Company Overview: Red 5 Limited (ASX: RED) is an Australian-based gold production company which aspires to become a successful multi-operational mineral resource company, providing benefits to all stakeholders, through the consistent application of responsible and sustainable industry practices. The company’s exploration assets include established mining projects located in the Eastern Goldfields of Western Australia and the Philippines. Two of the company’s gold mines are located in one of the World’s most attractive gold regions. The company has a strong and capable team, with many years of mining and development experience at both Red 5 and in prior multi-billion international development projects.


RED Details
 


Improvement in Top-line and Bottom-line: 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. The company owns and operates the Darlot Gold Mine and King of the Hills (KOTH) Gold Project, both located in Western Australia. KOTH is considered as one of the most significant Reserve endowed gold mines in Australia, with substantial upside potential. Via its Philippine-affiliated company Greenstone Resources Corporation, Red 5 Limited holds an interest in the Siana Gold Project, located on the island of Mindanao in the Philippines. Red 5 Limited intends to grow as a well-established and respected mid-tier Australian gold producer with multiple options to expand and develop the company. Over 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 has increased at a CAGR of 53.43%. 


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

Moving forward, the company is focused on the development of its King of the Hills mine which will help Red 5 to evolve into a mid-tier gold producer with two operating assets in Western Australia. Red 5 Limited is well funded to continue its long-term focus on exploration, wherein it has a strong track record of creating significant value for its shareholders. 

FY19 Performance Highlights: During the financial year 2019, the company reported sales revenue of $153.51 million, excluding $21.53 million in pre-operational sales at King of the Hills (KOTH) offset against mine development costs. The net cash flow from operating activities stood at $23.18 million with $24.87 million in cash and in metal accounts achieved at period end. For the full year, the company recorded a net loss of $3.03 million, significantly lower than the loss of $11.93 million in FY18, demonstrating the company’s improving bottom-line. 

During the year, the company ramped up its gold production to over 100,000oz per annum and made significant progress in advancing the opportunity for large-scale bulk mining at KOTH. For the period, the company reported total gold production of 102,012 ounces, recovered from 900,251 tonnes of ore processed at an average head grade of 3.86g/t Au.


Key Production Statistics for FY19 (Source: Company Reports)

Subsequent to year-end, the company entered into a $20 million working capital facility with Macquarie Bank Limited, which allowed it to refinance (on improved terms) the existing gold loan facility while also strengthening its balance sheet and operating liquidity.

H1FY20 Financial Highlights: The company’s strong operational and financial performance continued in the first half of FY20.  During the period, the company maintained steady-state production and delivered total gold production of 51,995 ounces, recovered from 477,079 tonnes of ore processed at an average head grade of 3.64g/t Au. For the period, the company reported sales revenue of $105.31 million, gross profit from operations of $24.14 million and a net profit after income tax of $8.24 million. 

During the half-year, 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.

Over the period, the company recorded net cash outflows of $26.241 million for investing activities, reflecting development costs at both Darlot and King of the Hills mines, Final Feasibility Study costs and deferred consideration paid associated with the acquisition of Darlot mine. Net cash flow from operating activities stood at $32.69 million at the end of H1FY20. As at 31 December 2019, the company had a cash and bullion of $26.56 million.


Key Production Statistics for H1-FY20 (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 49.79% of the total shareholding. Franklin Advisers, Inc. and Ruffer LLP hold maximum interest in the company at 12.02% and 9.07%, respectively.
 

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
 
A Quick look at Key Margins: For H1FY20, the company’s gross margin stood at 20.1%, higher than the margin reported in pcp. For the same period, the company reported a net margin of 7.8%, higher than the net margin reported in pcp, demonstrating the company’s improving profitability. Over the span of one year, the company’s current ratio has increased from 0.69x in H1FY19 to 0.81x in H1FY20, demonstrating that the company has improved its ability to pay its short-term obligations. 


Key Metrics (Source: Refinitiv, Thomson Reuters)

March Quarter Highlights: 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. Due to the short-term crusher and ball mill performance issues at the Darlot Gold Mine and lower grades than planned at the King of the Hills (KOTH) underground mine, the company’s overall production was impacted. However, the company expects its production to recover in the June 2020 Quarter, with an expected range of between 26,000 ounces to 30,000 ounces at an all-in sustaining cost of A$1,400 – A$1,525 per ounce. 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. 


Production Summary for March Quarter (Source: Company Reports)

$125 Million Capital Raising: On 30 March 2020, the company announced that it has completed a $125 million share placement which will underpin the next phase of the company’s long-term growth strategy to become a multi-asset, mid-tier Australian gold producer. The capital raising comprises a two-tranche placement to sophisticated and professional investors, both of which are now completed.  The proceeds of the capital raising will mainly be used to support the development of an integrated bulk open pit and underground mine and stand-alone 4Mtpa process plant at KOTH, ongoing exploration and working capital. Considering the current uncertainty in global markets arising 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.

Covid19 Update: As per the recent quarterly update, the company production currently remains unimpacted by the COVID-19 global pandemic. In response to the pandemic, the company has implemented several measures including the development of a Management Response Plan focused on ensuring the health and safety of its people and limiting the disruption risk to its operations. Further, the company has introduced social distancing practices on-site, health screening, increased hygiene practices, restrictions on non-essential travel, and has established robust infection control systems.

What to expect: The company’s strong production base and its existing cash and available financing facilities, has positioned it in a strong position to continue to execute its growth strategy and maintain its exploration momentum.  The company’s ability to maintain steady-state production from both Darlot and King of the Hills (KOTH) underground mines, is helping it to generate substantial revenues and deliver strong operating cash-flows. 

In FY20, the company expects its production to be between 98,000 to 102,000 ounces at an AISC of A$1,570 – A$1,620 per ounce. To achieve this target, the company has revised its mining plans at both KOTH and Darlot and has added a small second jumbo to access high-grade orebodies at the Darlot underground. Further, the company has undertaken a review of KOTH airleg resources to increase airleg production to allow high volume delivery of high-grade narrow vein material.


Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

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

EV/EBITDA Multiple Based Approach (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: With the recent capital raising, the company is currently well placed to continue its long-term focus on exploration and to deliver resilient production profile from two production centres based in Western Australia. We have valued the stock using EV to EBITDA multiple 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 Dacian Gold Ltd (ASX: DCN), Bellevue Gold Ltd (ASX: BGL), Resolute Mining Ltd (ASX: RSG), etc. Considering the company’s resilient performance amid Covid-19, recent capital raising, and its FY20 guidance, we give a “Buy” recommendation on the stock at the current market price of $0.285, down by 5% on 19 May 2020. 
 
 
RED Daily Technical Chart(Source: Refinitiv, Thomson Reuters)

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