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RED 5 Limited – Australian Gold Producer (July 2020 Review)

red 5 gold mining company review

Red 5 is an emerging gold producer with some challenges ahead, but at the same time has two gold mines in one of the world’s most attractive gold regions.

King of the Hills (‘KOTH’) and Darlot. 

KOTH is an underground gold mine bought from Saracen Minerals in 2017. Early drilling results indicated that the site is a significant growth opportunity for the company given its potential for bulk mining. The results show that the site comprises a network of multiple high-grade vein/veinlet stockworks that can be collectively bulked into very large zones of strong gold mineralisation.  

A Final Feasibility Study (‘FFS’) to develop KOTH into a stand-alone, integrated bulk open pit and underground mining and processing operation, is on schedule for completion in the September 2020 quarter.

Second hand portable accommodation comprising 240 rooms, each with an ensuite, together with wastewater treatment plant and an onsite office have been purchased. These are scheduled for delivery in the second half of calendar 2020 at a cost saving of $3M to 4M compared to the purchase price of new equipment. Once government approval is received for the site works necessary to construct the village accommodation and wastewater treatment plant, construction can commence. This is expected to occur before December 2020.

This stand-alone bulk open pit mining and processing operation will see a progressive scaling down of current underground mining activities at KOTH during the second half of calendar year 2020.  

Completion of the King of the Hills FFS in the next few months will represent a major milestone towards the development of one of Australia’s most exciting new gold development projects, according to the company.

Darlot is also shaping up as a worthwhile contributor to Red 5’s gold production ambitions in the years ahead.

Red 5 intends to establish the Darlot Gold Mine as a stand-alone mining and processing hub, with a targeted 5-10 year mine life, assuming no ongoing contribution of ore from KOTH.  The Darlot mine has an existing substantial Mineral Resource estimate of 10.8Mt @ 3.5g/t for 1.2Moz. Since this estimate was released by the company another 245,000 oz have been added to the resource estimate, following the purchase of adjacent tenements, further extending the mine life of Darlot.

Across the acquired portfolio there are many historical workings that have yielded high gold grades, including an intersected 15m at 9.18g/t Au and 5m at 26.67g/t Au. These are exceptionally high levels of high-grade, near surface mineralisation, implying excellent potential for greater Mineral  Resource estimates, as further exploration activity is undertaken.

In the 2021 financial year, 22,500m of underground exploration drilling has been earmarked for Darlot.

However this positive outlook has recently been tempered by a recent crusher breakdown at the Darlot processing plant resulting in lost production of 3200 oz, which together with lower than originally forecast average mining grades, will likely see annual production at 93000oz. This compares to FY20 guidance of 98000 – 102,000oz. Management, however, are confident that Darlot Mill will return to a more consistent and stable level of production in FY21.

The gold production guidance miss and resultant higher production cost per ounce for FY 20 has not helped the share price in recent times.

This, together with a dilutionary $125M capital raising at 18 cents in April, to fund the development costs of KOTH at a price that represents an 18 months low for the stock, has compounded the shareholder pain of the guidance miss.

Add to this the fact that the company will need to either debt fund or raise another $80M of equity to complete the capital cost of bringing KOTH into production and we can see why, for now anyway, the RED 5 share price may remain at the current level.

However, once KOTH is brought into production within the next 18 – 24 months, RED 5 would be a 200,000 oz gold producer.

This should get the attention of discerning investors and see the stock re-rated and the share price move higher, rewarding shareholders for their patience and resilience.

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