Red 5 Limited

Company Overview: 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. The company got listed on ASX on 16^th October 1996. As of 9^th March 2022, as per BMO Global Metals and Mining Conference Investors Presentation, RED stands with a total commitment of contracts of ~$182 million from its King of Hills Project (KOTH).

RED Details

Fundamental Upbringings:         

• King of the Hills: In March, 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 June quarter. Whereas the project has already completed its key construction and operational readiness milestones in February.
• Haulage and Road Maintenance Contract: The company has enrolled into a contract with MLG Oz Limited (ASX: MLG) to service its new KOTH processing facility. The contract is for 2 years which can be further extended for 1 year. The same is expected to increase MLG’s annual revenue from ~$10 million - $20 million per annum.

1HFY22 Financial Highlights:

• Revenue: From the revenue of ~$80.07 million for half-yearly ending 31^st December 2021, the main revenue came from Darlot Underground Mine. Recently, the said mine increased its known mineralization at Middle Walters South and brought up a new oval ~1300 area into the mine plan after the underground diamond drilling in February.        
• Cash Position: With ~$75.49 million cash receipts from customers, its net cash outflow stood as ~$3.87 million in 1HFY22. Half-yearly accounts were closed with the cash balance at the end of 31^st December 2021 at ~$15.03 million versus ~$17.42 million at the end of 30^th June 2021.

Key Metrics (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 45.59% of the total shareholding, while the top 4 constitute the maximum holding. Franklin Advisers, Inc. and VBS Exchange Pty. Ltd. are holding a maximum stake in the company at 10.90% and 8.80%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: RED reduced its cash conversion cycle days from 1HFY21 to 1HFY22. While on the other hand, the debt has increased from $10.2 million to $20.50 million in the same period as above.

Cash Cycle Days and Debt Profile (Source: Analysis by Kalkine Group)

Key Risks:

• Regulatory Risk: The company is exposed to a more complex regulatory environment; any failure in the same could lead the business to fines, penalties, etc.
• COVID-19: Travel restrictions and lockdowns due to COVID-19 might hold down its operations by delaying the projects and thereby affecting its earnings, cash flow and financial position.
• Commodity Price Fluctuations: The mineral and metal mining industry are highly influenced by the fluctuation in commodity’s prices, therefore might get affect its profitability.

Outlook: As of 31^st December 2021, RED has spent $152 million at King of Hills (KOTH), the development is progressing with intact budgets and remains on schedule to register the first gold production in June 2022 quarter. The project encompasses $182 million of contracts committed as of 9^th March 2022. The half-yearly period's investments in growth and sustaining initiatives stood at $91.41 million, primarily attributed to KOTH project. The company targets to transform Darlot to a satellite mine of KOTH by June 2022 quarter and its production remains in line with the guidance of ~ 62,000oz – 72,000oz at an AISC of A$2,300/oz - A$2,400/oz, provided in August 2021. Moreover, its Redpath Mine development program also remains on track and expects to establish its new mine areas for FY23, 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 has given a positive return of ~27.12% in the past one month, and has corrected ~2.59% in the past week. Currently, the market price is trading above its 52-week low and high average of $0.155 - $0.405 and taking the support of the trend following indicator 21 SMA, indicating a good support level to enter. The stock has been valued using EV/Sales multiple based illustrative relative valuation method and arrived at a target price with an upside of lower double-digit (in % terms). For the purpose of valuation, peers like Silver Lake Resources Ltd (ASX: SLR), AngloGold Ashanti Ltd (ASX: AGG), Gold Road Resources Ltd (ASX: GOR) and others have been considered. The company can trade at some discount to its peers’ average, considering its slight fall in revenue and increasing debt levels. Considering the growing investments in assets, operating in line with the production guidance at Darlot Mine, reducing cash cycle days, upside potential in valuation, current trading levels, committed contracts of ~$182 million for coming quarters, optimistic long-term outlook due to MLG contract, key risks associated with the business and current market volatility due to global tensions, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of $0.375, as of 1^st April 2022. Markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

RED 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 on 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 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.

Disclaimer

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