RED Details

This report is an updated version of the report published on 19 April 2022 at 2:18 PM GMT.

Key Positives:

Decline in Cash Cycle Days (64.6 Days in 1HFY22 Vs 83.5 Days in 1HFY21), Low Debt-to-Equity Ratio (0.10x in 1HFY22 Vs 0.13x of Industry Median)

Key Negatives:

Negative ROE (-12.3% in 1HFY22), Negative Gross Margin (-24.8% in 1HFY22)

Key Investment Risks:

COVID-19 Led Disruption, Regulatory Risk, Commodity Price Risk, etc. 

Recommencement of Underground Mining: Red 5 Limited (ASX: RED) is a gold mining and production company with high quality assets in Western Australia’s Eastern Goldfields, majorly holding Darlot Gold Mine, King of the Hills, and Mapawa Gold Project. 

• Recently, RED announced that its first gold production at King of the Hills Gold Project (KOTH - 100%-owned 2.4Moz, 16-year life-of-mine) in Western Australia is on track for the current quarter.
• Notably, During March 2022, the project has already completed its key construction and operational readiness milestones.
  

A Quick Look at 1HFY22 Key Results: For the six months ending 31 December 2021, RED delivered total gold production from Darlot of 32,898 ounces, and gold sales of 31,761 ounces. Total revenues and net loss after tax stood at $80.07 million and $5.84 million, respectively in 1HFY22, reflecting the impact of ounces produced and sold owing to lower average head grade related with mining at the Darlot Gold Mine.

Operational Highlights; Analysis by Kalkine Group 

Key Risks: The company is exposed to several operational risks that may materially impact operations or results of the company’s businesses. Travel restrictions and lockdowns due to COVID-19 might impact its operations by delaying the projects and thereby affecting its financial position. 

Outlook: The company targets to transform Darlot to a satellite mine of KOTH by June 2022 quarter. In addition, its Redpath Mine development program also remains on track and anticipates establishing its new mine areas in the days ahead, which will reduce reliance on remnant mining. 

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

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of RED gave a positive return of ~69.81% in the past six months. The stock has a 52-weeks’ high and low levels of $0.47 - $0.16, respectively. The stock has a resistance and support of $0.475 and $0.397, respectively. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price with a downside of high single-digit (in percentage terms). The company might trade at a slight discount to its peers, considering the continued impact of COVID-19 restrictions and regulatory risks on project approvals, fall in revenues, and high debt levels. For this purpose of valuation, a few peers like Silver Lake Resources Ltd (ASX: SLR), AngloGold Ashanti Ltd (ASX: AGG), Gold Road Resources Ltd (ASX: GOR) and others have been considered. Given the current trading levels, rally in share price in past months, downside indicated by valuation, and key risks associated with the businesses, we suggest investors to book profits and give a “Sell” recommendation on the stock at the current market price of $0.455, as of 19 April 2022, 10:40 AM (GMT+10), Sydney, Eastern Australia.

RED Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Exit decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings.

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