Red 5 Limited (ASX: RED)

RED deals into gold production with high-quality assets in Western Australia’s Eastern Goldfields, majorly holding Darlot Gold Mine, King of the Hills, and Mapawa Gold Project. As of 18^th January 2022, its market capitalisation stood at AUD 647.99 million.

Operational Updates: As per its 8^th December 2021, RED updated that its 100%-owned 2.4 Moz, 16-year-life of mine King of the hills (KOTH) for its first gold has been on schedule for June quarter 2022 and underbudget. As per is quarterly update, Darlot will become an additional medium-term, high grade feed source for KOTH processing plant from June Quarter FY22. It is expecting FY22 production at Darlot in the range of ~62,000-72,000 ounces of gold at an AISC of ~$2,300-~$2,400 per ounce (including mine development cost).

1QFY22 Updates & Top and Bottom Line: In its quarterly update on 19^th October 2021, RED recorded 16,377 ounces production and 15,922 ounces of sales of gold for its 1QFY22 at Western Australia Gold Operations. It closed the first quarter with a cash balance of ~$67.5 million at the end of 30^th September 2021 and a debt of ~$37.7 million.

• Revenue Details: In FY21, the company sold a total gold of 75,907 ounces and reported total revenues of $173.36 million, which was ~13% lower than last year.
• Profitability Status: RED reported net loss after tax of ~$43.25 million, compared to a profit of $4.54 million reported in FY20.

Technical Analysis:  On the weekly chart, RED stock price witnessed a breakout of the falling trendline support at AUD 0.267 level and sustaining above the breakout level. Moreover, the prices are trading above the trend-following indicators 21-period SMA and 50-period SMA, indicating a positive momentum. Moreover, the momentum oscillator RSI (14-period) is trading at ~56.60 level, indicating bullish momentum. An important support level for the stock, is placed at AUD 0.25 while the key resistance level is placed at AUD 0.33.

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

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 has been valued using EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). For valuation, peers like Silver Lake Resources Ltd (ASX: SLR), Perseus Mining Ltd (ASX: PRU), Bellevue Gold Ltd (ASX: BGL), and others have been considered. The company can trade at a slight discount to its peers, considering its risks associated with currency fluctuations and government regularity risks and dependency on the labour market. After considering the quarterly results, KOTH project update, its expected maiden sales at KOTH and current trading levels, the investors with a high-risk appetite might consider a ‘Speculative Buy’ position, while incorporating the support and resistance in analysing the investment opportunity. The stock was analysed as per the current market price of $0.275, as of 18^th January 2022, 01:30 PM (GMT+10), Sydney, Eastern Australia. However, the risk levels are extremely high considering the KOTH project progress, further production, price fluctuations and saleability of gold commodity.

Weekly Technical Chart – RED

Source: REFINITIV

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

Note 2: Investment decisions should be made depending on the investors’ appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.  

The Green colour line reflects the 21-period moving average. SMA helps to identify existing price trend. If the prices are trading above the 21-period, then it shows prices are currently trading in a bullish trend, (Vice – Versa).

The Blue colour line reflects the 50-period moving average. SMA helps to identify existing price trend. If the prices are trading above the 50-period, then it shows prices are currently trading in a bullish trend, (Vice – Versa).

The Yellow colour line reflects the Trendline, which shows whether the direction of the scrip is upwards or downwards.

The Purple colour line in the chart’s lower segment reflects the Relative Strength Index (14-Period) which indicates price momentum and signals momentum in trend. A reading of 70 or above suggests overbought status while a reading of 30 or below suggests an oversold status.

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