 following a round of pre-IPO funding that raised £500,000 at 2p. On flotation, Regency had a number of option agreements over exploration licences as well as exploration licence applications in Australia. Soon after listing, Regency acquired an iron ore project at Mt Ida north-west of Kalgoorlie in Western Australia which formed the basis of AIM-quoted Red Rock Resources which the company spun-off in July 2005. Regency’s interests in manganese and iron ore exploration in Australia went into Red Rock Resources which has grown to become capitalised in excess of £100 million; and where the company still retains a 20.96% stake.

In May 2006, the company acquired a 75% interest in the 584 square kilometre exploration interest covering the Mambare Plateau in Papua New Guinea which it subsequently increased to 100%. Mambare had been explored in the 1960s with fairly good results and soon this new project became the focus of exploration effort in 2006/07. The decline in the nickel price in 2008 led to the management to move the focus of its the exploration effort to nickel sulphide opportunities in Western Australia which have a far lower processing costs and substantial lower capex costs than nickel laterite projects. However the Board took advantage of lacklustre metal prices to assemble a number of new important licences in nickel and copper in Australia.

In May 2009 the company gained the rights to acquire four tenements prospective for nickel sulphide in the Archaean Lake Johnston greenstone belt in WA which lay next to some of Regency’s existing licence areas. This move meant that the company controlled 160 kilometres out of a 240 kilometre trend which included 60 kilometres of newly discovered greenstone belt that was untested.

In September 2009, Regency entered a Standby Equity Distribution Agreement for up to £3 million with YA Global Master SPV Ltd which the Board saw as an opportunity to raise funds in a manner that would be less dilutive than placings had become. However since then the company has returned to the equity market for further funds and since the summer, the company raised a total of £1.09 million at 1.1p, 1.25p and 3p per share for general working capital purposes.

Overview of Operations

Regency has interests in nickel, gold and copper exploration in both Australia and Papua New Guinea.

Nickel Sulphide & Gold

At the Lake Tay and Mt Gordon area in Western Australia, Regency is exploring for nickel sulphide and gold. The downturn in the nickel price in 2008/09 saw the company switch the focus of its nickel exploration to Western Australia an area that is rich in nickel sulphide discoveries which did mean that whatever the team discovered was likely to prove economic at the then prevailing nickel prices.

Exploration effort is concentrated on the Lake Johnston greenstone belt which is one of three main ultramafic belts; where greenstones are some of the oldest rocks on the planet that due to changes in heat and pressure has allowed large ore bodies to form. As the map of the Tay projects shows, the Lake Johnstone greenstone belt trends from in a north-south direction and is bisected by the Jerdacuttup fault. This fault is highly important geologically as its seems to host substantial  nickel discoveries (such as Trilogy) and copper in the south west; whilst 500 kilometres or so to the North of Regency’s licence is the location of the five million ounce Tropicana gold deposit owned by AngloGold Ashanti.

Much of the Lake Johnstone greenstone belt has only been recently identified and so still remains unexplored. In 2008/09, Regency consolidated its position on the belt by the acquisition of a number of further licence areas. In much of these licence areas the belt does not outcrop and so the team is using Versatile Time-Domain-Electromagnetic (VTEM) geophysical surveying which is a relatively new technique which penetrates 500 metres into the ground. The advantage this gives to geologists, is that this geophysical survey actually follows the anomaly down into the ground; and has proved to be a powerful tool in unmasking the belt and finding priority targets.

Phase 1 drilling began in February 2010 and by June 2010 the board was able to report on the 2,401 metres of reconnaissance air core drilling programme on the Munglinup North Project that lies within the Lake Johnston greenstone belt area. The drilling programme was designed to test on two anomalous target areas (T1 and T3). Target T1 tested an electromagnetic conductor at Lay at which was assumed to lie on the boundary between the Archaean Yilgarn craton and the Proterozoic Albany Fraser Metamorphic Zone. Drilling here showed traces of both base and precious metals but at sub-economic grades; but the southernmost drill line encountered significant sulphide levels in each hole, with one recording a maximum grade of 18%; which may suggest zones of base and/or precious metals are to be found at depth. Such is the level of interest that this whole area is generating that within days of Regency announcin g such drilling results that a vast area of new licences were pegged in the surrounding area by the likes of Trilogy and others.

Phase 2 of the drilling programme has already started which consists of infill drilling to outline the structurally controlled sulphide zone as well as deeper Reverse Circulation drilling to explore the source of the near surface base metal mineralisation found.

On 18th November 2010, it was announced that two VTEM surveys will be carried out near Munginlup. The first one is a 487 line kilometres on 200 metre spaced lines on a 145-325 degree orientation which is to be flown along the trend of the sulphide body inferred from the significant sulphide intercepts that were identified in the aircore drilling programme earlier on in the year. Secondly, south of Munginlup, a 134 line kilometres on 100 metre spaced lines on a 090-270 degree orientation will be flown to define more closely a significant anomaly detected along the trend of the north-south inferred line of greenstones under cover that had been highlighted by an earlier regional geophysics programme.

Kambalda

Up until 2009, Regency held just one exploration licence (E15/1134) at Kambalda which geologists reckon is a good address as it lies in the Kambalda/Boulder district in WA which is well-known for a large scale open cast gold mine. In these licences, the company is exploring for gold and nickel sulphide.

When nickel prices were under pressure, shortage of capital forced many cash-strapped exploration companies to drop licences. Regency was able to take advantage of this situation and gained six licences near to the Kambalda. The latest exploration effort in Kambalda is due to kick off with a VTEM survey along a 216 line kilometres on a 100 metre spaced lines on a 1000-180 degree orientation to be flown to test an anomaly.

Nickel Laterite

Mambare

The Mambare Plateau in the Oro Province in Papua New Guinea lies 110 kilometres by gravel and sealed road from the nearby town of Kokoda to the deep water port at Oro Bay. Mambare is an immense potential nickel/cobalt project. The deposit forms a 20 by 6 kilometre Mambare Plateau which rises prominently from the surrounding land. The licence comprises of 75 sub-blocks covering 242 square kilometres.

Map showing the thickness of the mineralisation at Mambare based on the results of the recent drilling programme

There was exploration work undertaken in the 1960s which was followed up in 1999 by Anaconda Mining led to the estimation of 628 million tonnes at 0.78% nickel (using a 0.5% cut-off grade) and 109 million tonnes at 1.01% nickel (using a 0.8% cu-off grade) from 158 square kilometre area which represents just 65% of the licence area.  This estimate by Anaconda just confined itself to the limonite material and ignored the saprolite layer beneath. Regency’s consultants have put the potential of the limonite at 200 million tonnes of 1% nickel and 0.1% cobalt and in the saprolites 200 million tonnes of 1.25 – 1.5% nickel; which would equate to 4.75 million tonnes nickel and 200,000 tonnes of cobalt. Whilst volume estimates by respected GPR contractors: 211,000,000 cubic metres of limonitic and ash material and 151,000,000 cubic metres of saprolite material over an area of approximately 22 square kilometres which equates to around 10% of the licence area. In comparison to new laterites mines that have come on stream in recent years and also potential new mines, it would seem that Mambare is shaping up to be not only bigger and also of a higher grade than most of the competition.

Exploration work in 2008/09 saw a 51.2 kilometre ground penetrating radar survey carried out over eleven profiles by Jan C Francke who is an expert in this field. Mr Francke was sufficiently impressed by the results of his work that he favourably compared the potential of Mambare with Onca Puma, Vale’s vast nickel laterite project in Brazil. The company’s 4,000 metre drilling program consisted of 335 holes covering only a small part of the plateau in the South West corner. Drilling in this limited area has led to the identification of two good grade ore bodies separated by the river. The one to the West of the river tested 1.08% and 1.36% nickel and 0.11% cobalt, whilst to the East of the river 1.24% nickel and 0.11% cobalt was found. This drilling programme showed that laterite and saprolite development was greatest on sallower gradients where the right bedrock was present.

Base Metals & Gold

Bundara

Regency holds two exploration licences covering an area of 260 square kilometres. The project lies 120 kilometres southwest of Mackay in central Queensland. Within the boundary of the project area lie a lot of old mines which date from the late 1880’s and the 1960s where copper was mined from a series of epithermal copper-gold occurrences which are located around the edge of a large granodiorite intrusion which is called the Bundarra grandiorite. The feeling is that the old timers were mining the surface expression of what could be a much larger porphyry system.

Porphyry systems are fairly common but they tend to be located at such a depth that they are often uneconomic. The rocks at Bundarra are very old which is a positive point. It has been calculated that 8 kilometres has been eroded off the height of the Himalayas, over that time any potential porphyry lying at depth at Bundarra would have come a lot closer to the surface. Exploration work at Bundara has been assigned an A$1.5 million (£0.75 million) budget to really make some headway.

Results of a radiometric survey at Bundarra, showing the old mines around the edge of the Bundarra grandiorite

Previous geophysics work has been re-interpreted and this work has led to the belief that some of the previous drilling work had not been in the right place as the anomalies had not been drilled properly in the past due to a small oversight. Added to which painstaking work of the team has unearthed the drilling records for holes that were drilled in the 1970s by Geopeko where a line of seven holes encountered intersections of 2.1% and 2.2% copper. Regency will be following these holes up in the coming exploration season and once these drill sites have been founded with the backing of the drill logs means that such data can be incorporated into the company’s own database. Bundarra could become a focus of investor attention over the coming months as Regency chases up significant copper and gold anomalies in this project area.

Mt Stone

Five hundred kilometres North West of Bundara lies the Mt Stone project where the company’s licences cover 200 square kilometres in an area with a known prospectivity for high grade gold. The target here is epithermal gold deposits akin to those at the nearby Pajingo and Wirralie gold mines which both have resources in excess of 500,000 ounces. Significant anomalies have been found at Mt Stone, there has been little follow-up work. Regional drill intercepts off 8 metres at 18.1g/t and 24 metres at 5g/t. Work in 2005 and onwards by the company involved, mapping, sampling and RAB drilling. Mt Stone has been demonstrated to have both gold and alluvial gold. Three years ago, the alluvial gold side of the project was uneconomic but with the price now standing over $1,350 an ounce, the likely operating costs per ounce now appears a lot more reasonable. Given the belated re-rating that many gold stocks have enjoyed over recent months would suggest that such a move into gold by Regency would be well supported by investors.

Investments

Red Rock Resources (20.96%)

Regency floated off Red Rock Resources within months of its own AIM debut. Red Rock was focused on iron ore manganese and uranium. The iron ore interests and manganese project in Australia were put into ASX-listed Jupiter Mines Ltd which has been established as a steel feed platform in partnership with Pallinghurst Resources, which is chaired by Brian Gilbertson who was formerly the Executive Chairman of BHP Billiton. Red Rock holds 85.7 million shares in Jupiter Mines which equated to a 23.2% stake before that company acquired a giant open pit manganese mine at Tshipi in South Africa. Red Rock’s uranium interests were spun-off into ASX-quoted Resource Star Limited which was re-listed in 2010 as a uranium and rare earths vehicle. Red Rock holds 13.6 million shares (26.3%) in Resource Star which has a JORC Inferred Resource of 4.6 million pounds of U3O8 @ 270 parts per million at Livingstonia, Malawi.

In recent months the share price of Red Rock has climbed significantly as investors begin to appreciate the potential value of that company’s gold interests. Red Rock has gold and volcanogenic massive sulphide (VMS) deposits in Kenya and a stake in an underground gold mine in Colombia.

Red Rock owns a 15% stake, with a farm in deal which can take the stake to 60% in the Mid Migori Mining (MMM) company Limited that operates the Migori gold and base metals project in Kenya. MMM holds Special Prospecting Licences 122 and 202 covering 310.5 square kilometres plus an option over a further 320 square kilometres in SPL 236. There is a NI 43:101 resource estimate (2006) of 1.1 million ounces at a 0.25g/t cut-off; and there is a planned database validation with a re-estimate of resource at 1.0g/t cut-off. A resource calculation is in preparation for the tailings (gold, silver, cobalt, copper and zinc) where it is expected that there is the possible recovery of 30,000 ounces of gold. To consolidate the existing resource estimate and investigate previously unexplored areas, Red Rock conducted percussive drilling on the Macaulder tailings and RC drilling on several areas across the licence. Re d Rock made an investment in its joint venture Kansai which has done rather well. The investment was C$460,010 which will now be worth C$10.9 million (£6.7 million). This will change little about the project except that Red Rock will now have a better-funded joint venture partner; and £6.7 million of bonus investment funds.

In Colombia, Red Rock has made a $2 million loan with rights to acquire up to a 51% stake in the El Limon and La Aurora Mines in the Frontino gold trend, which is the oldest gold province in the country. There is a history of sixty year production at El Limon and a gold treatment plant is already in place. Production is expected to raise to over 100 tonnes per day (tpd) by the year-end. Certainly in the first five months of the year the mine produced 108 tonnes of ore and 15.3 kilos (4745 ounces) of gold per month from non-mechanised operations. Lack of parts means that the 150tpd surface plant is not operational. La Aurora lies further south on the same trend with a shaft driven to a depth of 180 metres with infrastructure in place, production is imminent. Latest news is that the target date for the El Limon mine and mill to be operational is still the 30 November and that full gold production is ex pected to proceed as planned by the end of December 2010. In Colombia the objective is to explore for extensions of current veins and look for other properties. The recent funding of Ascot Mining could give rise to a variety of corporate developments to enhance shareholder value.

Oracle Coalfields (10.04%)

On 12th November 2010, the board announced that Regency had taken a 20% strategic stake in PLUS-quoted Oracle Coalfields by investing £1.02 million at 5.5p per share. Since its flotation in 2007, Oracle has made good progress with its coal project in Pakistan and is seeking a move to AIM in the first half of 2011. Through its 80%-owned subsidiary Sindh Carbon Energy Limited, Oracle holds an exploration covering the 66.1 square kilometre Block VI of the Thar Coalfield in Sindh Province in Pakistan which lies something like 320 kilometres from the capital Karachi. Oracle has already defined a JORC Measured Resource of 1,423 million tonnes of lignite in part of the licence area with an average calorific value of 3,537 kcal/kg. As this is lignite, or brown coal, it has a high moisture content of 40% which can be reduced to 14% by drying. The coal in Block VI has a sulphur level of 1.2% and an ash c ontent of 7.5% which low compared to typical lignite coals which makes it suitable for power stations and industry. Some further work is required on site to complete a feasibility study of the proposed coal mine. Oracle has appointed SRK Consultants UK Limited to conduct a bankable feasibility study (BFS) which is timetabled to be completed in 2011. Wardell Armstrong International will be conducting the Environmental and Social Impact Assessment. With the BFS in its possession the management will seek the conversion to a Mining Licence with the goal of beginning mine development and production in 2012 at an initial rate of 2.5 – 3.5 million tonnes. Regency sees this diversification into coal as a major opportunity where the board believes it can add value.

Alba Mineral Resources (14.1%)

A mineral exploration company whose lead project is the Arthrath Nickel-Copper Project in Scotland which has been drill tested in the past by others and is thought to have significant potential. Essentially looks as though it might form a useful quoted shell company which Regency might spin some interests off into sometime in the future.

Strategy for growth

From the beginning, the management at Regency has operated a twin strategy of exploration hand in hand with deal making in order to create value. It would seem that over the coming twelve months there maybe a number of opportunities for the Directors to crystallise more value which as yet is unreflected in the share price.

Firstly, the board is seeking to take advantage of the interest that was generated amongst its competitors in Western Australia when the drilling results of the TI anomaly at Tay Munglinup were announced. The board has now divided the licence into four zones and has developed a plan to optimise the value of each zone which will involve joint venture, disposals and further exploration effort to optimise the value of these licences. A reasonable exploration budget has been assigned for the coming season that could pave the way for a lot more progress here.

Secondly, going forward it is likely that Regency will become a more balanced resource play with a targeted investment in copper exploration leading to a time when the perhaps there will be an equal weighting given to both nickel and copper. It has not gone unnoticed by the board that the copper price has bounced back more strongly than that of nickel; and hence there is scope for adding value in reappraising the company’s copper interest in setting up a well-funded exploration programme at Bundara which is an awfully good address for a copper project. Already the aeromagnetic surveys have generated a compelling graphic which has revealed that the many old mines on Regency’s licence might be on the ring of an old Caldera with grades that suggest a copper porphyry; and within such old rocks it might well be that this structure lies relatively close to the surface. This is what a further A$1.25 million (£750,000) hopes to find out. The team on the ground in Australia in nickel and copper exploration has now been beefed up and what has been created is essentially is the structure for a separately listed company. Such a spin-off would allow a real value to be placed on these exploration interests and it would mean that the exploration budget would no longer needed to be funded by Regency.

Thirdly, moving ahead on Mambare the company plans further drilling work over a wider area on the main plateau. Certainly broad spaced regional testing across the full plateau would allow a JORC compliant resource to be calculated. This additional drilling work would also include infill drilling between the completed lines as well as deeper drilling in order to really assess the extent of the saprolite layer. The real key to monetising the value of Mambare is to crack the processing technology. The shortage of nickel has led to the development in recent decades of lateritic nickels which are far more difficult and more expensive to process. Certainly the big interest in lateritic nickel has only really been sparked of by higher nickel prices.  In September 2009, the company announce the signing of a Memorandum of Understanding with Direct Nickel Pty Ltd (DNi) concerning the Mambare nickel-cobalt project. This move led to a joint venture agreement whereby Regency will sell its 100% interest in Mambare into a joint venture company (JVCo) with DNi. JVCo will hold the licence for the production of up to 60,000 tonnes per annum (tpa) nickel in concentrate using the DNi technology plus the rights to a second licence for an approved second project of up to 30,000 tpa. The partners intend to list JVCo to allow the financing of resource delineation and the piloting of the DNi Process. Such a move would allow a valuation to be placed on Mambare. On 19 November 2010, the company announced an agreement to invest in DNi and for a joint financing with DNi on Mambare. Regency will be investing US$6.0 million into DNi in two instalments by issuing new shares (based on a pre-new money valuation of US$75 million for DNi). Regency and DNi will each be paying £1 million for the next stage of the exploration which will begin immediately and include a £1.5 million drilling p rogramme.

Lastly, all the above moves could see the Australian interests and Mamabare parcelled off into their own quoted vehicle which might leave Regency with the budget to back a move into gold that might be well-received by the investing public. The company owns the Mount Stone property in Queensland which has both gold and alluvial gold. With price of gold now standing at in excess of $1,350 an ounce, the alluvial gold interest would now be strongly economic. It does look likely that the Board may soon re-evaluate the opportunity here.

Risks and Opportunities

Risks

Geological risks –  There are a series of  technical factors concerning the amount of understanding of the geology of the project area, the mineralisation style being targeted, distribution and magnitude of the indicators that have been identified in geochemistry and geophysical work.

Technology risks – DNi technology would need to be proved with pilot plant such a technology became the preferred process at Mambare if and when this nickel project is seeking debt financing.

Nickel laterites – The development of lateritic nickel deposits only just makes financial sense at the current price per tonne. Certainly this is due to the costs of the capital expenditure with Weda Bay’s Halmahera Island lateritic nickel project requiring a $4.6 billion nickel smelter. Techniques used mostly to date are in the main some form of high pressure acid leach which require great heat or pressure or are highly corrosive which requires the use of expensive equipment. Regency is hopefully that DNi’s technology which seems reliant on ambient pressure will avoid such excessively high capex.

Capital shortage – Mineral resources exploration companies need to regularly raise capital to fund their future work programmes. In the aftermath of the credit crunch there has been a shortage of capital for smaller quoted companies which has led to incoming investors demanding substantial discount to fund  mineral exploration businesses which has undermined the share price.

Australian resources sector – The concerns about the new proposed Resources Super Profits Tax has many suggesting that such a move would make Australia an expensive place for operating a mine and so would act as a disincentive to investors and the mining industry alike.

Opportunities

Spinning off interests – The market is quite buoyant for small resource company shares and so it maybe that Regency will not only be able to launch both the JVCo and Regency Mines Australia at reasonable valuations.

Nickel – Two thirds of nickel goes into the production of stainless steel and the increasing wealth of the growing population in the BRIC countries seems set to strongly underpin future demand for nickel; this is because consumer electrical products use a lot of stainless steel. A leading provider of information on the international metals and minerals markets called Roskill Information Services at the beginning of the year in its outlook to 2014 reckoned that the average nickel price this year would be $20,000 per tonne with an average price increasing to $22,000. between 2010-2012.

Copper – India has begun to show the sort of growth rates that China is famous for and economic growth creates a buoyant demand for copper. This is because a lot of copper is necessary for building power stations, putting in power infrastructure, rolling railway transportation systems which are the basic building blocks of a growing economy.

Gold – The debasement of paper currencies have helped propelled gold to an all-time high. The house view is that there remains sufficient economic uncertainty and a material risk of inflation around the world which will push gold significantly higher. Certainly despite the recent sustained rise, in real terms gold is still $700 below its last bull market peak.

Management

Chairman – Andrew Bell – In the 1970s, Bell began his career as a natural resources analyst at Morgan Grenfell & Co. His business experience covers periods in fund management work at leading financial institutions, international corporate finance work as well as private equity. He is also the Chairman of AIM-quoted Red Rock Resources and Greatland Gold, along with being a Director ASX-listed Jupiter Mines Ltd and Resource Star Ltd.

Director – Edmund Bugnosen –  In 1973, Bugnosen gained a BSC in Mining Engineering from the Adamson University in Manila and went onto become  a lecturer and Head of the Mining Department at St Louis University, Manila. He is a Member of the Institution of Materials, Mineral and Mining, a Life Member of the Philippine Society of Mining Engineers and a Member of the Philippine Institute of Mining, Metallurgy and Geological Engineers. After a period working for the Mines and Geoscience Bureau in the Philippines, Bugnosen has since 1989 worked as a consultant based in the UK for a number of NGOs, aid/development agencies and governments including: The UN, UNIDO, the World Bank, the EU, the ILO, DFID and the BGS as well as for mining companies. In 1995-6 he served as Senior Mining Engineer in the Department of Mines and Petroleum, Papua New Guinea. He has published and given papers on mining la w and regulation, small scale gold mining and environmental, social and development issues.

Non-Executive Director – Julian Lee – In 1996, Lee qualified as an accountant with Deloitte & Touche. He went on to provide corporate finance services to small companies for PBTCCF Limited and worked as a venture capitalist for Elderstreet Investment Ltd and Fifth Avenue Capital Inc. Lee I the founder and Managing Director of Melee Venture Management Ltd, a private equity company investing principally in the technology sector, Managing Director of Wound Solutions Ltd and a Director of International Mining, Research and Development Ltd, MSL Ltd and Wavionix Ltd.

Non-Executive Director – John Watkins – Watkins is a Charted Accountant and a former partner of Ernst & Young and Neville Russell. He is a Director of Starvest Plc (which is a substantial investor in Regency Mines), Red Rock Resources Plc and Greatland Gold Plc. He is the Chairman of PLUS-quoted Lisungwe Plc and Equity Resources Plc.

Significant shareholders

Shareholder	Holding	Percentage
Bellmin Limited	114,442,285	22.6%
Starvest plc	33,350,000	6.6%
Barclayshare Nominees Limited	25,299,183	5.0%
HSDL Nominees Limited	20,423,415	4.0%
City Equities (Nominees) Limited	19,557,000	3.8%
Lewis Charles Nominees Limited	17,641,667	3.5%
Sunvest Corporation Limited	16,273,332	3.2%
Credit Suisse Client Nominees Limited	15,000,000	3.0%

Financial results

Mineral exploration companies normally have no earnings but Regency is an exception to that rule as the management seeks to improve shareholder value by deal making which has generated profits from associates. The last set of results were the interim figures for the six months to 31st December 2009 which showed that the company made a profit of £634,001 on profits in associates which reflects the associated profit from Regency’s big shareholding in Red Rock Resources which allowed Regency to report a pre-tax profit of £388,164, compared with a loss of £1.41 million in the comparable period in 2008. Certainly, little exploration effort in the first half saw the exploration expenses shrink from £510,232 to £5,729; whilst administration cost rose by 70% to £256,436 which probably reflects growing the organisational structure in Australia necessary if plans to spin off the Regency Mines Australasia are to happen. Overall the operating loss more than halved, dropping from £677,007 to £242,734. The share of profit or loss in associates was £634,001 compared to a loss of £638,825 in 2008. For the period, basic and diluted earnings per share came out at 0.10p against a loss of 0.60p in the first half of the previous year.

Year to 30th June £	2009	2008
Revenue
Sales of investments	131,256	–
Cost of sales	(146,799)	–
Management services	58,046	34,971
Gross profit	42,503	34,971
Exploration expenses	(132,691)	(117,661)
Administrative expenses	(365,556)	(366,668)
Currency (loss)/gain	(48)	25,271
Operating (loss)	(455,792)	(424,087)
Share of operating losses in associates	(271,327)	(64,323)
Interest receivable	10,988	16,819
Interest payable	(791)	(369)
Loss on ordinary activities before taxation	(716,922)	(471,960)
Tax	–	6,250
Loss on ordinary activities after tax	(716,922)	(465,710)
Loss per share – basic and diluted	(0.27p)	(0.24p)

Valuation and Conclusion

In ascertaining a target price for Regency, we have employed a sum-of-the-parts valuation which takes account of:  the Australian exploration business, the Mambare joint venture plus the holdings in Red Rock Resources, Oracle Coalfields and Alba Minerals.

Mambare has the potential to be a large scale nickel laterite project on a worldwide scale as the plateau there at 20×6 kilometres and dwarfs the better-known Wowo Gap Plateau which measures 7×2 kilometres. Using the resource potential that was determined by Regency’s consultants of the limonite at 200 million tonnes of 1% nickel and 0.1% cobalt and in the saprolites 200 million tonnes of 1.25 – 1.5% nickel; that equates to 4.75 million tonnes nickel and 200,000 tonnes of cobalt. Looking at the two comparisons below, the Mambare project could be valued at between pre-JORC £8.3 million and £24.4 million when the resource is JORC compliant. We have used the higher figure in our analysis as the company’s plan seems to be to move swiftly to defining a JORC compliant resource at Mambare. A value has been assigned to the DNi technology within the JVCo of US$ 25 million (£15.6 million) which represents a third of the pre-new money valuation of DNi (which was US$75 million) making a total valuation of £40.0 million.

Sum of the parts valuation of Regency Mines

Interest	Valuation	Per share
Red Rock Resources Holding (20.96%)	£22.7m	4.47p
JVCo (Mambare nickel/cobalt project 50%)	£20.0m	3.94p
Regency Mines Australia	£4.0m	0.79p
Oracle Coalfields (10.04%)	£1.2m	0.24p
Alba Mineral Resources (14.1%)	£0.1m	0.02p
Total	£48.0m	9.46p

We recommend the shares as a Speculative Buy at 7.9p with a target price of 9.5p per share. It must be pointed out that for every 1p increase in the share price of Red Rock Resources (16p today) would add £1.42 million to our valuation of Regency Mines and 0.28p to our 9.5p target price.

Key Data
EPIC	RGM
Share Price	7.9p
Spread	7.8p – 8p
Total no of Shares	507,351,777
Market Cap	£40.08 million
12 Month Range	1.1p – 7.9p
Market	AIM
Website	www.regency-mines.com
Sector	Mining
Contact	Andrew Bell – 020 7402 4580