Despite undertaking an exhaustive approval process with various NSW State and Federal Government departments, the development of the McPhillamys project has been dealt a fatal blow with an 11th hour Declaration of Protection by the Federal Minister for Environment and Water, which now requires a new location for the tailings dam. RRL has noted that this decision impacts the viability of the McPhillamys project, and we expect the A$190m carrying value is likely to be written down to zero. We had not included a development of McPhillamys in our production and earnings forecasts for RRL. However, we lower our price target by 9% to A$2.10 due to the reduction of the resource option value ascribed to the project. We expect RRL to produce between 360-375kozpa over the next five years. This should generate ~A$1.0b in free cash flow using Argonaut gold price forecasts and ~A$1.7b at spot prices and we reiterate our BUY rating on the stock.
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