Bigger King of the Hills worth the wait: Canaccord

Red 5 shareholders have a two-year wait for cash to flow from the company’s significant new King of the Hills gold project in Western Australia, and one investment bank's suggestion is the wait could be worth a lot more
11th September 2020
Resources Rising Stars

Red 5 shareholders have a two-year wait for cash to flow from the company’s significant new King of the Hills gold project in Western Australia, and one investment bank's suggestion is the wait could be worth a lot more if Red 5 shows in its upcoming final feasibility study how much the asset’s growth prospects have improved since its 2019 prefeasibility (reports MiningNews).

he company aims to build a new plant to establish KOTH as a standalone, 140,000ozpa-plus producer with at least a 10-year mine life based on 1.5Moz of reserves and a 4.1Moz resource base. That would make Red 5 a multi-mine WA producer if it can continue to extend the life of Darlot, 80km to the north, with tonnes of exploration upside on a large district landholding including at depth at KOTH along the contact line of a massive regional granodiorite structure.

Red 5 wants to start building new-KOTH as soon as possible after release of the FS, after raising A$125 million of equity funding earlier this year.

It completed 110,000m of drilling on KOTH in FY20.

The earlier PFS indicated strong returns when gold was at about $2250/oz from a four million tonne per annum plant and large-scale openpit mine costing $220 million to establish and producing 140,000ozpa at AISC of $1167/oz.

In a note circulated this week, Canaccord Genuity says Red 5's final study is imminent, but "everything is pointing to a larger [mining] inventory".

The Canadian firm says its life-of-mine metrics and "assumed resource conversion rates" based on what Red 5 has achieved with its drilling since releasing its PFS underpins a "67% increase to the mined gold ounces over the LOM to 2.46Moz" in its valuation modelling.

"We assume a 50% conversion of the underground indicated resource, noting that this material was excluded entirely from the PFS. Our assumed underground inventory and mining rates support a six-year underground LOM, at which point the plant is solely fed from openpit sources," Canaccord says.

"We see potential for extensions of the underground mine life as development progresses, allowing installation of adequate drill platforms to support completion of extensional drilling.

"At a high level, gold production averages 155,000ozpa - about 165,000ozpa in the first five years - at an AISC of $1447/oz."

Canaccord suggests KOTH capital costs could be 20% higher than the PFS estimate at A$262 million, necessitating debt funding of $170 million, and a 14% higher average LOM AISC of $1447/oz with the early introduction of underground feed, but the "changes to both capex and opex are offset by the assumed increase to ore inventory, resulting in a 19% increase to our valuation for KOTH to $742 million".

"We suspect the capital cost estimate will be of great interest to investors but highlight that our valuation is more sensitive to operating costs given the larger inventory underpins a longer mine life," Canaccord says.

"Rolling our model forward two years results in a 19% increase to our NAV/share to A56c. If a 5% discount rate is applied to KOTH - currently 10% - our rolled forward NAV/share increased by 62% to A76c."

Canaccord says it hasn't modelled Red 5's flagged potential plant expansion to 6Mtpa, but a discounted cashflow analysis that assumes a $50 million expansion comes on line in FY26 and is funded by mine cash flows shows the enlarged KOTH might be worth $945 million or 57c of NAV/share.

"Gold production increased to [more than] 200,000ozpa … for a seven-year period, reducing the mine life to 11 years on the updated inventory assumption [2.28Moz produced]. AISC average $1351-1257/oz after [the] plant expansion - with the NAV/share increasing by 10c/share to 57c."

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