Company Overview: Red 5 Limited (ASX: RED) is an Australian-based gold producer that owns and operates the Darlot Gold Mine located around 900 kilometres north-east of Perth in the Leonora-Leinster mineral province of Western Australia and the nearby King of the Hills (KOTH) Gold Project. Through its Philippine-affiliated company, Greenstone Resources Corporation, the company also holds an interest in the Siana Gold Project. The company’s vision is to be a successful multi-operational exploration and mining company that applies technical excellence, and responsible and sustainable industry practices to create value for stakeholders.

RED Details

Improving Bottom-Line: Red 5 Limited (ASX: RED) is a gold exploration and production company with high-quality assets located in Western Australia and Philippines. The company has two gold mines, namely King of the Hills (KOTH) and Darlot Gold Mine, both located in prospective gold districts. As on 1 December 2020, the company’s market capitalisation stood at ~$492.72 million. With its existing operations at Darlot along with mine development at KOTH, the company seems well placed to expand its production profile and transition into a multi-operational exploration and mining company. From 2016 to 2020, the company’s revenue grew at a CAGR of 19.78%.

Revenue Trend (Source: Refinitiv, Thomson Reuters)

Looking ahead, the company is focused on progressing towards the delivery of the KOTH development and target production from 2022 onwards from two mining centres. Further, the company is focused on maximising value from the Siana Gold Project and is currently investigating options based on the higher gold price. In FY21, the company plans to deliver targeted cost savings of A$200 per ounce and expects its total production to be between 90,000oz – 98,000oz at an average AISC of A$1,830 – 2,030/oz.

FY20 Result Highlights: For the year ended 30 June 2020, the company reported total gold production of 92,779oz, recovered from a total of 943,861 tonnes of ore processed at an average head grade of 3.3g/t Au. The company’s sales revenue for FY20 stood at $200.3 million, up from $153.96 million reported in FY19. Further, the company’s underlying EBITDA stood at $53.98 million, up from $30.94 million in FY19. Driven by the rise in the revenue and underlying EBITDA, the company’s net profit after tax came in at $4.54 million from a net loss of $3.03 million in FY19. One of the important milestones of 2020 was the announcement of a 31% increase in the bulk Mineral Resource base at KOTH to 4.1 million ounces of contained gold.

FY20 Production Summary (Source: Company Reports)

Key Metrics: For FY20, the company’s EBITDA margin stood at 27.0%, higher than the industry Median of 22.4%. The company’s current ratio for FY20 stood at 1.70x, higher than the industry median of 1.64x, demonstrating that the company is well equipped to pay its short-term obligations. The company’s debt to equity multiple for FY20 stood at 0.12x in FY20, lower than the industry median of 0.21x.

Key Metrics (Refinitiv, Thomson Reuters)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 38.6%.  Franklin Advisers, Inc. and Ruffer LLP hold the maximum interest in the company at 11.85% and 5.73%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Farm-in Joint Venture Agreement With Ardea Resources Ltd: The company recently expanded its exploration footprint in Western Australia’s world-class Eastern Goldfields by signing a Farm-in Joint Venture Agreement with Ardea Resources Ltd (ASX: ARL) to earn up to an 80% interest in two prospective gold exploration projects - Darlot East and Mt Zephyr. Notably, both the projects are located in close proximity to the Darlot Gold Mine in the Eastern Goldfields region of Western Australia that provides exciting opportunities for the delineation of additional gold resources as part of the Darlot Mining Hub strategy. Under the agreement, RED is going to spend $1.5 million over two years to earn an initial 60% interest, with the option to earn an additional 20% interest by spending a further $800k within three years from commencement, for a total 80% interest in the two projects. This Joint Venture Farm-in Agreement is in-line with the company’s growth vision of establishing two separate production hubs at KOTH and Darlot.

FY21 Surface Exploration Program Update: The company’s Darlot Mining Hub Strategy is focused on establishing Darlot as a second long-life gold production hub in the Eastern Goldfields alongside the 16-year Life of Mine King of the Hills Gold Project. To support this strategy, the company has planned over 35,000m of diamond and RC drilling across multiple near-mine and regional prospects in FY21. The drilling is expected to increase the existing resources and make new discoveries. The company has commenced Phase 1 in-fill RC drilling at the Mission deposit, with early results confirming the continuity of the mineralisation along the known 500m strike extent of the ore system and intersecting new lodes.

EPC Contract and Bulk Earthworks Awarded to MACA Interquip: The company has recently awarded an EPC Contract and bulk earthworks to MACA Interquip for the King of the Hills Project, marking a major step towards the development of the project.  The EPC contract and bulk earthworks will be undertaken as a fixed-price contract and following the execution of the EPC Contract, commitments to-date for the KOTH Project will be around $143 million, which is lower than the capital budget of $155 million, demonstrating that the company is on track to progress the development of this major project, with production planned to start in June quarter 2022.

Q1FY21 Result Highlights: For the September 2020 quarter, the company reported total gold production of 20,283 ounces and gold sales of 19,932 ounces. The consolidated all-in sustaining costs (AISC) for the quarter stood at A$2,126 per ounce of gold. The company also made a proactive investment in a new crusher and mill bearings to help drive plant reliability and performance, which has the potential to increase throughput by 20%. Following the completion of a holistic review across the organisation, the company has launched a “Project 200” project which is focused on delivering a sustainable annual improvement to the All-in Sustaining Cost (AISC) per ounce of $200 during FY21. During the quarter, the company invested $5.9 million in growth exploration programs at Darlot and KOTH. As at 30 September 2020, the company had cash on hand and bullion of $106.8 million and total outstanding debt of $8 million.

Q1FY21 Production (Source: Company Reports)

Key Risks: The company is exposed to the risks related to fluctuations in the prices of gold. Further, the company is exposed to the risks associated with the extent and the duration of COVID-19 pandemic. The company’s performance may also be impacted by the changes in the economic and market conditions, changes in the regulatory environment, and delays or changes in project development. 

Outlook: With decent production performance in Q1FY21, the company is on track to achieve its FY21 guidance of 90,000oz – 98,000oz at an average AISC of A$1,830 – 2,030/oz. The company is gearing up to commence production from the new Great Western satellite deposit, which forms part of its Darlot Mining Hub. The company is progressively scaling back underground production from KOTH in preparation to start the construction for the bulk mining operation. The company is also focused on implementing “Project 200” to deliver targeted cost savings of A$200 per ounce during FY21.

The growth in the KOTH Mineral Resource estimate to 4.1Moz has positioned RED to capture the benefits of the prevailing strong gold price environment and grow towards being a mid-tier, multi-asset producer from 2022 onwards.

The company plans to fund the KOTH Project Capital requirements of $226 million through a mix of existing cash reserves and a project finance facility up to $165 million. The imminent delivery of the KOTH development, existing cash resources and planned debt financing facilities place the company to efficiently transition into production at KOTH in the first half of CY 2022.

FY21 Guidance (Source: Company Reports)

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

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

EV/Sales Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation:  The stock of RED has corrected by 17.187% in the last three months and is currently trading below the average of its 52-week trading range, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~$0.231 and a resistance of ~$0.309. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and have arrived at a target price of a low double-digit upside (in % terms). For the purpose, we have taken peers like Calidus Resources Ltd (ASX: CAI), SSR Mining Inc (ASX: SSR), Gold Road Resources Ltd (ASX: GOR), etc. Considering the company’s decent operational and financial performance in FY20, existing cash resources, planned debt financing facilities, FY21 outlook, and current trading levels, we give a ‘Buy’ recommendation on the stock at the current market price of $0.265, up by 6% as on 1 December 2020. 

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

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