Red 5 Limited

RED Details

Change of Director’s Interest: Red 5 Limited (ASX: RED) engages in the exploration, production and, mining of gold deposits and mineral properties in the Philippines and Australia. Recently, the company’s director, Mark James Williams, acquired 2,814,565 ordinary shares of the company via vesting of unlisted 2021 Performance Rights issued under the Red 5 Limited Rights Plan.

Progress in the KOTH project: The company has made significant progress and completed 50% of the gold project at King of the Hills (KOTH) in Western Australia. Further, the project is progressing to receive the first gold in the June 2022 quarter.

Q4FY21 and FY21 Financial Performance:

• The company has recorded a full-year production of 76,104 ounces and total sales of 75,907 ounces at an AISC of A$2,273 per ounce of gold sold, which is in the range of FY21 company guidance.
• The June quarter FY21 gold production was 15,251 ounces, a decline from 19,047 ounces in March quarter FY21. Moreover, the gold sales stood at 14,552 ounces in Q4FY21 against 19,011 ounces in Q3FY21.
• The company has spent $39.1 million on construction activities at KOTH.
• The company’s cash on hand and bullion stood at $49.8 million as of June 2021.

Revenue Trend (Source: Analysis by Kalkine Group)

Key Risks:

• Geological Risk: The company is exposed to geological risk where it needs to have a regular quality and quantity check from a geologist. Therefore, any negative report could impact its operations.
• Impact of COVID-19 pandemic: The shortage of skilled labour caused by the COVID-19 pandemic has impacted the company’s operations.

Outlook:

• The company has guided FY22 Darlot production in the range of 62,000oz – 72,000oz at an AISC of A$2,300 - A$2,400 per ounce, and additionally, it has targeted to reduce Darlot’s AISC to between A$1,700 – A$1,900 per ounce in FY23.
• The company has evaluated opportunities for enhancing the life of the Darlot Operation that includes accelerating mine development to access future resource areas.
• RED has been advised to provide production and cost guidance for FY2022 during the September 2021 Quarter.

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: Recently, the company has signed an abiding agreement with TVI Resource Development (Phils.) Inc. (TVIRD), to divest its interests in Philippine company Greenstone Resources Corporation (GRC) that holds the Siana Gold Project and the Mapawa Gold Project. The stock of RED is trading below its average 52-weeks' levels of $0.155-$0.366. The stock of RED gave a positive return of ~12.20% in the past three months and a negative return of ~26.13% in the past nine months. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount to its peers’ average EV/Sales (NTM trading multiple), considering the uncertainty over COVID-19 impact and lower gross margin. For the purpose of valuation, peers such as Ramelius Resources Ltd (ASX: RMS), Regis Resources Ltd (ASX: RRL), St Barbara Ltd (ASX: SBM) have been considered. Considering the current trading levels, indicative upside in valuation, decent balance sheet, optimistic outlook and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.180, up by ~2.857% as on 23 August 2021.

RED Daily Technical Chart, Data Source: REFINITIV 

Southern Gold Limited

SAU Details

Change in Leadership: Southern Gold Limited (ASX: SAU) involves exploration, production of gold, silver, other mineral deposits. The company has recently announced the departure of Mr. Simon Mitchell, Managing Director, on 29 October 2021

Q4FY21 (June 2021 Quarter) Financial Performance:

• During the quarter, the company has completed the sale of the Gubong and Kochang Joint Venture interest.
• During the period, the company has completed rock sampling with a peak assay of 42.7g/t Ag in the Dokcheon Project and 2.36g/t Au in Yeongdong District.
• The company has reported a total net cash outflow of $1.03 million, including net cash outflows from Operating and Investing activities of $1.01 million.
• The cash position of the company stood at $7.99 million as of 30 June 2021.

Revenue Trend (Source: Analysis by Kalkine Group)

Key Risks:

• Impact of COVID-19 pandemic- Low demand and economic slowdown caused by the COVID-19 pandemic could impact the company’s operations.
• Fluctuations in Gold Prices: The company is exposed to the risks related to the fluctuations in the price of gold.

Outlook: The company focuses on future drilling targets in South Korea in 5 different project areas, including Deokon Project, Geum Mar Project, Dream Project, Dokcheon Project, and Yeongdong District.

Stock Recommendation: The stock of SAU is trading below its average 52-weeks' levels of $0.061-$0.160. The stock of SAU gave a positive return of ~6.349% in the past one month and a negative return of ~39.09% in the past nine months. On a TTM basis, the stock of SAU is trading at a Price/Book multiple of 0.7x, lower than the industry average (Metals & Mining) of 3.4x, thus seems undervalued. Considering the current trading levels and valuation on TTM basis, decent balance sheet, strategic drilling program, economic recovery, and the key risks associated with the business, we recommend a 'Speculative Buy” rating on the stock at the market price of $0.066, as on 20 August 2021, 11:04 AM (GMT+10), Sydney, Eastern Australia.

SAU Daily Technical Chart, Data 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 analysis has been achieved and subject to the factors discussed above alongside support levels provided.

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.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices

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