Company Overview: Red 5 Limited (ASX: RED) is an Australian gold producer with high-quality assets in Western Australia’s eastern goldfields. The company has two gold mines namely, Darlot Gold Mine and King of the Hills, located in one of the World’s most attractive gold regions. Through its Philippine-affiliated company, Greenstone Resources Corporation, RED also holds interests in Mapawa Gold Project and Siana Gold Project, both located in the Philippines. The company seeks to become a multi-asset company with a diversified, long-life production profile.

RED Details

Operating High-Quality Assets: Red 5 Limited (ASX: RED) is an Australian gold production company with high-quality assets located in Western Australia and the Philippines. The company owns and operates the Darlot Gold Mine and King of the Hills (KOTH) Gold Project, both located in attractive gold regions of Western Australia. The solid and growing production base at the Darlot and King of the Hills (KOTH) gold mines coupled with a rapidly evolving bulk mining opportunity at KOTH establishes Red 5 Limited as a producer with a significant upside. Over the last five years, the company has witnessed significant improvement in its top-line and bottom-line. From 2015 to 2019, the company’s total revenue has increased at a CAGR of 53.4%. Over the same period, the company net income has also improved as it has risen from the net loss of $58.9 million in 2015 to a net loss of only $3.2 million in 2019.

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

Amid Covid-19 pandemic, the company has continued its mining operations at both Darlot and King of the Hills mines with no material impact reported so far on the operational performance, demonstrating the resilience of the company’s operations. Moving forward, the company will continue to work towards its broader long-term vision of establishing two independent long-life production hubs in the Eastern Goldfields in order to build itself into the next significant mid-tier gold producer on the ASX. In the financial year 2021 or FY21, the company is focused on establishing the Darlot Mining Hub as an independent mining operation, and it intends to ramp-up exploration in the region surrounding Darlot, where it has gathered a strategic and highly prospective landholding.

FY19 Result Highlights: During the financial year 2019 or FY19, the company delivered steady-state gold production from its Eastern Goldfields gold operations. The combined Darlot and KOTH gold production stood at 102,012oz with gold sales of 98,240oz, resulting in a gross profit from operations of $11.34 million. For the period, the company reported a net loss after tax of $3.03 million, an improvement over the loss after tax of $11.93 million reported in the previous year.

In FY19, the company saw the successful ramp-up of production at the Darlot and King of the Hills (KOTH) gold mines in Western Australia while making significant progress in advancing the opportunity for largescale bulk mining at KOTH.

Summary of Key Production Statistics (Source: Company Reports)

H1FY20 Result Highlights: In the first half of FY20, the combined gold production from Darlot and King of the Hills stood at 51,995oz with gold sales of 52,664oz. For the period, the company reported sales revenue of $105.31 million and net profit after income tax of $8.24 million. During the period, 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.

H1FY20 Key Production Statistics (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 41.8% of the total shareholding. Franklin Advisers, Inc. and Ruffer LLP hold maximum interest in the company at 11.97% and 5.76%, 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 has an Asset to equity ratio of 2.21x, lower than the industry median of 1.70x. The company reported ROE of 9.3%, higher than the industry median of 5.3%.

Key Metrics (Source: Refinitiv, Thomson Reuters)

March 2020 Quarter Update: For March 2020 Quarter, the company reported total gold production of 20,077 ounces with gold sales of 19,360 ounces at an AISC of A$1,926 per ounce of gold sold. During the quarter, the company observed short-term crusher and ball mill performance issues at the Darlot Gold Mine. Further, the company also saw lower grades than planned at KOTH underground mine which impacted the overall production.  Over the quarter, the company delivered upgraded Mineral Resource estimates for both of its mines at eastern goldfield operations. Further, the company made significant progress with the King of the Hills Project Final Feasibility Study.

Completing $125 Million Placement: In May 2020, the company completed a $125 million share placement to sophisticated and professional investors. It is worth noting that the Placement received significant interest from both existing shareholders and new Australian and overseas institutional investors, reflecting the market’s confidence in the company’s future growth. The capital raising significantly de-risked the company’s funding requirements at KOTH project and strengthened its balance sheet.

Acquisition of Cables and Mission Gold Deposits: On 22 May 2020, the company announced that it has exercised its Option to complete the acquisition of the Cables and Mission gold deposits located around 10 kilometre north of the Darlot Gold Mine. This acquisition is in-line with RED’s strategy of expanding its Mineral Resource base for the Darlot gold processing plant as part of its Darlot Mining Hub Strategy. Recently, the company also secured adjacent tenements from Kingwest Resources Limited.

Acquisition of Great Western Project:  In April 2020, the company completed the acquisition of 100% interest in the Great Western Project, comprising Mining Lease M37/54. To acquire this project, the company has exercised an Option Agreement and accordingly has executed a Sale and Purchase Agreement (SPA) with the tenement holder, Terrain Minerals Ltd. As a purchase consideration, the company has issued $2.2 million worth of shares in Red 5 to Terrain Minerals Ltd.

June 2020 Quarter Update: For the June 2020 quarter, the company reported gold production of 20,707 ounces and gold sales of 20,929 ounces. Over the quarter, the company implemented operational changes which improved the company’s mine dilution performance and increased confidence in the long-term stability and profitability of the Darlot mining operations. During the quarter, the company made solid progress at KOTH with the Final Feasibility Study, which is now entering its final stages and is on track for completion in the September 2020 Quarter. At the end of the June quarter, the company had cash and cash equivalents of $122.3 million and total outstanding debt of $12.0 million.

Contributions from Darlot and KOTH in June Quarter (Source: Company Reports)

Transitional production strategy: Towards the end of the June 2020 Quarter, the company introduced a transitional production strategy, based on the inclusion of the recently acquired Great Western satellite mine into the Darlot Mining Hub mine plan. The transitional production strategy is focused on establishing a profitable and sustainable long-term production profile for the Darlot Mining Hub as an independent production centre operating in parallel with the proposed stand-alone bulk mining operation at KOTH.

Key Risks: The company is exposed to the risks related to the changes in economic and market conditions, changes in the regulatory environment, delays or changes in project development, fluctuations in metals prices and exchange rates. Like several other gold production companies, Red 5 Limited is also exposed to the risks associated with the extent and duration of Covid-19.

What to expect: For FY20, the company reported total production of 92,779oz with total gold sales of 92,953oz at an AISC of $1,798 per ounce of gold sold. Going forward, the company will continue to work towards its broader long-term vision of establishing two independent long-life production hubs in the Eastern Goldfields of Western Australia. The operational measures implemented in the June quarter coupled with the new transitional production strategy are expected to put RED in a strong position to deliver on its cost and production targets.

As KOTH Final Feasibility Study is close to getting completed, the company is now focused on establishing the Darlot Mining Hub as an independent mining operation. Further, the company intends to ramp-up exploration in the region surrounding Darlot, where it has gathered a strategic and highly prospective landholding. The company expects the Great Western to start mining in Dec 2020 Quarter.

For FY21, the company expects its gold production from the Darlot Mining Hub to be between 90,000 – 98,000oz at an AISC of A$1,830 – $2,030 per ounce. In FY21, the Darlot mill will receive a contribution from three mines (refer below image).

FY21 Guidance Showing contribution of contained ounces by Mine (Source: Company Reports)

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

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

Stock Recommendation: Over the last three months, the stock of RED has provided a return of 33.33% to its shareholders. The stock is currently trading slightly below the average of its 52-week trading range.  We have valued the stock using an EV/Sales based illustrative relative valuation method and have arrived at a target price with lower double-digit upside (in % terms). For the purpose, we have taken peers like Ramelius Resources Ltd (ASX: RMS), West African Resources Ltd (ASX: WAF), Perseus Mining Ltd (ASX: PRU), etc. Considering the company’s decent and growing production base at Western Australia’s eastern goldfields, its recently introduced transitional production strategy, FY21 production guidance and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $0.260 on 4 August 2020.  

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

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