Company Overview: Red 5 Limited (ASX: RED) is an Australia-based gold production company with established mining projects located in the Eastern Goldfields of Western Australia and the Philippines. With its high-quality assets, the company seeks to become a successful multi-operational mineral resource company, delivering strong and profitable gold production in a safe and environmentally responsible manner. The company owns and operates the Darlot Gold Mine and King of the Hills (KOTH) Gold Project, both located in Western Australia. 


RED Details
 
 

 
Establishing A Sustainable and Profitable Long-Term Production Profile: Red 5 Limited (ASX: RED) is an Australia-based gold producer that owns and operates the Darlot Gold Mine and the King of the Hills (KOTH) Gold Project, both located in Western Australia. When these mines were acquired by RED, both of these had less than six months of Ore Reserves, however, the company has been able to execute successful mining programs with limited high-grade Reserves. As a result of which, the life of both mines has been progressively expanded.

Recently in April 2020, the company completed the acquisition of the Great Western Project, in line with the company’s ongoing strategy to increase Resources and extend mine life at the Darlot Gold Mining Operation. In the last five years, the company has witnessed significant improvement in its top-line as well as bottom-line. During 2015-2019, the company’s revenue and gross profit increased at a CAGR of 53.43% and 40.4%, respectively. Over the same period, the company’s net losses reduced from $58.9 million in 2015 to $3.2 million in 2019. 


Revenue and Net loss Trend (Source: Refinitiv, Thomson Reuters)

Looking ahead, the company is focused on establishing a sustainable and profitable long-term production profile for the Darlot Mining Hub. The company has recently announced a transitional production strategy based on the inclusion of the Great Western satellite mine into the Darlot Mining Hub mine plan for FY21, focused on establishing two independent long-life production hubs in the Eastern Goldfields. The company is confident that the recently implemented measures will stabilise its production and improve predictability to put it on track to achieve the FY21 forecasts.

FY19 Results’ Highlights: During the financial year 2019 or FY19, the combined Darlot and KOTH gold production stood at 102,012oz with gold sales of 98,240oz, resulting in a sales revenue of $153.51 million. The company maintained a strong exploration program over the course of the year, leading to the identification of an outstanding bulk mining opportunity at KOTH. 

For the year, the company reported gross profit from operations of $11.34 million and net loss after income tax of $3.03 million. The net cash flow from operating activities stood at $23.18 million in FY19. 


FY19 Results (Source: Company Reports)

H1FY20 Highlights: During H1FY20, the combined gold production from Darlot and King of the Hills stood at 51,995oz with gold sales of 52,664oz, generating sales revenue of $105.31 million. For the half-year period, the company reported gross profit from operations of $24.14 million. The steady-state production from both Darlot and King of the Hills (KOTH) underground mine allowed the company to post an $8.24 million net profit after income tax for the half-year.

During H1FY20, the company invested $26.24 million in exploration and development activities, with the primary focus being on the evaluation of a stand-alone bulk mining operation at KOTH. This will provides Red 5 Limited with a unique foundation from which to continue to deliver on its medium and long-term growth strategy. Net cash outflows used in investing activities for the period were $26.241 million in H1FY20.
 

H1FY20 Results (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 40.23% of the total shareholding. Franklin Advisers, Inc. and Ruffer LLP hold maximum interest in the company at 11.97% and 5.77%, respectively.


Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

A Quick look at Key Ratios: For H1FY20, the company’s gross margin and net margin stood at 20.1% and 7.8%, respectively, both higher than the margins reported in the previous corresponding period, demonstrating the company’s improving profitability. The company reported ROE of 9.3%, higher than the industry median of 4.7%. The company has an asset to equity ratio of 2.21x, higher than the industry median of 1.70x.


Key Metrics (Source: Refinitiv, Thomson Reuters)

March Quarter Update: During the March 2020 quarter, the company reported production of 20,077oz from Eastern Goldfields operations, in-line with revised guidance. For the quarter, the company reported gold sales of 19,360 ounces with All-in sustaining costs (AISC) of A$1,926 per ounce of gold. One of the major highlights during the March quarter was the expansion of KOTH Mineral Resource to 4.1Moz and Darlot Mineral Resource to 1.2Moz. At the end of the March quarter, the company had cash on hand and bullion of $14.11 million.

June Quarter Update: For the June 2020 quarter, the company reported preliminary group gold production of 20,707 ounces, compared with guidance of 26,000 – 30,000oz. The lower production was primarily a result of a 10-day mechanical shutdown at the Darlot Mill and lower-than-forecast average grades due to mine dilution. At the end of the June quarter, the company had cash and bullion on hand of $122.3 million.

While the company is disappointed that Darlot production has again been impacted in the short term, it is confident that the recently implemented measures will stabilise production and improve predictability to put RED on track to achieve its FY21 forecast.

Recent Developments:

1. $125 Million Capital Raising: On 13 May 2020, the company completed the second tranche of the $125 million capital raising which will underpin the next phase of the Company’s long-term growth strategy to become a multi-asset, mid-tier Australian gold producer. Around $20 million of the proceeds from the capital raising has already been allocated for ongoing exploration at Darlot and KOTH. Given the current uncertainty in global markets resulting from the COVID-19 pandemic, the company’s ability to complete this significant capital raising reflects the market’s confidence in the company’s growth plans.

2. Acquisition of Great Western Project: In April 2020, the company completed the acquisition of the Great Western Project, in-line with the company’s ongoing strategy to increase Resources and extend mine life at the Darlot Gold Mining Operation. The company is now focussed on commencing open-pit mining from the December Quarter 2020 and progressively scaling down underground ore production at KOTH in the second half of 2020 which will coincide with the planned start of site construction for the proposed bulk mining operation at KOTH. The Darlot mill will be fed by three mines in FY21.

FY21 Mine Contained Gold Contribution (Source: Company Reports)

Secured Adjacent Tenements from Kingwest Resources Limited: As part of the Darlot Mining Hub strategy, the company has secured adjacent tenements from Kingwest Resources Limited which complements the extensive tenement package surrounding the Darlot Gold Mine, including Ockerburry, Great Western and Cables and Mission.

COVID-19 Update: Till now, the company’s production has remained unimpacted by the COVID-19 global pandemic. However, the situation is evolving, and there remain some uncertainty and risk relating to potential impacts at Red 5’s operations. In response to COVID-19, the company has implemented a wide-ranging series of measures and new work protocols designed to protect the health and well-being of its workforce and business operations.

What to expect: The company recently announced a transitional production strategy focused on establishing two independent long-life production hubs in the Eastern Goldfields. This will serve as the foundation for the company to become a significant mid-tier Australian gold producer. The company is looking forward to the Final Feasibility Study for the proposed stand-alone integrated bulk open pit and underground mining and processing operation at the King of the Hills Gold Project. This Final Feasibility Study is expected to be completed in the September quarter.

As per the recent update, the company expects its FY20 production to be around ~93,000oz. With appropriate capital and maintenance budget, the company is well placed to have stable production at Darlot Mill in FY21. In FY21, the gold recovered is expected to be between 90,000 – 98,000oz at an AISC of A$1,830 – A$2,030 per ounce. Around 22,500m of underground exploration drilling has already been planned for FY21. 

Key Risks: The company is exposed to currency risk on investments and purchases that are denominated in a currency other than Australian Dollar (A$) and Philippine Pesos. Further, the company is also exposed to the risk of fluctuations in gold prices which could significantly affect the revenues of the company. Like several other gold production companies, Red 5 Limited is also exposed to the risks of COVID-19 which could impact the operations of the business.


Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)


Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

P/E Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of RED has corrected by 37.5% in the last six months and is trading near to its 52 weeks low price of $0.175, offering a decent opportunity for accumulation. We have valued the stock using price to earnings multiple based illustrative relative valuation method and have arrived at a target price of lower double-digit upside (in % terms). For the purpose, we have taken peers like Ramelius Resources Ltd (ASX: RMS), Bellevue Gold Ltd (ASX: BGL), Resolute Mining Ltd (ASX: RSG), etc. Considering the recent capital raising, acquisition of Great Western Project, its recently announced transitional production strategy, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $0.230, up by 2.222% on 7 July 2020. 

 
RED Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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